is a paradox at the heart of political economy, which
can be seen as follows. Suppose a capitalist economy
is saddled with substantial unemployment and unutilized
productive capacity, as is the case now over the entire
capitalist world. Suppose in this situation the State
increases its expenditure by enlarging its fiscal
deficit, i.e. it spends, let us say, Rs.100 more without
any increase in its tax revenue. And let us assume
for simplicity that the capitalist economy is a closed,
isolated one. Then the Rs.100 of expenditure will
directly and indirectly, i.e. via the various rounds
of further expenditure it generates, increase aggregate
demand, and hence employment, and output in the economy
(since no demand will be leaking out in the form of
larger imports from elsewhere because of the closed
economy assumption). This increase in output will
of course increase profits as well. The paradox then
consists in this: if a rise in fiscal deficit increases
capitalists' profits, then why are they so opposed
to fiscal deficits? Why do they keep harping on ''fiscal
responsibility'', the financial capitalists most vocally,
but the others too, though with lesser stridency?
It may be thought at first sight that the problem
arises because we do not have closed capitalist economies,
and that an increase in the fiscal deficit will leak
out in the form of larger import demand, which will
generate little additional employment at home but
create a balance of payments problem. But, the capitalists'
opposition to fiscal deficit arises not only in countries
whose products are uncompetitive and whose additional
demand therefore leaks out abroad in the form of larger
imports; it arises even in strongly competitive economies,
where recession could be overcome, and more profits
generated, through a larger fiscal deficit, but where
the capitalists' opposition prevents this from happening.
This opposition therefore is more fundamental than
merely the fear of a worsening of the balance of payments,
which brings us back to the question: why do capitalists
oppose fiscal deficits?
The typical answer given to this question is that
fiscal deficits are simply bad policy, and the opposition
of capitalists to them is because of this fact and
has nothing to do with their self-interest. Just as
a family cannot have a perpetual excess of expenditure
over its income, without at some point ceasing to
be creditworthy, likewise a government cannot keep
having a perpetual fiscal deficit. By doing so it
gets saddled with mounting debt, which is bad per
se since it can never hope to pay back its debt, and
which, for that very reason, undermines its creditworthiness
beyond a certain limit.
This, however, is a completely wrong answer, since
the analogy between the family and the government
is a false analogy. To start with, if the government
uses the fiscal deficit to make investments in productive
assets, then it is doing something that is in principle
no different from what corporations do: corporations
after all have always a backlog of debt but still
keep borrowing for making fresh investments. But even
if it is the case that the fiscal deficit is used
to finance expenditure other than investment expenditure,
or that government investment, unlike that of corporations,
is not necessarily profit-making (out of which interest
payments could be made), the government still stands
on a very different footing from any other entity
in the economy, for two obvious reasons.
One, it has the power to tax, including even those
from whom it borrows to finance the fiscal deficit.
Indeed the lesser is the leakage of demand out of
the economy, and the more the fiscal deficit generates
employment and output inside the economy, the greater
is the borrowing from within the economy, and hence
the government's capacity to tax the lenders. Two,
since the government can always take recourse to borrowing
from the central bank, which can print money to meet
its borrowing requirements, the question of the government's
losing its creditworthiness simply does not arise.
True, if the central bank is made ''autonomous'' as
a result of ''financial liberalization'', and therefore
ceases to be obliged to lend to the government what
it asks for, then the government loses this privilege.
But since the argument for making it ''autonomous''
is precisely to prevent the government from going
on borrowing from it, such prevention must have some
independent rationale. For exploring this independent
rationale for preventing a perennial fiscal deficit,
we must therefore deliberately preclude financial
It may also be thought that running a perennial fiscal
deficit of this sort, which is financed by borrowing
from the central bank, would entail the emergence
of inflationary pressures; but we are talking about
the economy being in the midst of unemployment and
unutilized capacity, where the need is for increasing,
and not curtailing, aggregate demand. To be sure,
the government should not run a fiscal deficit if
the economy is producing close to full capacity output,
for that may cause inflation; but why should there
be any objection to its doing so when the economy
is mired in recession?
The objection to a fiscal deficit (at least beyond
a certain minuscule level relative to the gross domestic
product) implies de facto an objection to larger public
expenditure that boosts the level of aggregate demand.
Since such larger public expenditure, if not financed
through a fiscal deficit, would have to be financed
through larger tax revenue, of which the capitalists
would normally be called upon to provide a part, their
opposition to fiscal deficits merges with their opposition
to larger government expenditure: the two become indistinguishable.
The question we again come back to is: why this opposition?
