The nature of capitalist growth has always been, and continues to be, such that it engenders unemployment daily, hourly, and on a mass scale. The objective of capitalist production is to maximize profits for capitalists, not to provide employment to the existing unemployed or the underemployed, nor are capitalists or the state they control usually concerned with ensuring minimum livelihoods for the laboring poor. Two major features as regards employment marked classical industrialization in Britain, France, and other countries in Europe in the eighteenth and nineteenth centuries. First, wages were kept to the minimum possible level by capitalists to maximize profits, taking recourse to the extensive exploitation of labor through raising absolute surplus value, namely, the lengthening of the working day for the same daily wage and the widespread use of the underpaid labor of women and children. The resulting raising of the rate of surplus value (the ratio of surplus labor to necessary labor), however, led to a contradiction. The restriction on mass labor earnings, in the very process of maximizing profits, meant that the internal market for capitalism could never grow rapidly enough to stave off the problem of inadequately expanding demand and maintain the economic incentives for accumulation, as long as the economy was considered to be a closed one. Although much theoretical attention was devoted to the problem, it did not exist in practice for the early industrializing countries, for the very inception of the capitalist mode of production was preceded and accompanied by a high degree of exploitative trade integration arising from conquest and forcible subjugation of other societies that were made to serve both as providers of resources and as markets.

Second, from its inception, capitalist industrialization was marked by labor- displacing mechanization, perhaps because the main industries involved were import- substituting industries (imported cotton textiles and bar-iron for example). Textiles in Europe could not compete with the much cheaper imported handicraft textiles of Asian artisans as long as mechanization did not reduce unit labor costs of yarn and cloth, nor could iron ores be extracted and reduced profitably until innovations were applied. Once introduced, however, innovations spread and affected not only import- substituting goods but also domestic employment in every traditional sphere. Extensive methods of labor exploitation gave way to intensive methods, in which there was a rise in relative surplus value through a dual route—reduction in necessary labor through decline in the cost of wage-goods, in which colonial exploitation played a major role, and rise in labor productivity through the substitution of dead labor (machinery) for living labor.3 This latter route provided a means of partially overcoming the contradiction affecting accumulation, by absorbing more investment in the form of capital- intensification. However, with mechanization inevitably came labor displacement at a faster rate than the increase in labor demand arising from expansion of the domestically absorbed part of total output, giving rise to social discontent and to Luddite movements for breaking machinery.

Such unemployment has been often labeled “frictional” unemployment, as though it is always a short-run problem, which ignores the fact that had today’s advanced economies been closed economies, the unemployment owing to mechanization would have reached abnormally high proportions not commensurate with the concept of a reserve army of labor, and created social tensions not manageable within the capitalist system. In Britain, for example, despite the highest rate of manufacturing growth seen in its history, as well as rapidly growing exports in the early period of industrialization, by the 1840s, the discontent and social tensions owing to rising unemployment and bad conditions of work and life of the laboring poor combined with rapidly increasing income inequality had reached such a pitch that the fledgling working class movement under the banner of Chartism was ready for a general insurrection, and the ruling classes were in fear of revolution. The insurrections of the 1840s in Britain, France, and other countries in Europe were militarily suppressed, but the social instability of the capitalist system had been exposed within a mere six decades of the inception of industrialization. The early industrializers overcame the problem of growing unemployment inherent in their capitalist growth and technical change simply by exporting their unemployment abroad, an option which is not open in any serious way to today’s large labor-surplus economies like India and China. The export of unemployment (a phrase first used by J. M. Keynes) took place through colonization and imperialism and appeared in multifarious forms. The most direct form of export of unemployment was the physical migration of population. The precondition for this was the seizure of enormous tracts of land by western Europeans from indigenous peoples in the Americas, South Africa, and Australia and those lands’ permanent occupation by the in-migrants. “Land” in this context means not just land with the capacity for producing crops but includes all the natural fauna, rich water, timber, and mineral resources of these occupied regions. In Britain, nearly 2 percent of the domestic labor force every year was migrating for permanent settlement abroad by the mid-nineteenth century, while the nation got rid of large numbers of criminals and members of the potentially riotous underclass by transporting them to Australia.

