Undergraduate Economist

Perspectives of an economics student

Kunkel on David Harvey and Robert Brenner: Demand, Profits and Employment

Posted by Alex M Thomas on May 19th, 2014

The link between demand and profits, and consequently employment, is visible in the works of the classical economists and Marx. In this blog post, we set out the link between these variables by way of assessing the contributions of David Harvey and Robert Brenner, as narrated and presented by Benjamin Kunkel in his 2014 collection of essays, all previously published – Utopia or Bust: A Guide to the Recent Crisis (and not on the basis of Harvey’s and Brenner’s original texts).

Karl Marx has already presented us with the possible reasons for the occurrence of crises in capitalist economies. Kunkel treats these crises as profitability crises (pp. 34-6); they can occur because of (1) profit squeeze, (2) a rising organic composition of capital, and (3) underconsumption. A capitalist crisis causes activity levels to drop and results in wide-spread unemployment. The three factors mentioned above reduce the profits of capitalists, consequently affecting their decision to produce and therefore adversely affecting their decisions to employ workers and purchase capital goods. The first – a profit squeeze, is self-explanatory, but its causes need not be. A rise in real wages, ceteris paribus, leads to a decline in the rate of profit. The organic composition of capital, according to Marx, refers to the ratio between constant capital and variable capital. Constant capital refers to the investment expenditure on plant, machinery, tools and other constant/fixed capital. Variable capital refers to the investment expenditure relating to the workers – wage costs, training costs and the like. When the ratio of constant to variable capital rises, or equivalently, when the organic composition of capital rises, the rate of profit (the ratio between profits and capital advanced) falls. The third cause is underconsumption, by workers. This occurs, by definition, since the value of the real wage is less than the value they add to the commodity. In Marxian terms, this difference measures the surplus-value that the capitalists extract from the workers.


Strong bargaining power on the side of the workers can generate a rise in the real wages; although, note that the terms of agreement are usually set in money wages. The rising organic composition of capital is not a law, but a contingent proposition. As for underconsumption, if workers’ wages are just sufficient for their survival, it can result in goods lying unsold and therefore affect capitalist profits. To put it differently, there arises a gap between aggregate supply and aggregate demand. This, according to Harvey, places a ‘limit to capital’.

What can possibly eliminate underconsumption, a facet of capitalism, a consequence of positive capitalist profits and a cause of economic crisis? Harvey points out that it is credit which eliminates this cause, at least, temporarily.

‘Any increase in the flow of credit to housing construction, for example, is of little avail today without a parallel increase in the flow of mortgage finance to facilitate housing purchases. Credit can be used to accelerate production and consumption simultaneously.’

(Harvey; as quoted on p. 32)

But, Kunkel cautions us that even if credit can fund the required aggregate demand, changes in income distribution brought about by the struggle between workers and capitalists will affect the aggregate equilibrium, and will render it unstable.

‘If there exists a theoretical possibility of attaining an ideal proportion, from the standpoint of balanced growth, between the amount of total social income to be reinvested in production and the amount to be spent on consumption, and if at the same time the credit system could serve to maintain this ratio of profits to wages in perpetuity, the antagonistic nature of class society nevertheless prevents such a balance from being struck except occasionally and by accident, to be immediately upset by any advantage gained by labor or, more likely, by capital.’ (p. 37)

It is not entirely clear what mechanisms and processes Kunkel is referring to when he makes the above claim about income distribution rendering the equilibrium unstable. Indeed, if the available credit is not sufficient to counter the depressed wages and high profits, the aggregate equilibrium will be unstable.

Another route through which capitalist crisis can be postponed is via long-term infrastructural projects. ‘Overaccumulated capital, whether originating as income from production or as the bank overdrafts that unleash fictitious values, can put off any immediate crisis of profitability by being drawn off into long-term infrastructural projects, in an operation Harvey calls a “spatio-temporal fix”’ (p. 39). Here again, it is contingent on the extent to which the workers gain from the surplus generated by these projects, both in the short and long-term. For example, the employment guarantee programme in India creates infrastructure as well as provides employment and wage income.

‘So what then are the “limits to capital”’ (p. 41)? ‘Keynesians complain of an insufficiency of aggregate demand, restraining investment. The Marxist will simply add that this bespeaks inadequate wages, in the index of a class struggle going the way of owners rather than workers’ (p. 43). Inadequate wages, as previously indicated, does generate demand deficiency. To that extent, Marx’s and Keynes’s account of capitalist crises are very similar.

