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Structural Dependence: A Simple Marxian Analysis of the Limits to Redistribution with International Capital Transfers
Published online by Cambridge University Press: 27 January 2009
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States in liberal democracies are said to be structurally dependent on the decisions of private investors in the sense that governments do not directly control the level of investment and economic growth. The general consensus amongst Marxian political economists and neo-classical economists is that this imposes restrictions on the scope of the redistributive policies that governments can pursue. It is also frequently argued that these restrictions are increased with international capital mobility because of the threat or reality of capital flight. The McCracken Report noted this link between capital mobility and restrictions on government as early as 1977. It warned that some governments appeared to have ‘overrated their scope for independent action’ and they had paid insufficient attention to the consequences of ‘capital flight’. Since then, both the rate of capital mobility and the severity of these restrictions have probably increased. In the 1970s, capital outflows from the thirteen leading industrial countries averaged $52 billion per annum. In 1989 they averaged $444 billion. The problems that this presents to governments attempting to make transfers from capital to labour have been described in considerable detail and there is an extensive formal literature in trade theory that deals with capital transfers. There is also some work on strategies for social democratic governments wishing to minimize capital losses. The main gap in this literature, however, is that some of the fundamental political, or ‘democratic choice’, aspects of these problems are not well understood. In particular, little is known about the optimum rate of taxation for a government attempting to maximize workers' consumption out of profits. The purpose of this Note is to contribute towards such an analysis.
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References
1 The structural dependency argument is set out in more detail by Przeworski, A. and Wallerstein, M., ‘Structural Dependence of the State on Capital’, American Political Science Review, 82 (1988), 11–29.CrossRefGoogle Scholar
2 See Frieden, J., ‘Invested Interests: The Politics of National Economic Policies in a World of Global Finance’, International Organizations, 45 (1991), 425–45CrossRefGoogle Scholar, and Garrett, G. and Lange, P., ‘Political Responses to Interdependence: What's “Left” for the Left?’ International Organizations, 45 (1991), 539–64CrossRefGoogle Scholar, for recent discussions.
3 OECD, Towards Full Employment and Price Stability (McCracken Report) (Paris: Organization for Economic Co-operation and Development, 1977).Google Scholar Restrictions imposed on governments by capital mobility have already been felt in Britain and France, and during part of the Carter administration in the United States. This experience led European leaders to say that they had ‘learned a lesson regarding the negative effects of wage and welfare support in their competition for investment capital’ (Kolko, J., Restructuring the World Economy (New York: Pantheon, 1988), p. 235).Google Scholar
4 Frieden, , ‘Invested Interests’, p. 428.Google Scholar All figures in US dollars.
5 Williamson, J., The Open Economy and the World Economy (New York: Basic Books, 1983)Google Scholar and Kindelberger, C., International Capital Movements (Cambridge: Cambridge University Press, 1988)Google Scholar give broad neo-classical analyses. Gill, S. and Law, D., The Global Political Economy (Baltimore, Md: John Hopkins, 1988)Google Scholar, and also Kolko, , RestructuringGoogle Scholar, are recent examples of neo-Marxian analyses.
6 The work by Przeworski and Wallerstein, ‘Structural Dependence’, is the most well known, although their model is very sensitive to a set of restrictive assumptions. Frieden, , ‘Invested Interests’Google Scholar, gives a discussion of alternative policy mixes with a given level of tax. This level is not analysed.
7 The Hecksher-Ohlin model is of concern here insofar as it assumes that differences in the relative earning of resources or factors are explained by their scarcity or abundance. The factor price equalization theorem is not of concern. See Rogowski, R., Commerce and Coalitions (Princeton, NJ: Princeton University Press, 1989)Google Scholar, for a good introduction to this model and the argument about relative earnings for non-economists. His list of capital-rich countries includes North America, Western Europe, Japan and Australasia (pp. 68–9).
8 For a recent discussion of this question see Lucas, R., ‘Why Doesn't Capital Flow from Rich to Poor Countries?’, American Economic Review, 80 (1990), 92–6.Google Scholar
9 One reason for a formal approach is that the answers to these questions are not obvious and our intuitions may not provide a very reliable guide. If you believe that intuitions are a good guide, guess the answer to the question about capital flows from rich and poor countries.
10 See Cass, D., ‘Optimum Growth in an Aggregative Model of Capital Accumulation’, Review of Economic Studies, 32 (1965), 233–40.CrossRefGoogle Scholar A more detailed justification for the mathematical structure and some of the assumptions is to be found in this literature and in Takayama, A., Mathematical Economics (Cambridge: Cambridge University Press, 1987), pp. 444–66.Google Scholar
11 Marglin, S., Growth, Distribution, and Prices (Cambridge, Mass.: Harvard University Press, 1984), p. 53.Google Scholar
12 The consequences of allowing wages and profits to vary is that wages will decrease as investment leaves the economy. As one referee pointed out, this would reinforce the negative effects of investment loss and strengthen the findings for economies that lose investment in equilibrium.
13 More precisely, neo-classical economists assume that investors will have a utility function that is an argument of consumption. Marxian political-economists, on the other hand, treat investment in any period as primarily a function of accumulation in the previous period (Marglin, , Growth, pp. 53–5).Google Scholar
14 Kolko, , Restructuring, p. 58.Google Scholar
15 The fact is, as Elster, J., ‘Marx, Revolution and Rational Choice’, in Taylor, M., ed., Rationality and Revolution (Cambridge: Cambridge University Press, 1988)Google Scholar, points out, there is very little empirical data on the manner in which investors will transfer profits in reaction to various tax rates.
16 It can be demonstrated that there is no equilibrium in this region. I have simplified the discussion by ignoring it.
17 Takayama, , Mathematical Economics, p. 447.Google Scholar
18 Takayama, , Mathematical Economics, p. 446.Google Scholar
19 This has the same effect as setting g at zero in Equation (4) and immediately gives Equation (5).
20 It is difficult to envisage what could possibly generate such multiple equilibria in this type of welfare maximizing problem. It is possible that there would be more than one equilibrium if either (a) the assumption that wages are fixed might be dropped, or (b) the workers' utility was expressed as a function of wage levels and taxes. Without further research, however, this is speculation.
21 See Lucas, , ‘Why Doesn't Capital Flow’Google Scholar, for a discussion of this point.
22 I am grateful to an anonymous referee for pressing the advantages of modelling the problem in this form. See Takayama, , Mathematical Economics, pp. 444–50Google Scholar, for a more detailed discussion.