The Impasse of Neo-liberalism

Marxist, XLII, 2, April–June 2026

Prabhat Patnaik

The Impasse of Neo-liberalism

Neo-liberal capitalism has reached a period of stagnation and burgeoning unemployment. The annual growth rate of the world economy for the decade 2010-20, that is, even before the slowdown caused by the pandemic, was 2.6 percent, which was the lowest for any decade since the second world war. As the annual rate of growth of labour productivity over the same decade was around 1.6 percent, the rate of growth of employment, which is the difference between the two, was just about 1 percent per annum, well below the rate of growth of the world labour-force (around 1.2 percent). This means that, far from absorbing the vast labour reserves that exist in the world economy as a legacy of colonialism and that underlie the phenomenon of mass poverty in the world, the additional employment being generated was not enough to provide jobs even to the addition to labour-force. At this rate the extent of world poverty will only increase, and neo-liberal globalization will ensure that it will not remain confined only to certain specific locations; there will instead be a geographical spread of deprivation, a worsening of the conditions of the working people everywhere in the capitalist world.

This stagnation is not an accidental or temporary phenomenon confined to only one decade; it represents the climax of neo-liberalism, its ultimate denouement. There is, as we shall see, no question of overcoming it within the framework of neo-liberal capitalism; at the same time, going beyond neo-liberal capitalism to some new, more advanced, stage of capitalism for a permanent end to it is nowhere on the agenda. Hence, the capitalist effort to cope with the phenomenon of stagnation and burgeoning unemployment is taking the form of reverting to earlier, brutally repressive, incarnations of the system.

Some, of course, may point to the emergence of Artificial Intelligence as a way out of this impasse; but even if we accept for a moment that AI may generate enough investment to overcome, through its demand-generating effect, the current output stagnation, its adverse effect on employment will not only aggravate the situation of growing poverty, but, for that very reason, even make whatever boom it stimulates an extremely short-lived affair: the demand-generating effect of AI investment in other words would soon be overtaken by the demand-contracting effect of employment loss on account of it. In this sense what we are seeing today is a dead-end not just for neo-liberal capitalism, but for capitalism itself as a mode of production. Let us, in what follows, give substance to each of these claims. Let us trace the genesis of this stagnation, examine why it will persist, and why it can be said to represent a dead-end not just for neo-liberal capitalism but for capitalism itself.

I

The essence of neo-liberalism was the relatively unrestricted movement of commodities and of capital, including above all finance, across country-borders, which brought about the relocation of a set of activities from the high-wage Global North to the low-wage Global South. This kept down real wages in the Global North by enfeebling workers’ bargaining strength: in fact economist Joseph Stiglitz has estimated that the average real wage of a male American worker in 2011 was marginally lower than in 1968!¹

At the same time, such relatively unrestricted mobility of commodities and capital did not mean that workers in the Global South saw an improvement in their material condition. Even in countries of the Global South where the GDP growth accelerated under the neo-liberal regime, the rate of growth of labour productivity accelerated even faster because of the more intensified Darwinian competition between countries that neo-liberalism introduced. As a result, the rate of growth of employment, which is the difference between the two, was even lower than under the preceding dirigiste regime, and the relative size of the labour reserves inherited from colonial times did not dwindle at all, or did not dwindle sufficiently, to make a difference to the real wages. All across the capitalist world therefore the vector of real wages did not increase even as the vector of labour productivities did, causing an increase in the share of economic surplus in total output, both within countries and in the world as a whole.

Since a much larger proportion of wage income (or more generally income of the working people) is spent on consumption than out of the economic surplus, a rise in the share of economic surplus has the effect of reducing consumption demand relative to output and hence causing a slow-down in the rate of growth of output. This is what we observe today.

Of course as the growth of consumption demand slows down, if government expenditure could be increased to compensate for it, then the slowing down of the output and employment growth rate could be prevented. But since there is no world state, this would have to be done by governments of individual nation-states. For government expenditure to add to aggregate demand it has to be financed either through a fiscal deficit, in which case nobody is being taxed and there is no reduction in anyone else’s demand as government demand increases, or through a tax on the rich in which case a part of the tax revenue comes out of savings and does not fully offset the demand-generating effect of government expenditure. If government expenditure is financed instead through taxes on the working people who consume the bulk of their income anyway, then the net addition to aggregate demand by increased government expenditure is negligible.

