IN the era of finance capital, the familiar distortion of reality which lies in thinking that society is flourishing when the financial markets are on an uptrend, has its logical obverse in the equally familiar thought that the economic malaise in society arises exclusively because of some malfunctioning in the world of finance; and such malfunctioning in turn is attributed not to any intrinsic problems associated with this world of finance itself but to the unwise interference on the part of some external entity, notably the State, due to its having abandoned the principles of “sound finance”. Such a view gives rise to an incredible inversion of reason where matters appear in a way that is the exact opposite of what they are. I shall give three examples to illustrate this point by drawing attention to three propositions which are widely accepted and disseminated today.
The first of these, much in vogue in advanced capitalist countries at present, states that the means to overcome a depression is by reducing State expenditure. If the State reduces its expenditure by cutting the fiscal deficit, then this, so the argument goes, would improve the “state of confidence” of the “investors” and hence bring forth larger investments which would overcome the depression. This is an inversion of reason since it not only amounts to saying that two birds in hand are worth one bird in the bush, but also espies a bird in the bush when none exists.
ILLUSIONISM OF FINANCE
It is well-known that capitalists add to capacity when they expect demand to increase and one obvious pointer to whether demand is likely to increase is if it is already increasing, which can be judged, for instance, from whether the level of capacity utilisation of the equipment already installed is increasing. This moreover is only a necessary condition. Even when capacity utilisation is improving, capitalists may still not invest; they may prefer to wait for a while to assure themselves that the improvement in capacity utilisation is not just a transient phenomenon but represents a genuine uptrend in demand. Today in the US, for instance, even though there is an improvement in the capacity utilisation in the consumption goods sector thanks mainly to the fall in oil prices which has put more purchasing power in the hands of the American consumers, there is very little additional investment taking place; this is because the capitalists are not sure that this is not just a passing phase.
In such a situation if the government reduces its expenditure by cutting the fiscal deficit, then there would be a reduction in the level of aggregate demand which would lower capacity utilisation and cause a reduction in capitalists’ investment, rather than an increase. The depression in other words would get compounded rather than alleviated by the cut in government expenditure; but the illusionism of finance prevents a perception of this.
My second example relates to a proposition that is very commonly advanced by neo-liberal advocates in the Indian economy. This says that to reduce hunger we must whittle down the public distribution system. Again, the argument goes something like this: a large public distribution system entails a large food subsidy and hence a large fiscal deficit. Since such a deficit tends to cause inflation, the victims of this inflation suffer, including by being unable to access enough foodgrains outside of the public distribution system. Hence any widening of the public distribution system beyond a strictly defined small segment of the “BPL population” has the effect of worsening the lot of the people at large, including through greater hunger.
It is on this argument that the PDS has been whittled down in India by drawing a distinction between the BPL and APL populations and confining the provision of cheap food to the BPL population alone. And even though the parliament had passed legislation under the previous UPA government to widen the scope of the PDS (against the wishes of the finance ministry mandarins and other neo-liberal stalwarts at that time), nothing has been done by the Modi government to implement it. That legislation in fact has been given a quiet burial.
To be sure, not all who advocate “targeting” would necessarily advance this argument. Some would argue that a universal or pervasive food distribution system widens the fiscal deficit and ushers in inflation by providing food subsidies to the “undeserving”. But implicit in their position, whether or not they recognise it, is the view that an extension of the PDS aggravates hunger.
To see this, let us just ask one question: it is well-known today that the magnitude of total foodgrain absorption per capita (taking both direct and indirect absorption together, the latter via animal products and processed foods), is lower in India than in sub-Saharan Africa, which for long was considered the classic case of food deprivation. Yet the government of India has been exporting vast amounts of foodgrains instead of feeding it to the local population. If the food needs of the “deserving” (ie, those holding BPL cards, by definition) were fully met, while the “undeserving” satisfied their food needs anyway (which is what makes them officially “undeserving”), then why should India’s foodgrain absorption per capita fall below that of even the world’s most food-deprived region? And since it has fallen below, why does not the government do something to improve the situation?
The typical answer would be that any such attempt to improve the situation would increase the fiscal deficit and hence stoke inflation. And why should inflation be considered bad? Because, the answer would be, it affects the poor adversely, ie, it accentuates poverty. Since poverty is officially still defined in India with respect to the magnitude of hunger, this logic necessarily entails asserting that an expansion of the PDS would worsen hunger, and its converse that to alleviate hunger there must be a whittling down of the PDS, which is the position I attributed to the votaries of “sound finance”.
The absurdity of this argument is obvious. When foodgrains are procured, purchasing power is injected into the economy. When they are sold, no matter at what price, this purchasing power is, if anything, partially withdrawn from the economy, and therefore cannot possibly have any inflationary consequences. Hence disgorging foodstocks through the PDS cannot possibly be inflationary no matter what its effect on the size of the fiscal deficit.
Of course it may be suggested that even if this is true in a particular period, when procurement has already occurred and purchasing power already injected into the economy, a repetition of it over a sequence of periods would keep adding purchasing power to the economy over time through a sequence of larger food subsidies, and hence be inflationary; and this inflationary effect would be enhanced to the extent that the interest obligation of the government, on account of the larger debt caused by the larger fiscal deficit, also keeps increasing.
But if the interest payment was the worry, the government could easily borrow the requisite amount for the food subsidy from the Reserve Bank of India at negligible rates of interest rather than commercially; and as for the effect of the fiscal deficits per se, there is little fear of inflation in a demand-constrained economy anyway. And if the government is still not persuaded by these arguments, it could raise the requisite amount for the food subsidy through additional taxation, in which case even the most die-hard neo-liberal could not possibly have any fear of inflationary consequences.
The third proposition says that to increase employment in the economy one must reduce the government’s employment generation schemes. The argument again runs as follows: the employment generation schemes of the government enlarge the fiscal deficit which keeps down the “state of confidence” of the “investors”. If these schemes were whittled down, and the fiscal deficit curtailed, then there would be larger investment by the capitalists which would create more jobs in the economy. Hence the employment generation schemes of the government keep down job creation and should be rolled back, which is what the Modi government, ever subservient to the dictates of international finance capital, has been doing of late to the Mahatma Gandhi National Rural Employment Guarantee Scheme.
The absurdity of this argument has already been discussed in the context of the first proposition above and need not be elaborated: capitalists invest depending on the expected increase in demand and a curtailment of government expenditure, even on employment generation, cannot possibly lead to larger investment, and hence larger job creation on that basis.
John Maynard Keynes, though a victim of “commodity fetishism” in the sense described by Marx, ie, using the language of “factors of production” instead of the underlying social relations, was free of the further obscuring that the illusionism of finance introduces in a capitalist economy. The above positions not surprisingly would have invited the ire of even Keynes.
What is noteworthy in the contemporary world, including in India, is the prevalence of absurd notions that entail an inversion of reason, of which the three propositions mentioned above are illustrations. This is of course indicative of finance capital’s assiduous efforts, through propaganda in the media and through the commoditisation and destruction of education, to hegemonise thought. The struggle against its social hegemony requires above all a struggle against this intellectual hegemony.