Archive for September, 2011

A clap of thunder in the summer sky

September 27, 2011

Precipitous collapse of the nineteenth-century peace, and of the first era of haute finance, into a mess of squabbling empires and aggressive militarism, as described by Karl Polanyi:

The breakdown of the international gold standard was the invisible link between the disintegration of world economy since the turn of the century and the transformation of a whole civilization in the thirties. Unless the vital importance of this factor is realized, it is not possible to see rightly either the mechanism which railroaded Europe to its doom, or the circumstances which accounted for the astounding fact that the forms and contents of a civilization should rest on so precarious foundations.

The true nature of the international system under which we were living was not realized until it failed. Hardly anyone understood the political function of the international monetary system; the awful suddenness of the transformation thus took the world completely by surprise. And yet the gold standard was the only remaining pillar of the traditional world economy; when it broke, the effect was bound to be instantaneous. To liberal economists the gold standard was a purely economic institution; they refused even to consider it as a part of a social mechanism. Thus it happened that the democratic countries were the last to realize the true nature of the catastrophe and the slowest to counter its effects. Not even when the cataclysm was already upon them did their leaders see that behind the collapse of the international system there stood a long development within the most advanced countries which made that system anachronistic; in other words, the failure of market economy itself still escaped them.

The transformation came on even more abruptly than is usually realized… The conflict of 1914-18 merely precipitated and immeasurably aggravated a crisis that it did not create. But the roots of the dilemma could not be discerned at the time… For suddenly neither the economic nor the political system of the world would function… In reality, the postwar obstacles to peace and stability derived from the same sources from which the Great War itself had sprung. The dissolution of the system of world economy which had been in progress since 1900 was responsible for the political tension that exploded in 1914… The only viable solution of the burning problem of peace… [was] completely out of reach; so much so that the true aim of the most constructive statesmen of the twenties was not even understood by the public, which continued to exist in an almost indescribable state of confusion.

What appeared a sudden and violent collapse had been coming for some time.

The booming third quarter of the nineteenth century, with a wave of technical innovations from the 1850s (e.g. the ‘American system’ of production engineering using interchangeable parts, and invention of the Bessemer process allowing cheap production of steel), led swiftly into a crisis of profitability.

The Long Depression of the 1870s was followed by a belle époque during the late Victorian and Edwardian eras.

In Britain this age of finance saw the former ‘workshop of the world’ submit to the supremacy of the City of London. Britain’s Bank Charter Act of 1844 had constrained the growth of state money and circulating notes, limiting inflation and thus favouring the creditor interest in that country.

A generalized switch to the gold standard in the 1870s allowed the integration of the financial systems of Britain, western Europe, the United States and their respective empires.

The industrial capitalist class, which hitherto prided itself on sobriety and delayed gratification, now mimicked the extravagant habits funded by current expenditure of the old landed aristocracy.

The appreciation of financial assets during this boom corresponded to a change in the real economy, as a smaller portion of profit was materialized in new equipment, plant and machinery. Instead it was stored as money capital, and labour re-deployed towards construction, restoration and furnishing of stately homes in the countryside, on domestic servants and other luxury consumption, and from the 1890s on armaments as Britain, Germany and France, the industrial powers of Europe, contended for control of African colonies.

These territories, seized or merely dominated, served as suppliers of cheap raw materials, keeping wage costs down. They also were outlets for the excess liquidity of rentiers.

When the music stopped in 1914, the rival empires faced each other armed to the teeth.

Earlier this year Harvard University Press published a new book by Michael S. Neiberg on the outbreak of the Great War.

Dance of the Furies claims that the populations of belligerent Powers, as opposed to their leaders and the power elite, never saw it coming. When troops were mobilized and war was declared (even in the parliamentary states, Neiberg shows, the critical decisions were made by fewer than a dozen men), it came as ‘a clap of thunder in the summer sky’.

Most people were innocent of their state leadership’s longstanding territorial and economic ambitions. Nor were they swayed necessarily by nationalist bloodlust (an eventual result rather than a pre-existing cause of war, he avers).

