Neoliberalism: No reformist solution to its crisis
Chapter 03. Impact of ‘temporal mode of production’ on GDP and Inflation: Transportation of Inflation
‘Growth’ is a word that seems to be an obsession for the mainstream economy today. Such ‘growth’ means the increase in gross domestic product, i.e. GDP, [in fact not the amount of product but the product price] of a country or an economic region. We often hear the screaming of ‘slowdown’, which, especially these days, is exhibiting a level highly scaled up, in fact indicates a decline in the GDP growth rate. However, in most of the cases such ‘slowdowns’ are frequently observed, i.e. yearly or quarterly, and nothing but fluctuations around an average. Therefore, to study such parameter in the context of characterizing an economic era, we need to focus on the trend of its average over the time. It does not mean that the fluctuations are not important, in fact, at some particular moments they can be key factor for the entire economy to make a turn.
Another such term is the ‘Inflation’. If ‘growth’ is the hemoglobin of modern capitalist economy, ‘inflation’ is its sugar level that needs to be maintained within a range. Empirically inflation represents the value of money in a reverse sense, i.e. larger the inflation, lesser is the value of a specific amount of money; for instance, a ‘$100’-note may constitute a smaller value than hundred dollar if the inflation is high and vice-versa. In a mature capitalist system, money (‘narrow’/‘broad’), being the key representative of ‘exchange value’, is a measure of asset, and simultaneously, is the medium of all exchanges. Now, asset cannot be enhanced without accumulating money, whereas money fails to be representative of exchange value without its significant circulation. Therefore, to be worth as it seems to be, money needs to be centralized and decentralized together in order to control inflation/deflation. Conventionally it is thought that inflation can be manipulated by adopting suitable monetary policy. However, it will be shown in the current chapter that GDP and inflation have got tied together, as if with a spring, in the new phase of capitalism with the trend of ‘temporal mode of production’ [as discussed in the previous chapter]. It will also be shown that the growth rate has a tendency to fall due to such new economic mode. Then it will be elaborated that in a post-‘Bretton Woods’ system how the inflation can be transported from one nation to the other. In fact, in such cases, the instantaneous measures not the average ones get significantly important.
Impact of ‘temporal mode of production’ on GDP
How the ‘temporal mode of production’ affects GDP of a nation is indeed a very complicated issue. However, it can be comprehended by studying the trends and features of reinvestment, which is the engine of economic growth in capitalist systems. It is also important to take a note of the fact that, as Marx explained in ‘Capital’ (vol-I) , the central tendency of capitalism has been a journey toward higher ‘organic composition of capital’, i.e. to invest more on constant capital than on the labourers. It is true till date and is supported by the fact that the largest companies (top 500) of each of the USA, UK, Europe, Japan and the emerging economies including BRICS recruit approximately 5 people on an average per million dollar investment, and higher the amount of investment, lower is the employment per investment . Therefore, in such state-of-the-art globalized economy, gross capital formation (GCF) is roughly a good measure of such investment in constant capital. And if we look into its demographic variation, as can be seen in the plot of Fig.1 as per available latest data, only six nations, i.e. USA, UK, Germany, France, Japan and China, together constitute 57% of the global value of GCF among almost 250 countries. Thus it will not be an overstatement that the world economy follows, more or less, the trends set out in these very nations.
(Fig.1. Data Source: World Bank)
Now, it is apparent that the total products in a capitalist society, which in economic terms is represented by GDP, can be divided into two components in material terms, i.e. the consumables (including goods and services) and the means of further production, the latter being manifested as GCF. Thus, GCF of a year as a percentage of GDP of the previous year is our desired parameter to express the relevant reinvestment percentage. It is worthy to further elaborate that the capitalist society is divided into two groups, i.e. the buyers and the sellers of these products. The consumables are purchased by both the groups; however, the means of production are bought by the latter group only, although the former group also invests in an indirect way through savings in banks and finance sectors. Such investments from both sides, i.e. buyers and sellers, are included in the calculation of GCF. Fig.2 shows the trend of such reinvestment percentage for the abovementioned countries over past six decades.
