The myths of Capitalism

There is a pervasive view that growth under capitalism, though it may worsen poverty, even absolute poverty, to start with, eventually leads to a lowering of poverty. The experience of the English Industrial Revolution is invoked in this context. There has been a huge debate among economic historians about the impact of the Industrial Revolution on absolute poverty in England, with Eric Hobsbawm, the renowned Marxist historian, arguing that absolute poverty actually increased in the immediate aftermath of the Industrial Revolution, and others like Max Hartwell contesting this view. The precise outcome of this debate, which hinges upon the exact price deflator we use for converting nominal incomes into real terms, need not detain us here. But the fact itself that there has been this debate, no matter what its nuanced conclusion may be, is suggestive that the Industrial Revolution was accompanied at the very least by the persistence of acute poverty, that while the growth rate of the English economy was going up, vast masses of its labouring population continued to remain steeped in abysmal misery. The novels of Charles Dickens are a testimony to this as is Frederich Engels’ classic study The Condition of the Working Class in England in 1844.

Clearly however this situation did not persist, and later on there was a significant improvement in the condition of the English working class, whence the conclusion is drawn that any initial worsening or non-improvement in the living condition of the people that accompanies the growth process under capitalism, subsequently reverses itself, that capitalist growth, even though it may be initially harsh, is not intrinsically non-humane.

This conclusion is also theoretically supported along the following lines. In the initial stages of capitalist growth there is a dispossession of pre-capitalist producers who swell what Marx had called the “reserve army of labour”. The English Industrial Revolution for instance had dispossessed pre-capitalist textile producers by out-competing them through its cheaper machine-made products and they had no choice except to seek employment in capitalist factories as wage labourers. By its very nature however the amount of employment that could be offered was less than those dispossessed (because the whole point of capitalist production was to reduce labour requirements and hence labour costs). The result was a swelling of the reserve army, and hence an increase in destitution and absolute poverty.

But over time as accumulation proceeds, and the capitalist sector grows increasingly on its own steam, on the basis of demand generated within itself and not through the sheer displacement of pre-capitalist producers, more and more of the reserve army gets absorbed into the capitalist sector (as long as the population growth is not too rapid). And as the magnitude of the reserve army falls relative to the active army of labour, the magnitude of absolute poverty also declines, even if the real wage rate of the active army of workers continues to remain at some historically determined subsistence level. Once the magnitude of the reserve army relative to the active army has declined to a sufficiently low level, workers can organise themselves into trade unions and even raise the real wage rate above this historical subsistence level, which further curtails absolute poverty. Capitalist growth thus spontaneously reduces whatever initial increase in absolute poverty it may have generated, and goes on to reduce the absolute level of poverty.

Two crucial factors

This entire view however is a myth. No doubt in the case of England and other European economies poverty eventually declined as growth continued to take place, but this was not as a consequence of the growth itself. There were two crucial factors in England which contributed to reducing the relative size of the reserve army of labour, or for keeping it low. And this is true of other European economies as well. The first was migration. There was massive migration from Europe to the temperate regions of white settlement, such as the United States, Canada, Australia, and New Zealand throughout the nineteenth century. The migrants to these regions drove away the local inhabitants, eg, the Amerindians, from their land and used it for their own cultivation. In the process not only was the relative size of the reserve army within the European economies reduced, but the “reservation wage”, ie, the minimum acceptable wage to the workers, was pushed up, because the workers had the option of migrating to the “new world” if the wage rate at home was too low relative to what they could earn as farmers abroad.

The scale of outmigration was simply enormous. In 1820 there were 12 million persons in Britain. But between 1820 and 1915 as many as 16 million migrated out of Britain, ie, more than the entire population in the base year. Looking at it differently, every year between 1820 and 1915, more than half the increase in British population simply migrated out of Britain. The total migration from Europe as a whole to the “new world” over roughly the same period amounted to a staggering 50 million persons. Compared to this torrent, the initial displacement caused by capitalist production to the domestic pre-capitalist producers was quite minuscule; it is not surprising therefore that the initial increase in poverty as a consequence of the Industrial Revolution was reversed fairly soon, or the initially existent acute poverty could get alleviated rapidly enough.