Second, unemployment was exported by industrializing countries like Britain by flooding the subjugated colonies with its cotton textiles and other manufactured goods under discriminating commercial policy that kept these markets compulsorily completely open to imports, while the metropolitan market was protected from their handicraft manufactures for nearly 150 years. Export of unemployment by this route meant import of unemployment by the colonized artisans. While employment and wages rose in the industrializing country with output expanding at about double the rate of domestic absorptive capacity, the other side of the coin was that, in the colonies, manufactures employment went down sharply resulting in deindustrialization. The process was a prolonged one in vast countries like India and China, since the limitations of early transport protected the poorly connected hinterland that was penetrated by imports only after the railways became important.

Third, unemployment was exported by the leading imperialist country through a more complex route in which areas of recent white settlement, including North America, were developed through capital exports, the bulk of which the tropical colonies were made to finance. The then-leading imperialist power, Britain, did so through the systematic annual appropriation of the foreign exchange (forex) earnings from rising export surplus of its many colonies—the largest being India—to the rest of the world. These forex earnings, mainly from exports of primary goods and simple manufactures, became very substantial during the quarter century before World War I (WWI) and were used to meet the deficits on the balance of payments of the metropolis, allowing it not only to export capital and earn dividends but pari passu increase its capital goods exports. Britain, the world capitalist leader, not only shored up incomes in the European continent, the United States, and regions of white settlement (Argentina, Brazil, and South Africa) by running continuous current account deficits vis-a-vis them but also developed them rapidly by exporting capital, thus incurring ever increasing balance of payments deficits with these regions. Sustaining this system under the prevalent regime of fixed exchange rates (the gold standard) without itself suffering gold outflow, was only possible through its appropriation of the vast export surplus earnings of India and other colonies from these very same regions to offset its own deficits as Saul has shown in his Studies in British Overseas Trade.4 By 1910, India alone was obliged to provide 60 million pounds sterling in its exchange earnings from these areas, all appropriated by Britain.5

In the colonies, the peasants and artisans producing rising exports were paid in local currency, out of tax revenues they themselves had paid in to the state. Therefore, no new purchasing power was injected; rather, their rising export surplus became the commodity equivalent of rising taxes extracted from them. The strong deflationary impact of the mechanism (which involved one-quarter to one-third budgetary surpluses in India) led to higher net unemployment in the economy. Export-led growth of unemployment was the result. The Great Depression that started with the agricultural depression from the mid-1920s was the coup de grace and pauperized large segments of the peasantry in India—the percentage of rural labor force dependent on wage-paid work leapt from 26 to 38 percent comparing the 1921 and 1931 censuses. China fared even worse with not only deep agricultural depression but also foreign invasion, both civil war and anti-Japanese war, the latter entailing the loss of 6 million lives.6

It might be argued that today’s developing countries are getting their own back in the current era because their cheap labor leads to relocation of labor-intensive segments of metropolitan industry, whose products are exported back to advanced countries. Deindustrialization in the advanced countries is the result. However, this process is not symmetrical to the previous one. Certainly, some local employment is generated, but since production is in the hands of the advanced country corporations, they benefit by maintaining high rates of surplus value and mainly repatriate profits. They pressurize governments to set up special economic zones where domestic labor laws are relaxed to enable them to raise the rate of surplus value via draconian terms of contract for local labor and reduced standards of work safety and pollution control. The other beneficiaries are advanced country consumers enjoying cheapening imported consumer goods from developing countries.

Further, ultimately the resulting import surplus and current account deficit of rich advanced countries especially of the world capitalist leader, the United States, paradoxically continue to be substantially financed through the rapid reserves buildup and lending to them by poor developing countries—China and India, among others—and involve transfer in a new form, with the latter lending (in the form of purchase of U.S. government securities) at a much lower rate than the rate at which they borrow from the world. About 2.5 to 3 percent of India’s GDP is the estimated cost to the Indian economy of such borrowing short and lending long, which effectively is a transfer to advanced countries. Such transfer is increasing owing to the recent spurt in debt-creating capital inflows into India, far in excess of what is justified by the small deficit on India’s current account, leading to a sudden increase in the rate of buildup of reserves, which reached well over US$300 billion by mid-2008, second only to the mountainous Chinese reserves. As domestic rural hunger and poverty rise, poor countries help to finance the import-dependent consumption boom of the United States.

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