(Fig.2. Calculated; Data Source: World Bank)
It is evident from the plots of Fig.2 that the reinvestment percentage has been exhibiting a decreasing trend over the decades in developed capitalist countries. China, on the other hand, observes an opposite development in this regard. In fact, in the era of temporal mode of production, the tendency of producing costly commodities comparatively in smaller numbers results in reducing the capacity to reinvest. This is attributed primarily to the three following reasons. Firstly, such costly commodities are sold on credit and thus a smaller fraction of their prices are circulated back to the hands of capitalist owners in each production cycle; secondly, the trend of temporal mode itself is not intended toward increasing the products in numbers, rather it is deliberate to have an increment in the price level by updating or remodeling the product, which reduces the effective investment; and thirdly, the expansion of speculative stock market (which will be analyzed in detail in a latter chapter) attracts investments toward it for short term high profit and trims down the investment in real production. However, as discussed in the previous chapter, China has been facing a transitional phase toward neoliberalism along with a few measures claimed to be of socialist nature, where, alongside the costly products, they produce cheaper commodities in large numbers but with short durability. Therefore, the episode in China, in this context, is observed to follow an opposite trend to the former two of the three reasons mentioned above. Nevertheless, market for costly commodities is growing very fast in China and the speculative economy even at faster rate.
The tendency of reinvestment to decline due to temporal mode of production, in turn, leads to a decreasing trend in the growth rate of GDP. The continuous scaling up of organic composition of capital, adjoining the current affinity of reinvestment percentage to drop down, results to such slowdown of the economy . It does not signify any instantaneous symptom of a recessive event but a general syndrome of the temporal mode of production and can be studied by extracting relevant information from the real-time data if the yearly or quarterly fluctuations of growth rate are averaged out over decades. This is depicted in Fig.3(a) where the growth rates of real GDP (i.e. in constant currency value) for the abovementioned countries have been plotted.
(Fig.3. Calculated; Data Source: World Bank)
It clearly shows that, unlike what is conventionally claimed, as if the slowdown in economy of the so-called developed capitalist countries is a sudden consequence of 2008 sub-prime crisis, such slowdown has indeed been a continuous trend over the past decades since 1970’s. The GDP growth rate has now dropped down to 2% or less in these capitalist countries. And due to the supremacy of these countries over the entire global economy, the whole world is exhibiting a continuous slowdown since last five decades as shown in Fig.3(b). As a seemingly exception, an increment in reinvestment has been seen in China due to its significant cheaper products in the temporal mode (as mentioned earlier), which has made it possible for them to maintain a moderately higher growth level. However, the current decade is observing a serious slowdown in China originated due to the significantly increasing domination of speculative economy as mentioned above. This is a fundamental feature of neoliberal phase of capitalism that China is exhibiting as an obvious outcome of temporal mode of production.
In fact, in the era of such temporal mode of production, the GDP growth rate and inflation are tied together in a manner so that one follows the other. This can be seen in the plots of Fig.4 which compare the variation of growth rate and inflation (measured by GDP deflator) between almost 250 countries categorized as high (e.g. USA, UK, etc), upper middle (e.g. China, Brazil etc), lower middle (e.g. India, Vietnam etc) and low income (e.g. Syria, Somalia etc) countries based on their gross national income per capita.
(Fig.4. Calculated; Data Source: World Bank)
It is apparent from the plots that if the growth rate increases, it suffers from greater inflation; and if it tries to lessen the inflation, growth rate falls down. Thus fortune never comes alone in the current neoliberal phase of capitalism, rather, brings with it an unavoidable misfortune. However, the growth rate and inflation do not vary in equal percentage since the GDP signifies the sum of all domestic product prices whereas inflation is a measure of the increase in mean value of all such prices. Now, as discussed in the previous chapter, neoliberalism is defined by its new feature of producing costly commodities in comparatively smaller numbers repetitively with newer applicative quality. Thus, the trend is toward a continuous increment in the price level of the products of previous basket by updating or remodeling them in as small as possible production cycles (generally few years, may be few months in some cases). This asserts that, in such temporal mode, an increase in the growth rate is only possible, if the economically dominant products (i.e. the costly ones) are qualitatively renewed which leads to increase in the average commodity price, instead of an increase in the number of existing products keeping the average price intact. Thus, such production mode emphasizes that a GDP growth must bring with it an obvious inflationary pressure.