Rather ‘the people of Europe accepted the necessity of war primarily because they believed their wars to be defensive’ and themselves subject to existential threat:

The “militarism run stark mad” that the American Presidential advisor Edward House saw on his visit to Europe in 1914 was limited to the governing elites… The overwhelming response of the people of Europe was not enthusiasm or joy but sadness and resignation.

The German government, latterly under the liberal Chancellor Bethmann-Hollweg, was scheming to dominate a Mitteleuropa through creation of a continental customs union, seizure of the Belgian coastline, annexation of the ore-rich Longwy-Briey territory, expansion eastwards into the Russian Empire, political-military subordination of France, Italy, Scandinavia and the Netherlands, and creation of a colonial Mittelafrika between the Atlantic and Indian oceans by taking over Portugal, Belgium and France’s African possessions.

As much was revealed by Germany’s war aims as stated in the Septemberprogramm.

These expansionist ambitions were more than two decades old. Diplomatic secrecy and an obliging media helped to shield them from popular scrutiny, but were the people of 1914 really so ostrich-like, such that general war between the Powers appeared to arrive with ‘truly dizzying speed’, and so that their own country, alone, seemed engaged in a battle for existential survival?

Neiberg has assembled enough letters and diaries to suggest as much.

Imagine that some nosy historian will, one hundred years from now, pore similarly over the private communications of today’s intelligentsia: the liberal professions (civil servants, lawyers, doctors, architects, etc.), academics, journalists and artists. Will this examination reveal minds any more perspicacious?

Or is this social layer, like its forebears, so attached to its own epoch that its members delude themselves about the fundamental nature, and likely fate, of the present order?


The organisation of work and property ownership in India

September 26, 2011

Here’s an interesting article from Deepankar Basu and Amit Basole of the economics department at UMass Amherst.

At times it is a little confused (among other things, Basole is plainly influenced by Lohia’s thinking on industrialization, and Basu not). Past and current debates about Maoism are never far away.

But it tends to let facts speak for themselves, not getting bogged down in the usual pro- or anti-Naxalite boilerplate. Thus it contains a great deal of information about the nature of property holding and unpaid surplus labour in India’s agrarian and urban ‘informal’ sectors.

Indian enterprises

Those characteristics reveal, for contemporary India as for any other human collective, ‘the innermost secret, the hidden basis of the entire social structure and with it the political form of the relation of sovereignty and dependence, in short, the corresponding specific form of the state’:

One of the striking features of contemporary Indian capitalism is the predominance, both in agriculture and in industry, of small-scale production. In 2003, 70 percent of all operational holdings in Indian agriculture were less than 2.5 acres in size, with another 16 percent between 2.5 and 5 acres; around half of the produce from these small holdings is kept for family consumption while the other half is sold in the market. Similarly, informal manufacturing is dominated by petty proprietorships, which typically has an owner-employer and an unpaid worker (usually a family member); a large number of such firms neither employ wage labour nor are part of a putting-out system. Thus, while production for subsistence and for sale on small, unviable plots is a key characteristic of the agrarian scene, petty commodity production (or simple commodity production) marked by low productivity and income seems to be a pronounced feature of the non-farm economy. The vast majority of the Indian poor shuttle between these two.

Here, in the miserable tedium of ‘self-employment’ within the small workshop, household plot or home-based production, bound to the tyranny of the domestic patriarch or the local moneylender, is the reality behind journalistic effusions about ‘India’s growing middle class’.

handloom weaver

Quotas and sandal queens

September 12, 2011

Amusing revelations come, from a leaked US State Department cable, about the chief minister of Uttar Pradesh.

Mayawati is best-known internationally for adorning Lucknow with tens of thousands of statues of B.R. Ambedkar, elephants (her party’s symbol) and herself.

Labourers rest under elephant statues made of stone inside the Ambedkar memorial park in the northern Indian city Lucknow

Such icons of recognition and cultural esteem are the fruits of measures supposed to ‘uplift’ India’s Dalits, other scheduled castes, women, ‘backward’ tribes and minorities such as Sikhs and Muslims.

These measures include the reservation system, which allots quotas for parliamentary representation, education and civil-service positions.

The State Department cable thus says much, even if not directly, about many political currents  such as those derived from the social-democratic thought of Ambedkar and Rammanohar Lohia  which see advancing the oppressed through quotas, and the ‘politics of presence’, as the immediate desideratum of political activity.