Both these ways of raising revenue for financing larger government expenditure however, namely, a larger fiscal deficit or larger taxes on the rich, are opposed by globalized finance capital. And since finance is globalized while the state remains a nation-state, the writ of finance has to be obeyed, for any government of a nation-state that goes against the writ of finance would find itself facing a financial outflow that would produce a crisis. This, contrary to what Keynes had advocated, limits the scope of state intervention in offsetting the crisis of over-production that is unleashed by the rise in the share of economic surplus which occurs under neo-liberalism. Neo-liberalism in other words both unleashes a crisis of over-production and also simultaneously makes the state incapable of intervening to overcome it.

Burgeoning unemployment resulting from the crisis however poses a threat within each country to the hegemony of monopoly capital in that country which is integrated in a neo-liberal setting with international capital. To counter this threat, monopoly capital seeks to divide the working people and promote an alternative distractive discourse by entering into an alliance with neo-fascist groups. whose aim is to target a hapless ethnic or religious minority and generate hatred against it within the majority.

The simultaneous upsurge of neo-fascism all across the world today must be understood as the unfolding of this process. Milei in Argentina, Trump in the US, Meloni in Italy, Modi in India and Netanyahu in Israel are obvious examples of neo-fascists in power (though Netanyahu is in a special category of his own combining genocidal settler colonialism with neo-fascism). Among the neo-fascist parties waiting in the wings to capture or share power are National Rally in France (Marine Le Pen’s party), AfD in Germany, Reform UK in Britain (Nigel Farage’s party), and Fidesz in Hungary (the party of Viktor Orban who has just been ousted from power).

II

Contemporary neo-fascism exhibits in varying degrees several features of the fascism of the 1930s; and yet it differs in a crucial respect from old fascism; it is this difference which justifies the use of the prefix ‘neo’. The common features between old fascism and neo-fascism are: first, the ‘othering’ of a minority and the fomenting of hatred against it within the majority; second, the abrogation of democratic rights of the people and the unleashing of extreme repression; third, the combining of state repression with street repression let loose by fascist thugs like Mussolini’s balillas or Hitler’s SA; fourth, a very close nexus between the fascist or neo-fascist formations and monopoly capital; fifth, an even closer nexus between the fascist or neo-fascist formations and certain newer elements within monopoly capital, such as the Shinko Zaibatsu in Japan or the new monopoly strata that had emerged in Germany in producer goods and armaments sectors and whom Daniel Guerin had drawn attention to,² or the Adanis and Ambanis in India; and sixth, the promotion of a personality cult of ‘the leader’ who supposedly symbolizes the nation, a phenomenon exemplified in India for instance by the reference to the Indian army as ‘Modiji’s army’. There is thus an inversion of the relation between the people and the ‘leader’: the ‘nation’ is apotheosized above the people and the ‘leader’ is apotheosized above the ‘nation’, as the quintessence of the ‘nation’.

While all these features of neo-fascism, reminiscent of fascism of the 1930s, are visible in varying degrees in its current upsurge across the world, it is its difference from the old fascism that is of particular interest in the context of the present discussion. Fascism in the 1930s had expanded government military expenditure massively and financed it through an increase in the fiscal deficit; it had overcome the opposition of finance capital to fiscal deficits and adopted what some have called ‘military Keynesianism’ even before Keynes had propounded his theory. Japan had been the very first country to come out of the Great Depression, in 1931 itself, and Germany had overcome the Depression after Hitler came to power in 1933 and started his militarization programme.

