The Humbug of Finance

Apr 5th 2000, Prabhat Patnaik

I have chosen as the title of my lecture a phrase used by Professor Joan Robinson, who, in her
book Economic Philosophy, talks of "the humbug of finance which Keynes had
destroyed".[1] What she means by the phrase "the humbug of finance" is the view held by British
finance capital, based in the City of London, in the late twenties, and propagated by the British
Treasury (because of which this view came to be known as the "Treasury View") that in all
circumstances the government's balancing its expenditure with its income, i.e. not resorting to
any fiscal deficit, is the most desirable policy for an economy. The British colonial government
in India, it may be recalled, had used precisely this argument for pursuing deflationary policies
even during the years of the Great Depression because of the fall in its tax revenue. This had
succeeded in worsening the impact of the Depression on our economy[2], had thwarted the
industrialisation prospects which the policy of protection of the inter-war period had opened
up[3], and had resulted in a wholesale running down of the economy's infrastructure.[4]This
view in short was pervasive in the pre-Keynesian era. A slight variation of this view is that the
fiscal deficit must under all circumstances never be allowed to exceed a certain small limit.

The theoretical articulation of the Treasury view was contained in a White Paper of the British
Treasury in 1929, called "Memorandum On Certain Proposals Relating to Unemployment", and
written in response to Lloyd George's suggestion that Britain should undertake public works for
reducing unemployment which at that time stood at 10 percent (it was to reach 20 percent later).
The White Paper argued that in any economy there is at any time only a certain pool of savings,
and that if more of it is used for home investment then less becomes available for foreign
investment, or if more of it is used for public works financed by government borrowing, then less
is left over for private investment and foreign investment. It follows then that public works can
never increase total employment in an economy since the increase in employment brought about
by public works would be exactly counterbalanced by the reduction in employment arising from
reduced private and foreign investment.
The fallacy of this argument was exposed by a young Cambridge economist and pupil of Keynes,
Richard Kahn, in a classic paper published in 1931.[5] The argument was simple: total savings in
an economy depend, among other things, on its total income. There is therefore no fixed pool of
savings, unless we assume that income cannot be augmented, i.e. the economy is already at full
employment, in which case the need for public works does not arise. The Treasury View in other
words was arguing against proposals for reducing unemployment on the basis of a theory that
implicitly assumed that unemployment did not exist at all. In an economy in which there is
unemployment, in the sense of resources lying idle owing to lack of aggregate demand, if
investment increases then these resources start getting used up directly and indirectly, through
various rounds of the "multiplier". As a result, income rises and so do savings. Indeed, Kahn
showed, the whole process of increase in income and employment would go on and on, until an
amount of savings had been generated which exactly equalled the increase in home and foreign
investment. Far from there being a predetermined pool of savings above which investment
cannot increase, it is the total investment that determines the total savings: the direction of
causation in other words is precisely the opposite of what pre-Keynesian theory believed. A
corollary of Kahn's theorem was that if the government expanded public works for generating
employment and financed these by borrowing, i.e. by enlarging the fiscal deficit, then an exactly
equivalent amount of savings would accrue in private hands. A fiscal deficit in other words
finances itself.

The argument advanced by Kahn in 1931 was central to Keynes' opus The General Theory of
Employment, Interest and Money published in 1936. Keynes argued in a similar manner that in a
situation of "involuntary unemployment", or "demand constraint", the government can enlarge
employment and output by increasing its fiscal deficit; far from there being any adverse effects
of this on any other stream of expenditure, such government action in fact would stimulate the
total expenditure from these other streams via the "multiplier", and not even generate any
significant inflationary pressures. Moreover, since the government cansuccessfully pursue such a
policy, it must do so, because, as Keynes put it, "it is certain that the world will not much longer
tolerate the unemployment which, apart from brief intervals of excitement, is associated -- and,
in my opinion, inevitably associated -- with present day capitalistic individualism."[6] Even if
the government used the fiscal deficit for no worthier purpose than "to dig holes in the ground",
that is still preferable to letting unemployment persist, since "'to dig holes in the ground' paid for
out of savings, will increase, not only employment, but the real national dividend of useful goods
and services"[7] (again because of the "multiplier"). To argue against the mitigation to human
suffering that an increased fiscal deficit can provide is therefore bad theory, the sheer "humbug
of finance".

