The Limits of the Mixed Economy. Paul Mattick 1969
Keynes’ theory dealt with “mature” capitalism and its apparent incapacity for further “automatic” development. This preoccupation with “mature” capitalism reflected a rather general disregard for the development of the world’s industrially backward regions. In Keynes’ view, to recall, it is the diminishing scarcity of capital, a consequence of the diminishing propensity to consume, which explains insufficient demand and unemployment in the developed capitalist nations. In countries where capital is scarce and the propensity to consume consequently high, this problem does not exist, for a “poor country will be prone to consume by far a greater part of its output, so that a very modest measure of investment will suffice to provide full employment.” He also said that there has “been a chronic tendency throughout human history for the propensity to save to be stronger than the inducement to invest,” and that “the weakness of the inducement to invest has been at all times the key to the economic problem.” Apparently, then, the propensity to save is not only a consequence of the diminishing propensity to consume but exists quite independently of the scarcity, or diminishing scarcity, of capital. However, all in all, Keynes gave slight attention to backward nations, for he “looked upon international economic homogenization as a path to universal prosperity and lasting world peace.”
A fully-developed capitalism implies commodity production and exchange on a world-wide scale – the world market. When Marx pictured the future of capitalism by citing the example of British capitalism, it was not to imply that all other nations would copy England’s development, but that the world market would be an extension of the basic social and economic relations dominant in the then most advanced capitalist nation. Competition and accumulation would characterize world economy as they characterized England. The English picture was that of laissez-faire, supported by colonial exploitation and a monopolistic position in international finance and commerce. Even though capitalistically-developing nations objected to the laissez-faire principle, they did so only in order to gain competitive strength to operate more success fully under its conditions. They also strove for monopolistic positions in one or another sphere of world production and trade and vied for the possession of colonies so as to gain and secure special privileges. All this implied international heterogeneity rather than “homogenization,” as it involved the concentration of capital in more advanced nations and the exploitation of the poorer countries by these nations.
But as Keynes ignored the fact of exploitation at home, so he ignored the exploitation of underdeveloped by developed nations. And just as he believed that “unjustified” exploitation (excess yields) could be eliminated without altering existing social relationships, so he held that the interests of the capitalistically-dominating nations could be harmonized with those of the underdeveloped countries without changing anything basic in the social structures of either the underdeveloped or the developed nations. It was just a question of “making the saving propensities of the world’s richer members compatible with the development needs of its poorer members.”
Seen from the standpoint of Western capitalism, Keynesian policy with regard to underdeveloped nations exhausts itself in aiding their economic development by way of grants, loans, and investments. Although often considered aid, private business investments have, of course, nothing to do with helping foreign nations; they are undertaken purely for purposes of exploitation. Loans, too, whether from private or public funds, do not constitute aid but are supposed to yield interest and are thus instrumentalities to partake in the exploitation of the production they finance. Capital is invested where it can obtain profits and interest, and it is merely the height of these returns that determines whether capital will flow to developed or underdeveloped countries. There is then nothing specifically “Keynesian,” or “new,” about foreign capital investments or loans; what is new is the demand that they should be “compatible” with the development needs of the poorer nations, i.e., with their capitalistic development.
On the assumption that Western capitalism has solved its own problems via the Keynesian techniques that led to a state of general “affluence,” and aside from the threat of nuclear war, the problem of underdevelopment is now considered to be of first importance. How did this problem arise? To all appearances, it did not exist in the nineteenth century. As in the time of Ricardo, some economists still think that “it is in the nature of less-developed countries that they are mainly producers of primary goods, i.e., agricultural or mining products. With a low level of human skill and capital, the type of production in which they will have a comparative advantage will usually be those dependent on natural resources. Not only the ‘supply side’ but also the demand side is geared this way, for the poorer nations’ greatest need is food. To finance their imports underdeveloped countries will have to export primary commodities. The markets for such goods are often not such as to stimulate their development.” A solution to this dilemma in theory would be an increasing world demand for primary products, sufficient to raise their prices and to narrow the gap between imports and exports in underdeveloped nations. An other solution would be to increase food production at the expense of exports. An increased food production, geared to an increased production of manufactured goods, would enable these countries to reduce imports from developed nations. An increased world demand for primary products presupposes a much higher rate of capital formation in the developed nations than the prevailing one. Such a high rate of expansion in turn presupposes, among other things, larger export markets for the developed nations and, to that end, cheap importation of primary products. Capitalist nations which depend on overseas supplies of primary products cannot show any real enthusiasm for the industrial development of backward nations, for this would endanger their own favorable positions on the world market.
By shrinking the world market, a slowing down of the rate capital expansion in the developed countries hits the least industrialized territories hardest. It diminishes the demand for primary products and reduces their prices without lessening importation needs. But even a rapid economic expansion of the developed nations rarely benefits the underdeveloped economies. The fast pace of investments in the capital-rich nations in the wake of the Second World War, for instance, soaked up most of the world’s available capital, leaving little for the development of poorer regions. This Western “prosperity” led to large price raises for machinery and other finished goods, which worsened the terms of trade for the underdeveloped countries. Whether there is prosperity or depression, the poorer countries just cannot win in the competitive game. Their helpless dependency on changing market conditions comes to light in violent changes in their export markets and in export-prices for primary goods. It has been estimated that for the period from 1901 to 1950 export earnings from primary commodity producers fluctuated an average of 23 percent a year. The price fall for primary products after 1956 actually cancelled out all the aid poured into the underdeveloped countries by Western nations up to that time. Practically speaking, this “aid” was merely a partial compensation for their losses in international trade, which were so many gains to the importers in the developed nations. Data published by the Statistical Division of the United Nations  show that in 1964 the price level of primary commodities as related to that of manufactured goods was 22 per cent less than in 1950. The terms of trade have cost the undeveloped countries a value loss of $4 billion in comparison with their revenues 15 years ago.