Kunkel points out the role of environmental degradation, a consequence of capitalist drive for profits, in capitalist crises. ‘Already three-concentrations of carbon in the atmosphere, loss of nitrogen from the soil, and the overall extinction rate for nonhuman species-have been exceeded. There are impediments to endless capital accumulation that future crisis theories will have to reckon with.’ This can be easily integrated into the theories of output and of growth, as Ricardo’s diminishing returns to land, has been. Environmental depletion poses constraints on the supply side primarily and for economic growth, positive capital accumulation is necessary. Therefore, environmental degradation poses a strong constraint on the supply side of the economy.


Robert Brenner made a ‘frontal attack on the idea of wage-induced profit squeeze’ (p. 87). As Kunkel puts it, ‘increased competition exerted relentless downward pressure on profits, resulting in diminished business investment, reduced payrolls, and-with lower R&D expenditure-declining productivity gains from technological advance. The textbook result of this industrial tournament would have been the elimination of less competitive firms. But the picture drawn by The Economics of Global Turbulence is one of “excessive entry and insufficient exit” in manufacturing’ (p. 87). In other words, the profit squeeze was not wage-induced.

Marx’s realization crisis finds a mention in Kunkel’s essay on Brenner too. ‘If would-be purchasers are held back by low wages, then the total mass of commodities cannot be unloaded at the desired price. Capital fails to realize its customary profits, and accumulation towards stagnation’ (p. 91). This is the crucial point. Capital has to realize its customary profits, a magnitude which includes a return on risk and undertaking (a return on enterprise, if you like) and the rate of interest. Capital that is invested in a riskier enterprise is expected to provide higher returns. The search for demand (or markets) is not new. Mercantilism was precisely that. More recently, ‘[i]n Germany and Japan, and then in China, catering to external markets won out over nurturing internal demand’ (p. 94) However, currently, there are signs of a reversal as external demand is falling, and net-exporting countries are reorienting towards domestic demand (p. 95).

But, what is to be done? According to Kunkel, ‘[g]lobal prosperity will come about not through further concessions from labor, or the elimination of industrial overcapacity by widespread bankruptcy, but through the development of societies in which people can afford to consume more of what they produce, and produce more with the entire labor force at work’ (p. 98). Kunkel rightly advocates better wages and the full-employment of labour. For, it is only such a society which can afford its citizens with a dignified and economically comfortable life. As a matter of fact, ‘[m]ore leisure or free time, not less, would be one natural-and desirable-consequence of having more jobs’ (p. 103). A similar call is visible in Robert & Edward Skidelsky’s How Much is Enough? Money and the Good Life published in 2012. We urgently need an economic architecture where goods can flow easily across regions, workers earn good wages, capital earns its customary profits, labour is fully employed and the environment is respected. In working towards this goal, it is necessary to possess an accurate understanding of the link between demand, profits and employment.

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Posted in Economic Crisis, Economics, Employment, Karl Marx, Macroeconomics, Prices, Unemployment, Wages | No Comments »

Some Thoughts on Debt: The Indian Case

Posted by Alex M Thomas on April 30th, 2014

Any entity, private or public, needs to borrow if its expenditure exceeds its income. The difference between expenditure and income will then be the volume of debt. This post discusses the following: the meaning and role of debt, a brief overview of various kinds of debt, the fundamental difference between private and public debt, the structure of the Indian debt market, corporate debt and government debt in India. The post ends with some reflections and suggestions.

It is public or government debt which receives maximum attention in the media and rightly so.  Some of the other kinds of debt are external debt (the proportion of a country’s debt borrowed from foreign lenders), household debt and corporate debt. Households borrow money in order to meet various needs such as the purchase of assets, for purposes of education, for medical expenses, etc. Corporate debt refers to the excess of expenditure over income which is financed through borrowing (via issuance of bonds and debentures) by the private non-bank sector. In India, besides these different kinds of debt, agricultural indebtedness has received significant attention from academics, policy makers and political agents. A market for credit is important not just for long-term asset purchases or constructing plants but it is also important for daily business transactions, and today, also for usual consumption needs. One needs only to look at the booming credit card industry for confirmation.