Contemporary neo-fascism is incapable of bringing about any similar expansion of economic activity in countries where it comes to power. This is because even a neo-fascist state remains a nation-state while finance today is globalized, so that the same incapacity which the liberal bourgeois state experiences vis-à-vis globalized finance capital, an incapacity that prevents state intervention for overcoming unemployment through deficit-financed government expenditure, is also shared by the neo-fascist state. In the 1930s finance capital had been nation-based and nation-state-aided, so that the fascists could persuade finance capital in each country to drop its objections to fiscal deficits; but neo-fascists in any particular country today lack the capacity to persuade globalized or international finance capital to drop its objections to fiscal deficits. If a neo-fascist government increases its expenditure by enlarging the fiscal deficit, finance would simply flow out to some other location where ‘fiscal responsibility’ is adhered to. Because of this contradiction where the state, even a neo-fascist state, remains a nation-state while finance is international, neo-fascism in power cannot overcome the stagnation and unemployment that afflicts neo-liberal capitalism, unlike what its predecessor had done in the 1930s.

This incapacity extends even to the ‘leader’ of the capitalist world, the United States. True, the US, unlike the rest of the world, does not have ‘fiscal responsibility’ legislation to tie its hands (though enlarging the fiscal deficit beyond a Congress-approved limit requires special permission from the Congress); but US administrations have been unwilling to enlarge their fiscal deficits to finance larger government expenditure because doing so would create employment elsewhere, in a situation of unrestricted trade, through a ‘leakage’ of demand, while increasing at the same time the external debt of the US.

The likelihood of this occurrence points to a fundamental feature of post-war world capitalism. Britain, the earlier leader of the capitalist world, essentially in the pre-first world war years, did not have to face this problem: while its market was open to the rest of the capitalist world that was newly-industrializing, Britain did not get into any external debt; on the contrary it made substantial capital exports abroad and emerged as a major creditor nation. One very important reason for this was the existence of its colonies of conquest, from whom Britain extracted substantial sums both by making ‘de-industrializing’ exports to them and by the ‘drain of surplus’ from them.³

In the year 1910 for which economic historian S.B.Saul has made valuable estimates, Britain’s total current and capital account deficit (that is, current account deficit plus capital exports) vis-à-vis all those countries with whom it did have a deficit, typically the temperate regions of European settlement like Canada, Australia, New Zealand, the United States and South Africa, was $ 145 million. Of this amount as much as $ 60 million, or more than 40 percent, came from India alone.⁴

Utsa Patnaik provides a break-up of this amount: $ 26.5 million was India’s export surplus vis-à-vis these countries of European settlement, which Britain appropriated gratis as the ‘drain’ from India, $ 18 million was Britain’s export surplus to India which was made possible because India could not protect itself against British exports which were ‘de-industrializing’ as well, and $15.5 million was on account of private invisible payments like freight, insurance, shipping and profit repatriation from plantations and other British investments which too reflected the basic colonial relationship.⁵ In other words, Britain’s colonial relationship with India (and other similar colonies) made possible the financing of the balance of payments deficit that Britain had with the newly-industrializing temperate regions of European settlement. The Gold Standard could be sustained only on the backs of this colonial exploitation.

The US today has no colonies of that kind, which is why any effort on its part to stimulate the capitalist world economy, apart from the fact that its stimulating effect would largely ‘leak out’ to other countries, would also enhance its external indebtedness.

Thus, while no ‘world state’ (or even a surrogate ‘world state’ in the form of several metropolitan countries acting together by common consent) exists to overcome the current stagnation, no individual nation-state can do so in the face of opposition from globalized finance. And the ‘leader’ of the capitalist world is hamstrung by the fact that it has no colonies of conquest that could prevent its getting into even greater external debt in the event of its pursuing expansionary economic policies. It is this which constitutes an impasse for capitalism.

III

In fact the ‘leader without colonies’ problem had already afflicted capitalism for quite some time. When the Bretton Woods Agreement for setting up the post-war international trading and payments arrangement was being discussed in 1944 there was a proposal that the burden of adjustment in the event of a surplus or deficit on the current account of the balance of payments should not be borne by the deficit countries alone; the surplus countries too should be made to share this burden. This proposal however was vetoed by the US which then was a surplus country, and the claims on other countries which its being a surplus country gave it, were used by it to demand adjustments from them that would further its own interests.