India’s reservation system is a legacy of reforms made during the latter decades of British colonialism.

Successive viceroys and colonial secretaries used divide-and-rule strategy in the guise of assisting ‘depressed’ layers of society, and of protecting minorities from majority tyranny.

The Indian Councils Act 1909 reserved seats for Muslims in the Imperial Legislative Council. Growth of the All-India Muslim League, a circle of intellectuals which later agitated for partition of the Two Nations, dates from this period.

In 1932 Labour Prime Minister Ramsay MacDonald responded to Ambedkar’s statement of claims at the Round Table Conferences with the Communal Award, which reserved separate electorates for Muslims, Sikhs and Dalits.

This led to the famous dispute between Ambedkar and Gandhi, in which Gandhi, to protest dilution of the Hindu vote, begun a fast unto death, only averted by the Poona Pact. (Ambedkar later described Gandhi’s blackmail as ‘a foul and filthy act… the worst form of coercion.’)

Subsequently Ambedkar helped to draft India’s federal constitution and reservation was incorporated as a foundation of Indian political life.

According to the 2001 census, Scheduled Castes and Tribes make up around 24 percent of India’s population.

Especially in the states of South West India and Uttar Pradesh, they form a pool of servile manual labourers in the agricultural sector, bonded workers at stone and slate quarries, open mines and brick kilns, and as handloom weavers, fishermen and potters.

There is little incentive for employers to mechanize these production tasks so long as labour is cheap and plentiful. Dalit workers thus split rocks with hammers and chisels rather than with loaders and excavators made by Caterpillar or Komatsu.

This servile layer is demarcated, and the system of hereditary occupations enforced, by pollution taboos, endogamy, violence and terror, and ‘the dogma of predestination’.

The latter, of course, denies a key bourgeois right: the individual’s ability to determine his or her own life course.

In Annihilation of Caste, Ambedkar identified the economic imperative behind the emergence of this fundamental Enlightenment tenet, enshrined by Jefferson in the US Declaration of Independence:

Social and individual efficiency requires us to develop the capacity of an individual to the point of competency to choose and to make his own career. This principle is violated in the caste system in so far as it involves an attempt to appoint tasks to individuals in advance – selected not on the basis of trained original capacities, but on that of the social status of the parents.

The repudiation of equality as a ‘natural right’ thus also denied the principle advanced by Adam Smith in his parable of the philosopher and the street porter:

The difference of natural talents in different men is, in reality, much less than we are aware of; and the very different genius which appears to distinguish men of different professions, when grown up to maturity, is not upon many occasions so much the cause as the effect of the division of labour. The difference between the most dissimilar characters, between a philosopher and a common street porter, for example, seems to arise not so much from nature as from habit, custom, and education. When they came into the world, and for the first six or eight years of their existence, they were perhaps very much alike, and neither their parents nor playfellows could perceive any remarkable difference. About that age, or soon after, they come to be employed in very different occupations. The difference of talents comes then to be taken notice of, and widens by degrees, till at last the vanity of the philosopher is willing to acknowledge scarce any resemblance.

Smith’s contention, and that of the Classical political economy he founded, was that people were equal and adaptable. They were trainable or educatable for any specialized task or branch of activity that their social superiors could do. Thus, in the long run, each human was a full substitute  for the labouring capacity of any other. Labour for this reason constituted a universal and homogeneous (roughly equivalent) input, distributable to any task, industry or line of production.

In commercial society, saw Smith and later Ambedkar, private firms – driven by competition to technical innovation – need to re-allocate labour resources between various concrete tasks and branches of production. This requires horizontal mobility within the labour market.

But this shuffling of people between employment, says Ambedkar, is forbidden under the caste system:

Looked at from another point of view, this stratification of occupations which is the result of the Caste System is positively pernicious. Industry is never static. It undergoes rapid and abrupt changes. With such changes an individual must be free to change his occupation. Without such freedom to adjust himself to changing circumstances it would be impossible for him to gain his livelihood. Now the Caste System will not allow Hindus to take to occupations where they are wanted, if they do not belong to them by heredity… By not permitting readjustment of occupations, Caste becomes a direct cause of much of the unemployment we see in this country.

