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A Southern Perspective on Development Studies

Carlos Mallorquin

Chapter 2. The Unfamiliar Raúl Prebisch 1943-1949

Texte intégral

Time precedes existence
Prigogine (1990: 183)

Time is the substance of which I am made
Jorge Luis Borges (1996: 148)


1This Introduction is followed by three sections, A Crucifixion on a ‘Cross of Gold’?, which examines Prebisch’s first steps to explain the role of the “gold standard” aiming to generate alternative policies for the Periphery while the “White-Keynes” project for a new financial organization at Bretton Woods is in process, which is continued with the description of the theoretical strategy to jettison “classical political economy”, A Theology for Liberation, and finally, The Eternal Return: Time and Asynchrony, that underlines the culmination of Prebisch’s ideas on the cycle and time, or to use a pompous term, the “ontology” in question.

  • 1 The title of the original text, El desarrollo económico de América Latina y sus principales problem (...)

2The chapter hopes to display an episode in the intellectual life of Raúl Prebisch, namely, the years following his dismissal in 1943 as head of Argentina’s Central Bank until a few days after his departure in 1949 from Mexico City to Santiago de Chile, without having concluded the schedule of lectures promised. In Chile he was to draw up a report as a consultant for the ECLAC, a period just prior to the Manifesto (Prebisch 1949b).1

  • 2 I would like to thank Edgar Dosman for a copy of this 10-page manuscript.

3On October 18th, 1943, Prebisch received news that he had been fired from the Central Bank. This, as Dosman points out, was “the single most painful experience of his life” (Dosman 2001: 89), and one that Prebisch himself mentions repeatedly in interviews throughout the 1980s (Magariños 1991, Pollock et al. 2001, González del Solar 1983). By December 1943, Prebisch had already made an important decision to seek financial backing to research and write a book entitled La Moneda y el Ritmo de la Actividad Económica (Prebisch 1943).2 Argentina’s publishers rejected his proposal, but Prebisch went ahead with his plan “while he was teaching at the faculty” (Dosman 2001: 94).

  • 3 I am grateful to Dr. Washington Ashwell, who kindly sent me a copy of the manuscript.

4But today´s access to the content of much of Raúl Prebisch work and “published” texts during the following year’s requires an explanation. Writings such as Conversaciones en el Banco de México S.A. (1944b), were dismembered in two volumes, hence the reference “Prebisch 1944b in Prebisch 1991c and 1993”, and La Moneda y los Ciclos Económicos en la Argentina3 from 1944c, another dismembered text of the period, is referenced as appearing in Prebisch 1991c and 1993. The manuscript Conversaciones can be found separated in Prebisch 1991c and 1993. Conversaciones are talks he gave to a series of public officials of the Mexican government with whom he agreed they were not to be made “public.” On the other hand, La Moneda (1944c) incorporates substantial parts of Conversaciones (1944b). Editors mention that Prebisch allowed for this incorporation. The publication of La Moneda (1944c) is presented in turn dispersed as mentioned into specific fascicles representing specific lectures by Prebisch (1991c and 1993), but includes only 17, excluding fascicle no. 1 (“Introduction,” 11 pages) which can be read in Mallorquin (2006). In fact, La Moneda y los Ciclos Económicos en la Argentina is actually a full contained text of 342 pages. Editors were Julio Gonzalez del Solar, Pascual M. Martínez, and Juan Carlos Menescaldi. The volume contains the shorthand notes taken from Prebisch’s lectures which were revised under his supervision. In accordance with Argentina law 12,371 of June 1944, editors expressing no profit motive hoped to recover costs. However, notwithstanding the 1944 year as date of “publication” by Rotaprint Argentina fascicles 14 to 18 were published during the first weeks of January and February 1945. But the latter fascicles can also be found in Prebisch’s 1944b. In today’s terms, there was an incredible amount of “copy paste” work.

5It is my aim here to present the development of Prebisch’s critiques and reflections on economic thought. I will touch only obliquely on his ideas about economic policy and industrialization, a subject that merits consideration but which can be observed discussed throughout most of the book. One of the assumptions of my argument is precisely that Prebisch’s thinking displays a certain historical unity in this period. This can be analyzed independently of the intellectual periods immediately preceding and those that follow our analysis. The period between his demise in 1943 as the General Manager of Argentina Central Bank and his decision to take up initially a post of consultancy at ECLAC in 1949, should be seen in a context fraught with very important political transformations in Argentina with the rise of Perón to power. The Faculty of Economics of the University of Buenos Aires also bears the brunt of changes in process and Prebisch was not an absentee in the discussion for the reform of the curricula of the discipline by offering an alternative, although “losing” out to the proposals of the then governing body of the Faculty in 1948 (Arana 2016). Simultaneously, as his theoretical evolution would show, he consciously rejected any necessary “oligarchical” ties in thought and action with the landowning class: in September in 1945 he published in Spanish the 1924 conference he offered in Australia to the Henry George Club de Melbourne (The land issue, Prebisch 1945d) showing his lifelong disgust for the landowning class and parasitical practices in Argentina and Latin America. But the inner conflicts in the Faculty of economics, with the “Peronist” movement in process, convinced him to leave the Faculty in 1948 despite his favorable avowed posture for a “responsible” intervention in the economy (Prebisch 1945 in Prebisch 1991c: 447).

6I will not go into a comparison between the theoretical vocabulary of the period 1943-49 and subsequent vocabulary. However, the existential and political events that prompt the Prebisch of the Manifesto familiar to many is a period I take as “read.”

7In a nutshell, the Prebisch of the Manifesto (1949) and the theoretical reflection about the peripheral economy (and therefore the very notion of the cycle) that gradually took shape thereafter, was not predetermined by his earlier thinking. In other words, the ideas that Prebisch had been developing, and was carrying around in “his luggage” when he decided to accept the post of consultant to the ECLAC in Chile suggested a different theoretical path. We shall see that Prebisch had other theoretical options and may well have gone on developing them.

  • 4 “Which does not mean he might not be right” (Prebisch1944b in 1991c: 198).
  • 5 An example should it be needed: here the topic discussed is the tendency to disequilibrium in the “ (...)

8Joseph Love has mentioned that Prebisch read an article by Charles Kindleberger discussing the decline of the terms of trade suffered by the primary producing countries vis-à-vis the industrial ones and suggesting that “production factors for agriculture and raw materials [be] transferred to industry” (Kindleberger in Harris 1943). Indeed, Prebisch avoids these issues in Conversaciones (1944b) and criticizes Kindleberger (Prebisch 1944b in 1991: 197), for assuming that the rest of the world was predestined to buy much more from the United States than what it sells, rather than the other way around. Using Argentina as corroboration, even called into question his own statements about Kindleberger.4 However, we have to remember that the discussion at the time was focused on the international stabilization plans (the White and the Keynes Plans were already circulating) and the “scarcity of the dollar” (Mikesell 1994). Even more important, for Prebisch, the theoretical explanation for the different “income elasticities” was not relevant as a subject for reflection. During those days, he was examining economic theory in general, and although the subject of the “worsening” primary product prices had been “reported” and “assessed” by his own pen since his student days, he had as yet no theoretical explanation other than the classical one of the cyclical rise and downfall of prices.5

9Indeed, it is rather “odd”, as Love puts it (1996: 118), that no paternity of any kind is granted to Kindleberger as one of the precursors of the Prebisch-Singer thesis about the worsening terms of trade suffered by primary exporting countries vis-à-vis the industrial countries. Moreover, if we assume that these issues were foremost in Prebisch’s reflections on economic thought, then we can rightly talk, as John Toye and Richard Toye (2003: 445) do, of a certain “confusion” in his ideas about the mechanism of the “worsening in the terms of trade.”

  • 6 There is no better account of these years than Celso Furtado (1988) and Burger (1998).

10My own interpretation differs in that, rather than talking of “confusion,” I aim to show that Prebisch found himself in a process of theoretical transition, or at one of the several theoretical crossroads throughout his life, and which would in fact be frozen. But Toye’s approach fudges analysis of his reflections before the Manifesto with the latter. In other words, at ECLAC emerges once again a strategic shift in theoretical vocabulary, quite possibly the result of a crucial event, as well as the atmosphere of the “Cold War” and prudence and calculation produced by international organizations, especially ECLAC, hounded by the United States.6

  • 7 “It was the appearance of H. Singer’s work on the terms of trade that enabled people to think globa (...)
  • 8 On the vicissitudes of Singer’s article, see Toye (2003).

11This would seem to have been the case because Celso Furtado, a colleague of Prebisch’s in the early days of ECLAC, has said that prior to the famous manuscript, Prebisch circulated a “first text” and that, before discussion began, “it was abruptly taken out of circulation with no explanation,” aspects of which can be observed in our account further ahead. However, the text known worldwide today was presented without further preliminaries and reached “my hands in mimeograph in its finished form” (Furtado 1988: 53). In fact, we do not know what happened to the “first text,” but the new manuscript was, in Furtado’s words, no longer on the “defensive”; it was an open call for industrialization, in spite of pointing out the “limitations.” According to Furtado,7 it is the appearance of Singer’s classic article (1949)8 which explains the turnabout and the beginning of the transformation of Prebisch’s theoretical vocabulary between the two texts, as Toye (2003) tends to validate.

  • 9 Dag Hammarskjold had said: “Indeed, Prebisch is skating on thin ice, but I fully support him” (Maga (...)

12In Dag Hammarskjold’s celebrated phrase9, was this the period when Prebisch started “skating on thin ice?” Notwithstanding it did not prevent him supporting the presentation of the report commissioned from him for the Quintadinha Meeting in Brazil in 1954 by the OAS’s Inter-American Economic and Social Council. It is no secret that, aside from calling for his “head,” the United States government attempted unsuccessfully to prevent ECLAC being set up after the three-year trial period. There can be no better corroboration of this attitude and policy than when Eugene Black, then President of the International Reconstruction and Development Bank, shouted from the rooftops “Who does this man think he is coming here and giving us advice?” (Santa Cruz 1984: 467).10

A Crucifixion on a “Cross of Gold”?

13Several years after leaving the Central Bank, Prebisch claimed it had been a “true theoretical liberation” (Prebisch 1993: 411).11 It is symptomatic that right from the beginning of the Conversaciones (1944b) he draws the limit and extent to what he was willing to criticize of the “monetary doctrine”: “Why not seek our own principles when the traditional principles themselves are undergoing a severe process of critical revision?” (Prebisch 1944b in 1972a: 255).

14Although La Moneda (1944c) composed and written some months after Conversaciones incorporates much of the content of the latter, critical positions much more fundamental to economic theory can already be perceived. These positions Prebisch may already have held, but not yet conceptually elaborated, and they therefore did not form part of what he expounded previously in Mexico.12 The theoretical strategy of La Moneda still spoke of “adaptation” and the “modification of theories,” as well as “formulating new ones” about the “reality” of his “country” (Prebisch in Mallorquin 2006: 54-55). Indeed, a year later he was still trying in some way to defend the limitations of the traditional doctrine regarding the Periphery, referring to it in the image of “geographical charts” or “old maps” that should be put right contrasting them to specific realities (Prebisch 1945 in 1991c: 443).13 Then, in La Moneda, he does not suggest breaking with the traditional explanation of “monetary phenomena of big countries” (Prebisch 1944c in 1972a: 256), since they “coincide” (albeit only “partially”) with the phenomena of peripheral countries.

  • 10 The stance of Conversaciones (Prebisch 1972a) and El patrón oro… are similar: “to perfect,” “to cor (...)
  • 11 Elsewhere Prebisch says: “As a system the gold standard has been automatic only for certain countri (...)

15I should stress that the discrepancy (not to say theoretical “ambiguity”) about the usefulness or otherwise of traditional theories, is also present in his appraisal of the gold standard. If, on the one hand, this was not “about ditching the gold standard as a monetary regime in our country, but about finding a way to adapt its workings to our needs, to our economic and monetary reality” (Prebisch 1944c in Mallorquin 2006: 54),10 on the other, Prebisch also stated that the classical theory of the gold standard “is not universal.” Such a regime represented the “experience of the Center,” of “industrial and creditor” countries, and not “the experience of the countries in the Periphery” (Prebisch 1944c in 1993: 19).11

  • 12 We should stress that Prebisch states that this is “a hypothesis that should be checked” in other w (...)
  • 13 And the fact that the Bretton Woods Meeting and Agreements had already taken place. See Mikesell (1 (...)
  • 14 “When the personal incomes of the employed population rise -especially those in the relatively high (...)