The reason for my reviving this old and familiar discussion is that today in India we are once
again witnessing the parading as wisdom of this "humbug of finance", and there is even large-
scale acceptance of this "humbug" as wisdom. What is more, the "humbug" that is being paraded
as wisdom in our country is even more of "humbug" than what Kahn and Keynes had attacked.
In other words the "humbug of finance" that we are being subjected to even "out-humbugs" the
"humbug of finance" that the British Treasury was purveying during the Depression of the late
twenties. Let me explain this last point first.

There were no public sector enterprises in Britain during the late-twenties. The government
sector's transactions therefore were co-terminus with budgetary transactions, so that the term
fiscal deficit corresponded to the deficit of the government sector. This deficit had necessarily to
match, as an algebraic truism, the surplus of the rest of the world vis-à-vis the British
economy plus the surplus of the British private sector. An increase in the fiscal deficit, assuming
foreign transactions were unaffected, would necessarily correspond to an equivalent increase in
the private sector's surplus of income over expenditure. What Keynesian theory argued is that an
increase in the fiscal deficit in a demand-constrained system would cause an equivalent increase
in private surplus (and hence finance itself) through an increase in the private
sector's income (via larger employment and output through the demand stimulus obtained from
the government) rather than through a reduction in private expenditure, in particular investment
expenditure, which the Treasury View with its fantastic notion of a savings pool had claimed. As
the government deficit goes up by Rs.100, employment, output and incomes go up until private
savings have gone up by Rs.100 (assuming private investment remains unchanged), i.e. an extra
Rs.100 of wealth has been put into private hands, which is held directly or indirectly in the form
of claims on government.

Now, even though the use of fiscal deficit for increasing employment is perfectly legitimate, one
may have reservations about this particular mode of raising employment, for three reasons: first,
a fiscal deficit-financed expansion in activity, as just mentioned, does accentuate wealth
inequalities compared to an equivalent tax-financed expansion of activity. In a society wishing to
keep wealth inequalities in check, it is better to finance government expenditure by taxing
capitalists than by borrowing from them. Secondly, there may be problems about knowing how
much fiscal deficit is needed to get to "full employment" (which in a capitalist economy would
never mean employment for everybody willing to work, but would only entail lowering
unemployment to that level of the reserve army which is the minimum necessary for the
avoidance of cumulative price instability). Suppose for instance that the owners of wealth
increase their consumption as their wealth increases but with a time-lag. Then if, say, with
Rs.100 of fiscal deficit the economy gets pushed to full employment before private consumption
has responded to the increased wealth, then once it begins to respond, Rs.100 of fiscal deficit
would turn out in retrospect to have been too large, since now there would be too much demand.
Thirdly, even if private wealth has no effect on private consumption, if the economy gets taken to
full employment through a fiscal deficit-financed expansion in activity, then at full employment
there would be a large overhang of private wealth in liquid form (as direct or indirect claims
upon government) and these, when resources are being fully utilised, can give rise to
speculation-engendered inflation.[8]

None of the above considerations justify the "humbug of finance". What they say is that while an
increase in the fiscal deficit can increase employment, and should be used for doing so if
necessary, there are other ways of increasing employment, through tax-financed increases in
government expenditure for example, which might be even better for the purpose. Of course if
the latter cannot be implemented easily then fiscal deficit should be resorted to rather than
keeping unemployment going.

Even these residual objections to fiscal deficit however vanish when the result of the fiscal
deficit is to increase not private savings and wealth but those of public sector enterprises. When
this happens, there is in effect no increase in the government sector's deficit. What appears as an
increase in the fiscal deficit is counterbalanced by a surplus in the rest of the government sector
not reflected in the budget, so that the appearance of a fiscal deficit is entirely on account of the
convention of making the budget reflect only a part of the government sector's transactions; it
has no economic significance. To object to an increase in the fiscal deficit in such a situation is
even more theoretically illegitimate than to do so in a situation where there is no public sector. If
the objection even in the latter case is the sheer "humbug of finance", then in the former case the
"humbug" is, if anything, compounded several-fold. And yet in India there is an objection to an
increase in the fiscal deficit even when the consequences of such an increase would accrue as
larger surpluses to the public sector, which is why the "humbug of finance" being purveyed in
our country today "out-humbugs" the "humbug" attacked by Kahn and Keynes. I shall give three
examples of such "supreme humbug" (if I may call it so).