Transport of Inflation
Despite such apparent inflationary pressure while maintaining a sustained growth rate the inflation can be partially transported from one nation to the other through foreign trading in a global economy without gold standard . In fact, since 1971, with the end of Bretton Woods system of fixed exchange rate, such inflation transfer from one nation to the other has been observed as a general characteristics of the present economy. It is first important to realize that the fall of Bretton Woods system was not mere policy but a compulsion of the new mode of economy that was about to emerge at that period of time. The production of costly commodities needed sufficient liberty in global trade to get a considerable size of its market since purchasing power of the people for such commodities was very limited within the boundary of a nation. This in turn led to the formation of transnational companies, which, on the other hand, brought about a conflict between the concerned nations (oppositely to what is often claimed about inter-imperialist rivalry) in terms of seeking capital in order to enjoy a larger fraction of the profit. It will be shown in the next chapter how through investing a larger amount of capital an excess surplus can be extracted from the entire society. Nevertheless, due to transnational houses an equivalent capital inflow and outflow get significant importance in this new era. To keep the dominance over the entire world in this emerging situation of two-way capital flow, it became necessary for the monopolies of imperialist countries to replace gold standard as the medium of foreign exchange by the individual currencies of the nations. It is evident that the already established dominance of these countries would create hegemony over all other countries to trade in the influential currencies as exchange medium and therefore, also to reserve such currencies, namely dollar, pound, euro and yen, for a presumably worldwide market acceptability. Thus, such currencies, predominantly the dollar, have become effectively the international currencies. In addition, the U.S. Dollar, Pound Sterling, Euro and Japanese Yen (very recently, the Chinese Yuan also) achieved a special drawing right provided by the IMF as a virtual international monetary reserve. It will be shown in a latter chapter how such currency system has scaled up the crisis of neoliberalism.
Nonetheless, the abolition of Bretton Woods system has brought into a new phenomenon of inevitable transfer of inflation from one nation to other through foreign trading. We will explain it with an example. For instance, suppose a country like India exports its goods and/or services or bring in a foreign capital investment in any of such currencies, let in US dollar. The respective traders or banks of India then get the equivalent amount of Indian currency, i.e. Rupee, by substituting such dollars at its central bank, i.e. RBI. Thus, such money issued by the RBI enters the domestic circulation of India which becomes superior over its domestic products and is not balanced by the latter thereby resulting in a consequential additional inflation. On the other hand, the same amount of dollars being out-flowed from the US reduces its own domestic inflation. Thus, inflation is certainly transported, although being scaled up or down, from US to India through such mechanism of the current exchange system. And as always happens that capitalism depicts its dominance as liberalism, such transportation of inflation is claimed to be cancelled out in a self-manipulation mechanism in the bourgeoisie economic theories of inflation and justifies the need of a floating currency exchange rate instead of a fixed one. However, additional inflation transfer may further take place due to such floating currency rate since it can attain different instantaneous values. To elaborate such transportation of inflation, we take a real-time example of trading by India with US and China in the first half of this decade. In Indian context the inflation transfer is mostly influenced by these two countries since India exports its maximum (~16%) to the US and imports at maximum (~16%) from China. However, before we go into the relevant data, it is worthy to mention that usually inflation is calculated by two parameters, namely the GDP deflator, which accounts only for the domestic goods and services, not the imported ones, and the consumer price index (CPI) that includes also the import-export of commodities. Thus, the difference between CPI and GDP deflator can give us a picture of the inflation transfer if we comparatively study it with the trading and currency reserves. Fig.5(a) shows the plots of net export by India to the US (a –ve import) and import from China (+ve) [left axis] along with the growth rate of foreign reserves excluding gold at the central bank of India (i.e. RBI) [right axis] from 2011 to 2016. The difference between CPI and GDP deflator as a measure of importation of inflation by this three nations are plotted in Fig.5(b).