Given this structural degradation, and the ideology that upheld it, Ambedkar further observed that, under a standard parliamentary-electoral system, various depressed minorities would fare badly.

The composition of parliaments would see Dalits, and others, systematically underrepresented.

In 1947 Ambedkar thus submitted his ideal constitution for a decolonized India, on behalf of the All-India Scheduled Castes Federation, in “States and Minorities”. His plan for the nationalization of agriculture and other basic industries was rejected. (The only sectors reserved for the state were those that, due to the large fixed-capital outlays required, private firms had no interest in: infrastructure, railways, defence, utilities and nuclear energy.)

But ‘safeguards for the Scheduled Castes’ – special representation and affirmative action – designed to ‘uplift’ the Dalits and other ‘depressed’ groups, were included.

What has become of this project today?

Like in every other parliamentary system, the composition of India’s federal and state elected assemblies do not reflect the underlying demographic characteristics of the population from which they are selected. The sitting MPs are unrepresentative of those they purport to represent, whichever attribute one chooses to look at: caste, wealth, gender, age, education, previous employment, ethnicity, etc.

Ambedkar’s principle of ‘reservation’ would appear purpose-built to address this problem. Thus thirty years ago the Indian state elite, following the Mandal Commission, re-affirmed its commitment to affirmative action for scheduled castes and tribes, and, after some delay, extended it to Other Backward Castes (OBCs).

Yet, at the same time, during the late 1980s, the governments of Rajiv Gandhi and V.P. Singh legitimized and cultivated the growth of a noxious communalist movement, the Sangh Parivar. The SP (and its chief party wing, the BJP) appealed to popular grievances and resentment of the preferential benefits enjoyed by minorities, the absence of a Uniform Civil Code, and Muslim ‘personal law’.

The Congress leader’s demagogic appeal to Hindu nationalism in the run-up to the 1989 election led to the Bhagalpur pogroms in which 1000 Muslims were killed; the ‘pale Saffron’ premiership of Narasimha Rao presided over the similarly bloody riots of 1992, following the demolition of the Ayodhya mosque.

All the while the BJP and its Hindutva project rose to national prominence, and from 1998 took the reins of federal power, staging the Gujarat pogrom of 2002 for a grotesque encore.

Myron Weiner, the late MIT political scientist and no Marxist, explains that India’s reservation measures, by tying personal advancement to the fate of a particular caste or similar group, narrow the basis for social solidarity. By thus coralling the potential constituency of any mass mobilization within communal, caste, regional or linguistic borders, the control of ruling elites over a divided populace is strengthened.

Reservation, says Wiener, ‘created an incentive for political mobilization along the lines of caste, religion and language’.

It provides an institutional basis (in schools, lobby organizations, employee federations and political parties) for appeals to caste and religious solidarity, its preferential benefits inducing individuals to identify with their caste or other narrow demographic category as the means to personal betterment. This creates a perceived split in interests between individuals within the employed population and related (i.e. non-propertied) classes. This in turn allows the business elites and political class to mobilize the working poor to further the former’s own interests (either personal enrichment or some broader class project).

There exist many fracture planes at which to work away. Salary and wage earners, peasant smallholders, and impoverished urbanites in the ‘informal sector’ make up the vast majority of the population, but they are divided between Brahmins and Dalits, men and women, Hindus and Muslims, etc.:

Indian politics became the arena within which group identities were sharpened, and individuals sought material benefits through group membership. Factions and parties were often based upon these identities, and leaders vied with one another by appealing to these “fissiparous” tendencies.…

The middle classes within the lower castes promoted their own interests and for the rest there was little more than the psychological benefit promised by the Mandal Commission…

[With] the exception of Kerala, the efforts of states to provide material benefits for the Dalits remain marginal; more to the point Dalit politicians and bureaucrats and Dalit associations and political parties have had little impact on public policies.

The OBCs are better placed than the scheduled castes and tribes in the central and state bureaucracies and in political positions where they can have a major influence on policies and their implementation. Moreover, it has become a widespread practice for newly appointed OBC cabinet members in state government to transfers members of their own castes to senior positions within their own departments and ministries… Nonetheless, there is no evidence that either in Uttar Pradesh or Bihar the lower-income members of the backwards castes have materially benefited from the rising political power of their community.