Foreign loans and capital imports “aided” to some extent the capitalization and industrialization of underdeveloped country and hastened their change from feudal to semi-capitalist conditional by increasing commodity production. These investments served largely to facilitate the extraction of primary products. Capital has been used to develop the plantation system and to increase efficiency in the mining and oil industries. This basic pattern has not changed. American investments in Africa, for instance, which by 1964 had grown to a total of $1.6 billion, have “gone into extractive enterprises to take natural resources out of Africa; only a relatively small proportion has gone into local manufacturing and commercial enterprises.”  Over-all capital exports to underdeveloped countries have been greatly reduced and for some of these nations have come to an end altogether. In brief, there is not enough capital in vestment to facilitate economic growth in underdeveloped nations, and, more often than not, more is taken out of them in the form of profits than is poured into them by new investments. “Profits derived from operations in underdeveloped countries have gone to a large extent to finance investments in highly developed parts of the world;” so that, at least in part, the advance of one part of the world was made at the expense of another.
The main results of American penetration into underdeveloped countries were not different from those achieved by European colonial control. The countries in South America, for instance, are used as raw-material sources and as markets for finished products. America gained the benefits of imperial control by way of the “open door” policy based on productivity superiority, by means of capital exports, and, when convenient, by military intervention. However, the Latin American countries are not in the same category of underdevelopment as are those of Africa and Asia. Mexico and Brazil, for instance, experienced a rapid rate of native capital formation. In Mexico, this amounted to about 15 per cent of total national production in recent years. Nearly two-thirds of this capital investment belongs to private enterprise. American private investments here include not only the traditional raw material Sources but also the newer industries such as chemicals, electricity, telephones, aviation, automobiles, banks, and insurance companies, which causes some political resentment because “the economic Power of the large foreign enterprises constitutes a serious threat to the integrity of the nation and to the liberty of the country to plan its own economic development.” However, profits are high; the rate of earnings on foreign investments ranges from about 10 per cent to over 20 per cent, of which roughly half is reinvest and the other half repatriated.
By dividing the world’s nations into three different groups in accordance with the world’s income distribution in 1949 we get the following picture:
| ||WORLD INCOME |
|WORLD POPULATION |
On the North American Continent, including Canada, there are “a mere 10 per cent of the world’s population. But we have here about 75 per cent of the world’s income. By contrast, the 75 per cent of the world’s population whose income is below $125 per person a year receives altogether perhaps no more than 10 per cent of the world’s income.” Whatever the limitations of these and similar comparisons, they reveal nonetheless that “on the international scene, a drama is now staged, which could end in a Marxian catastrophe on a vastly larger scale than Marx ever envisaged. There is a tremendous income gap between rich and poor nations, and the poorer nations represent the masses. The gap is widening. The poor nations become class conscious but it is possible that, once more, concessions by the privileged, as the underprivileged: grow stronger, may create a new harmony.”
It is a question of concessions as the process itself cannot be reversed. And these concessions imply the sacrifice of at least part of the privileges which the developed nations derived from the process. This means larger capital investments and more foreign aid to hasten industrial development in the poor nations. Private capital is preferred but government aid is also necessary, as there are many undertakings in which private capital rarely, if ever, invests. These undertakings belong to what is called the industrial infrastructure, i.e., roads, dams, canals, harbors, education, health, and often transportation and energy – the services of which are used by almost all other industries. It is now generally acknowledged that the infrastructure is best taken care of by public authorities, even though its development is also a condition of private capital development. Because capitalists in both underdeveloped and developed nations are equally interested in this infrastructure, its construction is not so much a form of aid to underdeveloped as one of aid to private capital in general. And where all other economic relations between the developed and underdeveloped countries remain what they had been prior to the development, the infrastructure will aid the former even more than the latter. This form of aid subsidizes private business at public expense in both the giving and the receiving countries.
Any other large-scale aid, such as consumption goods and food stuffs for the immediate relief of suffering populations, would interfere with the existing market relations and the special interests vested in them. Whereas in the “mature” nations this merely means that the chronic overproduction will be resolved by waste-production rather than by the provision of higher living standards, in backward countries it often means actual starvation in the midst of various attempts to create the preconditions for capital development.
The overwhelming part of aid actually received by underdeveloped nations has consisted of military assistance. In this form aid is least detrimental to private interests. By relieving the governments of underdeveloped nations of part of their “defense” expenditures, funds are freed (theoretically but not necessarily actually) for purposes of development. Military assistance serves to shore-up governments sympathetic to Western policies: it is given to governments which represent social classes determined to maintain domestic property relations as well as international economic relationships unchanged. “Not without economic significance,” it is said, “is the capability demonstrated by specialized units of the armed forces of Peru, Columbia and Venezuela to destroy or control Communist-led guerrilla groups attempting to mount large-scale liberation front operations. Such efforts have failed to disrupt national confidence.” A minor part of foreign aid is of a non-military nature. Being a kind of auxiliary military assistance, it is determined by the political-military needs of the aid-giving nations, not by the development-needs of the aid-receiving countries. To provide aid of greater significance could lead to radical changes in the social and economic structure of the underdeveloped countries, which could affect the economic and political-military interests of the aid-dispensing powers. For the new social forces released by the developmental process may well upset and overthrow customary trade relations as well as political alliances; particularly be cause under present day world conditions rapid social and economic development implies government control tending towards state-capitalism. Foreign aid is giving to contain, not to extend, the state-capitalist trend.
A real concern for “backward” nations would be strange indeed: not so long ago enormous energies were released, in two world wars, to turn industrially-developed nations into so many under-developed areas; and still greater energies are today stored-up to transform the whole world into so much underdeveloped territory and, perhaps, into territory incapable of any kind of development. The imperialist power struggles alone prevent any meaningful assistance to foreign development. The bombing of the Yalu power stations in the Korean War, for instance, “destroyed more capital equipment in a single night than the United States is investing in the whole underdeveloped areas in a whole year.”  This “policy” is now repeated on a far larger scale in Vietnam, and will most probably be extended to the developed parts of China and the whole of Southeast Asia.