(Fig.5. Calculated; Data Source: World Bank)
It is apparent from the plots of Fig.5(a) that imports to US and exports from China by India got a hike in 2014-2015 along with a significant increase in the growth rate of foreign currency reserves. As explained above, a corresponding increase is observed in the importation of inflation in India whereas US exhibits a respective out-transport of its inflation (Fig.5(b)). Further, the inflation importation by China (Fig.5(b)) is attributed to the fact that, while such trading, US dollars entered India during its export whereas it is send away to China while imports. Thus India plays the role of channel to transport inflation from US to China in addition to their direct trading. However, such phenomenon of entry and exit of dollar to India not only occurs due to trading with US and China but during all such foreign trades which are carried out in dollar as the exchange medium.
Such mechanism is a generalized feature of neoliberalism. The above example depicts how the resultant of the two factors, i.e. the increase/decrease in foreign assets held by central bank and the net export/import by a nation, lead to import/export inflation by the country in addition to its own domestic inflation. It is thus apparent that when the pressure of inflation/deflation in some nations get elevated, the foreign relation may turn into a trade-war. The intermediate countries which predominantly trade with them may suffer the most. Finally, such transportation of inflated/deflated values of currency through foreign trading and foreign asset reserves result in a transportation of financial crisis of neoliberalism from one nation to the other and can blow out the intermediate nations, which will be elaborated in a latter chapter.
To be continued …
(Chapter-04: Generation of profit in neoliberalism: A qualitative change in the concept of class)
References and Footnotes
1. Marx K., “Capital” vol-I, Progress Publishers, Moscow (1957) [first published 1867].
2. It is to be mentioned at this point, that, the ‘organic composition of capital’, as defined by Marx, can be identified with the ‘value composition of capital’ (i.e. the ratio of constant capital to variable capital) “in so far as it is determined by” the ‘technical-composition of capital’ (i.e. relation between the amount of means of production and the mass of labour) and “mirrors the changes of the latter” . Thus, a tendency toward the higher ‘organic composition of capital’ has led to the fact that the present economy is characterized by the trend that, more the investment, less is the employment per investment. To demonstrate such trend, we have plotted below the employment per investment with the effective investment of the top 500 companies of each of the US, UK, Europe, Japan and the emerging economies including BRICS. It is to be noted that, in this work, subtracting the profit from the net sales, the effective annual investment values are calculated. Thus, the actual investment is much higher than the effective investment since the inventories are not included in the latter one. We have classified the companies based on the amount of their annual effective investments in the groups of less than 2,000 m$ (million dollar), 2,000-10,000 m$, 10,000-1,000,000 m$ and more than1,000,000 m$.
It is to be noted that, in this work, subtracting the profit from the net sales, the effective annual investment values are calculated. Thus, the actual investment is much higher than the effective investment since the inventories are not included in the latter one. We have classified the companies based on the amount of their annual effective investments in the groups of less than 2,000 m$ (million dollar), 2,000-10,000 m$, 10,000-1,000,000 m$ and more than1,000,000 m$.
(Fig.6. Calculated; Data Source: Forbes 2015)
It is evident from the plots shown in the above figure, that, firstly, the largest companies (top 500) of each of the abovementioned regions (i.e. the developed capitalist countries and the emerging economies) have failed to recruit at least 6 people on an average per million dollar annual effective investment; secondly, whichever the country or region may be, higher the amount of investment, lower is the employment per investment (from 6 people/m$ for <2,000 m$ to about <1 or 2 people/m$ for >1,000,000 m$ investment); and thirdly, these features are characteristic to not only the developed capitalist countries like US, UK, Japan or the Europe, but also of the developing countries as a whole including China. Thus, such features are common, not only in facts but also in figures, in all parts of the current neoliberal world indicating what actually globalization means. This represents the degree of ‘organic composition of capital’ in the present era and, indeed, is the way how to parameterize the stage of modern capitalism.
4. Nikitin S. M. (Ed.), “Inflation under Capitalism Today”, Progress Publishers, Moscow (1984).