Economists, especially Marxist economists who have
attempted to go deep into the political economy of
the system, have for long been intrigued by this paradox
and have answered it in a variety of ways. And all
of them have noted that the opposition of capitalists
is never to all forms of public expenditure, but only
to some. Public expenditure in the form of ''transfer
payments'' to the poor and working people, even though
the spending out of such transfers has the effect
of increasing output and capitalists' profits, is
opposed by the latter because it increases the bargaining
power of the workers. Likewise public expenditure
in specific spheres, even when it increases aggregate
demand and profits, tends to compete with private
interests in those spheres in which it is undertaken.
Thus larger government expenditure in building hospitals
has the effect of making private hospitals less profitable
by exposing them to public competition; larger government
housing construction has the effect of reducing the
profitability of private house-builders; and so on.
Capitalists' opposition to public expenditure however
gets muted if such expenditure is undertaken neither
in the form of transfer payments nor in spheres where
there is such competition. And one obvious sphere
that satisfies both these requirements is military
expenditure, which explains, according to Baran and
Sweezy, why post-war capitalism relied upon larger
U.S. military expenditure to keep up its level of
But the opposition of big capital, especially financial
interests, to public expenditure cannot just be explained
by these factors alone. There are more fundamental
objections, which also explain why, in the midst of
the current recession, the right-wing demand in the
United States is not so much for a step up in military
expenditure (which could be made to appear plausible
given the fact that the US is at present engaged in
two wars), but for a cutback in public expenditure
together with tax concessions to the super-rich. What
explains such policy advocacy in the midst of the
This brings us to the crux of the problem. The fundamental
property of a capitalist system is that its level
of output and employment is determined essentially
by the so-called ''state of confidence'' of the capitalists.
When they feel ''confident'', they invest; and this
raises the level of aggregate demand, and hence output
and employment. When they do not feel ''confident'',
the opposite happens. To be sure, this does not mean
that the functioning of a capitalist economy is purely
a matter of psychology. Undoubtedly, the capitalists'
outlook is governed by what their actual experience
has been, i.e. how certain objective indicators have
behaved (e.g. whether sales have been increasing).
But how this experience is interpreted and gets translated
into investment decisions depends also upon the state
of ''confidence'' of the capitalists.
Indeed this fact is what gives the capitalists an
upper hand. If employment has to increase, then, within
the logic of the system, the State must take steps
to improve the ''confidence'' of the capitalists.
If on the other hand the State directly tries to increase
employment through its own expenditure, then that
makes the ''state of confidence'' of the capitalists
irrelevant, and hence amounts implicitly to undermining
the logic of the system and the role of capitalists
within it. This is why all public expenditure that
directly serves the interests of the capitalists,
for instance investment subsidies, guaranteed rates
of return, input subsidies, making land available
at throwaway prices, are welcomed by the capitalists,
as are tax-cuts in their favour. But all public expenditure
that by-passes capitalists and directly generates
employment is opposed by them (with the exception
of military expenditure).
Consider just two examples. The Cameron government
in Britain, which never tires of preaching the virtues
of ''austerity'' and has imposed drastic ''austerity''
measures, has recently announced a programme of subsidizing
capitalists' investment in infrastructure from the
budget; but the capitalist press that systematically
hails ''austerity'' has not complained about this
programme! Likewise in the United States, when the
right-wing and the corporate media were opposing a
continuation of Obama's meagre $700 billion stimulus
package, as much as $13 trillion was being made available
under various heads for bailing out the financial
system that was engulfed in crisis because of the
collapse of the housing ''bubble''. But the big corporate
and financial interests were only too happy with the
This also explains the fate of Keynesianism. Keynes
was worried that if unemployment continued at high
levels, then capitalism would succumb to the socialist
challenge. So keen was he to preserve capitalism that
he advocated public expenditure as a means of directly
combating unemployment, and not indirectly by boosting
the ''state of confidence'' of the capitalists. For
this unpardonable sin, however, even Keynes, notwithstanding
the fact that he was trying to protect capitalism,
is shunned by capitalists today.
A barometer of the ''state of confidence'' of the
capitalists is the stock market, which in turn reflects
the ''state of confidence'' of the financial speculators.
Finance capital therefore is particularly concerned
that the ''revival of the state of confidence'' route,
which is so advantageous to itself, for generating
employment, must not get by-passed. The fact that
finance capital is particularly insistent upon ''sound
finance'', i.e. eschewing fiscal deficits, can be
explained by this.
This article was originally published in the ''People's
Democracy'' on 5 July 2012.