In 1959 government grants and loans by the industrial countries of the “free world” to the less-developed nations were roughly estimated at $4 billion, of which the United States supplied about two thirds and France and the United Kingdom most of the remainder. This was far less than 1 per cent of these nations’ gross national product. In fact, in 1961, when a renewed effort to assist the poorer lands was proposed, the 1 per cent figure was proclaimed a desirable goal for aid expenditures. The total flow of government and private funds from Europe and North America to the under developed countries averaged just under 7 billion dollars a year from 1956 through 1959. Of this annual average, government grants and loans accounted for $3 6 billion various forms of private lending and investment for $2.7 billion; and contributions to international agencies for helping underdeveloped countries for $600 million. These compilations included eleven different forms of “aid, ranging from government grants to private purchases of World Bank notes, and including guaranteed export credits, plowed-back earning of private companies in underdeveloped countries, reparation payments and so forth – all of these categories being considered “foreign aid” because all of them represented a flow of money to underdeveloped countries.
The “aid” thus far provided for the backward countries has been too slight to affect living conditions and not of a kind to enhance economic development. Consequently, it has only widened the income gap between the rich and the poor nations, rather than narrowing it. In the Keynesian view it must then be enlarged and perhaps differently distributed or qualitatively altered. Just as additional government-induced production is the Keynesians’ solution to the problem of capital stagnation in the advanced countries, so more foreign aid is their program for speeding-up development in underdeveloped countries. Having reached this conclusion, the Keynesians shelve the issue, for the implementation of their theories is not within their competence.
For the development of backward areas, however, the Keynesian generosity is as inapplicable as the miserly reality of foreign aid is meaningless. As pointed out before, government-induced waste-production in the developed nations is not considered superfluous by their governments or, for that matter, by their populations; it is seen as necessary for the internal and external security of the nation and of Western capitalism. Moreover, short of violating free-enterprise principles, there is no way to transfer funds from the sphere of waste-production to that of foreign aid, unless this foreign aid is a part of the defense mechanism of Western capitalism; in which case, it is itself another form of waste-production. In view of this situation, government funds for any and all purposes are always scarce. With an international armaments race in progress, there is little chance for an increase of foreign aid expenditures capable of making a difference in the economic growth of underdeveloped countries. But even a substantial reduction of waste-production via disarmament policies would not lead to a significant enlargement of foreign aid unless such aid served the profit requirements of the industrial nations.
It is held, of course, that foreign aid will prove a boon to the developed nations as the industrial growth of hitherto underdeveloped countries becomes the impetus for a general capitalist advance. Instead of making the rich countries poorer, the development of poorer countries can make all nations richer. The idea finds support in Keynesian theory, according to which all capitalist nations can reach a point of “maturity” where capital-demand falls below savings propensities. It is then just a question as to how the latter can be made compatible with the development needs of the poorer nations. The answer is the simple request to make them compatible by appropriate government measures. But it is precisely because the saving propensities of the richer nations are incompatible with the development needs of the poorer nations that neither private capital, nor governments representing private capital, can accept the Keynesian suggestions.
Economic stagnation in the advanced capitalist nations is accompanied by stagnation in the underdeveloped countries because in both further investments appear as unprofitable under the existing conditions of production. Obviously, stagnation is not a capitalist policy but is suffered by the capitalists, as by anyone else, for reasons beyond their control and even beyond their knowledge. For them the problem is not what to do with “savings” that cannot profitably be invested, but rather how to increase the profitability of capital so as to employ these “savings” capitalistically. But “savings” looking for investment opportunities will find them, if at all, first in the developed and not in the underdeveloped countries. Even if industrial development should get under way in the latter, the fact that they are less-developed makes their productivity, and thus their profitability, lower than that in the older capitalist nations. Thus, even their development will increase the disparity between developed and underdeveloped nations.
Although it is frequently asserted that backward countries “have the advantage of being able to adapt the latest equipment without having to scrap existing equipment and without being handicapped by the existence of obsolete buildings,” this advantage does not really exist. Rather, the slowly increasing industrialization of underdeveloped countries widens the productivity gap between “rich” and “poor” countries for the very reason that the developed nations enjoy all the advantages of modern technology. It is true, of course, that some of the new technological innovations find application in underdeveloped countries – in the extraction industries, for instance – but here they support foreign capital rather than native development.
The profitability of capital in underdeveloped countries is, of course, very high in the extraction industries. Operated with the most modern equipment and served by technicians from abroad, they are capable of competing with similar industries in the developed nations. In fact, such industries are often enormously profit able. This is not only because they are competitive, but also because there is no need for competition. The world price for crude oil, for example, is fixed so that its extraction from the relatively high cost oilfields in the United States will be profitable. This price has no relation to the cost of production in the low cost oilfields in the underdeveloped countries. “To sell for about 100 shillings a ton something which costs 13 shillings a ton to produce (in the Persian Gulf, for instance) is a remarkable achievement. Such a margin of profitability makes it far from ruinous to have to give back to the Arab States half (or more) of the profit.” It is for this reason, then, that the bulk of foreign private investments has been concentrated in the extraction industries. Private enterprise secures profitability for foreign investments by creating monopolies in particular industries and allowing them to charge prices independent of production costs. But even so, except for particular businesses, general backwardness implies low profitability and for that reason does not attract foreign capital.
Insofar as the underdeveloped nations could be developed through foreign private investments they are already “developed”; and insofar as they can be further developed by private capital they will be – quite apart from all government urgings. If they are still in a most frightful state of underdevelopment, this merely indicates that the capitalist mode of production – particularly in its free-enterprise form – is not able to develop an integrated world economy and a rational division of labor which assure the existence and well-being of the world’s population. For just as in any particular capitalist nation investments stop at the point where they cease to be profitable, regardless of actual social needs, so in the world at large, the existing investments indicate the borders set by their profitability. This situation testifies to capitalism’s inability to extend its mode of production into a world system. All capitalism has been able to do is to create the world market; and it was this creation itself which divided the world into “poor” and “rich” nations.
