Pulling Out All Stops to Keep Colonialism Afloat

Prabhat Patnaik | 24 Jan 2026

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The very aggressiveness of capitalism, its very effort to roll back the historical advances made by the people, underscores the necessity of socialism.

Activists participating in the People's Summit for Democracy rallied outside the Los Angeles Convention Center in June 2022 to demand lift sanctions against countries like Cuba and Venezuela. Photo: Midia Ninja

Post-war imperialism was founded upon a basic contradiction, which becomes clear when we compare it with the pre-World War I period. The leader of the imperialist world in any period typically fulfils its leadership role by running an overall balance of payments deficit vis-à-vis other major countries to which capitalism is getting diffused. This is so for several reasons: it has to make capital exports to help the diffusion of capitalism; it has to keep its markets open for goods produced by these newly-industrialising countries to which capitalism is getting diffused; it has to undertake military expenditure to maintain its hegemony; and it has to periodically fight actual wars.

The leader’s running a balance of payments deficit for all these reasons is almost an inexorable law of capitalism. Accordingly, the leading capitalist country of the pre-WWI period, Britain, had an overall balance of payments deficit, taking its current and capital accounts together, vis-à-vis the other emerging capitalist countries of that period, namely, Continental Europe, the United States, Canada, Australia, New Zealand and South Africa. But while running this deficit Britain did not get into any external debt; on the contrary, it had a net creditor’s position vi-a-vis the world as a whole.

This was made possible because of its tropical colonies of conquest (as distinct from its temperate colonies of settlement), and it happened in two ways: first, by Britain selling in these captive colonial markets its goods, which were being increasingly ousted by competition from capitalist producers in the newly-industrialising countries. This ousting occurred both in the markets of the new industrialisers and also in Britain’s own home market.

Second, Britain simply appropriated, without any quid pro quo, the entire net foreign exchange earnings of these colonies, the part that corresponded to their commodity export surplus to these newly-industrialising countries. (This phenomenon was called the “drain of wealth” by the Indian anti-colonial writers and was noted by Karl Marx in a letter to the Russian Narodnik economist N.F. Danielson in 1881).

Britain thus managed to maintain its leadership role without facing any difficulties because it could fall back on its colonial empire to sustain that role. For instance, Britain’s overall balance of payments deficit vis-à-vis Continental Europe and the United States in 1910, taking both current and capital accounts together, was 95 million pounds (out of a total of 145 million pounds with all countries with whom Britain had a deficit); of this as much as 60 million pounds came from only one colony, namely India (see S.B.Saul, Studies in British Overseas Trade); in addition, of course, it had similar extractions from the West Indies, Malaya and other colonies.

Now, the basic contradiction of post-war capitalism consisted in the fact that the leading imperialist country of this period, the United States, did not have any such colonies. It could neither access colonial markets, which constituted, to use S.B. Saul’s words, “markets on tap”, nor use any colonies as sources of loot. Fulfilling its leadership role in the absence of any British-type colonial empire, required therefore its getting increasingly into debt. We thus had this bizarre situation where the leading capitalist country of the world also became over time the most indebted country in the world.

This did not, of course, matter immediately since the rest of the world was perfectly willing to hold on to the IOUs pouring out of the US, namely the American dollars or dollar-denominated assets, as the dollar was considered to be “as good as gold”.

There was a brief setback to this belief when there was a rush to exchange dollars for gold in the early 1970s: the dollar was exchangeable for gold at $35 per ounce of gold under the Bretton Woods system and this provided scope for people to move away from the dollar and move into gold when there was an upsurge of inflation all across the world.

But after the gold convertibility of the dollar was officially ended and the Bretton Woods system abandoned because of this, the confidence in the dollar gradually returned and wealth-holders once again went on holding American dollars without any complaints. The US leadership of the capitalist world thus remained intact even after the end of the Bretton Woods system.

While this meant avoidance of any crisis arising from the basic contradiction of functioning without colonies, there always remained, however, the possibility of a future crisis, since this contradiction itself persisted. The confidence in the dollar arose among other things from the belief that the inflation rate within the US would never be so high as to induce wealth-holders to move away from the dollar to some commodity. And this belief in turn was rooted in the conviction that the dollar price of labour power would always remain within bounds through the existence of sufficient unemployment, and the price of the most important current input, oil, would remain restrained though the imposition of US hegemony over the oil-producing world. The possibility of these conditions getting undermined however always remained.

The US hegemony over the oil producing world became threatened as several oil producers like Iran, Russia and Venezuela got into antagonistic relations with it and even became targets of sanctions by it. Because of the sanctions, they began entering into arrangements with other countries to sell their oil in currencies other than the dollar. This began to erode the dominance of the dollar and portended a possible crisis in the future.

Besides, the very fact of becoming more and more embroiled in debt, even if this debt is readily held, is not a prospect that the US relished. The prevailing situation, therefore, was becoming increasingly unacceptable to the US and the Donald Trump administration finally decided to curtail altogether the balance of payments deficit of the US and hence reduce the debt it incurs at the margin.

