[OPE] Patnaik's Notes on Contemporary Imperialism

Jerry,

Just a quick comment:

(A) it is true that episodic "dumping" of surplus goods at "dumping prices"
does occur. But the scope and magnitude of overproduction, in the sense of
unsold goods, remains very limited nowadays, restricted to particular
branches of production. That is, I think, probably because of factors such
as the following:

- corporations have much greater control over the whole product chain
(supply chain management), and goods are produced much more on a "made to
order" basis, using market information transmitted instantaneously across
the globe.
- the utilization of installed productive capacity can be adjusted
downwards, so that rather than surplus goods being produced, they are not
produced at all.
- the largest portion of production in "industrialized" countries consists
of services,
- surplus goods can be resold in another part of the global market, though
perhaps at a lower price,
- the domination by finance of production activities has the overall effect
of an underinvestment in production capital, which thereby constrains the
production of large excesses of output.
- the financial effect of demand and supply fluctuations can be moderated
with a variety of arbitrage techniques.

That is not to say that the possibility of a sudden, massive and generalised
overproduction crisis is ruled out altogether; it could for example occur if
there was a big currency crisis, a big political crisis, a natural disaster
or a war. But these are more likely to be "exogenous" shocks, rather than
"endogenous" (cyclical) ones.

(B) As regards current account deficits: a current account deficit occurs,
if the value of imports of foreign goods and services exceeds the value of
exports of them, with the effect that a country increases its net debt
level. But, empirically, in countries like Australia and New Zealand for
example (to give an illustration that I am most familiar with), there have
been persistent, large current account deficits which did not get in the way
of very significant economic growth; all that really happened was, that
foreign investment strongly increased, hence also foreign liabilities, and
that total private debt escalated. Indeed, the US for years ran major
current account deficits without this impeding economic growth. In the US,
the value of the annual inflow of foreign capital is typically larger than
the annual value of the current account deficit.

*In simpleminded economic theories, foreign transacions consists only of the
import and export of goods and services. But that is obviously not the case.
There is also the import and export of money capital and investment capital,
and the latter sort of trade may exceed the former. In addition, MNCs can
transfer debts internationally, i.e. debt obligations can themselves be
resold and traded internationally.

*In simpleminded economic theories, GDP describes "the whole economy". In
reality, that is not the case, since there is a growing accumulation of
assets quite unrelated to production, as I have frequently pointed out on
OPE-L. In an internationalized economy, "national" trade balances do not
tell us a great deal anymore about the overal condition of the economy.

It is certainly true, that the maximum national debt level is set by the
capacity to repay debt. "Ultimately", debt repayment is accomplished either
by producing more than is consumed, or by selling off accumulated assets. In
that general sense, the current account deficit remains a significant factor
in debt crises, or is one indicator of overall debt levels. But it has to be
weighed against the national accumulation of assets, including
non-productive assets. Niall Ferguson made great play of public debt-to-GDP
ratios, but in financial economics that's pretty silly. You don't weigh debt
liabilities against new output, but against assets owned. Ferguson just
deflects attention from who actually owns the debt, versus who is really
liable for the debt. You cannot discuss the public debt independently from
the private debt, that's silly.

Anyway, the current account deficit thus can become a real problem only "in
combination" with other deleterious circumstances. The critical problem for
the US, in this sense, is not the "current account deficit", as Patnaik
argues, but a possible "capital account deficit", i.e. a possible halt to
the inflow of foreign capital, which could occur, for example,

- if the USD was debased as a currency.
- if there was a sudden crisis of investor confidence internationally for
any reason.
- if there emerged powerful international competitors for capital funds,
reducing the traditional ability of the US to claim foreign funds.

But that is not very likely to happen, I would say, in the next few years;
the US is still viewed as the strongman of the capitalist world economy. The
current account deficit has a certain metaphorical popularity in the sense
of "spending more than you earn", but in reality, it is not the decisive
factor for the fate of the national economy nowadays, from a scientific
point of view. A bigger threat is a sudden, very large fluctuation in
international capital flows.

Time is the most important factor in finance. Excess debt requires time for
repayment to clear the excess. Credit instruments provide flexible means to
spread the consequences of excess debt in space and time, and indeed to "buy
time". And indeed, faced with debt shocks, that is exactly what world
politicians do: they try to buy time, and try to appease the public that
things will come right in the longer term. The main immediate effect of the
credit crisis is just that you get roughly double the unemployment rate, and
roughly half the real GDP growth, i.e. a fraction of the working population
loses time, or gets less money for its time.

Jurriaan

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Received on Tue Dec 28 09:47:50 2010