Things however changed in the mid-seventies, as indeed they were bound to. It is one of the hallmarks of ‘leadership’ that the ‘leader’ of the capitalist world must run a current account deficit vis-à-vis the non-colonial segment of this world; and since in the post-war scenario there was no colonial or non-colonial segment, the ‘leader’ had to eventually run a current account deficit vis-à-vis the whole of the rest of the world. This is because inter alia it is charged with running an apparatus of counter-revolution against socialist movements, including against third world movements that could take a socialist form. The US for instance maintains around 750 bases all around the globe to keep the world safe for capitalism and suppress people’s movements, for which it has to incur expenditures abroad; such expenditure and the occasional wars that erupt in this process of counter-revolution (such as the Vietnam war), give rise eventually to a current account deficit even for a country like the US that had begun the post-war era with a surplus.

This deficit was not a matter of concern for the US for a long time. Its currency, the dollar, was institutionally recognized to be ‘as good as gold’ under the Bretton Woods system where it was officially convertible to gold at $35 per ounce of gold; and even after President Nixon ended the convertibility of the dollar to gold, the world’s rich have continued to have the confidence that the dollar is ‘as good as gold’ and have been perfectly willing to hold on to dollars and dollar-denominated assets with which the US has settled its current account deficits. In the process the US has become the most externally indebted country in the world.

Of late however the dollars pouring into the world economy in settlement of the US current account deficit, have started facing a threat. A fear has started emerging that the confidence in the value of the dollar may not last long. Here we are not thinking only of the possibility of a shift from the dollar to some other currency: no credible, competing, currency to the dollar has still emerged to pose a possible threat to it. But a shift from the dollar to some commodity, especially a commodity like oil, is always possible, and remains a threat.

The US therefore has a dual problem before it: how to enhance the level of activity in its economy even without increasing deficit-financed government expenditure, and thereby make a dent on its large unemployment (which is not always apparent because the unemployed often do not report themselves as belonging to the work-force, and hence a part of unemployment gets camouflaged as a decline in work-force participation rate); and how to shore up the dollar so that the threat of de-dollarization is contained.

Donald Trump’s policies which liberal commentators dismiss as ‘maverick’ seek to address both these problems. The strategy underlying these policies is to reduce the US current account deficit, which will kill two birds with one stone: it will give a boost to aggregate demand and hence domestic output and employment; and it will also lower the level of indebtedness of the US compared to what it otherwise would have been and thereby also improve the position of the dollar.

Since the Gross National Income of a country is simply the sum of its consumption, gross investment, and government expenditure less the current account deficit on its balance of payments, a reduction in this deficit, other things remaining unchanged, has the effect of raising its Gross National Income and hence the level of employment. If for instance imports are curtailed then demand is created for domestically-produced goods, which boosts output and employment. Hence, instead of stimulating the economy through larger government expenditure as Keynes had advocated, Trump is attempting to stimulate the US economy by curtailing its current account deficit.

One obvious means of doing so is by getting the other NATO countries to spend more on ‘defence’. His suggestion that the European NATO countries should spend 5 percent of their GDP on ‘defence’ means that the US would not have to undertake such expenditure in distant lands, which would free the US government to spend more on home-produced goods out of a given total expenditure, boosting output and employment.

The other means of curtailing the current account deficit, which would particularly affect third world countries, is by pursuing ‘beggar-thy-neighbour’ policies, that is by snatching markets from them, or, what comes to the same thing, exporting unemployment to them. Let us look at this in greater detail.

IV

Trump suddenly imposed massive tariffs on imports into the US, including from third world countries. This was followed up by a framework of an interim trade agreement signed with India, which however is now being renegotiated after the US Supreme Court had struck down Trump’s tariffs; the Indo-US Trade Agreement portends to be the model of trade agreements to be signed with other countries. The Indo-US framework trade agreement in its original form was clearly an unequal agreement which was being forced on India with the threat that if India did not sign it then India would continue facing the massive punitive tariffs to which it had been subjected of late.

The unequal nature of the framework of the interim Indo-US Trade Agreement (which the US is insisting must continue in the renegotiated agreement) is evident from two of its provisions⁶: first, the tariffs that the US would be imposing on Indian goods under it are far higher than the tariffs that India is allowed to impose on US goods. Second, it stipulates the actual amount of imports that India should be buying from the US over a five-year period, but there is no reciprocal provision about what the US should be buying from India. These amounts are far higher than what India imports from the US at present. Against the figure of $52.90 billion in 2025-26 (itself an inflated figure because of energy imports at high prices owing to the war on Iran), India under the Indo-US Trade Agreement is supposed to buy $500 billion worth of goods from the US over the next five years, which comes to $100 billion per annum; this is double the amount India is buying at present even in an unusual year.