The very notion of foreign investments implies that their owners reside somewhere other than where the investments are made. They may take all, or part, of the profits made abroad into the country of their residence. In this way, capitalists exploit the labor of other nations without accumulating much capital in these nations. It is true that in so doing they provide some people with work, people who otherwise might be idle or occupied in less-remunerative occupations; but they are not fostering economic development to the extent made possible by the exploitation of this labor. Native capitalists too, for reasons of either profitability or security, may and usually do send part, or all, of their profits abroad. All this is quite legitimate until it is outlawed, for it corresponds to the capitalist ideal of the “free” movement of capital in a “free” world market. The search for maximum profits and maximum security is precisely the mechanism supposed to distribute capital in the most “economical” way, which is supposedly also the way most beneficial for the world’s population. What it actually does is to perpetuate and accentuate the income gap between the rich and the poor nations. More money leaves the backward nations than is invested in them by the developed countries. According to the United States Department of Commerce, for instance, investments by United States investors in Latin American countries, including both new capital and unreturned earnings, amounted in 1958 to $317 million, while earnings returned to the United States were $653 million. The respective figures for the following years were:
|1959||$347 MILLION||$600 MILLION|
|1960||$267 MILLION||$641 MILLION|
Or to take a single country: “From 1943 to 1958 private foreign citizens invested nearly $250 million in Chile. Over the same 15 year period these foreigners took nearly $600 million in the form of repatriated profits. This outflow, mainly to the United States, represented a gift of $50 from every man, woman and child in Chile. The country desperately needs to receive aid, not give it.” But this complaint rests on a misunderstanding, for capitalism has nothing to do with charity, except as another profitable business.
In spite of the fact that most of the profits made enrich the developed nations more than the underdeveloped, the latter clamor nonetheless for more foreign capital investments to buttress the existing property relations in their own countries. But capital is not eager to invest, not only because of the competing demand for capital in the developed countries, but also because investments in many underdeveloped countries – which are nations in permanent crisis conditions – are no longer secure. Interested mainly in natural resources such as oil and metals, foreign investors foster a one-sided development which perpetuates the poor countries’ dependence on the rich nations and prevents their more general development. There are exceptions, of course, finding their cause in a geographical proximity between developed and underdeveloped nations. In Mexico and Cuba, for instance, American capital has tried to enter all strategic industries. American businesses owned 60 per cent of all Cuban industries from cosmetics to sugar cane. But this proximity did not prevent the rise of revolutionary social movements and governments. They restricted and even expropriated foreign capital in the name of a free national development, and set themselves against the specific profit needs of the great industrial and financial empires. Because such movements have been widespread and threaten to raise their heads again, private capital has no great desire to invest in underdeveloped areas, where it faces not only economic but also political risks.
Because only a limited amount of capital is available for government-to-government aid transactions, and because all government aid is designed to strengthen and secure as much as possible of the free world, this aid has the twofold function of the existing property relations in the aid-receiving countries and of assuring wider fields of operation for the capitalists of the aid-dispensing nations. With few exceptions, based on purely political considerations aid is not provided for the development of state-owned industries except those that fall into the category “infrastructure.” To encourage capital exports to the underdeveloped nations, governments often underwrite and guarantee such investments against currency disorders, exchange controls, confiscatory taxation, and expropriation. But even the elimination of risk at the expense of the public purse does not greatly stimulate foreign investments; what needs to be assured are larger profits than those available at home.
Capitalism’s inability and unwillingness to extend the industrialization process to the underdeveloped areas of the world has led to national-revolutionary movements which emphasize the role of the state in the general process of economic development. This conviction is here not the result of a long process of increasing government control as experienced in the advanced capitalist nations. Rather it is the starting-point for nationally-determined capital development directed against both native backwardness and foreign control, and often is accompanied by a partial, or total, expropriation of foreign and native capital. The ordinary business of profit-making becomes thus a matter of national concern and power politics. Because some Western firms lose out to “nationalization” in Iran or Guatemala, for instance, they get their governments to restore and secure their privileges. And because the businesses of these enterprises – as of all enterprises – are in some ways already an integral part of government policy, their governments will intervene on their own accord. Foreign business involves the interests and the prestige of governments. It is furthered and protected by political means. The attempts of nations to escape the detrimental economic consequences of being raw-material producing territories for the great capitalist powers, their insistence upon price and profit policies more favorable to themselves, are treated as “conspiracies” not only against special business interests but against Western civilization itself.
While political, military, and strategic considerations stem from economic interests and from necessities inherent in capital accumulation, and while this is often quite obvious – as, for instance, in the great interest displayed in Southeast Asia as a rich raw material-producing area and in the oil-producing Middle East – the national form of competition obscures the close relationship between political and economic interests. The latter, to be sure, have always included more than just the immediate or expected profit ability of specific corporations. But never before has capital accumulation been so closely associated with either imperialism or nationalism. This is still another indication of the general decline of the market economy and its slow transformation into a government-directed economy which operates, first of all, in terms of territories actually controlled, of raw material sources and manpower actually secured, and of lines of communication actually monopolized, instead of in terms of supply and demand in a world regarded as an open market place. And thus, though national and imperialist interests are still economic interests, seldom or not at all are they expressed in business terms.