16These discrepancies reflect an ongoing theoretical transition. It is in La Moneda (Prebisch 1991c: 286)12 where Prebisch expounds for the “first time” the theoretical explanation about the cycle while simultaneously trying to displace previous elaborations. This also explains why his arguments against Kindleberger in Conversaciones (1944b) are absent in La Moneda (Prebisch 1944c). Both narratives were elaborated in 1944: Conversaciones preceded La Moneda. The new theoretical issues also excluded any kind of rapprochement with Kindleberger’s thesis, apart from the fact that Prebisch already had a new appreciation of the international ensemble,13 despite being aware of one of the factors pointed out by Kindleberger to explain the “worsening” primary produce prices, for example a la Duesenberry on the low price elasticity of demand for consumer goods which he now begins to consider.14

17Prebisch then was claiming he was closer to the “classics,” since classical economists aimed to observe “reality,” “scientifically” (Prebisch 1944c in 1991c: 286) in contrast to those who just merely replicate it.

18There is a theory then (an explanation) of the workings of the realm of capitalism under the influence of a conceptual element that would survive throughout the period: the economic phenomenon should give priority to the examination of money, which is the “technical yardstick for measuring values,” and has an importance that is “absolutely fundamental in the life of society” (Prebisch in Mallorquin 2006: 55). By the same token, the descriptions of the evolution of the cycle that had for some time been devised under the assumption of a “system of communicating vessels” are clearly inadequate:

  • 15 A year later Prebisch said it was not necessary to look for “two orders of theories”, a cycle in th (...)

For this reason, the theory is incomplete, and incorrect on fundamental points, for one part of the system could not have been theorized about while disregarding the other fundamental part. Which is why I believe that the international theory of the gold standard has to be revised to give it a general character covering the Center, the countries close to the Center, and the countries of the Periphery. (Prebisch 1944c in 1993: 19).15

  • 16 “The time in which the process is completed -its duration- is of fundamental importance, and the ex (...)

19The first part of La Moneda (1944c) sets out under various hypothetical scenarios (rising or falling imports, domestic expansion of income, or lack of it, and so on) a series of examples illustrating the development of the economy and the consequences of the circulatory process of income and its reproduction. It points out the sectors’ interdependence, assuming different rates of income generation and reproduction in each case. Depending on the phase of the cyclical process observed (contracting or expanding), Prebisch insists that “external or internal influences cause expansion and contraction phenomena greater in scope than the numerical significance of the initial impulse that causes them in the first place” (Prebisch 1944c in 1991c: 250). In every hypothetical model he points out the shortcomings of classical monetary theory (Prebisch 1944c in 1991c: 274). But what he really wants to introduce into his models is the factor of time. The time it takes the various different productive sectors to generate new income implies thinking about the time they require to expand or extend productive activity.16 The notion will mutate into a much more complex phenomenon in the following years, which in my reading subsumes Keynes’s concept of “uncertainty.”

20To the time issue, or that of the rate of income circulation and reproduction, Prebisch adds the thesis that “income growth” in various countries is a function of profits. In other words, this phenomenon would explain the concentration and holding of gold crossing their borders.

  • 17 “The incremented income which stays in each country is proportional to its profits [réditos] (…) “i (...)
  • 18 “Therefore, as gold is distributed worldwide according to countries’ incomes and not according to t (...)

21One of the first phenomena to consider in explaining the serious flaws in the gold standard scheme is the different import coefficients among countries. In other words, gold holdings do not depend on a country’s opening-up or interaction with the international market. They depend instead on the distribution of “total profits” (“réditos totales”) between “domestic activity” and “foreign trade” (Prebisch 1944c in 1991c: 290).17 This is displayed by Prebisch with numerical models for countries with similar, then dissimilar, productive structures, but different import coefficients.18

  • 19 “There exists therefore incompatibility between an expanding domestic policy or maintenance of dome (...)
  • 20 “The economic cycle is thus manifested in an alternate movement of income, contracting and expandin (...)
  • 21 “I can thus prove numerically what I have so often said, namely, that in the downward phase, import (...)

22The sterilization of foreign currencies or gold in the upward phase, may diminish the effects of continuous drainage of gold reserves, but do not totally prevent it, particularly if the “gold standard regime” is followed to the letter.19 This arrangement, which in the long term concentrates gold within certain borders, contradicted the idea that gold was merely a vehicle for carrying out transfers and supporting foreign trade. Prebisch indorses theoretically the existing asymmetry through the idea of the “expansion coefficient,” which, according to him, is not the same as the concept of the Keynesian “multiplier” (Keynes/Kahn), as they are each “based on substantially different theories” (Prebisch 1944c in 1991c: 350). Whereas for Keynes the “multiplier” is a constant indicating the amount by which investments or original income have been reproduced, Prebisch holds that his idea of the “expansion coefficient” has “limits.” These “limits” have nothing to do with the amount of “saving” assumed by Keynes’s theory (Prebisch 1944c in 1991c: 364), but with the “time” elapsing between the beginning of a productive cycle and the generation of fresh income. This period is determined by two elements: “the number of times the money changes hands to produce the income” (i.e., its rate of circulation), and the “amount of money lost at each exchange in imports payment” (Prebisch 1944c in 1991c: 358).20 What this attempts to explain is, on the one hand, the loss of income leaving the circulatory process via imports in economies like Argentina’s, and on the other, the rate at which different economies generate their own income. It is precisely the time factor that explains a certain asymmetry, or “disparity” in Prebisch’s terms, in the concentration of gold: economies with low import coefficients that “take a long time” to put back a proportion of their income into the international market, which generated “gold holdings” within their borders, progressively amplified over various cycles. Thus, Prebisch suggests that it is the relationship between “total profit” (the rate at which they are generated) and foreign trade, that explains the process. If we accept that, in “the upward phase” of the cycle “exports grew faster than imports, and the balance of payments was positive, whereas in the downward phase exports fell more rapidly than imports” (Prebisch 1944c in 1991c: 320), then the different rates of circulation of the income and amounts leaving some borders would explain the circular accumulative process.21

23Given his theory “the greater the profits, the greater the gold holdings,” it is understandable that Prebisch would be suspicious of industrialization policies per se in shoring up growth and dealing with oscillations caused by the gold standard (Prebisch 1993: 210). Hence his reference to Alejandro Bunge and his group, and difficulties of adapting to the regime despite a clearly defined monetary policy in traditional terms: “It is often believed amongst us that Argentina’s industrial growth would make us less vulnerable to the effects of these international disturbance factors. The belief is totally without basis. I will demonstrate (…) that industrial growth could make us less vulnerable” (Prebisch 1991c: 279), only if Argentina takes into account political and monetary aspects to counteract the “negative aspects” operating under the classical “gold standard.”

  • 22 I translate “coeficiente de salida” as “exit coefficient,” and its contrary movement (“coeficiente (...)

24Prebisch is clearly not interested in the different demand/income elasticities or demand/price elasticities (nor even the terms of trade). Countries, it would seem, are differentiated based on their relationship of global rather than sectoral exchange with reference to a financial Center and its effects. Although La Moneda and the later Concepto… (Prebisch 1945a in 1993) both conceive of the rate and circulation of money and income in terms of the payment “habits” of the “public” (companies, individuals, the State), and/or of the varying number of “transactions required by each economy to obtain a given amount of income” (Prebisch 1945a in 1993: 223), Prebisch’s text (Concepto…) avoids any reference to the “quantitative theory of money” mentioned in La Moneda (Prebisch 1944c in 1991c: 400). Perhaps even more significant than the continuous process of theoretical elaboration is the fact that he does not mention his concept of the “expansion coefficient” in contradistinction to Keynes’s “multiplier.” As we shall see further on, this notion would mutate into the concept of the “exit coefficient” (Prebisch 1949a in 1993: 464)22. Prebisch is clearly still not totally comfortable because he does not stop there. More radically, a year later in 1946, at the First Meeting of Technicians on Problems of Central Banking of the American Continent, he stated:

I am disturbed by the arguments that free competition leads to general equilibrium and to the most appropriate distribution of resources and income within society. I see no correspondence between these abstract propositions and the reality of the economic world. (Prebisch 1946 in 1993: 227)

25But by this stage he already perceives that the ontological feature of capitalism is essentially stochastic:

I have reached the conclusion that all movements in the economy taken as a whole are cyclical in character (…) in the broadest sense, (…) a succession of undulatory movements rising and falling (…) The cycle (…), both in the Center and the Periphery, is the characteristic way the economy grows -the capitalist economy has grown in no way but cyclically. (Prebisch 1946 in 1993: 226)

A Theology for Liberation

26The theoretical work undertaken in the coming years will be devoted to a “dynamic examination of the economy,” because then it was still “in its beginnings” (Prebisch 1945a in 1993: 228). Between August 1946 and early 1947, Prebisch devoted himself to analyzing Keynes’s classic work, The General Theory of Employment, Interest and Money. It was during this analysis that he made his final theoretical transition of the period.

  • 23 “Keynes has also left behind practical solutions that are independent of his theory and that can be (...)
  • 24 Much of Prebisch’s disparagement with Keynes has also to do with the then ongoing process of the co (...)
  • 25 Introduction to Keynes.
  • 26 “Thus, our author states it categorically, though offering no arguments to prove it other than the (...)

27Though the “practical solutions” proposed by Keynes are indisputable, this does not necessarily mean agreeing with his critique of political economy or its doctrinaire construction,23 less still with the “dogma” his followers have made of his work, on the basis of which they devise “new theoretical constructions ever further removed from reality as, in my opinion, is Keynes’s own construction” (Prebisch 1948 in 1991c: 504).24 Prebisch insisted that anticyclical economic policy should be defended from a different theoretical perspective. Wherever he could, Prebisch emphasized the divergence between himself and Keynes. During 1947 Prebisch wrote a series of articles analyzing the elementary concepts to Keynes that would later become his Introducción a Keynes25 (almost a glossary of sorts). Prebisch did not interrupt the flow of Keynes’s ideas with his own or others’ criticisms. He also excluded from the book the more scathing of two negative comments about Keynes made in the original articles;26 only the following was left in: “What correspondence do these theoretical reasonings have with reality? Keynes’s book cannot be said to present a systematic analysis of facts to verify his theories” (Prebisch 1993: 258).

  • 27 “[Which] I intend to consider briefly in a more encouraging work on the Keynesian system and the ec (...)

28He leaves for another occasion the matter of whether or not “Lord Keynes” carried off “the rational explanation of economic movement, and elucidated the principles it obeys” (Prebisch 1991c: 454).27 Yet the strategy he was later to embark upon is already very clear here: looking when he could on analogies or “coincidences” between Keynes’s ideas and “classical” thought, missing no opportunity to point out that the “multiplier decreases” (Prebisch 1991c: 454) in an open interrelated economic complex due to the fact that some income filters abroad to pay for imports. Prebisch is in fact here reminding us of the asymmetric mechanism he developed concerning the trading relations under the gold standard.

29As his account of Keynes develops, Prebisch emphasizes the undulatory wave pattern and cyclical form of capitalism, highlighting its fluctuations, a phenomenon that seems not to have been central to the analysis, says Prebisch, for it is left until the end of the book. However, basing himself on Keynes’s idea of “oscillation around an intermediate position,” so as to avoid consideration of major serious fluctuations, he advances his own ideas that the cycle and its undulatory form should be seen in a historical, institutional sense, not as a “natural law” (Prebisch 1991c: 482). However, Prebisch’s critique of classical political economy in general and Keynes’s in particular, had already been set up:

  • 28 Introducción al curso de dinámica económica (1948a in Prebisch 1991c) was the first chapter of Apun (...)

To explain the phenomenon of continuous disequilibrium in reality, Keynes devotes a couple of pages at the end of his work, -the so-called notes on the cycle- in which he makes no use of the results reached in his theoretical discussion at all. He seeks the explanation of the cycle in another vague form. He said that the ascendant phase suddenly collapses with the falling of capital returns, without explaining his reasons nor the relation it has with the phenomena studied in the general theory; that is, as with classical economists, we find that his fundamental theories are unsuited to explaining cyclical reality. (Prebisch 1991c: 506)28

  • 29 As mentioned in the previous note, Apuntes de Economía Política (1948d) has been published in parts (...)