One explanation is that caste leaders of the OBCs do get what they want. Though most members of the backward castes are agricultural labourers, tenants and small landholders, OBC leaders are drawn heavily from among the better-off owner-cultivators… Their leaders seek reservations for their sons to the universities and for employment in the bureaucracy. The material benefits of OBC mobilization in Uttar Pradesh are landowning Yadavs, Kurmis and Koeris whose interests diverge from those of the agricultural labourers from these communities. By emphasising caste solidarity the richer peasants among the OBCs mobilise the poor sections of their castes to further their own caste interests.

Reservation in education and employment… permitted government to pay little attention to primary- and secondary-school education. Because limited financial resources were spent on mass education, the pool of qualified untouchables and tribals who could have entered the universities and obtained employment as a result on an equal basis remained small. The creation of a two-tiered education system – one that is private, but government-funded, with education in English, largely serving the higher castes,  and the other that is entirely government-funded with education in vernacular languages servicing the lower castes – is now so well established that socially mobile members of the lower castes aspire to get into the private system. OBCs and Dalits who can afford it (including OBC politicians and bureaucrats) send their children to private, English-medium schools…

The primary-education system throughout much of northern India serves the Dalits badly, and the rise to power in UP of the Bahujan Samaj Party (BSP), a Dalit-based political party, has thus far done little to raise expenditures on primary schools or to improve their quality… Changes in the caste composition of state governments has not led to increases in public investment in primary education.

Paradoxically, as caste has become somewhat less important in determining individual life chances, caste has become more salient as a political identity, and as an institutionalised element of civil society… Caste is institutionalised politically through reservations for scheduled castes and tribes in elected bodies and for all backward castes in government employment and in admissions to educational institutions. The tendency in India is towards institutional structures  based upon caste that are not open and which therefore nurture distrust and conflict between castes… The competition between the castes has become palpable as the political leaders of each caste take note of who is getting jobs and public offices.

In the urban areas, the struggle will be between the middle classes of the OBCs and scheduled castes on the one hand, and the middle and upper castes on the other over reservations and their extension. The middle classes among the forward castes will resist reservations, for they increasingly view reservations as an affront to the moral order they seek to create, one based on equality of opportunity not equality of outcome; and they will be resentful at he demand for jobs from middle-class members of the lower castes (the “creamy layers”) who want benefits for their children. Each of these middle classes, one drawn from the forward castes, the other from the backward castes, will assert its claims by moral appeals, the one to the principle of merit and equality of opportunity, the other to a history of centuries of victimization and a demand for equality of outcome…

[The] material benefits to the lower castes have largely gone to their more advanced members, such that some castes (Yadavs, for example) have benefited substantially, others hardly at all, and that there are growing class divisions within each of the lower castes as the more successful individuals obtain positions in government while others receive few if any benefits. Those who wield political power among the lower castes have tended to use their positions for self-benefit and to provide symbolic benefits for those who have been left behind. One does not see state government controlled by OBCs and Dalits devote new resources to expand mass education so as to provide  greater opportunities for mobility to the poor, or to commit substantial resources for drinkable water, health services and sanitation… The system of reservations simply provides a window within which a small section of the lower castes can enter into the middle class…

A similar description, of cultural surrogates substituting for tangible social improvements, has been made by Berkeley economist Pranab Bardhan:

[The] issue of group dignity comes up in the case of reservation of public sector jobs for backward groups which, as we have said before, fervently catches the public imagination of such groups, even though objectively the overwhelming majority of the people in these groups have no chance of ever landing those jobs, as they and their children largely drop out of school by the fifth grade. Even when these public job quotas mainly help the tiny elite in backward groups, as a symbol and a possible object of aspiration for their children, they ostensibly serve a valuable function in attempts at group upliftment, even though it is a divisive and inefficient way of achieving that objective.

Particularly in North India there seems to be a preoccupation with symbolic victories among the emerging lower-caste political groups; …these groups seem less concerned about changing the economic-structural constraints under which most people in their community live and toil…  So new political victories of lower castes in North India get celebrated in the form of defiant symbols of social redemption and recognition aimed at solidifying their as yet tentative victories, rather than in committed attempts at changing the economic structure of deprivation.