II

At this moment there are over 32 million tonnes of foodgrain stocks in the economy. Since 20
million tonnes of foodgrain stocks are considered adequate by the government (for this time of
the year) as buffer-cum-operational stocks, it follows that at least 12 million tonnes of surplus
stocks are lying idle with the Food Corporation of India. The existence of idle stocks of
foodgrains in a country afflicted by large-scale poverty and malnutrition, is so palpably absurd
that there have been proposals from time to time within the government itself to get rid of these
stocks by putting purchasing power in the hands of the rural poor through a massive expansion in
employment-generation schemes.

Such an expansion of employment generation schemes will kill several birds with one stone.
First, it will bring down unemployment and poverty; secondly it will get rid of the idle stocks
which are currently hanging like a mill-stone round the Food Corporation of India's neck; thirdly,
if such employment-generation schemes are properly conceived, then they can add to social
overhead capital in rural India and improve the quality of life, or augment productive investment
and contribute towards a larger output in the future: since the decade of the nineties has seen a
decline in per capita foodgrain output in the country, the first decade since independence to have
done so, any addition to productive investment effected in this manner, would be quite crucial. It
follows, given all these possibilities, that allowing idle foodgrain stocks to continue is extremely
irrational; it represents criminal waste in a poor economy like ours.

Why is it then that these foodgrain stocks are not being used for employment-generation
programmes? The answer is that such expenditure will increase the fiscal deficit! All
suggestions, even those emanating from within the government itself, for reducing idle stocks
through enlarging employment-generation programmes have been turned down on these
grounds.

Now, this is "supreme humbug". Let us assume, for simplicity, that employment generation
programmes require only labour and that labour spends its wages only on foodgrains. If Rs.100
are spent on employment generation through an increase in government borrowing (i.e. the fiscal
deficit rises by Rs.100), then these Rs.100 would be spent on foodgrains and hence (ignoring
minor complications like transport costs) the FCI's stocks would go down by Rs.100. The FCI
can then repay Rs.100 to the banks from whom it has taken credit for stock-holding. It follows
that as the government borrowing increases by Rs.100 for financing employment-generation
programmes, it reduces by Rs.100 as a consequence of such programmes, so that the net
government indebtedness does not change. What appears as an increase in the fiscal deficit in
this case is no actual increase: it is only a consequence of the fact that FCI transactions do not
figure in the budget as a matter of convention (indeed they used to figure in the budget until the
early seventies). And if there is no actual increase in the fiscal deficit, but only an apparent one,
then it cannot conceivably have even the adverse consequences that the protagonists of financial
orthodoxy associate with larger fiscal deficits. If nonetheless there is opposition to such a
seeming increase in the fiscal deficit, then what else can one call it but the "supreme humbug of
finance"?

To be sure, I assumed above that the employment-generation schemes required only labour and
that labour demanded only foodgrains. But dropping these assumptions only means that in
addition to foodgrains there would be some extra demand for non-food wage goods and for
material inputs for the employment programmes. Given the fact however that industry too has
been afflicted by a demand constraint of late, this would only mean that Rs.100 of spending on
employment-generation would clear less than Rs.100 of foodgrain stocks, while creating extra
demand for industrial goods, and bringing forth lager industrial output, from the remainder,
which can scarcely be frowned upon. True, in this case not all of Rs.100 would accrue back to
the government via the FCI; a part would materialise as private savings and hence would entail
an increase in the government's net indebtedness. But objecting to this in a demand-constrained
system is theoretically illegitimate: it would still qualify, on Keynes-Kahn grounds, as "the
humbug of finance".

The purveyors of humbug in this particular case often fall back on a second line of defence. This
states that the accumulation of surplus foodgrain stocks is only a temporary phenomenon; if one
enlarges employment-generation (poverty-reduction) programmes now because of this temporary
surplus, then, once the surplus is used up, the poor would be back to square one. Enlarging such
programmes, which have got to be sustained, purely on the strength of a temporary foodgrain
surplus, would be irrational.