30By mid-1948, in Apuntes de Economía Política29, shortly after finishing his book on Keynes, Prebisch was shifting the conceptual vocabulary that might almost be described as a “quantum leap.” He proposes no less a task than rebuilding “classical” or “traditional economics.” The initially timid vocabulary of the course - “to see things with one’s own mind” and “to detach oneself from certain foreign theories” (Prebisch 1991c: 495)- is succeeded by a full-frontal assault on the whole apparatus of economics as a discipline. He stresses that only by:

undertaking a profound revision of classical theory and devising a new theory, rather than attaching a theory on to it (…), might we find the theoretical elements to guide us effectively and wisely in practical action. (Prebisch 1993: 325)

31in other words, to reach through “economic policy” that which is nonexistent in reality: “economic equilibrium” (Prebisch 1993: 326). As a discipline (and even morally) economics was in “serious crisis” due to its excessive “exaltation of personal interest as the supreme regulator of economic activity” (Prebisch 1991c: 496). As a “scientific discipline” it was “incipient” and “indecisive.” As in earlier days, its critical situation had to be surmounted through reformulation: an “out-and-out effort to renovate it from its very foundations,” as it cannot “rationally explain” the way:

economic movement occurs, the how’s, why’s and wherefores of economic phenomena. And if political economy has not been able to teach us that, wrongly we could find in her the indispensable resources to act on a reality we don’t know (…) therefore the economy is insufficient to encompass, describe and explain the problems of reality to give us the means to act upon her with effectiveness. (Prebisch 1991c: 496).

32If we are to understand how he arrived at his theory of the cycle, we should deal with the brief excursion Prebisch made into the history of economic thought. First and foremost, Prebisch needed to deconstruct the discipline in order to synthesize and conclude the theory he had been devising, and to stress the importance of certain notions that “classical” thinking deemed marginal: time, money, and profit.

  • 30 “Building on thin air” (Prebisch 1991c: 497).

33Therefore, there is an explanation and a history of the distinct ruptures which the economic discipline has undergone: the first was “provoked by Marx” (Prebisch 1991c: 497), which is essentially a critique on the embarrassing nonexistence of the “inequalities” and “instability of the economic system” but which through the use of an “inconsistent” “theory of labor,” became an easy target of classical economics, despite the latter’s own limitations to explain these. With Walras and Pareto comes the reconstruction and a “superior phase,” whose precision and elegance through mathematics shoved the “body of the doctrine,” away from the real world, which was supposedly its task to explain, giving us the “means to act over her” (Prebisch 1991c: 497).30

34Although Prebisch perceived with pristine clarity differences within the “compact body of doctrines,” he keeps the term because according to him there is a series of underlining principles which authorizes its use: (1) the profit incentive under the free forces of competition drives to an “equilibrium” situation and an “optimum of production”; (2) the social distribution compatible with this “optimum” should not be interfered with by ethical or political questions, despite its importance; (3) the absentee state.

35Despite the “logical brilliance,” the “classical” doctrine has not been “able to explain what happens in (…) the imminent cyclical reality” (Prebisch 1991c: 499): “Historically the cycle is the typical form of growth of capitalism (…) There is no resting point: it ascends to descend, and it descends to ascend once again. (…) In the movement, there is no equilibrium point; the movement is a succession of continuous disequilibrium (Prebisch 1991c: 499).

36The search for profit generates the logic of growth described, and which does not achieve “equilibrium.” Classical economics cannot be “reconciled” with a reality which is “cyclical.” An “optimum of production” is impossible given the upturns and downturn phases and the structure never reaches “full employment” properly speaking, rather “productive forces” are squandered. The instability cannot be reconciled with the doctrine of classical economics and least of all with the way it postulates the “distribution of income” hence the “crisis of political economy”:

it’s ineptitude to explain the manner of being and production of the economic phenomenon. In other words, if the disequilibrium of the cycle constitute an inherent evil of the capitalist process, wrongly could we explain the cyclical reality with the classical doctrines which sustain that the process is conducive towards equilibrium. (Prebisch 1991c: 500)

37This does not mean that those doctrines have ignored the phenomena described, but rather that their crisis derives from not confronting the conundrum “scientifically” which meant “jettisoned” the theories “which do not achieve a satisfactory explanation of the reality” (Prebisch 1991c: 500). Adopting instead certain “attitudes” when facing phenomena like unemployment, indicating “rigidities” or “resistances” on the part of the reality like the downturn of salaries, thus eluding confronting the logical faults of the “premises.” Even Keynes, despite his efforts to liberate himself of those doctrines, presents a “type of explanation imminently classical” but here the rigidity lies in the notion of “the rate of interest,” which does not decrease sufficiently to counter the “decline in the marginal efficiency of capital” (Prebisch 1991c: 501).

38Another theoretical attitude assumed by the classics relates to blaming the consequences of the “excesses” and depressions of the cyclical process on the “abus[e] [of] the monetary system” (Prebisch 1991c: 501), or state intervention, and/or customs duties.

39The third attitude which Prebisch underlines among economists with respect to the undulatory reality is the “admission of the existence of the cycle” but “attributing” to it explanations sustained on the notion that it is a product of “alien elements,” “cosmic elements”; “psychological” alterations which produce optimism or pessimism: that is “alien factors to the economic system” (Prebisch 1991c: 502). The latter liberates the economists of an explanation because apparently it is a phenomenon external to the discipline.

40Therefore, Prebisch’s first step was to devise a historical explanation for the various ruptures in economic thinking, and in the process pointing the theoretical incongruities of “classical economics,” while simultaneously sharing with Keynes’s term when referring to neoclassical economists. As a second step, Prebisch would summarize this in his theory of the capitalist cycle, as indeed his own evaluation of the discipline demanded: an “absolutely endogenous theory of the cycle where it is repeated systematically through the very factors inherent in the system” (Prebisch 1949a in 1993: 458).

41As we will see later, Prebisch would suggest that the “general cycle” theory should be devised without:

the false sense of universality from which the major cycle theories have so far suffered, concerning themselves exclusively with the phenomena of Centers, blithely ignoring what is happening on the Periphery, and thus closing off one of the most fertile paths of research. (Prebisch 1949a in 1993: 414)

42But the theory must have a “general” character because the capitalist economy grows in a cyclical manner:

The capitalist economy has grown but in an undulatory form, has moved but in this form and any perturbation to the whole gives an undulatory form to the movement. Therefore, if the cycle is the form of growing and moving of the economy and if the economy moves incessantly in this form, it would seem that all the phenomena of the whole economy, not only those of occupation and production but also those of distribution, should be integrated within a general dynamic theory. (Prebisch 1949a in 1993: 414).

43Therefore, it presumes economics should not enclose itself in a “partial field” nor an “specialty”; the explanation of the “overall” economic movement requires including the variations and transformations of the “distribution of the income of the collectivity” (Prebisch 1949a in 1993: 415) during the cycle. Hence the distribution cannot be seen outside the context of the cycle, “outside the undulatory movement” (ibid.).

44Prebisch then hoped that the:

cyclical theory becomes the only dynamic theory of the economy, or rather, is the only theory of the overall movements of the economy. I do not believe that the overall movements can be the object of a static theory which pursues positions of equilibrium. I believe that the analysis of equilibrium points has no other fruitful field than the study of partial phenomena of the economy. But when it’s about the general phenomenon, the equilibrium analysis can only be useful in the initial phases of work as an instrument of work, which serves us to compare reality with that which could be the image of a state of things completely distinct than the one that rules in the world of capitalism. (Prebisch 1949a in 1993: 415, my emphasis)

  • 31 “Whence the crisis in political economy, and whence its ineptitude at explaining the form and origi (...)

45In spite of its “veneer of logic,” “classical” doctrine was not “able to explain to us what happens in an eminently cyclical (…) reality” (Prebisch 1948a in 1991c: 499), the result of the engine of capitalist growth through profit-seeking businessmen, and irreconcilable with classical economics, which describes the process in terms of “equilibria.” An “optimum of production” cannot exist when the expanding and contracting phases are systematic. The system approaches, but never reaches “full employment,” there being a waste of “productive forces” instead. Instability cannot be reconciled with the body of doctrines of classical economics, still less so with the manner whereby it postulates “income distribution” (Prebisch 1948a in 1991c: 500).31

  • 32 “A spontaneous logical result of the way businessmen act” (Prebisch 1948a in 1991c: 502).
  • 33 Further ahead, he was saying the same thing: “the continuous succession of disequilibriums’” (Prebi (...)
  • 34 “The very economist who speaks of typical equilibrium has devoted himself (…) to the study of the e (...)
  • 35 It was Prebisch himself who called for a “respectful revision of classical theories” (Prebisch 1993 (...)

46There was one further theoretical strategy among the defenders of classical postulates, which was the least coherent: it postulated an “endogenous” theory of the cycle,32 but did so “independently of the body of traditional doctrine” and, in contrast to previous attitudes, “incompatible” with the tradition due to the impossibility of simultaneously arguing that “the action of businessmen” brings “society to a point of equilibrium” and/or to a “continuous succession of disequilibria” (Prebisch 1948a in 1991c: 502).33 In other words, the postulates of classical doctrine are accepted, but reality is explained from different premises. To underline this “incoherence,”34 Prebisch brings up the name of none other than Alvin Hansen, which should not astound us when we remember how little “respect” he showed toward Keynes.35

47By the late 1920s then, political economy was facing the “Great Depression” in a state of “ineptitude” and “theoretical incongruousness.” The “deep instability” and “excessive inequality in distribution” found no explanation whatsoever, never mind a strategy to correct them.

48This period of the great world depression brings about the “second crisis in political economy” (Prebisch 1948a in 1991c: 503), overwhelmed by the labyrinth of the economic depression, we find Keynes suggesting an explanation that grants a certain place to “economic freedom.” Its “practical” solutions are couched in a “theory of economic movement” which had supposedly done away with the principles of “classical economics.” Keynes had not therefore “solved the crisis in political economy,” neither had he “extricated himself completely” from classical doctrine:

it is surprising that the two most formidable critics of the classical doctrine (Marx and Keynes) ran into the same difficulty. Marx because he sought to build his whole doctrine and interpretation of capitalism upon the basis of a theory of value inherited from classical doctrine. The Marxist theory of value, which essentially is the Ricardian theory of value. In respect of Keynes, was incapable of letting go of the mental habits of the classical economists who led him, in his theoretical system, to pursue the search for positions and laws of equilibrium in economics. (Prebisch 1948a in 1991c: 504)

  • 36 “A scientifically satisfactory economic theory would have to explain cyclical movement for us becau (...)

49Therefore, what should have been transcended was the “quest for laws of equilibrium,” otherwise “constructions alien to reality” (Prebisch 1948a in 1991c: 505) would continue unabated. Prebisch understood why early classical economists were fascinated by theorizing about the “apparent chaos of phenomena” in terms of “precise laws of equilibrium,” though these “laws of movement” could also be explained in rigorous scientific terms. However, the rigorous logical system of traditional thought embellished by mathematics had one drawback: it did not “correspond to reality” (ibid.).36 The “crisis” in “political economy” was due to its inadequacy in explaining reality.

  • 37 “Time is a fundamental element of reality, it is not possible to eliminate it arbitrarily as Keynes (...)

50The crisis occurred when political economy turned its back in horror to the “key factor of time”: classical economists view it as “contrived,” and Keynes as “arbitrary.” The discipline’s theoretical problem therefore lay in how “to introduce time into their theory just the way it is” in reality (Prebisch 1993: 271).37

  • 38 “I call the interest rate a logical subterfuge produced by classical economists to solve the proble (...)

51The absence of the time element could be seen in the notions of capital and saving in classical and Keynesian doctrine because it was through the “subterfuge” of the interest rate that it was tackled in theory.38 The interest rate then was the mechanism through which the saving that “society is willing to supply” matched capitalists’ demand to develop capital: according to the demand for saving, the interest rate would rise or fall, and therefore the saving “required” by businessmen would emerge. But Prebisch maintains that, for any given period, the produce requires a certain time to arrive to the marketplace, and therefore the income in process awaiting products has to be higher than the value of the production of the final consumption. These facts could clearly not be explained with Say’s Law, which states that “supply creates its own demand,” since it would be contradicting the idea that “demand” should not outstrip supply at the end of the productive cycle. However, classical economists explained this anomaly as being the result of a “saving” made by the community given a certain the interest rate. The interest rate is the subterfuge that facilitates or limits what amount of saving would be used in production in any given period, namely, the total income generated at the end of the process. Any “surplus” would be explained by the existence of the relevant “saving,” thus fulfilling Say’s law.

52Keynes, for his part, tackled the problem of time with a variety of “attitudes” (Prebisch 1993: 275). In one case, Prebisch claimed that, with a falling “interest rate,” Keynes went hand in glove with classical economists, but once marginal capital yield did not keep pace with the interest rate (due to a preference for liquidity), then Keynes ditched classical economics behind. Savings were left in liquid form, not invested, and a deficiency in demand arose. Nevertheless, according to Prebisch, Keynes keeps “within the logical game” of classical economics: on one hand, he recognizes “the time factor,” but uses the “subterfuge” of the “interest rate” to manage it; on the other, this subterfuge has limits after a certain point (the “preference for liquidity”). In contrast with this “attitude,” in the theory of the multiplier, Keynes “denies” the role granted to the interest rate by classical economists and does so without introducing time altogether; saving becomes an altogether different phenomenon than for classical economists. Here, the assumption of simultaneity in saving and investment is not taken into account, and it is simply accepted that saving will come out of the “income from production”: this would in turn multiply these “investments” (Prebisch 1993: 276). The very multiplication of income (also the product of investments) would by itself generate a certain level of saving in the community. Saving is a function of the rate of income growth. But Prebisch points out that, for certain investments to produce a certain income, a certain time is required, which otherwise only “confuses” the present with the future. This, according to Prebisch, is precisely the theory of the Keynesian multiplier. Its “logical inconsistency” invalidates “Keynesian theory” (Prebisch 1993: 277) and marks the absolute rift between him and the classical school.