Even in the past industrial development required a great effort on the part of the state. In Japan, for example, fear of colonization and foreign exploitation led to the deliberate introduction of capitalism by government. Already in its first stages the Japanese development showed elements of “Keynesianism” which were later to become characteristic of modern capitalism. By limiting the import of foreign capital, Japan retained a large degree of economic independence, and though this required an extraordinary degree of exploitation it achieved its goal – a Japanese capitalism capable of competing with other capitalist nations. Backed by politically favored financial houses, modern industry was introduced both with respect to economic-competitive and military needs. “These industries most highly developed in the technical sense and fashioned after the most up-to-date Western model, were the pride of the state bureaucracy which jealously guarded them even after large parts were acquired by private capital.” But Japan was the exception. Her rapid change into an industrial power took place around the turn of the century, at a high point of international capital expansion, and under the favorable political conditions occasioned by America’s challenge to European colonialism in the Far East. What the European powers had reached by intervention, America was out to reach by trade, and the “open door” policy was to operate against both the colonizers and the less-developed nation
The crises and wars of the twentieth century destroyed most of the European colonialism. But the political independence gained by former colonies was no longer a sufficient condition for their economic development. They were already too impoverished from the stagnation of previous decades. Their situation has been described as a vicious circle a low capital stock implies a low level of production, and so of income. But a low income does not permit large savings and hence the capital stock cannot easily be increased. The level of income cannot be raised without industrialization and industrialization cannot be developed. Without higher incomes but higher incomes cannot be gained by way of trade in non industrial products. It must be gained internally through a still more ruthless exploitation to yield surpluses large enough to set labor free to construct an industrial base, without thereby diminishing the exports required to pay for imports necessary to the industrialization process.
Aside from colonial control and trade discrimination, a country or area may stay underdeveloped because of a deficiency of natural resources such as arable land and mineral deposits. Surpluses may be unattainable; and thus industrial development will be impossible, except such as is introduced from without, which affects only particular resources – oil and gas in the Sahara for instance. However, underdevelopment exists in countries or territories whether or not they have adequate natural resources. It even exists within capitalist nations as, for example, in Italy, whose highly industrialized North and very backward, agricultural South repeats on a national scale the international division of poor and rich territories. While there are some parts of the world that cannot in any meaningful way be industrially developed, this has nothing to do with the problem of underdevelopment in nations potentially capable of economic growth.
In economic parlance a country is considered to be progressive if it consumes less than its net production, so as to permit a net addition to the existing stock of capital. It has been estimated that in recent years underdeveloped economies’ net investments have been between 3 per cent and 5 per cent of national products in contrast to developed nations, where the rates have been between 10 per cent and 15 per cent. But the increase of production in underdeveloped countries has been largely offset by an equivalent population increase. It is said that these nations consume as much as they produce; this, of course, is true only when one disregards the uncapitalized savings of the rich as well as those surpluses which disappear by way of trade to reappear as capital in the developed nations.
Because the underdeveloped countries are high-cost producers there is a great amount of unemployment in both agriculture and industry. According to Keynes, unemployment in “mature” capitalism finds its cause in a deficiency of effective demand because of oversavings due to a relative abundance of capital. This does not apply to underdeveloped nations. There are surpluses, of course, but they are not productively applied. The rich of the underdeveloped countries tend to amass fortunes in the form of hoards rather than in the form of productive capital. Income disparities between the rich and the poor in the underdeveloped countries are even larger than in the developed nations or, at any rate, appear to be larger because of the extremely low living standards of the great bulk of their populations. Being quite satisfied with the existing state of affairs, the rich ruling classes find no reason to alter the conditions which grant them their privileges.
In bourgeois economic theory, including the Keynesian version income inequalities are justified as a source of capital formation. Only the wealthy can save on a significant scale; and the more they “save” the more rapid the development will be. Only under conditions where too much has already been “saved,” i.e., in “mature” capitalism, may an increased demand require greater income equality. As these conditions are the opposite of those prevailing underdeveloped countries, Keynesian theory can only suggest what all other bourgeois economic theory also proposes and what, in fact, is the capitalistic practice – namely, the increase of “savings” through increased exploitation and their application in industrial development.
To reiterate, Keynes thought that throughout history the inducement to invest has always been weaker than the propensity to save. He wrote that “the desire of the individual to augment his personal wealth by abstaining from consumption has usually been stronger than the inducement to the entrepreneur to augment the national wealth by employing labor on the construction of durable assets.” However, though the poor cannot help but abstain from consumption they augment nothing but their misery. And though the rich consume in a quite fantastic fashion they get richer nonetheless.
Keynes speaks only about the rich in both developed and under developed countries, under capitalist and under pre-capitalist conditions. In “mature” capitalism, the inducement to invest is because “maturity” destroys profitability; whereas in “immature” capitalism, people can get rich, and stay rich, just because there is no capitalist development. “Non-consumption,” writes a disciple of Keynes, “does not necessarily carry with it the implication that it thereby releases just the kind of human and material resource which can be used to produce capital goods and with nonchalant ease at that. The rich of the poor nations must not only abstain from consumption but must abstain in order to invest in the construction of durable assets in short the Keynesian program for industrial development is capitalism. And this comprises about the whole of Keynes’ contribution to the “theory of economic growth.”
The meagerness of Keynes’ contribution to the “theory of growth” did not prevent the fact that the actual, or anticipated, industrial development of backward economies is now largely recognized as either a “Keynesian” or a “socialist” development, depending on the extent of state-participation in the capital formation process. Although state interventions under pre-capitalist conditions have an altogether different function from those advocated by Keynes to solve the problems of the advanced capitalist nations, it is possible to apply the Keynesian techniques for speeding up the process of capital formation in underdeveloped countries. State control of economic development preceded Keynes theory not only in the limited Keynesian sense of state control, as experienced in Japan, but also in the wider and more consistent non sense of state-ownership of the means of production, first realized in Russia.
National revolutions took on a variety of forms and characteristics within their basically capitalist nature, in accordance with the individual histories of the countries where they occurred and the world situation they faced. Russia’s proximity to the Western world, the amount of foreign capital that had been invested in highly-advanced industries (however small in relation to the size and the needs of the nation), the weakness of her bourgeoisie within the ruling social groups and her peasant population which strove to escape the persistent semi-feudal conditions – all this gave her revolution the character of a “revolution from below,” an uprising of workers and poor peasants and their middle-class allies against all experienced forms of exploitation, whether of landlords or of native or foreign capital. Based on Marxian ideology, the goal was socialism and its realization through the agency of a revolutionary state. In India the revolutionary ferment was of a different nature. Within the colonial conditions, there slowly emerged in identity of interests between the native and foreign bourgeoisie. Fostered by the circumstances of two world wars, there was a merger of foreign and native capital and a rapid expansion of the latter. Yet the greater primitiveness of her industrial and agricultural production and the consequent lack of social awareness in the lower classes gave her revolutionary aspirations the character of a national movement for political independence, awaiting deliverance through the decline of British imperialism. Whereas Russia is considered a state-socialist, or state-capitalist, system in the non-Keynesian sense of state-ownership of the means of production, India, considering herself a socialist welfare-state, represents, at least ideologically, a “Keynesian system” which limits itself to state control of the economy. For in “socialist India,” as of 1958, “it was estimated that 90 per cent of the country’s enterprises, including agriculture which is entirely in the hands of individual owners, were in private hands, and furnished 92 per cent of the country’s total income, with only 8 per cent of total income coming from government owned enterprises.”