There are two immediate rejoinders one can make to this argument. First, if employment-
generation programmes are carefully planned, then they can result in sustainable increases in
foodgrain output, in which case the temporary surplus can become the means of obtaining a
permanent surplus (though not necessarily of the same order) that can effect a permanent
reduction in poverty. Secondly, even if this were not the case and that the temporary surplus can
only bring temporary relief, what is wrong with temporary relief?

Beyond these however there is a more important point. Apart from a brief interlude in 1992 and
1993 when the central cereal stocks, especially wheat stocks, fell below the prescribed "norm"
and necessitated some imports, the level of these stocks has been well above the
"norm" throughout the 1990s. We are in other words not experiencing any temporary surplus,
but a more or less permanent glut, and that too at a time when the per capita foodgrain output has
shown a declining trend, and the rural poverty ratio an increasing trend. The economy has been
transformed into a demand-constrained one, and it is this context rather than any temporary
foodgrain surplus which lends urgency to the plea for an increase in the scale of employment-
generation programmes.
It is incredible that in the context of this transformation of the economy into a demand-
constrained one, with the coexistence of huge foodgrain stocks, large unutilised industrial
capacity, reasonable foreign exchange reserves (we shall discuss their adequacy later) and
growing rural poverty, the Finance Minister actually claims that reducing the fiscal deficit is the
primary task before the government, and that too when the ongoing inflation rate is a mere 2-3
percent! It is even more incredible that he gets away with this claim with not a single dissenting
voice in the media. This is indicative of the triumph of the humbug of finance in today's India.

III

My second example is logically analogous to the first one. There is an almost unanimous view in
government and media circles that India needs foreign capital to develop its power sector. When
in response to a High Court ruling on a Public Interest Litigation recently, Cogentrix announced
that it would pull out of its proposed power project in Karnataka, it began to be placated with
unprecedented ardour. The Supreme Court was pressurised into overturning the High Court
verdict, the Central government came up with counter-guarantees that Cogentrix, sensing its
chance, started demanding, and the President of Assocham wanted curbs on Public Interest
Litigations altogether![9] The clear impression was given that the heavens would fall if
Cogentrix pulled out. But the question remains unanswered: why do we need Cogentrix (or
Enron), and that too when the domestic power equipment producer, BHEL, has large unutilised
capacity owing to lack of orders, when the technology of putting up power plants is well-known
to us, and when it is also well-known that the foreign producers inflate their capital costs (owing
to the system of guaranteed rates of return) and produce power at a higher cost per unit than can
be done with Indian equipment.[10]

The answer cannot be that they bring foreign exchange, since the foreign exchange they bring is
to cover the purchase of equipment which they import; if we did not use their equipment we
would not need this foreign exchange in the first place. The only possible answer can therefore
be that they bring finance, that if they were not entrusted with the task then the government
would have to finance these power projects from its budgetary resources, which typically would
mean a larger fiscal deficit. In short, power projects are being entrusted to Multinational
Corporations in order to avoid a larger fiscal deficit. This once again is an example of what I
have called the "supreme humbug of finance" which is even more of "humbug" than what Kahn
and Keynes had demolished.

Suppose the government borrows Rs.100 and spends the sum on a power project. Suppose for
simplicity that the only cost of a power project is equipment cost. Then these Rs.100 would
accrue as sales revenue to BHEL, a public sector undertaking. Suppose again for simplicity that
the bulk of the cost of power equipment production is in the nature of fixed costs, then these
Rs.100 would accrue to BHEL as operating surplus which would be saved during the period, in
the form, say, of bank deposits. Now, even though the fiscal deficit appears to have gone up by
Rs.100, the net indebtedness of the government has not increased at all: the government on its
budgetary account has borrowed Rs.100, but holds these Rs.100 in the form of bank deposits of a
public sector undertaking. For the government as a whole the liabilities and the assets have gone
up identically, by Rs.100, leaving its net indebtedness unchanged. The higher fiscal deficit
therefore is only apparent, a consequence of the convention that the transactions of public sector
undertakings are not part of the budgetary transactions. Even by the logic of the votaries of
financial orthodoxy therefore the adverse consequences that are supposed by them to follow
from higher fiscal deficits should not be visited upon the economy in this instance.