53It is the idea of static equilibrium which should be called into question. In this “position,” neither businessmen nor consumers are thought of as having any interest in “moving” (nor do savers). The amount saved is the one that businessmen demand from a specific interest rate. Wages too reflect the position where there is no further incentive to work harder or change jobs. Similarly, the price of primary commodities is high enough to keep on working “marginal” lands where the production cost “only just” equals the “value of the products (the difference in cost in the best endowed or located lands being left as earnings)” (Prebisch 1993: 280). A change in any of the circumstances once again establishes a “position of static equilibrium”:

The concept of static equilibrium is a mere instrument of abstract analysis of the phenomena as viewed by classical economists to gain a better understanding of them. In classical doctrine, one can easily switch from the static to the dynamic. (Prebisch 1993: 281)

54If classical economists isolated every latent change and interpreted the event as a happening which could become unstable, then economic reality could be viewed as an “endless succession of disturbances.” It was therefore possible to go from the “static equilibrium” of classical economics to a “dynamic” theory of reality (ibid.). This theory should be infinite overlaying processes tending to reach equilibrium (Prebisch 1993: 281). But it is the incessant changes which might prevent it ever reaching “equilibrium,” even though one might suppose that “abstractly speaking,” the disturbance itself is the point of “equilibrium.” Prebisch offered a definition incorporating the very paradox of the economic reality he was attempting to describe: only if a certain limit-point is viewed abstractly in the sense that its disturbances “end,” can we speak of “equilibrium” in the economic system, which will, nevertheless, be unachievable.

55According to Prebisch, this explains why classical economists did not elaborate “a dynamic” or “general theory”: they presume that the disturbances themselves lead to equilibrium, and this excludes any reflection about “how it is reached” (Prebisch 1993: 282). A general theory could “be constructed” but it would suffer from the “fundamental vice of the theory of static equilibrium,” namely, its “mistaken conception of saving, and the subterfuge of the interest rate” (Prebisch 1993: 282). As the “theory of static equilibrium” starts from mistaken premises about reality, a theory of “dynamic equilibrium” would also suffer such consequences. “What we need then is a dynamic theory that explains movement, gives us laws of movement, and does not get bogged down in the quest for laws of equilibrium which does not conform to reality” (ibid.).

56Prebisch then moved on to present the way the interest rate was conceived as a regulator of production and distribution. First, he showed how businessmen require an incentive to transform techniques to mutate into “Professor Schumpeter’s” classical businessman (Prebisch 1993: 283). Only in this way will he seek out higher levels of saving, while paying a higher interest rate given the proportion of profit achieved in the new productive arrangement. Businessmen therefore require saving to put population growth on a level with a corresponding employment. “Profit” is the businessman’s “prize.” Due to technical innovations, he lowers production costs, which will eventually be matched by other businessmen. This makes “profit” a “temporary” thing. Competition pushes up wages or prices fall, so that “free competition transfer[s] to society the fruit of technical innovations which, during the transition period, is held by businessmen in the form of profit” (Prebisch 1993: 287).

57Once businessmen have made their investments concrete, the intensity of demand for greater savings evaporates, which had previously expanded due to a rising interest rate (a consequence of the businessmen’s earlier “creative” drive). This would in turn generate a fall in the interest rate. But this new equilibrium in the interest rate entails the existence of profits for businessmen because of the new fruits of technical progress.

58Prebisch then outlined a series of scenarios in which businessmen chose to use the same interest rate, without trying to alter it to make new investments. But there will also be businessmen looking for greater investment per head, who would reduce the employed population, and drive up the interest rate. And although, in the latter case, society loses out because “there are fewer products and unemployed people” (Prebisch 1993: 291), businessmen usually choose this situation because it gives them greater incentives to profit.

59But in this case the classical school would say that, if wages are not fixed, their levels will fall, and with it the demand for workers will grow once again, reaching a new point of equilibrium. To put it another way, wages will pay for the costs of the higher interest rate required so that savers supply a growing amount.

60One cannot here talk about a point of equilibrium because, as production is transformed by new technical inputs, the demand for workers will grow, raising the level of salaries, on the one hand, while on the other, reducing prices with greater production. Over time this will reach equilibrium, compelling “profit” to disappear, thus favoring “society.”

61Prebisch concludes that the classics maintain that unemployment is a means of reaching a new position of equilibrium by lowering wages sufficiently for businessmen to (a) obtain the minimum profit to induce them to extend innovations until unemployed is absorbed, and (b) pay the highest interest rate demanded by the market for additional savings (Prebisch 1993: 292).

62It is therefore a temporary impairment which is surmounted when equilibrium is reached, where profit evaporates and the “interest rate falls as the supply of saving rises by virtue of the increase in savers’ income” (ibid.).

63These examples aimed to underscore the process described by classical economists, as they facilitate exposition of the theory of “cyclical movements”: in classical and Keynesian models the “dynamic phenomena of reality whose disturbances prevent” equilibrium being reached are forgotten. Thus nothing prevents in the classical model, in which “businessmen themselves use their own saving for investment,” so as not to resort to the market or putting pressure on the interest rate: “They may lend to each other, and if the marginal yield is lower given the interest rate (once profits are withdrawn), they will prefer to lend their saving” (Prebisch 1993: 296). Keynes’s stance is different because, when there is unemployment, “saving” inhibits accumulation, and therefore the income multiplier. Equally, Keynes overlooks the reasoning of classical economists of the transitory period, in which wages are supposed to fall to achieve full employment. However, as “saving” is a “spontaneous” activity and requires a specific incentive to raise its total amount, there would seem to be no explanation as to how to achieve a lower interest rate to drive up investment.

64Prebisch says that this is where Keynes parted company with classical economics, especially for maintaining that the “interest rate is a conventional phenomenon and is within the reach of the Banks” (Prebisch 1993: 297). It can also be manipulated to reduce it and induce higher investment, which will in turn generate the corresponding savings, “until a new position of equilibrium is reached” (Prebisch 1993: 298). Therefore, the way of thinking about money creation, or its way of inducing a certain interest rate is, according to Prebisch, a “real revolution” (ibid.). Keynes maintained “just the opposite of what the classical school held,” but through the creation of money or “using inactive money, the equilibrium of the multiplier is not reached, instead, we go through the typical phases of the cycle, which neither Keynes nor classical economists have been able to explain because their reasoning is so artificial and arbitrary” (Prebisch 1993: 298).

65According to Prebisch, at the beginning of the cyclical upswing, the supply of saving is meager because recession is still being felt. This means that businessmen do not have the “option” of using the spontaneous “saving” assumed by classical economists unless they raise the interest rate considerably. Instead, a process of money creation by businessmen occurs:

The typical manner of accumulating capital consists in increasing the money supply. The businessman does not go out looking for saving, except to a minimal extent. (…) most fixed capital investment is covered indirectly with a rise in the money supply, not by turning to the market. (Prebisch 1993: 299).

  • 39 “It is through price rises that consumer items are transferred to those responsible for the formati (...)

66In contrast to what classical economists say, the rise in the money supply which makes technological progress possible does not allow prices to come down.39 Such a process involves a wage reduction, but not to be able to pay a higher interest rate in order to cover the growing “demand” for saving through investment, as classical economists believe:

but to compel those paying the highest prices to save, and shift this saving to the businessman (…), it is not the result of a mechanism of incentives and preferences, but of a mechanism of compulsion. This is what happens in the capitalist reality. (…) Except that one does not arrive at the equilibrium of the multiplier, but the typical phases of the cycle. (Prebisch 1993: 300)

  • 40 “And one wonders,” says Prebisch, “whether handing this instrument of inequality from private hands (...)

67The classical mechanism of the transference of savings is alterable and, by not being “complete,” loses the function assigned to it by classical economists. What Keynes advocated is then what happens in the capitalist reality, with one difference: that, instead of reaching a new position of equilibrium, “this way of covering investments” leads “to the typical movement of the cycle that characterizes reality” (Prebisch 1993: 301). This phenomenon also reflects the characteristic of capitalism mentioned by Keynes: “economic instability” and “inequality of distribution.” On the other hand, saving in the “collectivist economy” is identical because businessmen collectively raise prices, or stop them from declining, after bringing about a transformation in production.40

68Prebisch moves swiftly on to describe human history as one in which certain “groups and dominant classes” have made use of a variety of instruments to set up a distribution favorable to its regime: under capitalism the “monetary” instrument is privileged. However, the fact that the process is different under collectivism does not necessarily guarantee that inequalities are abolished. All regimes make use of certain monetary instruments “to favor dominant groups” (Prebisch 1993: 303).

69To summarize, the savings “interest rate” level has a regulatory function both in boosting productive activity to optimum levels, and in the “distribution” of income. There is no room for unemployment in classical economics where, given free competition, the economy tends to the “optimum.” Unemployment is a phenomenon of “system rigidity.” Optimum production requires a certain amount of market savings, and if the amount required is not forthcoming at the existing interest rate, higher costs means a reduction of wages (“temporarily”), to allow businessmen to afford the rate in question. In the classical mechanism, this was achieved by displacing the workforce, which would lead to lowering wages, and paying a higher rate of interest. In the event of lower wages not being accepted, there would be unemployment. Unemployment is a phenomenon of “system rigidity.” But this possibility also finds a place in the classical system (a case only Keynes considers) thus completing the system, and still “remaining classical” (Prebisch 1993: 305), but equally far removed from “reality.”

  • 41 “Income that, at different stages in the process, businessmen pay to the productive factors employe (...)

70Nevertheless, Prebisch would accept the classical postulate about how capitalism transfers the fruits of technical progress, either via wage increases or a price decrease. But “the process by which this transfer has occurred, the time it has taken, and its quantity are, in my opinion, different to those postulated by classical theory” (Prebisch 1993: 311).41

71There was also the classical and Keynesian coincidence in terms of the phenomenon of short-term unemployment. This involved an abundance of manpower and temporary shortage of capital. The explanatory difference between classical economists and Keynes regarding the phenomenon would lie in the “remedy” and its correction: classical economists advocate a fall in wages, while in Keynes it is attempted by “lowering the interest rate.”

72With its conception of money as a mere “veil,” classical theory obscured its prime importance. Classical doctrine’s idea of isolating “money” presupposed that it could be studied independently of productive and distributive phenomena, and that “it intervenes without affecting either the nature of the phenomena or the laws that guide them toward equilibrium” (Prebisch 1993: 317). Money therefore adapts to economic evolution, and with this system in “equilibrium,” it made analysis of the monetary phenomenon superfluous.

73If for classical economists’ inflation was a “pathological” aspect, for Prebisch “certain inflationary seeds” that “upset the tendencies to equilibrium” (Prebisch 1993: 319) were part and parcel of capitalism. It was really their way of making abstractions that led classical economists to certain theoretical errors because they believed that various partial aspects could reach equilibrium in themselves and as regards to the whole. Positing a theory “closer to reality” (Prebisch 1993: 324), Prebisch suggests that the increment in money systematically affects the “three planes” of economic reality (a theory of production and distribution, a monetary theory, and a theory of international trade), identified by classical economists, which culminates in his theory of the “wave movement.” In this case there are “disturbances” that lead to “a series of actions and reactions that are in fact those that give economic phenomenon their characteristic wave form” (ibid.). Their “laws” are different to those that supposedly lead to “equilibrium.” It is the “interdependence” between different economic spaces which makes of the process a wave phenomenon and makes it imperative to discard classical theories.

  • 42 According to Jaime Puyana Ferrara: “It is clear that there was a very solid trust in the analytical (...)
  • 43 Gottfried von Haberler: “the process of monetar y expansion by way of reciprocal stimulation of con (...)