Trump’s imposition of tariffs on imports from the rest of the world is one manifestation of this desire to curtail the payments deficit. The decision to sell American energy which earlier used to be stored within the US itself is another manifestation; and the drive to acquire colonies, especially those endowed with rich mineral resources, so that these resources can be looted (as the tropical colonies earlier could be through the “drain”) to pay for the US balance of payments deficit is another. This is not to say, of course, that other motives did not underlie each of these decisions; it is simply to highlight one important common motive.

Liberal opinion tends to blame Trump for the current ultra-aggressive stance of the US and there is no doubt that a major difference exists between Trump and the other Presidents, in so far as Trump is a neo-fascist while the other at worst could be considered only arch-conservative. But to single out Trump as the sole villain is to turn a blind eye to the frailties of the system as a whole.

What Trump’s action against Venezuela demonstrates is not just his aggressive intent, but also the fact that capitalism functions properly only when it is sustained by direct colonies; and Trump understands this in an intuitive manner. Neo-liberalism and other such ways of controlling the world’s resources by the metropolis, which have been the instruments used until now, are not half as effective as direct colonial rule.

This indeed is the exact opposite of what liberalism believes, which is that the subjugation of people through colonial oppression might have occurred in the past but is not intrinsic to capitalism, that capitalism can function in a peaceful manner through international cooperation, just as it can maintain class cooperation and a welfare state in the metropolis. Trump’s behaviour deviates from this idealised picture of capitalism not because he is a nasty person but, above all, because this idealised picture itself is untenable and Trump’s nastiness fits in with the contemporary requirements of capitalism.

This implies that it is capitalism, not Donald Trump, that is pushing mankind to an extraordinarily dangerous situation. Historical advances such as democracy, decolonisation and the welfare state, which had been made through the struggles of the working people against the system at a time when it was vulnerable because of the socialist challenge, are being sought to be rolled back, now that this challenge appears to have abated. But the very aggressiveness of capitalism, its very effort to roll back the historical advances made by the people, only underscores the necessity of socialism.

Rosa Luxemburg’s assertion that mankind faced a stark choice between socialism and barbarism is being amply vindicated today by Trump’s desperate shenanigans to keep imperialism afloat.

 

Prabhat Patnaik is Professor Emeritus, Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi. The views are personal.

No Country’s Safe in Imperialism’s Gangster Phase

Prabhat Patnaik | 13 Jan 2026

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The difference between Trump and earlier US Presidents lies only in the fact that the others had camouflaged their gangster acts under a patina of “civilised” verbiage.

When the Soviet Union collapsed, liberal bourgeois writers had proclaimed the arrival of an era marked by the universal triumph of democracy and stability; they had considered the socialist challenge unnecessary and counterproductive, and believed that capitalism, which had already given political independence to its colonies, and introduced universal adult franchise and welfare state measures at its core, would, in the absence of this challenge, secure for mankind peace, economic security and individual freedom.

Several Left writers, on the other hand, had seen decolonisation, and the introduction of universal adult franchise and welfare state measures, as concessions wrung out of capitalism at a time when it faced an existential threat because of the socialist challenge, and had anticipated that the abatement of this challenge would make the system assume its usual predatory character and roll back these concessions. They have been proved right, and imperialism, with which alone we shall be concerned here, has shown its blatantly aggressive nature, exhibiting what can only be called a “gangster phase”.

To abduct, as US imperialism has done, a duly elected President of another country, Nicolas Maduro of Venezuela, and his wife, from their residence through a military operation, and bring them to the US in handcuffs to face trial on trumped up charges for which no credible evidence has ever been provided, and to run their country directly as a US colony until a suitable puppet government has been put in place, is an act of incredible audacity which violates all legal and moral norms of international behaviour and typifies this “gangster phase” of imperialism.

This, however, constitutes the latest act of the gangster phase of imperialism. The forcible removal of Iraq’s Saddam Hussein and his execution, again on totally false charges, the brutal killing of Libya’s Muammar Gaddafi, the occupation of Syria, the genocide perpetrated on the Palestinian people whose only “fault” lies in their desire not to be evicted from their homes by an imperialist-backed settler colonial project, the taking over of Gaza as a US colony to be ruled by a “Viceroy” selected by US President Donald Trump and to be converted into a piece of prime real estate, are all episodes in the unfolding of the gangster phase of imperialism.

Liberal opinion, again, holds Trump as a maverick responsible for behaving like a gangster and puts the entire onus of recent predatory acts on him alone. But most of the episodes mentioned above predate Trump’s ascendancy to power; the difference between Trump and earlier US Presidents lies only in the fact that the others had camouflaged their gangster acts under a patina of “civilised” verbiage, while Trump makes no bones about his administration’s intentions.

Besides, every one of the episodes mentioned above, including even the genocide directed against the Palestinians, has the full support of other imperialist countries who never cease to advertise their so-called “liberal” principles. Even the abduction of Maduro, while it has drawn condemnation from all over the world, except a few in the Global South wishing to curry favour with Trump (among whom alas India is included), has enjoyed the active or tacit backing of Germany, France and Britain.

An argument is being put forward, in particular by the European allies of the US, to the effect that Maduro was an authoritarian ruler, so that no tears need be shed over his removal. The utter absurdity of this argument is palpable. International law does not allow the US, or any other country for that matter, to intervene militarily in the affairs of another country to establish democracy there; it is for the people of that country to determine who the ruler should be. Whether Maduro was authoritarian or not is thus completely irrelevant to the issue of US intervention.