There was a second factor at work as well, and this consisted in the fact that the bulk of the displacement of pre-capitalist producers owing to competition from capitalist products as a consequence of the Industrial Revolution occurred in the colonies. And these displaced producers in countries like India, whom nationalist historians have called the victims of “deindustrialisation”, continued to remain as a vast pauperised mass without getting absorbed into the working class under capitalism. Economic historians like Tapan Raychaudhury have argued that the roots of mass poverty in India for instance lay in this colonial incursion that decimated the production structure which had existed earlier without creating any avenues for absorbing the displaced producers. The consequence of such deindustrialisation for the British economy however was that the magnitude of displacement within that economy was correspondingly kept low. The magnitude of increase in poverty that would have occurred in the absence of the colonies would have been far greater than the actual increase that occurred.

The question may arise: even if we can explain England’s turnaround with regard to poverty in this manner, what about the other capitalist countries? For Europe we have seen that migration played a crucial role. In addition, Europe also had access to colonial markets, not just directly, but also indirectly, ie, it had access to British colonial markets. This is because Britain absorbed a lot of European goods, but this caused no additional unemployment in Britain since its own goods could be exported at will to colonial markets at the expense of local producers in such markets. It was as if Europe was exporting indirectly to British colonial markets, causing deindustrialisation there while increasing domestic employment through such exports.

Dishonest Claim

In the “new world” itself of course there were hardly any pre-capitalist producers to be displaced through competition from capitalist products. The persons who were displaced were the traditional inhabitants, like the Amerindians, who had occupied the land earlier. And they were kept in “reservations” where many of them still live, a dejected, isolated and dispirited people. In the case of Japan, the only Asian country that has successfully made the transition to the status of a developed capitalist economy, it not only had escaped the fate of being a colony, but had acquired its own colonies which it exploited. Besides, it had access to the American market and rode “piggy-back” on American growth, just as the European countries had ridden “piggy-back” on Britain in the matter of accessing colonial markets.

If we examine the matter in terms of the theoretical argument advanced above, it looks as follows. The capacity of the capitalist growth process to make a dent on the relative magnitude of the reserve army depends upon three factors: the overall growth rate (taking the capitalist and pre-capitalist sectors together), the growth rate of labour productivity (again taking the two sectors together), and the rate of work-force growth (taking into account migration as well). The excess of the overall growth rate over the growth rate of labour productivity is the rate of growth of labour demand in the two sectors taken together; if this happens to be less than the rate of growth of the work-force, then the relative size of the reserve army of labour, and with it the extent of absolute of poverty, will keep increasing. There is nothing in the operation of the capitalist economy that can spontaneously prevent this. Hence the entire claim that capitalist growth must eventually reduce absolute poverty is completely baseless. It is a myth spread by capitalism. A phenomenon that arose historically through a process of pauperisation of traditional inhabitants in the “new world” and of pre-capitalist producers in colonies (namely, the reduction in the magnitude of domestic poverty) is passed off as an intrinsic property of capitalism, as something it achieves spontaneously through its own inner operation even when it operates in complete isolation (ie without colonies). This is a dishonest claim, and unfortunately the entire discipline of economics is harnessed to serve the interests of capital by supporting this claim.

The foregoing has extremely important implications for third world countries like India. They are the repositories of vast labour reserves created in the past through the process of deindustrialisation of the colonial period, ie, they already inherit immense mass poverty. And even if they experience high rates of growth under the capitalist dispensation (taking both capitalist and pre-capitalist sectors together), the rates of growth of labour productivity (again taking the two sectors together) are so high, both because of new goods displacing traditional goods owing to changing life-styles of the rich and also because of the eviction of peasants from land because of real estate development projects etc, that the relative size of the reserve army of labour does not diminish at all; on the contrary it keeps rising. This both keeps the wage rate low, and also increases the magnitude of absolute poverty. The fact that accompanying India’s high growth rate there has been a reduction in food intake for the bulk of the population which is the surest sign of absolute impoverishment, is therefore not an accidental phenomenon but intrinsic to the nature of capitalist development in such countries.


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Prabhat Patnaik, കടപ്പാട്: പീപ്പിൾസ് ഡെമോക്രസി