There is an overwhelming tendency to impose rules of finance employed by households on the government. This is fallacious. As individuals, we try to live within our means; we borrow reluctantly. Agricultural farmers, industrial firms and service providers need to borrow too. For, it is unlikely that every person who wants to start an enterprise will possess the required funds. If that were so, the meaning of entrepreneurship would have been different from what we know it to be. Similarly, for a government (central, state or local), which is expected to conduct policies which have social and environmental benefits, it becomes necessary to borrow. Taxation incomes are seldom sufficient to meet the recurring and capital expenditure of the government. Moreover, social programmes relating to education, employment, environment, food and health have very long gestation periods. The point is that government bodies (Ministry of Consumer Affairs, Food and Public Distribution, Ministry of Agriculture and Ministry of Drinking Water Supply and Sanitation to name a few) are not profit-maximizing bodies; but, this does not imply that they can be inefficient or irresponsible. By virtue of the fact that they are democratic bodies and because their incomes and borrowing are mainly from households (the voters), it is imperative that their functioning is transparent and organizationally efficient. Government borrowing or public debt is not, or rather, should not be, synonymous with organizational inefficiency.

The sovereign debt in India is issued by the Central and State government. The instruments include Treasury bills, Index bonds and zero coupon bonds. Government agencies, public sector undertakings (PSUs) and government owned banks issue debt instruments – bonds, debentures, commercial paper (CP) and certificate of deposit (CD). The private sector comprising the non-bank corporate sector and private sector banks issue bonds, debentures, CPs and CDs. In advanced economies, the debt market is the preferred route for raising funds. However, in India, the equity market is more preferred than the debt market, and government securities dominate the Indian debt market. [For more details, see the 2004 SEBI working paper no. 9 titled ‘Corporate Debt Market in India: Key Issues and Some Policy Recommendations’. Conditions are changing and more corporate debt is being issued, as a more recent (2013) CRISIL document indicates.]

A 2013 Credit Suisse report on India’s financial sector pointed out the high growth in the debt levels of ten corporate groups – Lanco, Reliance ADA, GVK, Jaypee, Adani Enterprise, Essar, GMR, KSW and Vedanta. Despite profitability pressures, their debt levels rose between 2012 and 2013. Also, 40-70% of the loans are foreign currency denominated. Delays in their planned projects can cause further strain on their cash flows and therefore on their debt servicing ability. Some of them have undertaken asset sales, but they have proved insufficient. Indian banks need to be concerned as well; although, majority of the non-performing assets (NPAs) are from agriculture and small & medium enterprises (SMEs). In 2014, the International Monetary Fund sounded a warning too.

The debt-to-GDP ratio is more important than debt levels themselves. Why is this so? This is because an economy whose GDP is growing faster than its growth in debt will not face the problem of repayment. However, if the GDP grows at a smaller pace than debt growth, the economy will not have adequate surplus (aggregate output net of replacement) to repay the debt. This is what we mean by debt sustainability. In early 2014, the credit rating agency, Moody’s warned that India’s sovereign rating can be affected due to the slowdown in growth and high inflation. [In so far as public authorities, via the central bank, can create money ex nihilo, debt can always be repaid (referred to as monetising the debt). However, this is the case if and only if the public debt is denominated in the local currency. In India, most of the public debt accrues to Indians and is therefore denominated in Rupees.] The following chart compares debt-to-GDP ratio of India with three advanced economies – Australia, UK and US.


Data from World Bank

Clearly, advanced economies have different debt-to-GDP ratios (also see this link for data on OECD countries). In short, there is no economic reason why a high debt-to-GDP ratio is bad for the economy; it is the growth in the debt-to-GDP ratio that must be closely monitored and appropriate measures undertaken to ensure that the economy grows at a faster pace than the growth in debt. As previously noted, government expenditure on education, environment and health have long-term positive benefits (significant positive externalities). Over time, these expenditures will boost economic growth and will therefore aid in debt repayments. Of course, the returns from any investment – private or public, depend on the effectiveness of the project undertaken such that they generate the expected yields.

The financial liabilities of the household sector have also risen over time, due to the attractive home loans and increased ease of obtaining credit cards. All economic agents – be it households, corporate bodies or the government, often (and have to) resort to borrowing. This post has shown that the borrowings undertaken by the Indian household sector, the Indian corporate sector and the Indian government have grown over the years. This, per se, is, and should not be a cause of immediate concern. However, this does warrant a more detailed analysis of the ability of the Indian government to make debt repayments, which hinge crucially on the rate at which the Indian economy grows and its rate of inflation. A serious macroeconomic analysis, perhaps based on the economics of Domar, Keynes and Lerner is in order.