Read Also: What Really Does ‘Western Civilisation’ Denote?

Besides, Trump himself has openly admitted that Maduro’s principal opponent in Venezuela, Maria Corina Machado, did not enjoy sufficient popular support to take over the reins of administration after Maduro had been arrested.

In a country with two main political platforms, if one does not enjoy sufficient popular support, then it stands to reason that the other must have greater support. In such a case, to claim, as Trump himself and many European leaders have done, that Maduro lacks political legitimacy, is utterly absurd. If Machado lacks political legitimacy and so does Maduro, then Trump must specify who in Venezuela does enjoy political legitimacy.

The real reason for removing Maduro was revealed by Trump with his characteristic bluntness, when he stated at his press conference on Saturday, January 3: “We are going to be taking out a tremendous amount of wealth out of the ground”. The money made, according to him, would not only go to the people of Venezuela but also to American oil companies and to the “United States of America in the form of reimbursement for damages caused us by that country”.

The “damages” Trump was referring to were caused apparently by Venezuela’s nationalising its oil resources. Venezuela has more oil reserves than any other country in the world, reserves amounting to as much as 17% of total world reserves. And Trump’s proposal to loot Venezuela’s oil is a brazen admission of his motive for taking over and “running” that country. This is nothing else but open gangsterism: you have oil and we shall take it from you by abducting your President if he stands in the way, and either by running your country directly as a colony or by putting in place some puppet government that would allow us to loot your country.

To be sure, looting the resources of other countries, including land or products of land, is what imperialism has always done; it is central to imperialism. After decolonisation, it attempted to carry on the process of looting by toppling governments that stood in the way and putting in place pliant governments.

The CIA-sponsored coups against Arbenz in Guatemala, Mossadegh in Iran, Lumumba in Congo (as it was then called), and Allende in Chile, come to mind as obvious examples. More recently, the various colour revolutions in Eastern Europe and former Soviet republics, and the American assault on West Asia, belong to the same genre. 

The difference between all these earlier cases and Venezuela lies in the fact that in earlier cases the US gave the appearance of supporting one side in an internal conflict, while working on coups behind the scenes; but in Venezuela it has simply carried out a military intervention without this fig-leaf of supporting one side in an internal conflict.

Of course, it also targets those countries which have anti-imperialist governments even when they may not be minerally rich, and Trump has already announced his plans of targeting Cuba, Mexico and Colombia as part of his attempted revival of the infamous Monroe Doctrine. But it is not just Latin America and the Caribbean that constitute the domain of his empire. No country in the world is safe from US intervention today.

The Soviet Union had come to the defence of Cuba during the so-called Cuban missile crisis when the US had threatened to attack that island, even at the risk of provoking a nuclear conflict with the US, just as it had earlier come to the defence of Egypt against an Anglo-French invasion following Egyptian President Gamal Abdel Nasser’s nationalisation of the Suez Canal; in both cases, imperialism had to beat a retreat. The absence of the Soviet Union today will be sorely missed by all countries of the world that are threatened by imperialism led by the US.

This gangster phase of imperialism, which constitutes the highest stage of imperialism to date, cannot obviously last for long. The people of the world, especially of the Third World who have been victims of imperialism, will not allow themselves once again to remain in thraldom to imperialist domination. In fact, even in earlier cases of imperialist gangsterism in the Arab world, the outcome of its interference has been quite different from what was intended.

It is significant in this context that Trump’s bland assumption that, with Maduro out of the way, the Vice-President of Venezuela, Delcy Rodriguez, who has taken his place, will obey American diktat has already proved hollow: she has condemned the US action and demanded the release of Maduro because of which Trump has started threatening her with “a fate worse than Maduro”. And indeed, the entire country has stood up against this act of US gangsterism. While the absence of the Soviet Union has emboldened imperialism in its quest for world domination, this domination will remain a pipe-dream.

Prabhat Patnaik is Professor Emeritus, Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi. The views are personal. 

Opinion



Will the New Labour Codes Worsen India’s Inequality Crisis?

Divya Pradeep and Satyaki Dasgupta
15 hours ago
THE WIRE

The rationale provided by the government for raising the worker limit for layoffs, retrenchment and closures is to reduce compliance burden for firms, which in turn is expected to spur employment. However, studies suggest that flexibility in labour markets has not led to employment growth in India.

Workers prepare fruit cakes and other varieties of cakes at a bakery ahead of the Christmas festival in Prayagraj, Uttar Pradesh on December 21, 2025. Photo: PTI.

The Union government recently notified four new labour codes on November 21, merging the 29 existing labour laws, supposedly marking an era of progressive labour reforms. The codes relate to four major areas and have considerable implications for both workers and employers. These include Code on Wages, Code on Industrial Relations, Code on Social Security and Occupational Health and Working Conditions Code. The codes have been received with a considerable degree of optimism by employers in anticipation of increased ease of doing business in India. However, trade unions have clearly expressed their dissent and have once again called for countrywide direct action, including a general strike in February 2026, demanding the withdrawal of the labour codes.