74It is both ironic and unfortunate that Prebisch never considered the Keynes of The General Theory as a possible theoretical ally, but rather as a special case within neoclassical economics, the so-called “neoclassical synthesis.”42 Given the importance of money and money creation in Prebisch’s model (also, paradoxically, a crucial topic in Keynes, as is nowadays being recognized) when it comes to understanding the cycle and capitalism, it is the Keynes of the Treatise on Money whom Prebisch exhibits as constructive for his own theoretical development up till this stage, all the more so because he then identifies him as a follower of Wicksell :43

If we go back to the Treatise on Money, we will find that his reasoning over the economic process and the cycle is fundamentally Wicksellian (…) I would not know how to explain (…) the reason for such an abrupt change in Keynes when, a few years after the Treatise on Money, he switches to The General Theory, forgetting everything he had told us about Wicksellian theory, and the economic cycle to go and get himself hopelessly tangled up in the theory of the multiplier, thus spoiling the value of his contribution to economic phenomena (Prebisch 1993: 326).

75Prebisch then sets about integrating monetary theory and the theory of production. He lays out the shortcomings of the classical theory of money, showing that, faced with an increase in the money supply (assuming the economy is at a point of equilibrium), it is correct to deduce an increase in prices. This is explained by the hypothesis that there is a “proportional relationship between price movement and the amount of money” (Prebisch 1993: 327), which signifies a new “position of equilibrium.” But given the assumption of full exploitation of resources from which its starts, “prices rise or fall” without affecting production. But a disturbance of this nature “makes the amount of businessmen’s profits vary and leads them to expand and contract production, distancing them from the position of equilibrium postulated by classical theory” (Prebisch 1993: 328).

76If full employment of factors is assumed, the increase in the money supply undoubtedly:

pushes prices up: Keynes starts from a position of insufficient exploitation of resources, and assumes that the increase in the money supply only pushes up production without having a bearing on prices, except where the production cost for the diminishing labor yield pushes up prices (Prebisch 1948b in 1993: 330).

77However, this is an arbitrary starting point because, as the “economy approaches full employment, it is due precisely to a series of phenomena in which monetary expansion plays an important part” (Prebisch 1948b in 1993: 329).

78Full employment is something “fleeting” and, in this respect at least, Keynes is closer to reality than classical economists, otherwise productive capacity could not rise. But in contrast, Prebisch holds that growing production involves price rises.

79Classical economists are wide of the mark because the nearest thing in the capitalist reality to full employment is when “monetary expansion” occurs. The Keynesian position misses the point too because, despite assuming the existence ofunused resources, monetary expansion increases both production and prices, and this trend does not necessarily lead to equilibrium.

80The “intimate relationship” between production and the monetary can be visualized, according to Prebisch, in the “the cycle’s upswing,” where it can be seen that the:

increase in the money supply tends to simultaneously expand production and prices (or stops them declining to the extent that they would fall due to falling costs arising from technical innovations, under a regime of free competition). This process gives rise to business profits, and the sequence of actions and reactions. (Prebisch 1948b in 1993: 330)

  • 44 “In other words, that part of the increase in the money supply left in the economic space is higher (...)

81In other words, it is typical of the capitalist cycle. The core of Prebisch’s explanation assumes an understanding the variations and global quantity of profit. Profit is a consequence of the successive processes of money creation used during different periods to form or cover the costs of forming capital. It follows a different logic than the simple use of “savings.” If, for the time being, we exclude the phenomenon of increases of money filtering through to other economic spaces, the function of money left in a given space is to “absorb” the “increase in finished consumer production” (Prebisch 1948b in 1993: 332).44

82The process of the capitalist cycle, according to Prebisch, requires an “excess” of the “increase in the money supply” in relation to the increment of production, which in fact defines its form: prices rise (preventing the incorporation of declining prices as a consequence of productive improvements) under a regime of competition. The “origin” of and reason for the quantity of “businessmen’s profit” is then due to the fact that the “increase in the money supply is thus responsible for businessmen’s profit, and makes its quantity to vary, with major repercussions for the economic process” (Prebisch 1948b in 1993: 332).

83Prebisch thus refuses to accept that the mechanism of “savings supply and demand” assumed by classical and Keynesian theories is so important. The “increase in the money supply” is actually the method used (instead of “savings”) since at the lowest point of the cycle, businessmen find themselves with relatively “large quantities” of money “inactive in their bank accounts” (Prebisch 1948b in 1993: 333); they do not require to use the market for savings which might actually “force upwards” interest rates.” There is then a paradoxical phenomenon at the lowest point in the cycle: savings are in short supply, “but there is an abundance of money (a very important distinction indeed, for, where there is no savings but an abundance of money, money is used by businessmen in substitution of savings to make investments” (Prebisch 1948b in 1993: 333).

  • 45 “but there is one fundamental difference between the value of the products in process that are crea (...)

84When the net increase in the money supply “decreases,” or its rate of expansion decreases and is “insufficient to absorb the increase in production, at the prevailing prices”, the “decrease in prices” is not automatic. There are “obstacles,” otherwise we would be back in the realm of classical economics. The situation assumed by this perspective, where profits have completely disappeared, is a stage unreachable because in the capitalist economy profits are “irreversible,” (Prebisch 1948b in 1993: 336), in other words, they cannot be “shrunk.” This becomes clearer when we are told that profit does not “blossom” in the last stage of production and sale of the produce in question, but that it had been generated previously over several productive stages by various businessmen as it approaches culmination in the final consumer. In other words, in terms of Marx’s metaphor about “the Salto Mortale” of commodities, this event has already occurred before reaching the marketplace (profit is materialized in product prices).45

85Therefore, what halts the continuation of the cycle, is a relatively insufficient demand, a result of a slowdown in the increase in the money supply in terms of the increment in production. As profit, “accumulated by businessmen,” is not “confirmed,” the economy contracts, and the typical phenomena of the “downward slope of the economic cycle” (Prebisch 1948b in 1993: 338) begins. If the net increase in the money supply cannot guarantee the increase of production, according to the value of supply, one cannot turn back and reimburse the profit received: the phenomenon is “irreversible.”

  • 46 “If profits were reversible or only occurred at the final sale, investments could even conceivably (...)

86The growing stocks held by businessmen indicates that it is necessary to reduce production, and thus initiate the cyclical downward trend.46 However, if for classical economists profit (the result of cost reduction) decreases with competition, for Prebisch competition does not have “any influence on the general amount of profits in the economy as a whole”; it is set “exclusively by the difference between the increase in production and that part of the increases in money left in the economic space” (Prebisch 1948c in 1993: 355, my emphasis).

87This does not mean that competition is not important, rather its function is not to “lower the amount of total profits set by other factors, but to establish how profit is distributed among businessmen” (ibid.). The quantity of profit is set by both phenomena: productive and monetary activity -competition does not alter the “quantity nor the variations” but their distribution “within the group of businessmen” (ibid.). On the other hand, profit is “concomitant” to the phenomena of the cycle and “has nothing to do with the free competition” (Prebisch 1948a 1993: 355) of businessmen, regardless of the decrease or increase of the profit which is determined by the competition between them.

88According to Prebisch (1948a in 1993: 357), in the “real economic movement” during the cycle’s upswing, prices rise at the expense of real wages, and their decrease does not obey the classical thesis that this is done to pay a higher rate of interest to savers; rather, it is “to allow businessmen to carry out their own savings with the profit from price rises, that is shifting savings from the rest of society unto the businessmen” (Prebisch 1948a in 1993: 357).

89Conventional theory considers other agents as the sectors that save to undertake technological innovations, supposedly motivated by a higher rate of interest. For Prebisch, different sectors of the collectivity:

are compelled by the system to save more so as to make the investments. These are undertaken yielding fruitions, which is a higher productivity. How is this fruit transferred in reality? In the classic scheme, by the competition, translated in raising salaries or a decrease of prices. In reality, this transference exists with more or less intensity, depending the circumstances but not through competition but rather during cycles’ downward phase. Just as during the upward phase prices rise above nominal salaries, and therefore, real salaries decrease with more or less intensity, and even making plausible investments in a determined cycle without a perceptible lowering of real salaries, which by itself is sufficient for the businessmen given the high productivity increase; during the downswing, the cycle’s inherent forces of its movement generate a lowering of salaries by much less than prices (…) While prices decrease with salaries declining at not the same intensity, the worker gets transferred the fruits of technical progress. Free competition does not perform the distribution role which the classic scheme attributes to it. In synthesis, in reality salaries decline because of price rises, not to draw a higher savings from the high-income sectors by means of a rise in the rate of interest but rather so that businessmen can compulsively accumulate the savings of the rest of the collectivity. (Prebisch 1948a in 1993: 357, my emphasis).

90Prebisch insists that the justification of profits, and the theory thereof, in its classical sense or his own postulates cannot be confirmed given that “objective elements” are few and far between. It is therefore a matter of a political or ethical posture. Its un-demonstrable how far “competition” would keep on lowering the profits of “businessmen who have undertaken technological innovations” (Prebisch 1993: 359) because this “reality” has never existed:

  • 47 For modern discussions of the accounting illusions of the procedures see Mirowski (2007, 2010), Fel (...)

and the theory does not allow us to measure the magnitude of a phenomenon that is not tested in the real world. Nor could we ascertain the scope of the businessman’s incentive (…). We cannot say, for we utterly lack any objective elements for doing so. The only thing we can say at this stage is that profit has a different origin than that stated by classical theory; that its quantity and variations are determined by the increase in money supply and production (…), but we cannot ascertain how far profit is justified or not because, from an economic perspective, we lack the elements of judgment to demonstrate this. (Prebisch 1948a in 1993: 359)47

91Furthermore, if an aliquot of profit is absorbed to varying degrees by most businesses according to their innovations, then we can no longer speak of “profit as the prize of those who have introduced technical innovations” (Prebisch 1948a in 1993: 359) without forgetting the existence of so-called called “free riders.” There can be no such principle by means of which businessmen can exert a proportion of the profits by claiming “to each according to his innovations” as it were.

92Equally, the wave form capitalist reality, driven by the specific structure through which the economic ensemble grows, and through businessmen’s decisions, cannot be justified. We may complain and object or not, but economics, cannot justify the compulsive mechanism of savings in action, given the nonexistence of equilibrium, equality or “optimums.” The only thing which can be said is that average profit is the prize of businessmen who “introduce innovations,” and it is the “minimum incentive that the other businessmen require in order to go on” (Prebisch 1948a in 1993: 360) expanding production. But one cannot ascertain “how far technical competition would change technical results” or “what the minimum incentive of businessmen would be. Only experience will tell” (ibid.).

93Prebisch underlines that, although capitalism requires a “compulsory” mechanism guaranteeing society’s savings during the “cyclical upswing,” its concept of “forced savings” should not be imagined in terms of “plundering” some to “give to others” (Prebisch 1948a in 1993: 360), for on occasions “profit” can be null and void, and it is businessmen who “begin to use increases in money supply which push up prices and move consumer articles from certain sectors to others, generating profit.” Therefore:

what businessmen take is precisely what is due to them, since they were working without profits and now [that] the increase in money supply is engendering them (…) this is the incentive that must stimulate them to introduce innovations and increase production. (Prebisch 1948a in 1993: 361)

94In other words, during the upswing there are transfers, but it cannot be said to “what extent businessmen take from the rest of society what is due to them as a prize or incentive, and what is not due to them” (Prebisch 1948a in 1993: 361). Therefore, Prebisch’s theory does not “enable us to say what profit is justified” either; rather it compels us to undertake a “decision” as to our postures with respect of the “Other” given the existent power asymmetries.

95If we assume that economic spaces are always linked by “influx” and “exit” currents of income, another mechanism presents itself through which income filters, and reduces the “net increase” in money supply in one of those spaces. This is the thesis of “doctrinaire economists” (Prebisch 1993: 367) who, basing themselves on the “brilliant” (“Ricardo’s theorem of comparative costs”) prove what should be imported and/or exported between certain countries, or what should be produced locally. Prebisch, however, holds that this reasoning is only true from the static point of view,” in other words, “when it is shown (…) that the protection of B is an economic heresy: [for] it would use more labor, and primary income would be lost by seeking to produce directly what one can obtain indirectly under better conditions (ibid.).

  • 48 For a presentation in modern vocabulary of the case outlined by Prebisch, see Cypher (1998).

96But in dynamic terms, a certain level of protection between countries A and B can bring about significant changes because a “net loss in A” can be a “net gain for B” (Prebisch 1993: 368). But this will not always be true, as it will depend on how B reduces its “Ricardian loss” (ibid.). And if we also take into account the fact that B has been “subject to the cyclical fluctuations stimulated in A, having achieved a more stable production even if costlier, involves increasing the net gain” (Prebisch 1948a in 1993: 369). Here we are back to the “gold standard” disparities-power asymmetries described by Prebisch early in the 1940s, but with a distinct vocabulary toying with the idea that B represents a “group of countries” (Prebisch 1948a in 1993: 368)48 testing out an industrialization process. He also points out how unjustifiable and untenable is the posture of deploying “the classical theory of international trade” in order to restrict protectionist policies in the B countries, as executed by “United States of North America” (Prebisch 1993: 373), whose violation of “rules of the game” was never-ending.

