Rising Poverty: Capitalism, Employment and History

When industrial capitalism was developing in Britain in the late 18th and early 19th century, the new machine-made goods had displaced many artisan producers, giving rise to the Luddite movement against the introduction of machines. With increased unemployment, there was an increase in the relative magnitude of poverty, as Eric Hobsbawm had argued in a debate with another historian R.M. Hartwell. But then things improved later on in the course of the 19th century. The proportion of the population afflicted by absolute poverty stopped increasing and indeed came down, as did the proportion of the workforce afflicted by unemployment.

This experience of Britain is usually generalised as an intrinsic characteristic of capitalism, namely, that while it may initially give rise to an increase in poverty and unemployment, it eventually brings these down, causing a general improvement in living standards for all, even if income inequality increases compared to the initial situation.

This impression, namely, that the development of capitalism eventually necessarily causes an improvement in employment and a reduction in poverty, is so widespread that the standard panacea recommended for any country that is afflicted by mass unemployment and acute poverty today is to attract capitalists to invest within it; and exactly the same is recommended for any state within the Indian Union. “If you are poor, then offer fat concessions to capital to entice it to come and lift you out of it”, has become almost a standard mantra.

This, however, apart from lacking any theoretical basis whatsoever, is a complete misreading of what actually happened in history. If it was only a once-for-all introduction of a new machine, then, as long as the pace of accumulation of capital stock was high enough and did not slacken, then the initial unemployment caused by such introduction would not only be made up, but would be more than overcome.

But industrial capitalism is characterised by continuous process and product innovations, so that labour displacement occurs all the time. In such a situation there is no necessary reason why the unemployment caused by capitalism should disappear at all. There is, in short, no theoretical reason why capitalism should eventually cause a disappearance of unemployment.

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Historically, too, the reason why the initially generated unemployment that had so angered the Luddites had eventually got alleviated has nothing to do with any innate tendency of capitalism. It occurred in the latter half of 19th century Britain for three quite distinct reasons.

The first was mass emigration from Britain (and from Continental Europe) to the temperate regions of white settlement. Economist W. Arthur Lewis pointed out that as many as 50 million Europeans migrated to Canada, the United States, Australia, New Zealand and South Africa in the “long nineteenth century” (stretching up to the first world war); they drove the local inhabitants off the land, herded them into reserved areas, and set themselves up substantially as agriculturists. The scale of emigration was so large that from Britain alone, roughly half the annual natural increase in population between 1815 and 1914, actually migrated to these “new lands”. This very substantially reduced the magnitude of unemployment in Britain.

A second factor that contributed to this was the other instance of colonialism, namely, the colonies of conquest as distinct from the colonies of settlement. Throughout the 19th century, especially in its latter half, machine-made goods were being exported to the colonies of conquest like India, displacing local pre-capitalist producers there through a process that has come to be known as “de-industrialization”. What this meant was that the machine-made goods, while not causing any further unemployment within Britain (since they were now being exported to the colonies), were reducing some domestic unemployment through larger production.

In addition to these two factors, there was also the additional factor that the production of machines themselves in the initial stages was highly labour-intensive (which is what may have made Marx believe that the organic composition of capital, C/V, would always tend to increase through technical progress). Hence, even though machine-made goods displaced some living labour, this was partially offset by the fact that machine-making itself absorbed a fair amount of labour.

These three factors, however, had nothing to do with any innate tendency of capitalism. The first two had to do with colonialism; even the last one, having to do with machine-making being labour-intensive, was a happenstance, not a necessary characteristic of capitalism and not always true.

It follows, therefore, that the conclusion typically drawn from European experience lacks validity, namely, that capitalism, no matter what transitional problems it may bring and no matter how differentially it may confer its benefits upon the population, necessarily and inevitably brings about an improvement in the material conditions of life for everyone. What happened in Europe was made possible by the specific context of those times; it does not constitute an inevitable outcome.

In fact, one can go further: capitalism today stands opposed to the agenda of “development”. Consider some figures: over the decade 2010-20 the annual rate of growth of world GDP was 2.6%, the lowest for any decade since the Second World War. The growth of world labour productivity, which was 1.8% in the first half of the decade, declined to 1.4% in the second half, so that we can take 1.6% as the average for the decade as a whole. This means that the rate of growth of employment in the world economy, which is the difference between the two, would have been about 1% annually over the decade.

But the rate of growth of the labour-force over the same period was anywhere between 1% and 1.5% annually, which means that the relative size of the labour reserves in total world labour-force would have increased over the decade. If we take the world economy as a whole, then, it follows that the unemployment rate would have increased during the pre-pandemic decade of neo-liberal capitalism.

Neo-liberal capitalism, which is the latest phase of capitalism, involves a slowing down of the GDP growth rate, both because of the increase in inequality it entails and also because of the inability of State intervention to jack up the growth rate through Keynesian measures. Neo-liberal capitalism, therefore, necessarily implies a slowing down of employment growth, too, and to levels even below the rate of growth of the world labour-force. A rise in the relative size of labour reserves is thus not just a fact of, but is necessarily associated with, contemporary neo-liberal capitalism.

This does not, of course, mean that all countries that adopt the capitalist panacea for overcoming unemployment and poverty would necessarily come a cropper. What it means is that those countries which do succeed through the capitalist panacea would be doing so only at the expense of other countries, that it is impossible for all countries to progress towards “development”, in the sense of alleviation of distress of the majority of the population, through the pursuit of the capitalist path of development.

Indeed, on the contrary, since the relative size of the labour reserves is a major factor underlying poverty, the pursuit of capitalism today would necessarily aggravate absolute poverty in the world economy as a whole.

The intellectual sleight-of-hand of institutions, such as the World Bank, becomes clear here. From the fact that some countries manage to shake off their backlog of poverty by promoting capitalist development, they suggest that all countries can do so, which is directly contradicted by the available statistics of the world economy. Those countries which shake off poverty do so only by making other countries wallow in even more accentuated poverty.

In fact, countries that are small in size, that have in absolute terms small labour reserves, and can attract the relocation of productive investment from the metropolis to their soils, can well succeed in overcoming poverty and effecting “development” through the pursuit of capitalism; but these constitute the exceptional cases, which, far from constituting the general situation, prove precisely the contrary.

What is true of the world economy as a whole, holds true for countries like India, which have enormous labour reserves inherited from the colonial times, reserves hidden away in particular in vast agrarian sectors. Expecting such economies to overcome their state of poverty and underdevelopment through the pursuit of capitalist development is the height of absurdity. This was a point well understood in the days before the launching of the neo-liberal onslaught. But so assiduous has been the “selling” of capitalism in the past few decades that this simple truth has been lost sight of.

The sooner people get over such illusions and wake up to the necessity of ushering in an alternative path of development, that is based on the home market (and hence sustained by the development of agriculture), that controls cross-border capital flows, and that makes use of the public sector to offset “investment strikes” by capitalists, the better it would be for mankind.

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