Another troubling picture emerges before us – India’s position in the recently released World Inequality Report 2026 by World Inequality Lab. The report states that the top 1% of the population in India holds 40% of the wealth, making it one of the most unequal countries in the world. What is even more worrisome is that, over the decade between 2014-2024, the income gap between the top 10% and the bottom 50% has not reduced, indicating persistent income inequality.

According to calculations based on National Account Statistics too, there has been a sustained increase in the share of profit in Gross Value Added (GVA). GVA is calculated by adding compensation to employees, fixed capital consumption, and operating surplus, and subtracting taxes and subsidies. Business profits form a part of the operating surplus. This has been growing significantly across sectors like mining, electricity, transport and financial services. There has not been a corresponding rise in wages though. The compensation element in GVA has fallen between 2019-20 and 2023-24. The trend of falling share of wages is not a new phenomenon. Abraham and Sasikumar, in their 2017 paper find that this fall has been noticed in the manufacturing sector since the 1980s. The Economic Survey 2024-25 also reveals that corporate profits have hit a 15-year high while wage growth remains sluggish, raising concerns about weakening demand and rising inequality. Piketty (2014) also talks about the inherent tendency for returns on capital to exceed the growth rate of the economy under capitalism.
Understanding the macro linkages between labour codes and income inequality

To the extent that labour laws improve the returns to workers in the form of wages and salaries rather than the returns to capital in the form of rents and dividends, the emergent structure would be one of a more equitable distribution of national income. While it is possible that labour incomes may include very high earners, the returns to income in the top 0.1 or 0.01% of the earnings distribution are largely attributable to returns to capital, says Deakin in his 2021 paper.

Explainer | What do the Labour Codes Mean for the Indian Worker?

Importantly, the bargaining power of the workers and the employers determine the distribution of the value added in a production process. The new labour codes significantly weaken the bargaining power of workers vis-a-vis the employers. For instance, under the new Industrial Relations Code, 2020, workers in any establishment cannot go on strike unless they give notice within 60 days before striking and within 14 days of giving such notice. Previously, a 14-day advance notice of strike was required for public utility services, but under the new labour codes all the establishments need to follow this protocol. The codes mention that mass casual leave will be treated as illegal strikes. This tilts the bargaining power in favour of employers by making striking legally difficult for the workers.

It must be noted that as per the most recent data available on the causes of major industrial disputes published by the Labour Bureau, the highest number of disputes (46.4%), were related to ‘Wages and allowances,’ for both the Union government and states combined. By increasing the difficulty to strike, wage hikes are less likely thereby having implications for income inequality.

The other thorny issue in the Industrial Relations Code relates to raising the retrenchment limit from 100 to 300 workers making it easier for firms to lay off workers at will. Kleinknecht, A. (2017) has argued that easy retrenchment of workers will erode worker loyalty and increase labour turnover, reduce incentives in firm specific training and knowledge sharing between workers and firms that provide the competitive edge for firms. Thus, even from an economic efficiency perspective, a dilution in the Industrial Relations Code 2020 is not advisable.

According to a working paper by Radhicka Kapoor, over 90% of the Indian enterprises hire less than 300 workers. With such a large percentage, the code increases labour precarity for a vast majority of workers. Thus, with greater ease to retrench workers and reduced ability to strike, workers will experience job insecurity and loss of social protection. Along with the ease of hiring and firing, the Code on Social Security (2020) also facilitates fixed term employment where workers employed on the basis of a written contract for a fixed period of time are provided benefits at par with permanent employees subject to certain conditions. However, this is likely to result in less permanent jobs and increase job insecurity.

The rationale provided by the government for raising the worker limit for layoffs, retrenchment and closures is to reduce compliance burden for firms, which in turn is expected to spur employment. However, there is a body of literature significantly contributed by Bhattacharjea (2020), Roychowdhury (2019), Roy, Dubey and Ramaiah (2020) which suggest that flexibility in labour markets has not led to employment growth in India. In fact, the latter paper finds that increasing labour flexibility is associated with weaker employment performances in Indian manufacturing. The rising unemployment in the country has frustrated the dreams of a demographic dividend and the labour codes only serve the purpose of distracting from deep rooted structural issues.

New Labour Codes Erase a Century of Hard-Won Workers’ Rights in One Stroke

As Prabhat Patnaik puts it, neoliberalism has created massive income inequalities that tends towards overproduction and worsening of the employment problem. With wage share lagging in the national income, demand for output falls as wages are not just costs to firms but also represent the purchasing power of the working class. Firms respond to shortfalls in demand by cutting down on production and laying off workers. Without addressing the structural issues that are part of the neoliberal order, quick fixes in the form of change in closure and retrenchment rules, will serve little towards reducing unemployment. In fact, the weakening bargaining power of the workers may exacerbate inequality in an already very unequal country.

Undermining labour rights and worker protection will prove expensive particularly in the current geo-political context with trade wars being unleashed at an alarming pace. When export markets come under stress, internal domestic demand will play a crucial role in maintaining the incentives for continued production. This can happen only with improvements in bargaining power of workers and a rise in wage share of national income.

Divya Pradeep and Satyaki Dasgupta are faculty members at the Department of Economics at Christ University.