The Eternal Return: Time and Asynchrony

97This was the context in which Prebisch would make his qualitative theoretical leap, leading us to the Center-Periphery theory he expounded in a series of lectures in México eight months after his course Apuntes de Economía Política (1948d in 1993), the title of which read Teoría Dinámica de la Economía (con especial aplicación a las economías latinoamericanas) (1949a in 1993). If on this occasion Prebisch is slightly less vociferous in his critique of the history of economic thought, he nevertheless salvages and expands on his earlier theory of capitalism and profit.

  • 49 “I will take it that the primary production stage takes place in the Periphery, and the other stage (...)

98The “countries” “found in the Periphery of the world economy,”49 display the effects of the cycle, whose characteristics are:

different from the ones it has in the big Centers. There is a very clear-cut division of functions between Center and Periphery. The theory is to explain the workings of the economy between the Center and the Periphery, and the close connection between the two. (Prebisch 1949a in 1993: 413)

  • 50 Or Jorge L. Borges (1944).

99The notion of “the laws of movement” forced Prebisch to specify his conception of time, and the reason for its effects: the “wave movement.” This could be defined using the narrative which points to “time-lags,” but then we will mislay the essential forces at hand. Forces driven by a desire of profits, a notion of the appearance of profit in a context of power asymmetries (“disparities” is Prebisch’s term), a power whose force generates movement, which in the last instance crystalizes as “time disparities” (power disparities) between the time of the productive process and the time of the circulatory process, generated in the process itself. I believe that Keynes’s notion of “uncertainty” can be subsumed under this general description of the process, since the intervals or the metric of the “units” of time cannot in themselves be deduced in advance: the “construction” of these “units” compose the antagonistic element of the choice-decision of the agents in the context of the (power) asymmetries in question. Hence Shakespeare’s expression “time is out of joint” is an irreplaceable representation.50

100The disparity in these “units” of times is what gives us the cyclical movement with its alternating prosperity and depression. Even “under the most ‘perfect’ free competition and a total lack of State intervention in the economy,” the wave phenomenon will necessarily occur “due to the time disparities” (Prebisch 1949a in 1993: 416). Agents are under real or imagined asymmetric power-time horizons.

101If we accept Prebisch’s assumption that the incomes being paid currently are greater than those corresponding to today’s completed production, then what he is underlining is the asynchronies between the productive and circulatory processes, between the appearance of liquid resources in the marketplace and products, which prevents there ever being a “perfect equilibrium between the total overall demand for income and profits paid, and global supply (the value of the finished items),” for then one would have to assume “equality between the time of the circulation process of income and profits, and the time taken by the entire production process” (Prebisch 1949a in 1993: 418).

102Therefore, the money or the final “demand” paid today relates to an income which was paid long before today’s market transaction, or the actual production in process during the same day. In Armando Di Filippo’s words, there is an “asynchrony” (Di Filippo 1981: 54), and therefore:

there is no automatic mechanism in the economy, however perfect free competition, that assures a perfect correlation between the time of the value formation and the time of the circulation of the income generated in the productive process when these values are created (Prebisch 1949a in 1993: 419).

103Starting out from this asynchrony, Prebisch would present the model of a world economy between the Periphery and the Center, which in turn forced him to explain expanding and contracting phases, in other words, the reason for the changing tempos of the world economy.

  • 51 The curves are shaped like sine waves and slopped indicating the different times at which they begi (...)

104This he attempts in a simple graph (see graphics at the end of chapter): a series of curves which we could think in terms of three rollercoaster wagons starting out one after another and which we will call IP, RI, and PT (“paid incomes = production in process,” “returning income = demand”, “completed production” respectively) (Prebisch 1949a in 1993: 419).51 The brave occupants of the cars IP and PT speed up their movement, amplitude and steepness of their ride which will always be more intense than for those occupying the RI, the “weaklings” wagon.

105These wagons or curves advance uphill in parallel until they reach the points at which they cross paths, or as Prebisch calls them, the points of “conjunction.” It is only at this instance that the wagons’ occupants can wave at each other; from then on, the speed of the trajectory changes. This representation tells us that when the “demand” curve (wagon RI) finally reaches the supply curve or “completed production” (wagon PT), the latter maintains up its upward momentum, whereas demand slows down and bottoms out. Meanwhile, the paid income curve (wagon IP) is still on its way up. Then, as the curves approach their peaks, the representation of the cycle begins just as this curve (IP) is showing a tendency to level its movement, and the wagon’s occupants’ yell. After a “while,” the occupants will be able to wave at each other once again (a new point of conjunction). This is where demand (wagon RI) bumps into “completed production” or supply (wagon PT) once more, which in contrast with the first moments of the expanding cyclical process, demand exceeds completed production.

106This again inaugurates the cycle, and a new line of passengers repeat their rides (those inhabiting the Center can repeat several times in the “period” which takes those in the Periphery to complete just “one” ride), and once again the waves of the occupants as their wagons cross each other: it is the disparity (asymmetry) in the time taken to complete the cycle which explains why they cannot wave at each other at a point of “equilibrium,” bearing in mind income paid and overall gross production.

107When the movement is represented through the respective origins of paid income or demand (Center and/or Periphery) and the respective productions, we can see that, unlike the Periphery, the paid income=demand curve of the Center always “exceeds” completed production or supply: in the Periphery the curve of its demand always displays an “insufficiency” in terms of the completed production curve. The Center’s “excess” is the counterpart of peripheral “insufficiency.” If observed from the Center, the “point of conjunction,” which can be seen in the cycle in its expanding phase, indicates that this “excess” of demand gradually disappears, and is outstripped by the completed production curve, which continues upward as the demand curve flattens away (Prebisch 1949a in 1933: 456). We don’t know in advance where these curves may actually intersect each other, these aspects of the time-power asymmetries, are the flip side of Keynes’s notion of “uncertainty,”, which Prebisch does not discuss, but which requires his ideas on time-power disparities.

108Prebisch starts from the idea that, during the “cyclical upswing,” paid income “for businessmen” is always higher than completed production (the “demand curve exceeds supply”). This process is reversed after the point of “conjunction.” Demand outstrips supply because:

the time of return of the income paid by businessmen is shorter than the time taken by the productive process. Therefore, before completed production flows in, it is outstripped by income. (Prebisch 1949a in 1993: 420)

109It is the decline or the accumulation of stocks which spurs on expansion or contraction, respectively. But completed production or supply always trails behind the contraction of income in both the upswing and the downswing. The conditions of contraction and expansion are generated at these two points of “conjunction”, on the upswing or the downswing. This means that “disequilibrium” is inseparable from capitalism’s growth logic: one “goes alternately from a situation in which demand exceeds supply” (Prebisch 1949a in 1993: 421).

  • 52 “Some time elapses between the payment of income by businessmen (payments to productive factors and (...)

110The “Center” and “Periphery” divide is central to understanding the economics of “our processes.” The origin of a certain demand and the place where certain values are generated has distinct effects for their respective roles due to the varying amplitudes and rates displayed within each economic space. The Center will always have an excess of demand whose shrinkage takes “time,” which depends on the amplitude and rates of the time disparities of the return of income in question. I should mention that my exegesis presents Prebisch’s perspective using terms such as “rate,” when in fact Prebisch systematically avoided the term. Therefore the “rate” of “return” of income towards the Center from the Periphery actually is slower than the converse of the same process.52 In other words, there is a power-time asymmetry (Prebisch uses the term “disparity”) between the periods of production and circulation, and the time for the “return” of income originally paid in the “cyclical Center”:

the return of incomes and demand, paid by the cyclical Center towards the Periphery is extremely long. So that if in the combination of both processes, the time of return shrinks and the time of value formation in the productive process shortens, the excess demand over supply will tend to shrink, because it has been initiated precisely by the contrary phenomenon, that is, by a very much shorter return time than the time of production. (Prebisch 1949a in 1993: 422)

111The “wave form” is a consequence of this “Time” disparity, within and between production and circulation processes. “Within,” because “branches,” “sectors,” exhibit their own specific product-power-time heterogeneous characteristics (asymmetries). On the upswing there is an accumulation of circulating capital investment, while production is in process along with completed production; on the downswing, the circulating capital is liquidated: investment and/or disinvestment, respectively. Just as on the upswing income influx is lower than the payment of income, during the downswing “income return” is higher than the “payment[s] of income by businessmen” (Prebisch 1949a in 1993: 425).

112What “corrects” the timing disparity in question, between the “demand curve” headed to meet the “completed production” curve is the contraction of production undertaken by businessmen when they observe that their stocks are overflowing and start reducing their investment. This will in turn produce the other “point of conjunction,” and inaugurate the cycle in its upward phase.

113Overall, therefore demand exceeds supply, and retailers initially cover the higher demand with stocks instead of putting prices up, by increasing unit sales: prices only rarely depend on supply and demand, according to Prebisch. It is businessmen’s stocks that regulate the market: they simply sell more items. This produces greater demand from retailers on wholesalers, and in their turn from wholesalers on industry, which also ups demand on primary producers. This chain causes the rise in prices, as well as “profits” (Prebisch 1949a in 1993: 432). But when the “market” does not confirm the “speculation” or “anticipation” by businessmen, prices have already incorporated these “profits,” which having been paid previously and cannot be reduced, as assumed in the classical image of the market where supply and demand converge. As prices have already incorporated the values by the time they have reached the marketplace, this involves, as Prebisch insists, an “irreversible” phenomenon (Prebisch 1949a in 1993: 434), which nevertheless still produces fatal contraction effects. As the different productive stages transpire, profit is incorporated into final goods, and the “rigidity” which those values convey induces a cyclical contraction, that is demand becomes “insufficient to absorb supply after the point of conjunction” (Prebisch 1949a in 1993: 433). Therefore, it is the “disparity of time” between the process of return and income, and the outflow of production which produces the “disequilibrium between demand and supply” during the cyclical upswing.

114Let us not forget either that in this illustration Prebisch claims that the most usual thing in cycles is the relatively faster growth of profits in the Periphery with respect of those of the Center:

How do we prove this? It is an established fact that, in general, prices of primary products rise faster than those of finished products, indicating that the profit incorporated into the primary product has grown faster than that incorporated into the finished product (Prebisch 1949a in 1993: 434).

115This occurs because, between the different stages of the manufacture production and sale, each agent buys the goods at one price and sells them at another with a given “unitary” profit. But through such buying and selling, businessmen pay their peers their respective profits and other income, while production has yet to arrive. It is the stocks in the respective agents’ warehouses that are sold at a price including the profit, driven by the “demand” generated by the ongoing productive process. This explains why the “value of supply” increases at each stage, which in turn drives the increasing demand. The profit arising among the various businessmen performing these alternative activities in turn make possible an increase in demand. Each productive stage raises demand above the immediately previous one, and so on.

  • 53 “In the partial phenomenon -an industry or company- we can dismiss as insignificant the impact on d (...)
  • 54 On the next line he says: “It is obvious, moreover, that if this increase in demand were not to var (...)

116There can therefore be no “stability of demand” (Prebisch 1949a in 1993: 436);53 demand is always contingent, which lends capitalism its typical “wave” form. Even in the idyllic scenario of a perfect market with no “rigidities,” it would be the time element in terms of process and the “timetable” to generate a given production, which ultimately defines the existence of profit and explain its total quantity. And since the process of production or response to a given stimulus is slower in the Periphery than in the Center, the quantity of “profit corresponding to the Periphery will be less than for the cyclical Center” (Prebisch 1949a in 1993: 440).54 This is due to the fact that, in terms of the whole picture (Center and Periphery), lower unit profits are not necessarily at odds with a higher quantity of the total profit.

117To put it another way, when the Periphery itself shortens the time response to demand from the Center, it does not necessarily mean that “total quantity of profit” declines, as this process would drive businessmen to cover demand more quickly, and push up their own production and profits, generated by their payments to productive factors and other businessmen. This makes a lower profit per product compatible with a higher total quantity of the profit.

  • 55 “the typical form of capitalist accumulation (…) Is the result, therefore, of an inflationary press (...)

118On this occasion, Prebisch no longer speaks of a “compulsory mechanism” for savings. He continues to question the traditional “theory” on the subject and how it would shape the “interest rate,” but maintains the idea of the “inflationary” dimension in order to understand the resources used by businessmen to start the phase of the upward cycle, as well as its negative social distributive consequences.55

119Prebisch wants to show that it is “increases in the money supply” that makes capitalism work, since the monetary volume is flexible. “Money” then is supposedly an endogenous creation of companies, and it is therefore businessmen who are the main agents in explaining the operation of capitalism, and its characteristic wave form. It is obvious by now that the “Wicksellian” notions on the “natural rate of interest” have been superseded in Prebisch’s narrative.

