…I met with two young girls, blonde one was called Freedom – dark one Enterprise
Imagine a country for which Rs 100, say, of external debt has just matured. If this amount is paid immediately, then its consumption and investment levels will have to be squeezed, forcing the country to a regime of quasi-stagnation and low living standards, which would bring huge social unrest in its wake. The alternative is to defer debt-collection, allow the country to use this Rs 100 for domestic consumption and investment, and to supplement this amount with additional resource mobilization at the expense of the tax-evading rich, to boost consumption and investment still further. In that case, the living standards of the people, and the growth rate of the debtor country, will be markedly higher than in the first scenario. And if this growth rate exceeds the rate of interest on the debt, then creditors need not even be worried about default, since the country at a future date will have less to pay relative to income than now, in clearing the legacy of this Rs 100 of current debt.
Hence, as long as the interest rate on the deferred debt is lower than the growth rate that a programme of which debt-deferment is a part would generate, creditors should not mind debt-deferment. Why then is the Angela Merkel government of Germany so vehemently opposed to a re-scheduling of Greek debt, when the people of Greece, squeezed by years of austerity, have just voted to power a political formation that promises to end it, and whose failure will cause massive political and social unrest in Greece and in Europe at large?
The answer, it may be thought, is that this condition, about the growth rate following debt-re-scheduling being higher than the interest rate on the re-scheduled debt, will not hold, since the market will be reluctant to lend to an already over-indebted Greece, or to roll over its debt, at less than a considerably high interest rate, because of the risks involved. But much of Greece’s debt is now owed to the European Central Bank (and even if this were not so, the ECB could have stepped in to take over the debt), so that the market does not enter the picture. Besides, in the current world scenario, where the crisis has forced down interest rates in the advanced countries, even to nearly zero in the United States of America, this condition should not be too difficult to fulfil for the ECB.
The reluctance of Angela Merkel’s Germany to re-schedule Greek debt is not a personal issue concerning Merkel. Her behaviour is dictated by the predilections of her main constituency – globalized German capital. But why should German capital act in this way? One possible reason could be fears of the Greek government’s reneging on promises of payment in future. But it is always open to the European Union to exert the same pressure on Greece at some future date in the event of its dilly-dallying on payment, as it is exerting now; and, at that future date, the resistance to payment will also be lower because of the relatively lower burden of the debt. Besides, the very fact of Syriza keeping faith with the people (otherwise it would not be asking for debt deferment) should persuade German capital of the reliability of its word. So this cannot be the explanation for Merkel’s intransigence.
Likewise, the domino theory – that if Greece is allowed to get away with debt-deferment, then others too would demand such deferment, cannot be an explanation, because the question here is not some concession to Greece, but a straightforward business deal where the creditors have nothing to lose through such deferment. In other words, there is no reason why others getting away with debt-deferment should be a problem, if debt-deferment itself is not a problem: creditors, just as they would not lose anything by re-scheduling Greek debt, will also not lose anything by re-scheduling anyone else’s debt. So, re-scheduling of Greek debt starting a domino effect cannot be an explanation for German intransigence.
This however brings back the question, why is there so much opposition on the part of German capital to a re-scheduling of Greek debt, especially when not much Greek debt is owed to German capital anyway? Much of what was owed to German capital some time ago has been taken over by the European Central Bank. Why then this bloody-mindedness?
The answer that Keynes would have given (for he gave a similar answer to a similar problem in his time) and economists like Joseph Stiglitz give today is that this opposition is ideological, in the sense that those who are opposed have a set of prejudices about what is ‘right’, which are derived from wrong theories. If only a correct understanding gets circulated among the economic actors, then the opposition to a re-scheduling of Greek debt will disappear, since there is no question of anyone being a loser because of it
Keynes had given a similar answer to a question that had arisen in his day. If in the midst of a depression (which is when he was writing), governments spend more, even by running large fiscal deficits, then both capitalists and workers gain, the former through larger profits and the latter through larger employment, then why do capitalists and financiers oppose fiscal deficits so much? Keynes’s explanation was that they subscribed to a wrong theory, which saw sound finance as virtuous – a theory he was criticizing. Hence, once the correct theory, which he had discovered, was understood by them, this opposition would disappear. However, almost eight decades after Keynes’s magnum opus was published, this opposition still persists. And what is more, the pre-Keynesian orthodoxy, which had got dislodged by Keynesian ideas for a while in the post-war years, has actually made a come-back.
The triumph of a particular ideology at a particular time has itself, therefore, got to be located elsewhere, such as the changing material conditions. The ascendancy of Keynesianism, then, may be explained by the post-war retreat of metropolitan capital, the compromises it was forced to make, in the face of the socialist threat, and of militant working class demands for a new order to replace the discredited Depression-afflicted pre-war capitalism. Likewise, the subsequent retreat of Keynesianism and the revival of the old orthodoxy may be explained by the reassertion of its strength by metropolitan capital, especially finance capital, which, because it has become international (in this era of globalization), has little to fear from working class resistance that continues to remain national in its scope.
Economic orthodoxy, in short, has to be seen both as buttressing, and deriving its strength from, the power of capital. But, then, the explanation for the rejection of a more humane solution to any problem of capitalism – which could make everyone, including the capitalists, better off – in favour of a harsher one that insists on squeezing the working people, has to be sought in the very nature of capital itself, the fact that it is systematically characterized by a desire for power that even over-rides immediate profit considerations. This underlies what appears as bloody-mindedness, which, to repeat, consists in the fact that when capitalism is faced with a problem to which there are two apparently possible solutions, one of which involves everyone becoming better off, and the other involves a squeeze on the working people, the spontaneous tendency of capital is to choose the latter. It chooses the latter, ironically, even when the latter is only an apparent, not a real, solution, like enforcing wage cuts during the Great Depression.
Capitalism, thus, is not just an anarchic, or exploitative system; it is also a bloody-minded one, in this sense. Keynes recognized the first of these traits, and Marx recognized the first two traits. But even Marx did not discuss this third trait, while Keynes’s remedy to capitalism’s basic problem, of being afflicted with large-scale unemployment, specifically assumed that the third trait did not exist. Standard text-book economics, which teaches that the market equilibrium in an economy characterized by (perfect) competition, with everybody acting as a price-taker, is one where a Pareto-optimum prevails – that is, where nobody can be made better off without someone else becoming worse off – is thus totally irrelevant for a capitalist economy. Capitalism is not only perennially stuck in sub-optimal states, but any effort to move it from there, so that everyone becomes better off, is fiercely resisted by the capitalists.
This bloody-mindedness of capitalism is visible not just in Greece, or in the current austerity measures being imposed all over the capitalist world even during a crisis, it is visible in India too, where the ruling corporate-communal alliance is busy dismantling the Mahatma Gandhi National Rural Employment Guarantee Scheme to improve the confidence of the international investors in the Indian economy.
The author is Professor Emeritus, Centre for Economic Studies, Jawaharlal Nehru University, New Delhi