With Russia’s development into an industrial power and with the rise of the Eastern bloc after the Second World War, the world’s national economies in both developed and underdeveloped countries divided into systems of state-ownership and systems of limited state control. The division is not absolute; the various nations adhering to one or the other principle of social organization display various degrees of either state-ownership or state-control.
There are no two countries exactly alike in this respect either among the so-called communist nations or among the nations belonging to the “free world,” or among those which are considered uncommitted” to either one of the existing power blocs. But in a I nations governments intervene to some extent into the economic mechanism. In the “communist” nations investments are presumably directly determined by government decisions. In the con I trolled, or mixed, economies, developed and underdeveloped, investments are the result of market forces which the governments seek to influence by monetary and fiscal means, and which they supplement by directly-determined investments in public enterprises and government-induced production. The fiscal and monetary policies which have come to be associated with the name of Keynes are applicable in all existing economic systems regardless of their specific character or their particular stage of development.
Whereas in the “mature” nations Keynesian policies serve to stabilize the economy, underdeveloped countries can use them to organize and coordinate economic growth. Fiscal and monetary policies may distribute income in such a way as to increase the accumulation fund. The government may itself undertake the task of savings and investments, enacting what Keynes conceived as a somewhat comprehensive socialization of investments through the collection of communal savings. If Keynes himself saw this only as a possibility of the future, he was nonetheless convinced, or so he said, of its desirability, not only because of the declining propensity to consume but also because he believed in the state’s superior capacity to calculate the profitability or marginal efficiency of capital in the long-run and to give due consideration to the “general social advantage.”
All the Keynesian suggestions as to how to overcome capitalist stagnation and decline in the developed nations refer to government activities which bring a measure of “planning” into the market mechanism. But if partial “planning” is possible, so is total planning; there is nothing in the Keynesian system which would exclude its application in a state-capitalist, or state-socialist system advocates of the state-capitalist system object to Keynesianism not because it suggests manipulating income distribution to create the desired relationship between investment and consumption but because Keynes wished to make only limited use of such manipulative techniques.
Although Keynesian manipulative techniques are applicable in all capitalist systems regardless of their stage of development, Keynes’ “general theory of employment” loses its “generality” by a consideration of unemployment in underdeveloped countries. In these countries, unemployment is the result not of an abundance but of a lack of capital. This unemployment, disguised as over population relative to the existing means of production and to their productivity, is itself a hindrance to capital formation, not only because of the cheapness of labor competing with capital, but also because planned development must here necessarily be of an employment-generating instead of a capital-increasing nature. The planning authority must start out with a kind of social planning not conducive to rapid capital formation, or destroy a large part of the population. Under such conditions the Keynesian techniques will not suffice to yield the surpluses necessary to initiate capital development.
A country may be so impoverished that neither fiscal nor monetary policies can successfully channel funds from consumption to investments. It may then be found necessary to organize production and consumption by purely political means and to force populations into behavior patterns that will yield surpluses not other wise attainable. The collectivization of Russian agriculture, as well as the whole of the Stalinist terror system, was such an undertaking. It finds a modified repetition in present-day China because there is no other way to capital formation. “Given a backward and over populated agrarian society as a starting point,” it has been said, “any emotionless practitioner of economics might have prescribed most of what is being done in China today even if he had never heard the word Communism.”
But not all underdeveloped countries are in such an impoverished state, and even if they were, some of them would still not be able to solve their developmental problems in the authoritarian ways of state-capitalism. In some cases, a developed capitalist nation may prevent an underdeveloped nation from following the state capitalist model; or the underdeveloped nation may be too dependent on capitalist countries to consider such a move. State-capitalist systems must to some extent free themselves from traditional world market relations. They must be able to exist under predominantly autarchic conditions, and they must be capable of with standing imperialist pressure. They must therefore be large with large populations, well endowed with natural resources. Since the end of the Second World War, however, state-capitalist nations have been combined into an Eastern power bloc which, in its economic relations, represents a kind of “second world” market. This allows even weak or small nations to break out of their previous dependence on the private world market and to organize their economic life on state-capitalist principles.
The synchronization of various national economies appears to be less difficult than economic “integration” by way of private trade on a monopolistic world market. And just as the Western powers distribute some “aid” to underdeveloped countries within their spheres of interest, so the stronger countries of the Eastern bloc come to the “aid” of their underdeveloped allies or potential allies. Economic “aid” by the Soviet bloc to underdeveloped nations had reached the equivalent of $3 billion by 1960. Most of this “aid” was in the form of loans and credits, some of it comprising military equipment. This “aid” has been regarded in the Western world as “aid competition”; and so it is like the “aid” of the Western nations, it is given to further the political and economic interests of the dominating powers with the Eastern bloc. The direct or indirect control of underdeveloped countries adds important sources of raw materials to the power base of the state-capitalist systems and subtracts these raw from the “free world’s” resources.