No doubt, our simplifying assumptions would not hold in practice, necessitating some
increase in government indebtedness, though again, in so far as through the different "multiplier"
rounds following the initial government expenditure of Rs.100, the profits, and hence savings, of
other public sector enterprises also go up, the net indebtedness of the government would, to that
extent, be kept down. Since the different public sector enterprises in India provide inputs to one
another (not to mention the fact that FCI foodgrains stock-decumulation provides the additional
food demanded by workers when the wage bill goes up), an increase of Rs.100 in power sector
investment would largely come back as additional savings of public sector enterprises without
any increase in net indebtedness. In short, as long as unutilised capacity owing to deficient
demand exists in the power equipment and its feeder units belonging to the public sector, to talk
of the government's experiencing a shortage of finance for power investment is "supreme
humbug". Even if some of these feeder units are in the private sector, as long as they have
unutilised capacity, power investment financed by a fiscal deficit, even though it would raise the
government's net indebtedness, would still make perfect sense on the Kahn-Keynes grounds. The
opposition to it constitutes the "humbug of finance".

The point here is not whether a larger fiscal deficit is the best way of financing power
investment. Nor am I suggesting that all of India's immediate power needs can be met through
such financing alone.[11] The point being made here is altogether different and can be summed
up as follows: first, in a situation of demand constraint, financing investment through a fiscal
deficit is perfectly legitimate even when the government's net indebtedness goes up as a result of
it; secondly, very often the government's indebtedness does not even go up since the multiplier
effects are all within the public sector itself; thirdly, to invite Multinational Corporations
desperately for investment in the power sector, on the plea of a shortage of finance, in a situation
of demand constraint for power equipment and feeder units, is to be fooled by the "humbug of
finance"; fourthly, to do so when these demand-constrained equipment and feeder units are all in
the government-owned sector itself is to be taken in by the "supreme humbug of finance".
Unfortunately this last case is what fits the Indian government's current policy in the power
sector.

IV

My last example is slightly different in nature. It relates to the practice followed in recent
years of treating the proceeds from the sale of public sector enterprises' equity as being
analogous to revenue, and hence using such sales proceeds to "bridge" the fiscal deficit. This
practice, based on a confusion between stocks and flows, is manifestly unsound.

Consider an example: suppose the government has a fiscal deficit of Rs.100. This must
generate private savings worth Rs.100 which would be held in the form, directly or indirectly, of
claims upon the government. In a situation of demand-constraint, these savings are generated
through an increase in output, employment and incomes. But if the economy is supply-
constrained, then these savings would be generated through an inflationary squeeze on real
wages. Hence the fiscal deficit can be objected to on the grounds that it would cause inflation (or
equivalently, balance of payments problems) by creating excess demand, if the economy happens
to be supply-constrained. Now, if the government raises Rs.100 through disinvestment of public
sector equity, then, unless the buyers of this equity finance this purchase by reducing their own
flow expenditures (and there is no theoretical reason why they should do so), there would be no
reduction in excess demand compared to when there was no disinvestment. The inflationary
effects of the fiscal deficit would be exactly the same whether it is met by borrowing or through
disinvestment. The only difference would be that instead of holding claims upon the government
as in the first case, the private savers would be holding titles to actual government assets in the
second case.

Thus the argument one frequently encounters, namely that the government should sell off
some public sector enterprises and use the proceeds for increasing social expenditures, is simply
erroneous: the macroeconomic consequences of doing this would be exactly analogous to what
would happen if the government increased social expenditure merely through deficit financing.

There is a variation of this argument which is equally erroneous. This states that the
government should use the proceeds from the sale of public sector enterprises for retiring public
debt, in which case its interest payment obligations will go down and it can spend more on social
sectors. Suppose the government sells Rs.100 of public sector equity and retires public debt of an
equal amount. If the interest rate it had to pay on this debt was 10 percent, then it would be
saving Rs.10 per annum from then onwards on interest payments and can therefore spend Rs.10
more per annum on social sectors. But the public sector enterprise whose equity is being sold
would have also earned some returns every year. The argument for disinvestment would make
sense only if these returns were less than Rs.10 per annum. But if they were less than Rs.10 per
annum, then why should any private agent pay Rs.100 for them? With returns less than Rs.10 per
annum, their present value, at the same rate of discount as the interest rate on public debt, would
be less than Rs.100. It follows that unless the private buyers employ a lower rate of interest for
discounting the returns, on the public enterprise they purchase, than the rate of interest on public
debt, selling off public enterprises can never improve the government's ability to spend. Since
there is absolutely no reason why their discount rate should be lower than the interest rate on
public debt (in fact it would be invariably much higher since the rate of interest at which they
borrow from banks is generally higher), every such disinvestment, instead of improving the
government's spending capacity, actually worsens it.