 

The ‘Inside’ and ‘Outside’ of Capitalism’s Universe

Prabhat Patnaik | 19 Dec 2025

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A more “humane” society can only be built by transcending capitalism, and ushering in a system where the means of production are socially owned.

Banners at theOccupy London protest in Finsbury Square in the City of London. 2011.(File Image)

It is a well-known fact that contemporary “mainstream” economics, the only kind which is taught to students all over much of the world, does not capture the reality of capitalism. What is less recognised is that this “mainstream” economics, not just in its existing incarnations, but no matter what new incarnations it assumes, is incapable of capturing the reality of capitalism. Let us see why.

Any production requires the coordinated action of a number of individuals. Whether it is members of a tribal community hunting down a wild boar, or a modern capitalist factory manufacturing automobiles, it is important for those engaged in such activity to work according to a certain plan, which must necessarily demand coordinated action for its realisation.

Coordinated action in turn requires discipline. This discipline in most earlier modes of production was imposed through explicit coercion. If the actions of the slaves working together were not coordinated because some slackened in their work, then those who slackened would be physically punished by the agents of the slave-owner.

Likewise, in the feudal system, if the serfs working on the lord’s land did not act in a coordinated manner, say, in harvesting the crop, because of which a part of the crop got destroyed, then the allegedly laggard serfs would be beaten.

Production, in short, requires coordination, and in any society where the means of production are not owned in common, where in other words there is a distinction between the owners and the workers, so that the workers are not voluntarily interested in conforming to a coordinated action plan, there must exist some coercive means of making them conform.

Capitalism, however, despite being a class-divided society, does not resort to any explicit coercion. Not that capitalists do not occasionally use physical coercion, but that is not the rule under this system, which then raises the question: how is work-discipline maintained under capitalism so that workers are made to conform to the plan of coordinated action?

The answer is that this is achieved under capitalism through what the Polish Marxist economist Michal Kalecki had called the “threat of the sack”. Anyone who is deemed to be slacking, and hence upsetting the coordinated action plan is simply thrown out of employment. That person, in short, loses his place within the system and is thrown outside of it.

It follows, therefore, that capitalism as a system must have both an “inside” and an “outside”, to enforce work discipline that is so essential for production. While there is no explicit physical coercion, like starving a slave or beating a serf, there is implicit coercion imposed on the workers, without which of course production under this system would not be possible. For this implicit coercion to exist, a space “outside” of the system must exist where conditions of life are so difficult that those employed within the capitalist region dread being pushed into this “outside” region.

The totality of capitalism, therefore, consists of two regions: the “inside” and the “outside” regions. The Marxist tradition alone takes cognizance of this fact and notes the existence of a “reserve army of labour” as a necessary feature of capitalism constituting this “outside” sphere.

Even many Marxists or persons sympathetic to Marxism do not see this point. They see the reserve army of labour only as explaining why real wages under capitalism remain tied to a (historical) subsistence level, that is, only as playing the same role as the Malthusian theory of population played in the Ricardian system. In Ricardo’s view, the Malthusian theory explained the fact of real wages of workers remaining more or less tied to a subsistence level, for, according to Malthus, if wages rose above subsistence then workers procreated rapidly, causing labour supply to increase which pushed wages down again to subsistence level.

Marx had rejected Malthus’s theory, calling it a “libel on the human race”, and it is generally believed that Marx substituted his concept of the reserve army of labour, which served to keep real wages down to subsistence level, for Malthus’s libelous explanation.

This, however, is an incomplete reading of Marx. It is certainly true that the reserve army keeps down real wages to a historically-given subsistence level, but this is not its sole role. Without the reserve army there would be no work discipline under capitalism and hence capitalist production will become impossible.

All of contemporary “mainstream” economics, however, sees capitalism as a self-contained system where all “factors of production” are fully employed if markets are allowed to work freely; and those existing deviant traditions, such as the Keynesian tradition which does not accept this proposition, believe nonetheless that capitalism as a self-contained system can achieve full employment of all “factors of production” through the efforts of the state supplementing the working of the market.

In other words, both the orthodox and the heterodox traditions in non-Marxist economic theory that currently exist, see only the “inside” of capitalism, not its “outside”. In fact, they do not even see the necessity of an “outside”, that is, of a region containing a mass of unemployed, underemployed, and disguised-unemployed workers, such that being thrown into these ranks fills employed workers with dread and serves to instil in them an obedience to discipline that is absolutely essential for capitalist production.

The reason why contemporary “mainstream” economics and not even its heterodox critics do not see the necessity of this “outside” region, is because they do not analyse production sui generis but see it only as an extension of exchange. Their focus, in short, is on the process of exchange which markets are supposed to effect; and that is where their analysis stops.

What happens after the capitalist has purchased raw materials and labour-power on the market and retreated into the premises of the factory, is not something that occupies their attention. Their analysis, therefore, can at best cover production only in an imaginary world where all production is artisan production, with each artisan employing only his own labour, so that there is no separate need for having an arrangement for imposing work-discipline. But outside of this imaginary universe, and certainly for a capitalist economy, both “mainstream” economics and even its valid and insightful critical theories such as the Keynesian theory, clearly fall short.