Most recently, India’s Women’s Reservation Bill is designed to extend, to state legislatures and to the Lok Sabha in New Delhi, the 33 percent of seats currently reserved for women in municipal representative bodies. Despite long being mooted, thus far it has not secured passage.

Its main proponents are Congress and the BJP, with its opponents to be found in the self-styled ‘social justice parties’. The latter are the chief inheritors of Ambedkar and Lohia’s thought, and beneficiaries of the reservation system, and find their electoral base among Muslims, Dalits and the Other Backward Classes. Their MPs have demanded a ‘quota within a quota’ to prevent seats for women accruing to wealthy and privileged urbanites from the forward castes, rather than to representatives of rural ‘minorities’: otherwise the bill ‘would perpetuate the dominance of a few political families.’

Obviously enough, the Nehrus-Gandhis, et al., and the mainstream parties, do want to splinter the voting base of the smaller parties. Each party, under the reservation system, tries to secure more privileges (and electoral weight) for that segment of the population with the demographic characteristics of its particular candidates (and voting base).

But the ‘quota within the quota’ argument makes clear that no electoral system can readily secure an elected assembly whose composition is representative, in demographic terms, of its underlying population. If a quota for women will benefit merely a female elite, a quota for Scheduled Castes similarly elects only privileged Dalits.

If the aim truly were to select a representative body of political decisionmakers, this could simply be done by sortition: taking a random sample of the population as with jury selection. Or, through referendum, the population as a whole could assume responsibility for major political decisions; by definition, each group would find its views represented in proportion to its relative demographic weight.

Yet there is no prospect of either option being taken up as a cause or project by the professional political stratum.

The reality is that the Indian state will remain the plaything of remote elites – from whatever caste or religion – hostile and unhelpful to Dalits and other ‘depressed’ layers, and willing to whip up communal hatred, so long as:

  1. People who administer the state hold a position that gives them opportunities to wealth, power, plum posts and perquisites through its capacity to levy taxes;
  2. The scope of state activity depends on its fiscal instruments, i.e. tax revenues from incomes (salaries, profits, rents) in the capitalist sector, and credits (purchase of bonds by rentiers), in order to function;
  3. This dependency forces state managers (politicians and bureaucrats) to be concerned about maintaining the levels of economic activity, regardless of their other goals (whether these be Hindutva, delivery of public services, improving welfare and sanitation, uplift of some minority group, or pursuit of aggressive militarism);
  4. Economic activity is largely dependent on the level of private investment by firms and wealthy individuals;
  5. Private firms make investment and rentiers provide loans based on their confidence and the perceived prospects for profitable returns in the current and near-future environment;
  6. India’s domestic production of textile garments, granite benchtops, etc. is most profitably undertaken using labour-intensive techniques and a cheap, plentiful, semi-servile, debt-bonded and terrorized workforce, marked out as inferior and denied horizontal mobility within the labour market.

Taken together, these factors discipline state managers to formulate and implement policies that favour the continued stable functioning of the capitalist sector, maintenance of the caste system, and reproduction of the existing social order.

The reservation system thus provides no remedy for India’s scheduled castes and tribes.

Those elected, from within their ranks, as ‘the best’ of them (the aristoi), increase the diversity of society’s upper layers, and do little more. Having taken their place at the High Table, they swiftly acquire the usual appetites.

This can be seen from the record of Dalit ‘representatives’ in office.

BAMCEF is an organisation which advertises itself as deriving ‘inspiration from the life and mission’ of Ambedkar and ‘Ambedkarite’ ideology. BAMCEF material states that there must be ‘clear identification and distinction between the ruling castes who are beneficiaries and Backward castes who are worst victims of the existing social system and we should channelise our energy to organise the victims of the system under the banner of BAMCEF. Arya-Brahmins are clever and cunning people…’

In 1984 Kanshi Ram, leader of BAMCEF, founded the Bahujan Samaj [Majority People’s] Party.

The party describes its chief aim as ‘providing a level playing field to the downtrodden to help move forward in their lives with “self-respect” and at par with the upper castes Hindus’.