120Therefore, investments are started with money created by the banking system, or which has been inactive and has been accumulating in businessmen’s accounts. During the cyclical upswing, businessmen offload their savings, or turn to the banks, and during the downswing, they do the opposite, canceling debts and storing up circulating capital to be used during the cyclical upswing. In other words, for Prebisch savings are performed in the downswing since during the cyclical upswing, the phenomenon signifies an expansion of future productive capacity and profits, a process which culminates once “fixed capital necessities” have been covered and the rate of growth declines with respect to profits, inducing businessmen instead to invest a portion of the profit “in circulating capital. This is enough to lead us to the point of conjunction, and to unleash the phenomenon of contraction” (Prebisch 1949a in 1993: 449).

121The notion of the cycle then involves a series of articulated activities between Center and Periphery. Businessmen in the Center make resource payments in the Center and to the Periphery (see graphics at the end of the chapter). This entails resources leaving a certain economic space, and due to the nature of the Periphery they take much longer to return to the Center than the income and profits paid within the Center itself. And we know that during the upswing businessmen pay more resources and profits than they will recoup in the future, but “accumulation” occurs because they are manufacturing articles in process, and paid resources (two modes of establishing circulating capital). However, in the downswing “they liquidate articles in process” and “store money,” for any future productive resources or profits.

122In both contexts (Center and Periphery), profits grow faster during the cyclical upswing than “productive factors’ income,” thus explaining the rise in prices. But just as profits “grow faster in the upswing,” “they fall faster during the downswing” (Prebisch 1949a in 1993: 452). However, the “distribution of profit over the different stages of the productive process does not occur proportionally to income” (ibid.), and profits in the Periphery grow relatively faster than in the Center.

123The movement of the capitalist cycle, regardless of its origin, the process inevitably leads to the points of “conjunction,” and the curves between demand and supply intersect and the contraction process initiates.

  • 56 “I maintain that within the same system there are forces which tend to enlarge the deficit or insuf (...)

124During the upswing, an “insufficiency” of demand concerning supply or finished products always manifests itself. The functioning differences between the demand and completed production between the Center (“excess”) and the Periphery (“insufficiency”) can be explained by the fact that the velocity of the rate of “income return” in the Center is relatively much lower than in the Periphery but with time, the gap between peripheral insufficiency and Center’s excess tends to grow wider.56

  • 57 “Until its quantity has created an insufficiency similar to the excess” (Prebisch 1949a in 1993: 46 (...)

125If we think about the hypothesis that profits are generated relatively faster in the Center than the Periphery, a relatively larger quantity of profits will go to the Periphery. But meanwhile, businessmen go on demanding higher levels of produce due to the existing surplus demand, and simultaneously reciprocally increasing profits and demand. This displacement of profits to the Periphery eventually determines the peripheral “insufficiency” and the Center’s “excess” to converge.57

126According to Prebisch, it is the “spontaneous play of the system” (Prebisch 1949a in 1993: 461). It is not a point of static equilibrium; it is a point of conjunction. It is the “equivalence of magnitudes” of pressures exerted by profits towards the Periphery. There can be no convergence of demand and supply because then that would mean there would be no profits, least of all the “undulatory” phenomenon of capitalism.

  • 58 “I believe that these disturbances that intervene and prevent it attaining equilibrium, which lend (...)

127“Dynamic” equilibrium and the “succession of dynamic equilibriums” are equally impossible (Prebisch 1949a in 1993: 463), as it would presuppose supply closely shadowing the demand curve, where in fact the point of conjunction means that the demand curve begins to lose speed or bottom out. Or else his “model would be destroyed,” and “classical theory” vindicated (Prebisch 1993: 462).58 Because the dynamic element comes from the decrease or otherwise of “stocks,” forcing businessmen to invest or disinvest, “the idea of equilibrium with a possible increase or systematic decrease in stocks” is untenable. “The two conditions repel each other” (ibid.).

128To demonstrate the systematic and circular accumulative disequilibrium of capitalism between the Center and the Periphery, Prebisch reconceptualizes his earlier idea of the coefficient expansion into exit coefficient. He presupposes a kind of circulatory production process during which, as production expands and is replicated, it reincorporates part of its income to amplify the established capacity. The Periphery “returns’” its income towards the Center in a much more time-consuming interlude than the other way around, but since both entities are divergent in terms of their respective “exit coefficients,” there is no chance of their respective supply and demand curves ever catching up to each other simultaneously. This is why Prebisch posits that “excess of Center demand” and “insufficiency of peripheral demand” are parts of a single system. To each unit growth of the economy (central or Periphery), we should add the outbound proportion of income, as well as any investment necessary to keep steady their respective growing capacities, therefore the distinctive outflow, or “influx coefficients” (Prebisch 1949a in 1993: 466). This movement opposes the possibility that their respective demand and supply curves would coincide, because of their respective “exit coefficients.”

  • 59 “What happens while the peripheral insufficiency does not coincide with the Center’s excess? There (...)

129Any race to intensify growth or demand from either sector will eventually bring about the system to the point of conjunction (intersection), and the respective contraction inaugurating the next cycle. What conducts the system towards to the point of conjunction and contraction is its virtue, namely, profit. As stocks are accumulated in the Center, businessmen react in order to lower the proportion of stocks, which in turn gradually reduces profit per unit among various businessmen, until demand meets supply the “point of conjunction” (Prebisch 1949a in 1993: 461),59 that is “completed production”.

130Nevertheless, the “peripheral insufficiency” grows faster than the “excess of the Center’s demand” due to the respective asymmetric exit coefficients, or their respective income circulating velocities. This causes the gap between the “insufficient [demand] of the Periphery” and the “excess of the Center’s demand” to widen, which in turn brings about the conjunction initiating the process that leads to the system’s contraction.

  • 60 “The smaller the exit coefficient of the circulatory mass is, the higher the magnitude of income re (...)
  • 61 “I believe that where there are two diverse exit coefficients, it is quite impossible to reach equi (...)

131This is precisely what prevents theorizing about the growth and circulation of income between the Periphery and the cyclical Center in terms of “dynamic equilibrium” :60 it will simply never be reached.61 If different economic spaces grow at distinct time rhythms’ disparities, a change in exit coefficients, or an acceleration of peripheral growth would not alter the proportional asymmetry of income which each of the spaces “retains” for itself.

132In a timeless world it is possible to observe positions of equilibrium between the mass of income and production. However, businessmen would then be none the wiser as to the levels of accumulated or declining stocks. For the same reason, “Centers’s excess” “dies out before insufficiency,” which is a consequence of the greater slowness of the return of income towards the Center. If we postulate a growth or greater productive expansion in the Periphery, autonomously from the Center and equalize the income magnitudes, then we would move from a situation in which a “net [excess] of demand” reign to one where a “net insufficiency of demand” predominates. This would in turn involve an accumulation of stocks and reduce production, unlike the reverse situation in which businessmen continued expanding production given a surplus demand.

133Only by neutralizing the “action of stocks on demand” could a “dynamic equilibrium” (Prebisch 1949a in 1993: 470) perspective be made viable, but impossible in practice since it is the mechanism that makes the whole productive apparatus work, starting with the reactions of businessmen themselves. But in the event that the tempo ofproduction, or the farsightedness of businessmen begins to slacken, circulating capital will accumulate to be used during the recovery, or the start of the cycle in its upward phase.

134During his account, Prebisch perceived among his audience a near frenzy state, reacting to the merely “passive” function of peripheral economies with respect of the Center, insisting on raising the theoretical possibility of an autonomous process of expansion and growth. Prebisch would later try to show that such a process is absurd.

135He introduces a series of alternatives (such as higher levels of investments or loans in the Periphery) to see whether the point of conjunction could thus be avoided or postponed for a while at least. Now, a higher quantity of investment in the Periphery (due to whatever mechanism) would speed up the encounter between demand and supply (the point of conjunction). Another theoretical option for reaching the point of conjunction is to examine an atypical case where income grows at a faster rate during the upswing in the Center rather than in the Periphery. Here, unlike the typical case, the “excess of Center’s demand” and “peripheral insufficiency” (by definition the point of conjunction) cannot be made to coincide. But although rising demand will take its course, and exceed supply, it cannot go on rising ad infinitum. The point of conjunction will be reached only if the tempo of fixed capital investment grows faster than the rise of profits. This involves higher levels of fixed capital investment, which in turn implies a growing proportion of savings. This would considerably slow down income return, which means that the “excess of the Center’s demand” curve begins to level out, eventually coinciding with the rate of “peripheral insufficiency” (the “point of conjunction”) “via another path.”

  • 62 “A higher retention of income has been developing. This means a slower return, and although the dis (...)

136If in the typical case, the point of conjunction was reached because the “insufficiency of peripheral demand grew more intensely” than demand in the “Center,” it is now “Center’s demand” which slows down relative to the “Periphery.”62

  • 63 “It creates its own income in a much greater quantity than the Periphery would need in its passive (...)

137At his audience’s request, Prebisch examines a case when the Periphery, acting autonomously, generates its own process of economic expansion in an attempt to break away from its merely “passive” function.63 Such action would only “delay” the meeting of the supply and demand curves (the point of conjunction) in the cyclical Center, in turn generating full employment and a process of inflation. We would be faced with an event in which the cyclical phenomenon and the inflationary phenomenon would converge, with much more profound negative effects than would occur during any strictly cyclical process. But in fact, these considerations only change the “amplitude” of the cycle, not its characteristic “wave form”: “it has always risen only to fall again” (Prebisch 1949a in 1993: 478). See graphics at the end of the chapter.

138Apparently then, the adjustment mechanism for the “phenomena of Center and Periphery” would not change, regardless of the variables considered, precisely the phenomena that prevent “equilibrium” being achieved: the existence of time. When Prebisch describes the depressive effects of the cycle after the point of conjunction, demand does not “exceed” production, and therefore the accumulation of “the circulating capital” is “excessive” (Prebisch 1949a in 1993: 485). Then the problem of liquidating stocks arises, which generally exceed the level necessary to deal with the “demand set by the point of conjunction” (ibid.) and it’s when businessmen react:

leading us back to recovery, for, while businessmen see themselves accumulating passive stocks, it is natural for them to try to lower production, but when they see that their stock in existence is not accumulating before the point of conjunction, if they don’t wish to be deprived of their existence in time, if they wish to deal with the volume of demand reached, they will have to go back to paying higher incomes superior to the completed production, thus initiating the system’s recovery. (…) Supposing that, for whatever reason, instead of returning the income during the cyclical downswing in the way we have seen, the Periphery is slower to make repayments making the devolution with less rapidity (…) what would happen? Income return would be less active, and instead, the point of conjunction where we marked it, would be found much lower down. (Prebisch 1949a in 1993: 486)

139If, during the depression, instead of offloading stocks or circulating capital, the Periphery is also able to raise its import coefficient, and prolong the repayment of income towards the Center by some mechanism, then “supply and demand” would cross much earlier (the “point of conjunction”).

140But this is something that has never actually happened. According to Prebisch, the history of inflationary phenomena is originally the result of the Center’s monetary practices, not the Periphery. No matter how long it goes on, the inflationary process will eventually produce the “point of conjunction”:

Inflation means an intense and increasing accumulation of profits in the cyclical Center. A portion of those profits is made over to the Periphery, all the more so, the faster the rise in profits in the Center is, and the longer the time the productive period in the Periphery. This would tend to make simultaneously a parallel development of production in the Periphery increasingly difficult, and neither would the growth of the quantity of the outflow of profits towards the Periphery such as to make peripheral deficit encounter, sooner or later, the excess. (Prebisch 1949a in 1993: 487)

141The idea that this process would only stop because there was “full employment” was for Prebisch a theoretical madness simply because while the inflationary process is at full tilt, businessmen will go on investing and receiving profits in view of the rise in prices. Circulating capital will grow, and as in any expanding process, will require increasing sums of money to enlarge the circulating capital/stocks. But they will also have to use their profits to make purchases and investments in the Periphery, which means in fact that the “excess of cyclical demand” will be reduced. This will increase the “insufficiency of peripheral demand” (Prebisch 1949a in 1993: 488), and “inevitably” produce a point of “conjunction after which the contraction of the system will supervene” (ibid.).

142In his last lecture given registered on the March 1, 1949, Prebisch promised to return and delve deeper into certain aspects, introducing “world gold production and the tempo of technical progress” into his model (Prebisch 1949a in 1993: 488). But Prebisch did not keep this promise, for he left for Santiago de Chile the next day as consultant to the ECLAC, where he embarked upon other reflections of a theoretical and practical nature.