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Posted in Economic Growth, Economics, GDP, Government, India, Keynes, Macroeconomics | No Comments »

Prices, Competition and Markets

Posted by Alex M Thomas on March 31st, 2014

It has become commonplace in India to point fingers at the central government when prices of essential commodities such as onion or fuel rise. The underlying arguments behind this accusation could be that: (1) the government is expected to maintain price stability and/or (2) the government should socially engineer agricultural markets in a ‘fair’ manner. But, is the pursuit of price stability not the job of the Reserve Bank of India (RBI)? It is true that the RBI cannot do anything to combat inflation when it is caused by a supply-and-demand mismatch in the domestic vegetable market or the international oil market. What the RBI can do is manage inflation expectations, and that is for another post. The present post is motivated by the insightful analyses of Kannan Kasturi on the Indian vegetable market, published in the Economic & Political Weekly and other places. That is, this post takes up the second of the reasons mentioned earlier.

The price mechanism – adjustments made by producers to the selling prices and consumers to the purchasing prices – is expected to allocate the commodities brought to the market amongst the consumers, in accordance with their needs, reflected in their willingness to pay. The prices therefore act as signals for the producers especially. Sellers can adjust quantity in order to affect prices; hoarding commodities is one such strategy. At equilibrium, producers earn a normal rate of profit, which contains a pure rate of return on capital advanced and a return for risk and entrepreneurship. If producers do not make normal profits in time t, they will cut down production in time t+1. During the equilibration process, producers who are unable to earn a normal rate of profit will exit the market. If entry costs are low, new producers will enter the market. Producers who have large financial resources (or access to easy credit) at their disposal are insulated from temporary alterations in demand. Producers who have enough accumulated earnings can shield themselves from such market volatility. In short, a competitive market is one where prices are not distorted (by the producers or by external intervention), no (especially, cultural and social) barriers to enter the market exist and workers are mobile within and across markets.

Of course, the agricultural markets in India are far from competitive. Since more than 50% of Indians derive their income from agriculture, and particularly because of the poverty of the farmers, these markets require government intervention. This is not to say that any form of government intervention will better the situation. Kasturi quite convincingly shows that the fault lies with the supply-side – the agricultural supply chain. This post will not discuss minimum support prices or other input subsidies, such as for electricity, irrigation and fertilizers. Also to be noted is the specific manner in which the agricultural input markets are inter-linked in India, which has been of an exploitative nature. Finally, social and cultural factors (pertaining to caste and gender) are seen to hinder competitiveness in Indian markets, not just in agriculture.

What are the problems with the agricultural supply chain? Kasturi points out the following: (1) Small farmers lack storage facilities in order to gain from the high market prices. (2) The middlemen (those who intermediate between farmers and final consumers), i.e. the wholesale traders and commission agents have the ability to hoard vegetables and consequently they reap the benefits of the high prices they themselves engineer; the Agricultural Produce Marketing Act governs the agricultural markets (mandis) and it is here where all the proceeds from higher prices are absorbed with nothing reaching the farmers. These traders and commission agents are ‘well entrenched in the mandis, having been in the business on average for 20 years’ (3) Agricultural pricing is not at all transparent and the mandi records are of no assistance in this regard.

To sum up, the nature of government intervention has to change, in such a way that is beneficial to farmers. Proper laws are of utmost importance, not just in protecting the interests of the small farmers, but also that of the consumers.  Moreover, intermediaries in any market perform useful functions but laws should be in place which ensures that they do not become monopolistic and exploitative. Agricultural infrastructure such as storage facilities is paramount in this context. A very detailed study of how these supply-chains operate will be of much help in our attempts to combat inflation.

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Posted in Agricultural sector, Development Economics, Economics, Government, India, Inflation, Markets, Prices | No Comments »

2013: A Round-Up

Posted by Alex M Thomas on February 28th, 2014

January: Wages in Economic Theory and Reality: Some Issues

February: Reflections on Chayanov’s The Theory of Peasant Economy

March: The 2012-13 Economic Survey of India (with Raghuram Rajan)

April: On Economic Growth and Development

June: Thomas Tooke: An Introduction

July: Understanding India’s Economic Growth and Development [book review]

August: Misunderstanding Economic Growth and Development [book review]

September: Robert Torrens: An Introduction

October: Two Fundamental Objections to Marginalist Economics

November: Towards an Objective Understanding of Scarcity [book review]

December: A Review of Dipankar Gupta’s Revolution From Above: India’s Future and the Citizen Elite [book review]

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