It advances no programme and describes no methods for achieving the aims of legal equality for Dalits, other than to ‘capture the Master Key of political power, which opens all the avenues for social and economic development’. All economic and social goals are subordinated to this immediate task.

The party’s platform thus consists entirely of advice to elect BSP candidates to office.

BSP’s leadership was later bequeathed by Kanshi Ram to Mayawati. Mayawati has since become chief minister of Uttar Pradesh. She has been described from within the BSP as ‘the Obama of India.’

In the US diplomatic cable mentioned at the beginning of this post, Mayawati is described as a ‘virtual paranoid dictator’ and ‘first-rate egomaniac’.

She is said to be ‘obsessed with becoming Prime Minister’, positioning herself as a ‘powerbroker and perhaps even a king (or queen) maker.’ She has a ‘penchant for personal corruption and a strong authoritarian streak’, with a ‘security entourage to rival a head of state’, and ‘constructed a private road from her residence to her office, which is cleaned immediately after her multiple vehicle convoy reaches its destination.’ She has ‘centralized corruption in her own hands’, demanding ‘competitive fealty payments’ from rival criminal gangs, receiving ‘payoffs and kickbacks from almost every interaction’ of business with the UP government, taps the phones of journalists and civil servants, and forced one insubordinate journalist to do sit ups in front of her. ‘When she needed new sandals, her private jet flew empty to Mumbai to retrieve her preferred brand.’

The State Department envoy continues: ‘Dalits will remain with Mayawati regardless of poor governance, simply because the fact that one of their own is Chief Minister provides them heretofore unimaginable pride.’ The cable concludes that ‘caste remains the DNA of UP politics, and no one has demonstrated more ability at playing caste politics than Mayawati.’

This venality may be explained away as the behaviour of an idiosyncratic personality, or as the result of local conditions.

But it also says something about electoralism, quotas and affirmative action.

In all present-day circumstances and settings  (i.e. where the state provides a stable juridical framework and policy climate for the capitalist sector, and public administration depends on extracting a portion of the social product as tax), such measures produce an aristocracy of the oppressed, who in the name of identity politics style themselves as the representatives of ‘their people’, and thereby attract a faithful constituency for  their own narrow pursuit of privileges and income, and for broader elite projects.

Capital-market inflation (and financial instability) in pictures

September 1, 2011

The RBA and APRA maintain the line that Australian banks and other financial institutions are not vulnerable – as US and European banks were revealed to be, in spectacular fashion, during recent years – to insolvency when asset prices fall and creditors refuse to refinance loans.

But a quick look at the balance sheets and lending data of Australian banks, pension and insurance funds shows that the local financial sector has shared in the same multi-decade trends that issued in the so-called North Atlantic financial crisis.

Of course these are the same trends that have led to the inflation of financial assets, enriching fund managers, investment bankers and others whose primary income comes from financial activities, tying union bureaucrats to this layer through subcontracting the administration of pension funds, replacing state provision as the primary source of retirement income (especially for an upper-salaried layer), serving as collateral for borrowing by this same layer, and re-directing firms away from commercial and industrial activities and towards balance-sheet restructuring as their chief source of profits.

First the banks.

Here is the most low-risk liquid asset, the monetary base or high-powered money (central-bank reserves, i.e. RBA deposit liabilities or ‘exchange-settlement funds’, plus notes and coins) as a proportion of total Australian bank assets:

Another low-risk asset, Commonwealth government securities, as a proportion of total bank assets:

Now to a riskier, relatively illiquid asset, cash flows from which depend on repayment by less creditworthy borrowers.

Here are household loans for residential property as a proportion of total bank assets:

Banks and other deposit-taking institutions seek to maintain solvency margins in the form of low-risk liquid assets that can be used to meet liabilities (e.g. withdrawals) when they fall due. Here is the ratio of liabilities to primary assets (high-powered money, the exchange-settlement funds shown in the first chart).