Although Soviet “aid” serves the same purposes as “aid” extended by the Western nations, it is often provided under conditions more favorable to the underdeveloped countries. Russia’s rate of interest on foreign loans, for instance, is 2½ per cent as against a Western interest-rate of between 4½ and 5½ per cent. Russian investments in the oil-industry of India demand 10 per cent of the returns as against the 50 per cent asked for by British and American companies. And, most important, industrial establishments erected through Soviet aid measures become the property of the receiving countries, whereas Western private investment in underdeveloped nations continue to be owned and operated by foreign companies. There is much barter dealing and government-to-government trading, which is favorable to underdeveloped COU tries since it by-passes international payments problems. There are also no restrictions or preferences with regard to types of industrial development; complete factory installations of all descriptions offered and delivered. Extensive use is made of experts working in the underdeveloped countries. For all these reasons, trade too expanding between the Soviet bloc and the underdeveloped nations, though not on a scale that will make a real difference in the condition of the backward nations for some time to come.
The Soviet bloc’s policy of expanding trade with underdeveloped countries began on an extremely small base of foreign trade. “For the underdeveloped countries as a group, Soviet bloc trade can be expected to make a positive though distinctly marginal contribution. But even a manifold increase of trade would not alter the fact that the economic future of these countries will continue to be interwoven with the trade of the free world.” Trade with the “free world,” however, is trade for private profit and as such is determined by the conditions prevailing in the developed, not the underdeveloped, countries. If this trade has hitherto not much profited the backward nations, it can hardly be expected to do so in the future – a future already restricted by the existence and the growth of competitive state-capitalist systems.
The alignment of nations in Eastern and Western power blocs is not based on the existence of the “two world markets.” Rather is the opposite true: the “two world markets” have some reality only because international competition (and cooperation) now has a political-military character. The Western powers desire the maintenance of capitalistic property relations, and favor government controls only to that extent which appears necessary to secure these relations and to allow them to develop in countries on the verge of capitalization. All foreign policy is designed to strengthen private enterprise wherever possible and to sabotage state-capitalist aspirations wherever they arise. Economic relations with state-capitalist systems are held to a minimum, or are done away with altogether, by the Western nations, though some are more consistent in this policy than are others. Trade with China, North Korea and Cuba, for instance, has become a crime under the American “Trade with the Enemy Act.” For the state-capitalist nations, the inter national market is thus largely restricted to other state-capitalist nations and to nations not as yet committed to either of the dominating and competing power centers.
Most of the underdeveloped countries suffered, and are still suffering, under the double yoke of native and foreign exploitation.
The social struggles in these nations are still fought against both native ruling classes and foreign capital. Both struggles involve questions of property expropriation for the rearrangement of notional production and distribution in greater conformity with national interests, even if these “national interests” become once more the basis of new special interests vested in the political control of the state. “Middle-class groups,” it is often pointed out, are the Promethean elements in the underdeveloped societies today – the only conscious, active and capable agents of social change. The communists have long recognized the crucial role of the middle classes and have been making major efforts to reach and influence them. In contrast, the West has done far too little to reap the benefits of its own advantages over the communists.” With regard to social change the West has no such advantages. The change required in these nations can only be disadvantageous to the Western capitalist nations. It is precisely because of social change, or the desire for change, that the underdeveloped nations find themselves in open or latent rebellion not only against their own ruling classes but also against the latters’ supporters in the advanced countries. These rebellions can have no other objective than the change of existing conditions and therewith of the property relations at the base of these conditions. It is because the “middle classes” find no prospect for advancement in underdeveloped countries, and these countries find no prospects for development in the monopolistically controlled capitalist world that any serious attempt at development will base itself on state capitalist ideology and a state capitalist program even where for the time being it must actually be satisfied with state-control in the Keynesian sense.
The development of capitalism in poor countries presupposes social movements against the social forces favoring the status quo; it is thus first of all a political problem. Because the nation is the largest historically evolved unit for coherent social organization and because conditions in all countries vary, development appears as a national program. In some ways it must be coordinated with similar programs of other nations; but this larger unit of organization will be composed of a number of national units and will have no permanent basis until the institution of the nation-state is altogether abolished. The development of capitalism and the rise of the nation-state were one and the same process. It was the function of the state to assure and secure the growth of the national capitalist economy, as it is its function now – but in far greater measure – to stabilize the capitalist system so as to assure its continued existence. Development under present world conditions is far more difficult than the stabilization of advanced capitalist systems and requires even more government controls. As these controls affect various social groupings differently, they are established by way of political struggles, which are not confined to the national scene but involve other nations by affecting their political and economic interests.
To do justice to the problems of underdeveloped countries, it would be necessary to deal with each nation separately, for each is unique not only in its physical and social structure but also in its connections with other nations and with the world at large. Measured in terms of national income per head, Southeast Asia appears to be the world’s poorest area; but it is also one of the areas most contested by the imperialist powers representing the two competing social systems. China and India follow closely, the one attempting the state-capitalist path of development, the other that of state-aided private capital development. The nations of tropical Africa, though even less developed, fall into an entirely different category. No attempts as yet are made here, either by foreign capital, or by the Africans themselves, to diversify production. Largely self-sufficient in food production and in relative isolation from one another, the various African states restrict their production and trade to primary goods intended for the Western, predominantly European, markets. The capital in evidence is foreign capital invested in extraction industries. Nonetheless, some African governments, Ghana and Senegal for instance, call themselves “socialist” or “welfare states” because they have transformed existing private marketing organizations into monopolistic government agencies. The various nations of the Middle East display different degrees of state-control, from government participation in private enterprise and some form of government regulation for almost all economic activities, as in Egypt, to an almost complete absence of government intervention in business, as in Lebanon. Israel, being entirely de pendent on foreign support, assumes the character of a mixed economy merely because assistance from abroad is distributed by the government and channeled into government and semi-government undertakings. As this assistance has been ten and twenty times as large as private capital investments, it is the government not private capital, which determines economic activity. Some of the poorest countries in terms of per capita income are found in Latin America; Bolivia, Paraguay, and Ecuador are examples Latin America also contains some of the most rapidly developing nations, such as Mexico and Brazil. Yet all these nations find themselves in permanent crisis conditions; some because no development takes place, others because there is development, and also because of the international repercussions of one or the other of these situations.