It may be argued that while the level of flow demand might remain unaffected whether the
fiscal deficit is met by borrowing or disinvestment, the difference in private portfolio between
these two cases would have important secondary effects, in so far as claims upon the
government, being more liquid, can exacerbate excess demand-caused inflation, more than the
ownership of government property which would be relatively illiquid. But, first of all, this is not
necessarily true: government equity is no less liquid than government bonds or term-deposits
with banks. Secondly, the degree of liquidity of the private portfolio can acquire relevance only
if excess demand-based inflationary pressures are engendered; in a demand-constrained system
the question of such inflationary pressures simply does not arise. The belief that fiscal deficits
cease to be fiscal deficits if covered by equity disinvestment is therefore doubly wrong: first, its
premise is wrong (since the economy is demand-constrained), and secondly, its logic is wrong
(since equity is not necessarily less liquid than debt). This premise however is that of the
"humbug of finance".

The protagonists of this "humbug of finance", who frown upon fiscal deficits even when the
economy is demand constrained, and even when the savings generated by the fiscal deficit occur
within the public sector itself (and who believe that selling public sector equity mitigates the
effects of a fiscal deficit), often fall back on two additional arguments. The first states that State
intervention in the economy should be eschewed because it promotes "inefficiency". This
argument too is "humbug", like the rest of the "humbug of finance". If State intervention in a
situation of demand constraint increases total output, then calling it "inefficient" is a travesty of
the truth. Propositions such as "State intervention causes inefficiency" invariably assume
comparisons between two situations in both of which all resources are fully employed. These
propositions become completely meaningless, nay absurd, when the non-State intervention
situation is demand-constrained.

The second argument runs as follows: the point is not what a fiscal deficit is intrinsically (i.e.
in a ceteris paribus sense) capable of doing in a particular situation; the point in today's context is
what foreign capital thinks it would do. And if foreign capital is suspicious of any increase in the
fiscal deficit, then, even if this suspicion is ill-founded, it would nonetheless ensure that adverse
consequences would follow from an enlarged fiscal deficit, in the form of capital flight for
example. The effect on the balance of payments in this case would be as real, despite the
existence of demand-constraint, as if the fiscal deficit had impacted on it in a situation of supply
constraint.

This argument has some merit, but it needs to be inverted. If the confidence of foreign capital
requires a curb on democracy, then that is no reason for curbing democracy; if foreign capital has
more confidence when the Prime Minister is an ex-employee of the World Bank, then that is no
reason for limiting the country's choice for the post of Prime Minister only to that set; likewise if
workers agitating for their demands dents foreign capital's confidence then that is no reason for
banning workers' agitations. In all these cases the better course for society to adopt is to put
curbs on foreign capital rather than dance to its tune.

VI

Two questions inevitably arise: first, if the "humbug of finance" is mere humbug, then how
does one explain its revival more than half a century after it had been buried? This is a complex
question relating to political economy, a convincing answer to which requires answering two
distinct questions: whose interests does it serve? Have some of the elements whose interests it
serves become stronger in recent years?
 The basic objective behind propagating the "humbug of finance" is to prevent, or roll back,
any activity on the part of the State to become a producer, or an active investor, or a controller of
capital. This not only opens up more space for capital, not only permits its grabbing hold of State
assets at throwaway prices, but ushers in a bout of centralisation of capital in the crisis that
follows State withdrawal. It follows then that different elements of capital have an uneven
interest in embracing or propounding the "humbug of finance": larger capital has greater interest
than smaller capital, and finance capital has greater interest than manufacturing capital (which
benefits from the expansion of the market caused by State activity).

