Structural Dependence: A Simple Marxian Analysis of the Limits to Redistribution with International Capital Transfers

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.