Read Also: Two Expressions of Capitalism’s Dead-End

This has important implications. The existence of a reserve army is necessary not only for production, not only for keeping real wages down as already noted, but also for ensuring that workers act as a class of price-takers who are too weak to demand and obtain higher money wages even when their real wages are being eroded.

This is not to say that if the reserve army disappears or dwindles, the system will immediately collapse; but its functioning will become impossible over time, which basically means that the maintenance of full employment under capitalism is an impossibility. The Keynesian idea that through state intervention in “demand management” capitalist economies can maintain full employment, is a chimera, arising from the fact that Keynes saw the deficiency of aggregate demand as the only cause for involuntary unemployment.

This is not just an idle claim. The Keynesian idea put into practice in the post-war period came to grief with an explosion of money wages all over the advanced capitalist world in 1968, which in turn gave rise to an inflationary explosion, since the low unemployment rates that had been sustained had ended the workers’ role as “price-takers”. This inflationary explosion which was carried forward by primary commodity prices, was finally ended with US President Ronald Reagan and British Prime Minister Margaret Thatcher. They ended Keynesian “demand management” and re-created massive unemployment.

If the maintenance of full employment is impossible under capitalism, then so is the maintenance of a welfare State. Welfare State measures make the position of the reserve army less intolerable, and hence the punishment for an employed worker who is “given the sack”, for allegedly violating work-discipline, less severe. Such measures, therefore, undermine work-discipline within the capitalist system; what is more, they also enhance the bargaining power of the workers, thereby undermining their “price-taker” role. Such measures, of course, can be in force for some time, but the effort of the capitalists will always be to erode them.

In the 1950s and the early 1960s, there was much discussion about whether “capitalism had changed”, whether it had altered its nature from predatory to welfare capitalism; and many believed that it had. The imposition of neo-liberalism, however, altered the fortunes of the workers even in the advanced capitalist countries and this imposition was immanent within the system. All attempts at “reforming” capitalism, making it more “humane”, it follows, are bound to come a cropper. A more “humane” society can be built only by transcending capitalism, by ushering in a system where the means of production are socially owned.     

Prabhat Patnaik is Professor Emeritus, Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi. The views are personal.

 

Speculation, US Tariff Threat, and Working People

Prabhat Patnaik | 25 Nov 2025

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The hallmark of a neo-liberal regime, like India, is that the real living conditions of millions of working people are left to the whims and caprices of international speculators.

The fact that speculation can exacerbate a basic situation of shortage of a commodity by encouraging its hoarding, or even cause a completely artificial shortage of it when no basic shortage exists, and thereby play havoc with the lives of the working people, especially when the commodity happens to be a necessity, has been well-known. There is no doubt, for instance, that the basic situation of excess demand in the foodgrain market, owing to deficit-financed war expenditure on India’s Eastern front, that caused the death of three million people in the Bengal famine of 1943, was exacerbated by the hoarding of grains. But the neo-liberal regime of today does something more: it makes the cost of living of the working people directly dependent not just on speculative behaviour in commodity markets, but on speculative behaviour in the currency market as well.

With controls on capital flows, including financial flows, lifted under a neoliberal regime, and with the exchange rate being determined in the market, any tendency on the part of speculators to take funds out of the country in the form of, say, US dollars, causes an exchange rate depreciation, which raises the price of imports in local currency. When these imports include essential inputs, like oil, this has a cost-push effect on the economy as a whole, which causes an inflation that necessarily leads to a fall in real wages, or more generally on the real incomes of the working people.

Indeed, such a cost-push inflation, in a world where profit mark-ups are given, can only come to an end through a compression of the real incomes of the working people; this squeeze on real incomes occurs by virtue of the fact that their money incomes are not indexed to prices. The hallmark of a neo-liberal regime, therefore, is that the real living conditions of millions of working people are left to the whims and caprices of a bunch of international speculators.

It may be thought that just as any tendency toward a financial outflow causes a squeeze on the living conditions of the working people via an exchange rate depreciation, any opposite tendency, towards an inflow of finance (in excess of the autonomously determined current account deficit in any period) should have the opposite effect of appreciating the exchange rate and hence lowering the cost of living, to the benefit of the working masses. This, however, does not occur; there is an asymmetry between the effects of a financial inflow and those of a financial outflow.

When finance flows in, if the exchange rate is allowed to appreciate, then domestic production becomes uncompetitive vis-à-vis imports; production contracts while imports increase, and the increase in imports would, in the absence of any intervention by the central bank, have to be large enough to absorb the extra financial inflow. In such a case, the country would have become indebted to foreigners in order to finance its own “de-industrialisation”, which would have been a patently absurd development. To avoid such an absurdity, the central bank in a Third World country intervenes to prevent the exchange rate from appreciating, by holding on to the extra financial inflows in the form of foreign exchange reserves; this is what the Reserve Bank of India has been doing.

The asymmetry between financial inflows and financial outflows, therefore, lies in this: while outflows cause the exchange rate to depreciate and hence the real incomes of the working people to be squeezed through cost-push inflation, inflows are simply held as additional reserves without any effect on the exchange rate.