This ratio (the inverse of the reserve ratio) is more important for maintaining liquidity, if not bank solvency, than the capital-adequacy requirements set out in the various Basel accords. The probability of default (or of leaning on the central bank’s capacity as lender of last resort) rises with the ratio of bank liabilities to state money:

Bank fragility of this sort, leading to periodic financial crises, is an inherent feature of capitalist development. Economic growth means expanding the circulation of commodities, and thus a growing number of transactions that need to be settled (as well as investment that needs to be financed).

Increasing turnover is financed by exponential growth in bank-created credit money (endogenous money). And, because ‘loans create deposits’, by the recirculation of funds this greater mass of loans leads to a growing burden of bank liabilities and inter-firm debt.

Over time the ratio of commercial debt to state money will rise. The assets that form the collateral for borrowing will be of successively lower quality (riskier, more illiquid).

For a time these can be squirreled away in off-balance sheet special-purpose vehicles. But it gradually will become clear (due to falling prices in some asset class, or rising default rates) to financial institutions that the consolidated balance sheets of other big institutions are similarly impaired to their own.

Eventually the interest rates at which banks can borrow on the wholesale interbank market will rise, or creditors will refuse to roll over short-term debt. This leads to a credit crunch, and to demands on the state for emergency liquidity through the discount window, or through bailouts, of the sort that emerged in 2007.

Such liquidity problems are at bottom solvency problems.

Yet massive debt is sustainable, for a period, so long as asset prices keep rising. Loans can be refinanced against the expectation that realized capital gains will produce cash flows allowing repayment of debts.

To understand why financial assets appreciated so spectacularly for twenty years from the mid-1980s, we need only observe the inflow of money to the financial sector set off by compulsory subscription to pension funds, which channelled worker savings into the stockmarket, and by the growth in insurance-fund premiums.

Total assets of superannuation funds:

Total assets of insurance funds:

When financial assets are appreciating all round, securities without a fixed repayment value (i.e. stocks rather than bonds) provide the best opportunity for investors to realise capital gains.

Commonwealth and State government securities as a proportion of total superannuation fund assets:

Commonwealth and State government securities as a proportion of total insurance fund assets:

Equities as a proportion of total superannuation fund assets:

Equities as a proportion of total insurance fund assets:

Thanks to the growing savings pool of institutional investors, and the latter’s preference for allocating those flows to equity purchases, during recent decades firms could issue shares cheaply. This became the preferred method of long-term financing, ahead of borrowing via bank loans or commercial paper.

Meanwhile the loss of their chief customers (commercial lenders) led banks towards real estate, and fee-related activities in derivative markets, brokerage and debt issuance.

Thus the diverging trajectories of commercial loans and household plus fixed and revolving personal loans as a proportion of bank lending:

These banks were obliged by regulation to hold capital in proportion to the risk-weighted size of their balance sheets. Therefore the majority of equity issuance was conducted by financial corporations and was purchased by other financial corporations; purchase of newly-issued stock thus did not take out of the market any excess net inflow of money into the financial sector or alter the net balance sheet of the non-financial sector.

In other words, the amount needed to finance commercial and industrial operations was not (when we look at the past three decades) sufficient to absorb the inflow of funds into the financial sector.

Lack of demand for funds to finance real investment in fixed capital is, I have argued elsewhere, a stage in the maturation of capitalist economies. The average return on real investment becomes low enough relative to the interest rate that firms withhold their funds from deployment in productive activity; they either cannot service debt or choose to receive higher revenues from loaning money out. It is more advantageous for them to lend out their capital than to invest it productively in plant and equipment.

Corporations thus develop bloated balance sheets and greater exposure to risky financial markets. To hedge this risk they must hold liquid assets (short-term deposits, financial paper, etc.). Using these liquid assets (or issuing new stock) to repay debt is an easy way to raise profits.

The upshot was an accelerating inflow of funds to the financial sector, without a compensating outflow. This excess inflow, as it circulated around, bid up prices of stocks, real estate and other financial assets. Yet price appreciation could not of itself absorb savings. Net lending and borrowing must balance.

Thus the outflow from the financial sector – balancing the inflow of excess savings from the rentier class – went as bankers’ bonuses and executive salaries, interest and dividend payouts, consumer credit for current expenditure.

Thus the flipside to financial instability, fragile banks, sluggish real investment, slow employment growth, and household indebtedness, was the luxury consumption of the financial elite.