This is a general picture. Looking at the matter in the context of the world as a whole, it
follows that international capital generally, and international finance capital in particular, would
be the strongest votary of the "humbug of finance", especially of inflicting it on third world
countries. The third world State acted after decolonisation as a bulwark against foreign capital
and was used by the domestic bourgeoisie to strengthen itself at the expense of foreign capital.
Rolling back the third world State, in particular relatively autonomous and powerful third world
States like the Indian State, by imposing the "humbug of finance", represents therefore a major
triumph for international (or more accurately metropolitan) capital. It is able to achieve this
triumph partly because it has become much stronger owing to the inter-related phenomena of
subsidence in inter-imperialist rivalry, and the ascendancy of a new form of metropolis-
dominated supra-national finance capital.[12]

The second question that inevitably arises is: why should the domestic bourgeoisie in third
world have gone along with the propagation of the "humbug of finance"? In part it has to do with
the unsustainability of the earlier post-independence trajectory of State-sponsored bourgeois
development: having reached a dead end the big bourgeoisie now feels that its future lies in
linking up as a junior partner of metropolitan capital. In part, the answer has to do also with the
pressures exerted by metropolitan capital itself whose increase in strength in its new incarnation
has already been referred to. It follows then that the third world bourgeoisie has had a role
reversal. In the new historical conjuncture it can no longer play the positive role of leading the
struggle for emancipation of the national economy from the control of metropolitan capital.
 In this context it becomes absolutely and urgently necessary for all of us, who are not wedded
to the cause of the big bourgeoisie or of metropolitan capital, to expose the "humbug of finance"
which is being used to justify the decimation of the capital goods sector of the economy and the
useless stock-piling of millions of tonnes of foodgrains in a country of starving people.

[1] Joan Robinson, Economic Philosophy, C.A.Watts and Co., London, 1962, p.95.
[2] A.K.Bagchi, The Political Economy of Underdevelopment, CUP, Cambridge, 1982, p.123.
[3] ibid; see also his Private Investment in India 1900-1939, CUP, Cambridge, 1972.
[4] M.J.K.Thavaraj, "Public expenditure Trends in the Inter-War Period", in V.K.R.V.Rao et.al. ed. Papers on
National Income and Allied Topics, Vol.1.
[5] "The relation of Home Investment to Unemployment" , Economic Journal, June 1931.
[6] The General Theory of Employment, Interest and Money, Macmillan, London, 1949 edition, p.381.
[7] op.cit., p.220.
[8] For a more elaborate discussion of this argument see my Accumulation and Stability Under capitalism,
Clarendon Press, Oxford, 1997, Ch.5. The conclusion to be drawn from the fact of this overhang of liquidity is
not that the "Treasury View" is right and that the fiscal deficit cannot raise employment, but that the full
employment target would have to be somewhat lower for deficit-financed government spending than for tax-
financed government spending.

[9] Jayati Ghosh, "The Curious Case of Cogentrix", Frontline, Jan.1, 2000.
[10] It so happens that two power plants of exactly the same capacity are coming up at exactly the same time in
roughly the same place, near Vishakhapatnam, one of which is being set up by NTPC with BHEL equipment,
while the other is being set up by National Power (U.K.) in collaboration with the Hindujas, relying on
imported equipment. While the capital cost of the first of these plants is Rs.4.08 crores per MW, that of the
second is Rs.5.74 crores per MW. This is as close to a perfect comparison as one can get, and the results are
clear.
[11] Interestingly however we would have done better relying on deficit financing of public sector power
projects than we have actually done relying on foreign producers. Against total agreements with foreign
producers (through MOUs and global tenders) for the setting up of 75000 MW of capacity, the actual capacity
installed till December 1998 was a mere 1589 MW. On the other hand, BHEL which has the capacity to
produce, annually, power equipment for plants up to 5850 MW (4500 MW thermal plus 1350 MW hydel), had
an average annual production during the 90s of equipment for only 3200 MW. The total capacity added by
foreign producers over the whole of the 1990s could have been added annually by domestic public sector
producers at virtually zero cost, since for them (if we take equipment and feeder input producers as a total bloc)
costs are mainly in the nature of fixed costs.
[12] The nature of this new form of finance capital is discussed at greater length in my Introduction to
Lenin's Imperialism, the Highest Stage of Capitalism, Leftword Books, Delhi, 2000.