The stipulation of one-way import targets is peremptory in a double sense: it is peremptory because only one side has to buy stipulated amounts while there is no such compulsion on the other. It is also peremptory in the sense of going against the normal practice under capitalism, which is that the amounts of goods to be bought should be left to the choice of buyers in the markets.

Of particular concern is the destruction of food security that this Agreement will bring about. Through massive government subsidies the US grows grain surpluses that it wishes to dispose of in third world countries at the expense of local peasant production. If third world peasants shift from growing grains to other cash crops that the US demands, then their countries become vulnerable to famines, like several African countries that have abandoned grain production under imperialist pressure.

This is so for two reasons. First, cash crop prices fluctuate a great deal, much more than foodgrain prices; in a year of sharp fall in cash crop prices therefore the country would lack the foreign exchange to import its foodgrain needs. Secondly, even if perchance supplies of foodgrains for the country can be arranged, the farmers would lack the purchasing power to buy their foodgrain needs. Food security in a country requires, at least for a large country, growing as much of its foodgrain requirements as possible.

There is an additional factor here. The US, having forced countries to abandon food self-sufficiency, then uses their import-dependence for foodgrains upon it to arm-twist them into accepting its hegemony. Foodgrain self-sufficiency therefore is not just necessary to avoid famines; it is essential for the maintenance of a country’s freedom.

The unequal treaty being imposed by Trump, first on India and then no doubt on other third world countries, would not only undermine India’s and other countries’ food security; it would also reduce employment in these countries if the cash crops to which they shift acreage while abandoning foodgrain production are less employment-intensive than foodgrains. In fact many cash crops, especially orchard crops, are less employment-intensive than foodgrains. In their case, the Trump strategy would mean creation of unemployment in the third world country that would make it even more famine-prone.

V

Reducing the US current account deficit, which not only stimulates the US economy but also reduces the growth of its external indebtedness, is only one part of Trump’s strategy; it is insufficient to counter the threat to the dollar, since the already massive accumulation of dollars and dollar-denominated assets with US creditors is not affected by a reduction in current account deficit which acts only at the margin. For strengthening the dollar, the Trump strategy includes another component, and that is a recolonization of the Global South.

Whether aware of the role of colonies in sustaining British balance of payments and hence Britain’s leadership role in the pre-first world war period (which got undermined during the inter-war years because of the world agricultural crisis that reduced the export surplus of its colonies and hence the ‘drain from colonies’), Trump is recreating colonial conditions, especially the acquisition of control over the resources of the Global South.

Political decolonization after the second world war had been followed by the far more arduous process of economic decolonization, that is, the acquisition of control by the newly-independent ex-colonial countries over their own natural resources. Imperialism had put up an extremely stout resistance against such economic decolonization: from the CIA coup against Arbenz of Guatemala when he confronted the land-grab in his country by the United Fruit Company of the US, to the coup against Mossadegh of Iran when he nationalized the Anglo-Iranian oil company that controlled Iran’s oil resources, to the assassination of Lumumba of the Congo when he had sought control over that country’s mineral wealth, to the Anglo-French invasion of Egypt when Nasser had nationalized the Suez Canal, to the assassination of Allende when he had nationalized Chile’s copper resources, it is one long story of imperialist aggression in defence of its control over third world resources. Whatever success the third world had achieved in this realm after independence was made possible to a substantial extent by the help of the Soviet Union. Trump now wants to reverse this process of economic decolonization.

By abducting President Nicolas Maduro of Venezuela and his wife, Trump sought to capture the oil resources of Venezuela which has the largest oil reserves among all countries of the world. His attack on Iran was motivated likewise by a desire to control Iran’s oil resources; it is another thing that the US did not succeed in its plan to put in place a regime in Iran that would have transferred control over Iran’s oil to the US, but it has not given up its plans. The plan to take over Greenland which has brought it into conflict with Denmark is a part of the same picture: Greenland has rich mineral resources, especially rare earths for which the US currently depends on imports from China.