As regards Latin America any intensive development requires opposition to both the existing semi-feudal internal relations to the exchange relations between the South American and the developed foreign nations. Only about 10 per cent of Latin American trade is internal, 90 per cent consisting of trade with the United States and Western Europe, which is trade in primary products such as coffee, bananas, cocoa, wool, meat, oil sugar copper, etc. This situation suits the industrial nations, the hereditary ruling classes in Latin America, and the foreign investors in primary industries. The native haciendas and latifundia operate under a peon system of obligatory labor. Although native labor is thus extremely cheap, foreign investors in large commercial plantations have found it more profitable to replace labor by machinery, a policy soon adopted by native plantation owners. There arose a rural proletariat, landless and unemployed, which has been held down by military dictatorships subservient to the native and foreign ruling classes. Foreign, particularly American, exploitation has allied itself, if not always ideologically at any rate factually, with the semi-feudal interests controlling the Latin American nations.
With the exception of Cuba, the combined powers of the American and Latin American ruling classes have until now proved capable of maintaining the basic social relationships in the Latin American nations despite a series of social upheavals. The Mexican Revolution was halted midway and turned into an instrument of private capital formation. However, new social movements confront the Mexican government with fresh demands for the completion of the interrupted nationalization process. The social restiveness in the Latin American nations forces their governments, at times, to assume greater controls over the national economy. Mexico has been joined by Bolivia and Brazil in the division of some large estates and the nationalization of natural resources and selected industries. The chronic instability of most of the Latin American countries, and the increasing misery at the base of this instability, induced the United States to offer more “aid” within the framework of a new Latin American “Alliance for Progress.” But this “progress” is still envisioned in terms of the market economy and private capital accumulation.
Unavoidable government interventions in the economic activities of these nations modify their capital development to such an extent that these “developing” nations may be considered “developing mixed economies.” Whereas in the developed nations the “mixed economy” feeds on the capacity of private enterprise to produce more than it can capitalize, in the less-developed nations the “mixed economy” must create the conditions of capital development. Agricultural output must rise but less must be consumed in order to gain investment capital. To bring consumption down in spite of the increased economic activity there must be monetary inflation. And thus the more and the harder people work the less they are rewarded. It is this preference of inflation to other methods of capital formation which gives these “mixed economies” their “Keynesian” connotation. But being already near starvation levels, this method will not suffice to bring forth the capital necessary to turn the underdeveloped into competitive industrial economies. Rather, it will increase social unrest and bring forth social movements for more efficient and less horrible ways of overcoming their present economic impasse.
Partly by choice and partly by necessity, private enterprise and government control operate simultaneously in each capitalist country and also as competing social systems in the world at large. Side by side there exist, then, the most ruthless general competition, the subordination of private to national competition (or vice versa), and the subordination of national competition to supra-national requirements intended to serve national ends and therewith the of private capital formation. This situation makes consistency and persistence in any and every form of competition and cooperation impossible; and the various and changing attempts at organization and collaboration which result from it only increase the anarchic character of capital production. Nationalism as imperialism, and nationalism in opposition to imperialism, lead to an always-greater international economic disintegration. And this at a time when world conditions and physical production processes make the satisfaction of the most immediate needs of the world’s population dependent on the closest economic integration.
Instead of working for such integration, industrial countries increase their agricultural production to reach a high degree of self-sufficiency in expectation of war, or merely to satisfy their own agricultural producers as a measure of “welfare economics.” They protect both their agricultural and their industrial markets from all possible competitors with a great variety of tariffs and import restrictions. While increasing their agricultural surpluses, they hinder the primary producers to diversify their production, thus forcing them to contract their agricultural production which is already insufficient to feed their populations. The great mass of the world’s population stays hungry, while surpluses are piled up in nations unable to sell them and unwilling to give them away. These people are supposed to starve themselves still further so as to raise the capital which will make their work more productive, while industrial labor in the developed nations is idle, or producing waste, instead of producing for world-wide use. These irrational economic contradictions manifest themselves in political tension and the diversion of an always greater part of world production into arms production. The nation-state, in its government-controlled or government-owned avatar, proves to be no less irrational a social form than private capital production on a supposedly free world market. The difficulties of capital accumulation in both the developed and underdeveloped nations defy not only market but also national solutions.
1. J.M. Keynes, The General Theory, p. 31.
2. Ibid., p. 347.
3. K. K. Kurihara, The Keynesian Theory of Economic Development, New York, 1959, p. 22.
5. J. Tinbergen, Shaping the World Economy, p. 15.
6. United Nations, Department of Economic Affairs, Instability in EXPO Markets of Underdeveloped Countries, New York, 1952, II, p. 1
7. November, 1965.
8. The New York Times, January 31, 1966
9. P. A. Baran, The Political Economy of Growth, New York, 1960, p. 184.
10. Lewis, “Mexico Since Cardenas,” Social Change in Latin America Today, New York, 1961, p. 306.
11. Nurske, Problems of Capital Formation in Underdeveloped Countries London, 1953, p. 63.
12. P. F. Drucker, Landmarks of Tomorrow, New York, 1959, p. 164.
13. G. Myrdal, Beyond the Welfare State, New Haven, 1960, p. 222.
14. The New York Times, January 31, 1966.
15. The New York Times, September 5, 1952.
16. P. Einzig, The Economic Consequence of Automation, New York, 1957 p. 65.
17. J. Strachey, The End of Empire, New York, 1960, p.
18. J. Becket and K. Griffin, The New Republic, December 29, 1962.
19. H. Norman, Japan’s Emergence as a Modern State, New York, 1946,
20. J. Tinbergen, Shaping the World Economy, p. 14.
21. The General Theory, p. 348.
22. K. K. Kurihara, The Keynesian Theory of Economic Development, p. 57
23. V. M. Deans, New Patterns of Democracy in India, Cambridge, 1959, p. 106.
24. T. Mende, China and Her Shadow, New York, 1962, . 16.
25. Berliner, Soviet Economic Aid, New York, 1958, P.
26. The National Planning Association, The Political Economy of American Foreign Policy, New York, 1955, p. 161.