“Our role is to widen the field of discussion, not to set limits in accord with the prevailing authority.” Edward Said, Orientalism (1978)

This blog post aims to introduce Patnaik’s theory of imperialism – as developed in The Value of Money (2009) – and its relation to economic theory. According to Patnaik a cogent economic theory that seeks to understand the laws of capitalism necessarily stems from a coherent theory of money due to the central place money plays in a capitalist mode of production. Hence, the purpose of his scientific endeavor is to examine the underlying social arrangement behind the determination of the value of money. Consequently, the conceptual framework Patnaik establishes starts with the following question: what does determine the value of money?

There has been a traditional great divide in economics – since its establishment as a scientific discipline – that separates two traditions on the central issue of income distribution between the capitalists and the workers: (1) the classical political economy paradigm (Smith-Ricardo-Marx) regards income distribution as dependent on the conditions of production – namely, income distribution is socially determined and as a result the price system is based on this outcome (this theoretical deduction came from the assumption distinguishing between “natural prices” and “market prices”). (2) Whereas the “Marginalist” theory (or neoclassical, Menger-Jevons-Walras) states that prices in all markets – factor prices included – are determined by the law of supply and demand. This distinction is illustrated by Marx’s analysis of the sphere of production by opposition to the sphere of circulation the “vulgar economists” privileged. Nevertheless, both traditions believed in Say’s law (except Marx): supply creates its own demand. Thus, they considered capitalism as a system functioning at full capacity and ruled out demand-constraint crises.

As a matter of fact, this theoretical distinction hindered the significant contribution of the Keynesian and Kaleckian revolution that put demand constraint as the major issue of the capitalist system. For this reason, Patnaik questions the legitimacy of this theoretical schism and brings us back to the initial question he’s enquiring. To him, the theoretical differences mentioned above are simply a “derivation” from a more fundamental analytical dichotomy pertaining to the monetary theory each clan provides – namely, what determines the value of money. According to this distinction, we can separate two strands: (1) the monetarist tradition and (2) the propertyist tradition.

The monetarist tradition (represented by Ricardo and Walras) states that the value of money is determined by supply and demand as any other commodity (only market prices exist). The economy is supply determined, it functions under a beneficent equilibrium system and market forces clear perfectly. The sole property of money under this framework is to be a neutral means of payment. However this conception is logically flawed, as it does not incorporate the hoarding role of money (nor the inherited payments obligations) and assumes the economy to function at full employment. Thus, the economy is never demand constrained. Indeed, this proposition has since been falsified by the successive crises capitalism has undergone. By opposition, the propertyist tradition considers money as a form of wealth holding – besides its other properties – and its value is determined outside the realm of supply and demand. The core of propertyism relies on three propositions: (1) the value of money is determined outside the law of supply and demand. Here we can distinguish two trends: (a) Marx who considers the value of money to be determined by the conditions of production (or labor theory of value) and (b) Keynes/Kalecki who consider the value of money to be fixed vis-à-vis one commodity, labor-power (money wage rate in Keynesian terminology). (2) Money is a form of wealth holding and constitutes a store of value. Agents – whether they are capitalists or workers – do not spend all of their income and as a consequence save. (3) Because of this property money embodies, there is a possibility of overproduction (in Marxian jargon) and involuntary unemployment (in Keynesian terms). Hence, capitalism is subject to demand constraint crises and does not operate at full capacity. As Patnaik argues, propertyism can best explain capitalism, since it is able to shed light on the inherent capacities of the capitalist system to generate crises. Therefore, if one wants to understand the laws of capitalism, one should start from the propertyist theoretical point of view.

Despite this superiority, Patnaik argues that propertyism remains incomplete because it theoretically conceives of capitalism as a closed system that does not interact with its surroundings. The reason behind this incompleteness lies in the lack of a satisfactory framework within this paradigm to explain the sustainability of capitalism: if capitalism is a demand-constrained system, how could it remain viable and maintain an adequate rate of profit for capitalist accumulation? The explanations generally offered by this literature stress the importance of two exogenous stimuli: (1) technical innovation and (2) state expenditure. Yet, both elements are either endogenous (innovation depends on the expected growth of demand) or not part of the spontaneous order of capitalism (in the case of state expenditure). Hence, this theory remains trapped in a dilemma: capitalism as an isolated system lacks a real exogenous stimuli to maintain its existence. Since it has been sustainable so far, where do these exogenous stimuli come from?

It is at this moment that Patnaik operates his analytical tour de force and states his thesis: capitalism is a mode of production (metropolis) that can never maintain its existence without entering into a structural coercive relationship with its precapitalist surroundings (periphery). Peripheral markets are exogenous stimuli because they constitute “reserve markets” and a pool of a vast reserve army of labor: the metropolis needs raw material products to ensure its wealth accumulation and thus exchange with the periphery. This increasing demand from the metropolis gives birth to inflationary processes that threaten the value of money. Therefore, the periphery must loose in the terms of trade with the metropolis to cope with this threat in the metropolis. This phenomenon creates (i) deindustrialization and (ii) unemployment in the periphery (i.e. a reduction in overall employment through a replacement of domestic output by imports). As a result, pauperization emerges in the periphery which creates a distant reserve army of labor for the metropolis: this reserve army plays the role of a disciplining device in preventing the wage rate to go up in the periphery and forces the workers to be price-takers. They hence play the role of a shock absorber of the capitalist system: they prevent the advent of an accelerating inflation, which maintains the stability of the monetary system in the capitalist sector, and they maintain the possibility of a minimum acceptable rate of profit.

We can notice from this thesis how Patnaik evaluates the underlying social arrangement that determines the value of money: the modern monetary economy – in order to maintain its stability – is necessarily coercive and unequal toward the periphery. Patnaik calls this phenomenon imperialism.

Patnaik’s argument is very convincing and appealing. However, I would like to raise two points he deliberately or involuntarily ignores: (1) according to him, the state has played a minor role in demand management within capitalist countries and as a matter of fact did not constitute an exogenous stimulus. From an institutionalist and historical perspective, this proposition seems problematic – especially given the active role of the state for the early development of capitalism but also during its crises. One can think of Polanyi’s work and how the active role of the state is essential for the good functioning of any market economy. (2) Patnaik keeps referring to precapitalist surroundings – a concept that remains quite vague given the recent development of these regions (developing countries): (a) most of these countries have become capitalist in their modes of production (despite them not necessarily exporting manufactured goods) and (b) most these economies have become service-economies where raw materials play a decreasingly significant role. Therefore, how does Patnaik’s theory fits in these new development within the developing countries and – as a consequence – where does he put the threshold of what is a precapitalist region subject to imperialism? These two aspects are fundamental to Patnaik’s overall theoretical approach and if addressed might reveal the incompleteness of his critique of propertyism.

This blog post is based on a term paper by Obaidy on Patnaik’s theory of money.  Download the paper here.

Mohamed Obaidy is an MS student in Economics at The New School.