Control over mineral resources, especially oil, can shore up the dollar’s position in at least three ways: first, it would ensure that the dollar remains the medium of circulation in all oil transactions. At present this is largely the case thanks to the close relation between the US and Saudi Arabia; but if the dollar is virtually the sole means of circulation then no other currency can possibly challenge it, for a currency cannot become a form of wealth-holding unless it is a medium of circulation as well. Secondly, by controlling the world’s oil the US can ensure that the price of oil in terms of dollars is not expected to show any significant secular increase, in which case the threat to the dollar arising from its possible replacement by a commodity would have been removed. Thirdly, if the US controls the world’s oil, then American companies would be involved in developing and transporting it, which would earn substantial surpluses for the US, improving its current account in a manner analogous to the ‘drain’ of colonial times.

Whether Donald Trump’s strategy for reviving the US economy and for stabilizing the currently threatened US dollar would work or not is beside the point. It is what propels much of world politics today and is expressive of the constraints that world capitalism faces.

VI

The turn towards neo-fascism that entails the spread of hatred and the undermining of democracy, the adoption of ‘beggar-thy-neighbour’ policies vis-à-vis especially the countries of the Global South, and the attempt at recolonizing these countries by snatching control over their natural resources, all go to show the hideous face of capitalism in its latest phase. And there appear to be no prospects of going beyond this hideous phase; nothing akin to the Keynesian Revolution suggesting the possibility of a ‘reformed’ capitalism is on the horizon. Capitalism, as Rosa Luxemburg had pointed out, is getting deeper and deeper into sheer barbarism, of which the tacit or explicit support being extended by almost all the governments of the advanced capitalist countries to the genocide carried out by Israeli settler colonialism in Gaza, is a clear indication.

The immediate post-second world war years had seen capitalism divesting itself politically of its colonial possessions, espousing democratic forms of governance based on universal adult suffrage, and adopting welfare state measures under pressure from their respective domestic working classes; all these had been interpreted by many as marking a fundamental change in the nature of capitalism, a change that supposedly made socialism an irrelevant objective and the struggle for it quite unnecessary. What is more, the economic crises of the system were believed to have become ‘manageable’ through the intervention of the state applying the Keynesian medicine.

All this however has turned out to be a chimera, as it was bound to. Capitalism is a spontaneous or self-driven system where individual economic agents are caught in a Darwinian competition against one another and act in ways that are not of their own volition. Capitalists for instance accumulate not necessarily because they like to, but because they are compelled to, for otherwise they would lose their place within the system. The aggregate outcome of the actions of economic agents leads to a set of immanent tendencies that characterize the system.

The idea of the state acting as an independent agent, and not only ‘managing’ the system, but making it behave in humane ways, is foreign to the very nature of capitalism. Political democracy, welfare state, respect for the independence of smaller nations, respect for human rights, are not ideas that capitalism can possibly internalize in order to change permanently into a humane version of itself; it had to accept these ideas in the post-war conjuncture because of its extreme vulnerability in the face of the socialist threat.

Paradoxically therefore the humane phase of capitalism, was an indirect contribution of the Soviet Union, forced upon the capitalist system for its sheer survival, not a durable metamorphosis in the nature of this system. Indeed Keynes was extremely sensitive to this socialist threat; his objective was to preserve capitalism from the socialist threat by improving its functioning in a manner that made it less vulnerable. And now that the socialist threat in the old form has receded somewhat because of the collapse of the Soviet Union, capitalism is back to its hideous form, with which its spontaneity endows; and this hideousness gets magnified in a period of crisis.

What we are witnessing today is an impasse of the system from which there is no apparent escape and which would force it to become more and more hideous as it tries to cope with this impasse. The struggle against this hideousness becomes an existential necessity for mankind, and in particular for countries of the Global South; and this struggle will inevitably lead on to socialism. Socialism becomes the ultimate denouement of a consistent struggle for democracy, for secularism, for human rights and for a welfare state. These struggles in other words are not separate from the struggle for socialism; they are the means through which the struggle for socialism has to be waged in the current conjuncture.