Tag: Unemployment

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

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.

I

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.

II

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.

Economic Survey of India 2010-11: A Critical Look

The Union Budget is presented based on the Economic Survey conclusions and recommendations. Therefore, the Economic Survey becomes a crucial document to examine and interpret. This time as well, the hands of its architect remain quite visible. Like the previous attempt, there is an increased use of economic theory ‘ game theory, mechanism design, rational choice theories, etc ‘ which provide support to various policy recommendations. According to this economic architect, all solutions are to be found in incentives. If the right incentives are provided, then economic and political governance will be smooth like that of the most competitive market. Agreed! What commonsense and insights from various social processes tell us is that individuals have heterogeneous preferences and what is an incentive for one might be poison for another. This blog post will examine some of these suggestions in detail (from Chapters 1 and 2 of Economic Survey 2010-11). In particular, the suggestions examined below will be those which have been favoured or disregarded based on arguments drawn from (neoclassical) economic theory.

Fiscal policy

Economic Survey 2010-11 assures the reader that India has recovered from the global financial crisis because of the high growth rates. For all practical purposes, this information indicates that we can now call for fiscal consolidation or lowering of the fiscal deficit. The usefulness of the government is over; let market forces function peacefully now without any government intervention!

‘With clear evidence of economic recovery in 2009-10 as indicated by the Advance Estimates of the GDP, the Budget for 2010-11 resumed the path of fiscal consolidation with a partial exit from the stimulus measures.’

It is at the same time interesting and worrying to see this sort of rhetoric. Such rhetoric rests on the following premise: the opportunities for investment are limited (read: scarce) and the entry of the government will crowd out private investment. Surprisingly, this neoclassical idea, which is much promoted in our academic textbooks, fail to point out the fallacy of composition on which this argument is based. This argument does not recognise the interdependence in an economy. Wages generated from government jobs are not only used to purchase goods and services from the government sector. In fact, the wages and salaries generated by the government sector are spent in consuming goods and services produced by the private sector. It is certainly time policy makers understood the benefits of crowding in effects of government intervention. The expenditure, one should look for, is mainly in social services ‘ education, health and employment.

Agriculture

Agriculture has been identified to be critical for macroeconomic stability and growth; although services sector is our potential growth engine. This can be read as: agriculture needs to grow at a level which will enable (the favourite word of the economic architect) the service sector to grow. Agriculture is carried out by majority of our fellow Indians (around 60 %) and it provides us food and raw materials. Our economic architect argues:

‘The rise in prices of agricultural produce would in part help incentivize production; the moot question remains what proportion of the rise accrues to the producer and what proportion gets appropriated by middlemen. The creation of more direct farm-to-fork supply chains in food items across the country would be critical in incentivizing the farmer with higher producer prices and at the same time would lower the prices for end-consumers.’

Why are middlemen always blamed’ Are they not the ones who aid production’ Who exactly are these middlemen’ Be that as it may, what is clear is that the middlemen have often more power (economic and social) than the actual producers. Majority of the farmers are forced to sell their product immediately after harvest owing to debt obligations. In addition, the (small) farmers do not benefit from the price rise because they do not have adequate storage facilities. As a matter of fact, even the Government only stores certain food grains in its godowns. Vegetable and fruits are not procured by the government. The undue emphasis placed on incentives by our economic architect is of concern. For one, production can only be carried out if the farmers have sufficient capital to purchase inputs. In India, the phenomenon of inter-linked markets is common in agriculture. That is, the same person provides credit as well as inputs to the farmers, thereby enjoying a very strong bargaining position over the farmer. Now, when our economic architect recommends FDI in retail food because they incentivise production, he is being blind to the production conditions of Indian agriculture. This can exacerbate the plight of the Indian farmer by making him/her subject to the contracts of the foreign firms. In this scenario as well, the farmer, owing to his/her weak bargaining power will never be able to enjoy higher prices. But yes, this could mean a lowering of prices for our urban consumers!

Inflation & employment

The subject of inflation has been dealt with in great detail in Chapter 2 of the Economic Survey 2010-11. In recent times, inflation has affected both the rural and urban consumers. However, as we know, the effect of inflation on the consumers are not equal in magnitude. Consumers who have very less income will be deeply affected by inflation. For instance, the small and marginal farmers are severely impacted when prices rise. Given this plight, the following statement by our economic architect is indeed baffling:

‘It may be mentioned that food price inflation during the last financial year was mainly driven by high inflation in pulses, cereals, and sugar due to bad monsoon. The rise in the purchasing power owing to the rapid growth of the economy and inclusive programmes like the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) partly might have contributed to the upward trend in inflation.’