True, the holding of such reserves serves as a cushion against financial outflows, so that when such outflows occur, reserves are decumulated to prevent a depreciation of the exchange rate. But since the decumulation of reserves serves to strengthen expectations of a depreciation of the exchange rate and hence causes a further outflow of finance, the central bank typically does not wish to run out of reserves; it does not completely prevent an exchange rate depreciation. There is some depreciation and some decumulation of reserves, resulting on the whole in a squeeze on the real incomes of the working people, as has been happening in India in recent months.

The basic asymmetry, and hence the validity of the basic proposition, therefore, remains unimpaired, namely, that financial outflows cause the exchange rate to depreciate and hence squeeze the real incomes of the working people, while financial inflows are simply held as reserves at the prevailing exchange rate without any opposite effects.

This asymmetry shows itself over a period of time as a secular decline in the exchange rate, which is exactly what we have been witnessing in India under the neo-liberal regime.

On November 10, 1990, when the Chandra Shekhar government had taken office just prior to economic “liberalisation”, the exchange rate was Rs 17.50 against one US dollar. Today, November 15, 2025, the exchange rate is Rs 88.50 against $1; a huge depreciation of the rupee during the neo-liberal period. The extent of this depreciation, by over 400%, is in contrast to a mere 33.3% depreciation over the entire preceding period, from Independence in 1947 to 1990.

All this relates to the immanent tendency of a neo-liberal capitalist economy in the Third World. There is, however, a second way in which a Third World economy becomes vulnerable to import-cost-push inflation within a neo-liberal arrangement, and that is evident today in the face of US President Donald Trump’s tariff aggression. Trump is imposing punitive tariffs against India on the grounds that India is violating the unilateral sanctions imposed by the US and other imperialist countries against Russia by buying Russian oil.

Since India’s achievement of self-reliance has been undermined by the adoption of a neo-liberal regime, and since the Narendra Modi government does not wish to reverse neo-liberal policies and also lacks the backbone to take any counter-measures against the US, it has totally caved in to US pressure and agreed to stop buying Russian oil. This is not admitted by the Indian government, but Trump has announced it in no uncertain terms, and there is no reason to disbelieve him.

India’s ceasing to buy Russian oil will push up oil prices within the country for two distinct reasons. The first is that Russian oil is cheaper than the oil that will be substituted for it, so that not buying from Russia will push up India’s oil price even at the prevailing international oil prices.

The second reason has to do with the fact that if Russia is cut off from supplying oil, then the international oil price itself will go up, for it will mean a lower overall supply relative to demand in the world economy. This will further increase oil prices within India.

A rise in oil price within the country will have a cost-push effect on the economy, which will come to an end only through a compression of the real incomes of the working people. India’s succumbing to American pressure by ceasing to buy Russian oil, therefore, will have exactly the same effect on oil prices as an exchange rate depreciation; and it will squeeze the incomes of working people of the country in an exactly analogous manner.

US sanctions against Russia are imposed not just for political strategic reasons, but also for increasing the size of the market for the more expensive American oil. Europe has already fallen in line, and committed what can only be described as economic hara-kiri, by substituting more expensive American energy for cheaper Russian energy.

Germany is well on its way to becoming deindustrialised by such substitution, and German workers have already suffered the rigours of one cold winter. Now the working people in Third World countries, like India, are also being made to suffer in order to enlarge America’s energy market.

It speaks volumes on America’s imperialist arrogance that it openly demands sacrifices from the working people all over the world in order to promote its own economic interests by enlarging the size of its energy market. It also speaks volumes on the current Indian government’s total helplessness when faced with American imperialism’s arm-twisting. This government is willing to sacrifice the interests of the Indian working people for the sake of placating a US administration that is promoting American interests.

Prabhat Patnaik is Professor Emeritus, Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi. The views are personal.

Multiplier Effects of ‘Bubbles’ Under Neo-Liberal Capitalism

Prabhat Patnaik | 28 Oct 2025

When the ‘AI bubble’ bursts, as it inevitably will, there will be a substantial rise in unemployment rate in the US.

Neo-liberal capitalism has an immanent tendency toward stagnation, which arises because of the operation of two factors: the first is the growth in income inequality that it continuously spawns. Since the poor consume the bulk of their incomes while the rich “save” (that is, do not consume) most of it, consumption demand, and hence overall aggregate demand, tends to fall below the growth of producible output, resulting in a rise in unemployment and unutilised capacity that drives the economy down.

This continuous tendency toward a rise in income inequality arises from the fact that, owing to the mobility of capital across country borders, wages across the entire world have to suffer the baneful consequences of the massive Third World labour reserves; and the relative size of these reserves does not diminish despite such relocation of capital from the Global North.

On the one hand, the withdrawal of State support from petty production and peasant agriculture forces distressed producers from these sectors to move to towns in search of employment, thereby increasing the number of job-seekers; on the other hand, the rise in the rate of growth of labour productivity that is enjoined upon all countries because of trade “liberalisation”, via the adoption of new processes and products, keeps down the number of new jobs being created. Real wages across the world, therefore, fall behind labour productivity, causing a rise in the share of economic surplus in the output of each country and in world output as a whole; the observed rise in income inequality is an empirical manifestation of this phenomenon and constitutes the basic reason for the tendency toward stagnation under neo-liberal capitalism.

The second factor that underlies the realisation of this tendency is the inability of State intervention to rectify this deficiency of aggregate demand relative to producible output. Such state intervention is what John Maynard Keynes, the foremost bourgeois economist of the 20th century, had pinned his hopes on.