First of all, the above statement indicates an inadequate understanding of inflation. Secondly, what about the rising purchasing power of the urban consumers or the employees of BPOs. What makes our economic architect point fingers at those who barely manage a living’ If the beneficiaries of NREGA were surviving by barely subsisting before NREGA, their purchasing power would not have risen so much post-NREGA to contrbute, as our economic architect suggests, to inflation. In fact, such statements indicate a gross misunderstanding of inflation, a lack of knowledge of how rural India operates and a insensitivity towards subsistence and livelihood in general.

Conclusion

It is high time that we seriously examined some of the tenets of conventional (neoclassical) economic theory. Today, a lot of students and professors of economics world over are questioning the premises and logic of neoclassical economics. However, we find neoclassical economics still domination in various forms, such as new institutional economics, mechanism design, law and economics, microeconomics etc. Given that some of the foundations of economic theory are in question, it is surprising to see how much our economic architect bases the policy recommendations on such apparent scientific and objective truths!

On Disguised Unemployment: Some Issues

This post discusses some of the broad theoretical issues underlying the category of ‘disguised unemployment’. The discussion is made clear by closely examining the hypothesis that Indian agriculture is plagued by the presence of high disguised unemployment.

Let us take a glimpse at the Economics textbook for class XI published by the NCERT. (NCERT 2006, p 131, Indian Economic Development)

‘Economists call unemployment prevailing in Indian farms as disguised unemployment. What is disguised unemployment’ Suppose a farmer has four acres of land and he actually needs only two workers and himself to carry out various operations on his farm in a year, but if he employs five workers and his family members such as his wife and children, this situation is known as disguised unemployment. One study conducted in the late 1950s showed about one-third of agricultural workers in India as disguisedly unemployed.’ (italics mine)

Is disguised unemployment unemployment’

A thought experiment. Suppose A and B are two similar countries ‘ both are equally populated. Now, a study has estimated disguised unemployment in country A to be 30% and in country B to be 10%. This implies that employment in country A is more than that of country B. Should this be of concern’ Must we try and reduce disguised unemployment in country A’

If so, what is the basis of ‘disguised unemployment” Do we see the principle of allocative efficiency present in disguise’ Disguised unemployment means that ‘labour’ is ‘inefficiently’ utilised. Attestation of this claim is done by showing the high share of workers employed in agriculture alongside the low contribution of agriculture to GDP.

The first draft of National Employment Policy (2008) reads thus: ‘Over half the workforce continues to depend on the agriculture even though it accounts for less than a fifth of the total GDP. This implies a vast gap in incomes and productivity between agriculture and non-agriculture sectors. This is mainly due to inadequate growth of productive employment opportunities outside agriculture.’ Is employment the need of the hour or is it contribution to GDP’ Which variable (employment or GDP) should be the criterion’ Why not improve the quality of employment in agriculture’ To attain quality, provision of infrastructural support is absolutely essential- credit facilities, good roads and increased railroad connectivity, storage houses, institutions so as to enable the farmers get a ‘decent’ price for their produce, etc.

In 1960-61, the share of agriculture, forestry and fishing in total GDP was 53% (at 1993-94 prices). This came down by around 30 percentage points to 22% in 2002-03. On the other hand, the share of agriculture, forestry and fishing in total employment was 75.9% in 1961; by 1999-2000, it had come down to 59.9%. [The Oxford Companion to Economics in India, ed Kaushik Basu, OUP: New Delhi, 2007, p. 11]

The above discussion attains significance when we view agricultural workers as those who are trying to make a livelihood out of various jobs ‘ farm and non-farm employment and self-employed and casual labour. ‘Employment’ mainly refers to wage employment. In India, out of total employment, the share of self-employment is the highest. As Amit Bhaduri writes, the economic activities predominant in the agricultural sector (or rural or informal) can be called as ‘survival strategies’. [Bhaduri 2006, Employment and Livelihood, in Employment and Development: Essays from an Orthodox Perspective] He cautions the policy makers on the use of dual-sector models in framing development policies for India owing to the heterogeneity prevalent in rural India and also because of the specificities present in the unorganised agricultural sector. Hence, the notion of ‘surplus labour’ loses much of its weight. In turn, we need to carefully look at ‘disguised unemployment’ for it disguises a lot of specificities of rural India.