But since State intervention to yield results must mean larger State expenditure financed either by a fiscal deficit or by taxing the rich (the other alternative, of taxing the working people and spending the proceeds does not entail an increase in aggregate demand since the working people consume the bulk of their income anyway), and since both these means of financing State expenditure are disliked by globalised finance and hence ruled out, the Keynesian remedy ceases to work. The tendency toward stagnation arising from over-production relative to demand under neo-liberal capitalism has, therefore, no effective counterweight in the normal course.

But this is where “bubbles” come in. Speculation in the market for assets or claims to assets pushes up their prices sky-high which encourages extra investment in those sectors (because of the ease of raising finance) and extra consumption by the holders of such claims (who feel extremely wealthy and hence consume more, even though much of this wealth is actually fictitious). Hence even though the asset price bubble is primarily a financial phenomenon, it has an effect on the real economy. And such bubbles play the role of providing a temporary counterweight to the tendency toward stagnation under neo-liberal capitalism.

Such bubbles do not negate the tendency toward stagnation; they do not introduce a long-term growth trend. They occur from time to time, and introduce a temporary wave around the growth trend before dying out.

During the upward surge of the bubble, there would be some improvement in the performance of the real economy, just as when the bubble collapses, and a financial crisis ensues, the performance of the real economy would receive a setback.

Of course, a bubble does not arise entirely out of the blue; it is typically associated with the introduction of some new technology, in the form of some new product (or process). The euphoria generated by the new technology translates itself into a bubble that then gets metamorphosed into a speculative phenomenon, where the focus is no longer what the new technology would fetch, but on how other speculators would behave.

The Austro-American economist Joseph Scumpeter had rightly seen technology being introduced in such waves, but had erred grievously in not recognising the phenomenon of deficiency of aggregate demand and the consequent tendency toward over-production, and how that, in turn, affects the shape and nature of the wave through which technology gets introduced.

One consequence of this was Scumpeter’s vision that the economy is always at full employment (the wave caused by the introduction of new technology affecting only prices rather than employment), so that when the wave is finally over and dust has finally settled, the workers are decidedly better off owing to the higher labour productivity that the new technology has brought, whose benefits accrue to them in the form of higher wages. This idyllic picture, alas, does not hold, a point whose significance we shall presently see.

Such a temporary reprieve from the tendency toward stagnation under neo-liberal capitalism, had been provided by two such bubbles earlier, both occurring in the US: the dotcom bubble of the 1990s and the housing bubble that followed almost immediately afterwards (such immediate succession being deliberately engineered to an extent by Alan Greenspan, the then chairman of the Federal Reserve Board, which is the US central bank).

After the collapse of the housing bubble, the world economy sank into a prolonged stagnation, aggravated in its initial phase by the after effects of the collapse of this bubble. Not surprisingly, the growth rate of the world economy during the decade 2012-21 (that is, after the pandemic-induced drop had been reversed), was lower than the growth-rates during the previous three decades -- 1982-91, 1992-2001, 2002-2011-- which themselves were lower than during the decades of the post-war period.

There is an impression that the Artificial Intelligence (AI) bubble currently underway will not only offset the tendency toward stagnation for the present, but will also do so on a more sustained basis. This perception, however, is completely erroneous. While the size of the AI bubble in financial terms is quite significant, its impact on the real economy is not. Indeed, two points have to be noted about the impact of the AI bubble on the real economy.

First, its impact on the totality of the real economy within the US itself, though positive, is quite marginal. According to the US Bureau of Labour Statistics, the youth unemployment rate in that country in July 2025 was 10.8%, which was not only high in itself, but represented an increase over July 2024 when it was 9.8%. In other words, the boost to the level of activity in the real economy provided by the AI bubble today is not significant enough to cause a fall in the year-on-year youth unemployment rate.

What is more, and this is the second point to be noted, when this bubble bursts, as it inevitably will, there will be a substantial rise in unemployment rate in the US. This would be so for three reasons: first, the effect of the bursting of the bubble (and even if there was no speculative bubble, but just the introduction of technology in a wave, the effect of the ebbing of that wave), which would be in the nature of a cyclical downturn in employment. Second, the effect of AI itself in reducing employment even in normal times (that is, even if there were no cyclical downturn).

And third, the effect of reduced incomes of the employees as a whole (since wages would not be rising while employment falls) on aggregate demand and hence on the level of activity (this is what economists call the “multiplier effect”).

Even when the first of these effects has waned, the second and the third will continue, and will ensure that the net long-term consequence of the introduction of AI would have been a vastly increased permanent level of unemployment, which will further accentuate the tendency toward stagnation of neo-liberal capitalism.

Nothing demonstrates more clearly than the introduction of AI, the irrationality of capitalism as a mode of production and the unquestionable superiority of socialism over it. A technological breakthrough that in a socialist economy would be absorbed through increased leisure for everyone without any fall in real wages, and would in addition enhance human capacity, is causing reduced employment directly, reduced real wages because of it, and is accentuating both these reductions (in employment and real wages) through their multiplier effects via reduced aggregate demand.

Prabhat Patnaik is Professor Emeritus, Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi. The views are personal.