143I have tried here to describe a period in Prebisch’s critical thinking on economics of a specific period. Even during his lifetime, certain devotees or detractors of Prebisch’s work have made our protagonist say many things, I have, as far as possible, adopted the strategy of presenting his ideas by means of his own words, however paradoxically that sounds to non-Spanish speaking readers. The development and conclusion of his ideas on the world economic cycle during this period involved setting aside certain ideas that he had initially espoused. His political radicalization is the flipside of his theoretical reconstruction. I believe the history of Latin American economic thought has not carefully examined this period in Prebisch’s intellectual development, and his further rise to fame after ECLAC’s reunion in Habana distanced him from making such reflections.

  • 64 See the recent account in De Vroey & Hoover (2004).

144However, certain faint conceptual traces passed into the phraseology of his following texts at ECLAC, and this makes Di Filippo’s work (1981) even more worthy. In just a few sentences he transports us to Prebisch’s texts and ideas of a quarter century later, around 1975, when he began work on what would become Capitalismo Periférico (Peripheral Capitalism). Once retired from his international posts, Prebisch crossed the equator to return to tropical lands, and took his manuscripts of the period we have been analyzing out of the deep freeze. Unfortunately, in the Western-centric academy Keynes work as the IS-LM64 instigator, seemed to corroborate Prebisch’s critique and distance him as a potential ally against economic orthodoxy. Their notions on money creation are close to the versions about endogenous money currently being resurrected (Dow 1997, Cutler et al. 1978), which resuscitates Keynes himself. For Prebisch, as we have seen, Keynes remained a hopeless case.

145Discussion of the economic cycle (Kuznets 1930), standard for the course back in those days, and its stochastic nature (Mirowski 1989, 1990, 1991a, 1991b), would also again become part of the intellectual daily life. I am not referring to the “real business cycle,” but Ormerod’s critique (2000) of it demonstrating its theoretical incongruities (a version that is currently dominant in certain schools of economics in the United States). Also, those who feel that the “equilibrium” or “disequilibrium” issue is a myth made up by Prebisch, should remember that the economic establishment had considered an attempt to “stabilize” Weintraub’s “dynamic” (Weintraub 1991: 123) to be their main theoretical task, since the notion of “equilibrium” in neoclassical economics has always been highly “unstable” (De Vroey 1999), if not impossible (Nadal 2004).

146Only time will tell if economics will again be thought of in historical and institutional terms (Hodgson 2001, Furtado 1983, Mallorquín 2001) as Prebisch highlighted throughout his life, an attitude clearly visible in his descriptions of the action of businessmen in their zeal for maximum profit. What better than to return to the past and some of its thinkers in Latin America, who gathered together in the Golden Decade of ECLAC (1950- 1960), providing then as today, theoretical and practical alternatives for economic development in a region facing a legacy of economic problems bequeathed by latter day neoliberalism.

Based on Prebisch 1949a in Prebisch 1993: 419.
IP = Paid Incomes; PP = Production in progress; PT = Completed Production; IR = Returning Incomes; D = Demand; X = Intersection; Prebisch uses overwhelmingly the term “conjunción” which grammatically has the role to join two words, (i.e. “and”), on occasions, we also find “inflexión” (inflection).

Based on Prebisch 1949a in Prebisch 1993: 484.
I = Total incomes paid, Center and Periphery; P = Production; D = Demand, (D = R) R = returning Incomes. Horizontal lines shows expenditure and circulation in the Periphery during the upswing. Vertical lines indicates circulating capital held in the Periphery during the upswing. After point A (supply and demand intersect), starts the downswing of the cycle, and incomes paid initiates their return to the Center.


1 The title of the original text, El desarrollo económico de América Latina y sus principales problemas (The Economic Development of Latin America and its Principal Problems) is not qualified by the term some (“algunos”) when cited by many specialists. Did Prebisch himself change the title, or was it due to an error that could not be altered, given the lightning speed with which it was published everywhere? I am in debt to Dr. Víctor Urquidi for giving me a copy of the original manuscript.

2 I would like to thank Edgar Dosman for a copy of this 10-page manuscript.

3 I am grateful to Dr. Washington Ashwell, who kindly sent me a copy of the manuscript.

4 “Which does not mean he might not be right” (Prebisch1944b in 1991c: 198).

5 An example should it be needed: here the topic discussed is the tendency to disequilibrium in the “balance of payments” in 1936: “I am referring to the fall in international prices. If international prices go on falling year after year, the balance of payments, which tends to balance out after the first fall, is again unbalanced with successive falls (…) The case I am considering is different. It involves the hypothesis that price levels fall continually over a number of years” (Prebisch 1991c: 566), “setting off a new wave of gold exports. That is the characteristic feature of this phenomenon” (Prebisch 1991c: 569).

6 There is no better account of these years than Celso Furtado (1988) and Burger (1998).

7 “It was the appearance of H. Singer’s work on the terms of trade that enabled people to think globally about the problems of underdeveloped countries, or about the global terms of worldwide exchange between primary and industrialized products, which is translated into global terms of trade. Singer took the relationship between the developed and undeveloped countries as a central hypothesis. It was a description of imperialism under another name, in a manner of speaking. (…) Prebisch read Singer’s text and it must have had a great effect on him because, after tidying up the first version, he worked intensely on a second, introducing a quote by Singer, and the system of exchange data” (Furtado 1998: 85-86).

8 On the vicissitudes of Singer’s article, see Toye (2003).

9 Dag Hammarskjold had said: “Indeed, Prebisch is skating on thin ice, but I fully support him” (Magariños 1991: 144).

10 The stance of Conversaciones (Prebisch 1972a) and El patrón oro… are similar: “to perfect,” “to correct,” “not to destroy” the gold standard in “our countries” (Prebisch 1991c: 233).

11 Elsewhere Prebisch says: “As a system the gold standard has been automatic only for certain countries. It was not so for England, who managed it until the First World War. The concept of the gold standard’s automatism is a dogmatic aberration of the kind so frequent in economic matters. (…) the gold standard has been a highly directed system, not by a single authority, by one government, but by a group of bankers led by the Bank of England (…) directed (…) from the standpoint of British interests, and even more so from the standpoint of a social class with great economic and political influence in Great Britain, and extremely concerned to maintain domestic monetary stability, despite the consequences that might result from it for international economic activity” (Prebisch 1944c in 1991c: 317). At around the same time, Nurkse was saying something similar, but from a different theoretical perspective: “The policy of offsetting is intended not to raise total spending but to prevent it from falling. (…) Yet the amount of imports, and hence the gap in the balance of payments, will necessarily be greater than if the country allowed depression to spread to its whole domestic economy. (…) Under the gold standard, not only were things expected to take their natural course, but a country in the situation described was even expected to accelerate the spread of depression by pushing up its discount rates and contracting credit as gold flowed out. No doubt the gold standard’s ‘rules of the game’ tended to reduce the loss of gold to a minimum; but they did so only by speeding up the propagation of depressions. The offsetting procedure described is precisely the opposite of that which would be called for under the gold-standard’s rules of the game. (…) Even in the best days of the gold standard, of course, the rules of the game were not always strictly observed. There is some statistical evidence of “neutralization,” on the part of the Bank of France and the Bank of England in the nineteenth century. In the inter-war period neutralization of gold movements by central banks became, in fact, the rule rather than the exception. (…) Though neutralization by central banks was very common in the inter-war period it was nearly always frowned upon; it was widely regarded as wicked and disreputable behavior. (…) it is time to accept it as a normal and respectable procedure” (Nurkse 1945: 11-13).

12 We should stress that Prebisch states that this is “a hypothesis that should be checked” in other words, “the nature of the income circulatory process at the monetary Center to and from the countries of the Periphery [which] would explain by it [self] the generation of the cyclical global process, with no need for any other reasons, which is not to say no other extremely important reasons exist” (Prebisch 1944c in 1993: 30).

13 And the fact that the Bretton Woods Meeting and Agreements had already taken place. See Mikesell (1994).

14 “When the personal incomes of the employed population rise -especially those in the relatively high-income bracket- they do not consume more food, but greater quantities of manufactured products” (Prebisch 1944c in 1991c: 271).

15 A year later Prebisch said it was not necessary to look for “two orders of theories”, a cycle in the Periphery, and another in the industrial Center, “as two phases are involved, two different aspects of the same international phenomenon. But it is inadmissible to apply the interpretation of one phase to the events of the other, to the obverse, (…) domestic and international economic activity manifested in a continuous process of circulation of income” (Prebisch 1945 in 1991c: 446).

16 “The time in which the process is completed -its duration- is of fundamental importance, and the explanation of this point is of interest in gaining a better grasp of the international mechanism and its flaws” (Prebisch 1944c in 1991c: 280).

17 “The incremented income which stays in each country is proportional to its profits [réditos] (…) “it can be proven that the increment of income which stays in each country at the equilibrium point, have between them the same relation (…) That is, the incremented original income is distributed proportionally to the profit of distinct countries considered” (Prebisch 1944c in 1991c: 294).

18 “Therefore, as gold is distributed worldwide according to countries’ incomes and not according to their foreign trade, countries with lower returns and higher import coefficients are put in a much more vulnerable position in terms of fluctuations in foreign trade and balance of payments.” (Prebisch 1944c in 1991c: 296).

19 “There exists therefore incompatibility between an expanding domestic policy or maintenance of domestic economic activity in a downward phase caused by falling exports, and the monetary stability inherent in the gold standard regime” (Prebisch 1944c in 1991c: 315).

20 “The economic cycle is thus manifested in an alternate movement of income, contracting and expanding in the circulatory process. (…) Whatever the origin of domestic income, it gradually evaporates and is transformed into income of other countries. (…) The extent of which this substitution takes place has great influence on the evolution of domestic economic activity” (Prebisch 1945a in 1993: 217).

21 “I can thus prove numerically what I have so often said, namely, that in the downward phase, imports fall less steeply than exports. In this way, the remainder of money is consumed, or the gold and foreign currencies from the positive balances of the preceding phase -which amounts to the same thing in this case” (Prebisch 1944c in 1991c: 354).

22 I translate “coeficiente de salida” as “exit coefficient,” and its contrary movement (“coeficiente de afluencia”) as “influx coefficient.”

23 “Keynes has also left behind practical solutions that are independent of his theory and that can be admitted or rejected, while wholly abstaining from it. These practical solutions are of great importance and have not yet been superseded. (…) You will say that there is contradiction in my theoretical position in judging Keynes, and my respect for some of his practical propositions. There is no such contradiction, since accepting an interpretation of reality totally distinct from Keynes’s own does not imply seeing the positive side which in the absence of a better one, certain of his practical propositions could have, within certain limitations” (Prebisch 1948a in 1991c: 505).

24 Much of Prebisch’s disparagement with Keynes has also to do with the then ongoing process of the construction of the famous IS-LM “workhorse” that was to dominate economics in the Center countries. Hicks´s original diagram posed the vertical axis signaling interest rates and the horizontal one as total income with a downward-sloping curve (IS) representing investment in terms of changing levels of interest rates, and savings in terms of income, which is intersected by an upward-sloping curve (LL) for the money mass demanded which is presumed fixed, subsequently redefined as LM; see De Vroey and Hoover (2004), for more details see chapter “How Economics Forgot Power”.

25 Introduction to Keynes.

26 “Thus, our author states it categorically, though offering no arguments to prove it other than the ones he has just succinctly mentioned” (Prebisch 1947 in 1991c: 476). See the end of the first paragraph of the Introducción a Keynes (Prebisch 1947: 57). It is no coincidence that this jab appears at this juncture of the argument, since it relates to the theme discussing the multiplier. But as we will see, Prebisch’s critique of Keynes takes another spin in subsequent years: “his general theory of employment seems to unfold upon a plane independent of the cyclical movement” (Prebisch 1993: 260).

27 “[Which] I intend to consider briefly in a more encouraging work on the Keynesian system and the economic cycle” (Prebisch 1991c: 454).

28 Introducción al curso de dinámica económica (1948a in Prebisch 1991c) was the first chapter of Apuntes de Economía política… (Prebisch 1948d). All the following chapters appear in Prebisch (1993).

29 As mentioned in the previous note, Apuntes de Economía Política (1948d) has been published in parts in Prebisch 1991c and 1993.

30 “Building on thin air” (Prebisch 1991c: 497).

31 “Whence the crisis in political economy, and whence its ineptitude at explaining the form and origin of economic phenomena” (ibid.).

32 “A spontaneous logical result of the way businessmen act” (Prebisch 1948a in 1991c: 502).

33 Further ahead, he was saying the same thing: “the continuous succession of disequilibriums’” (Prebisch, 1949a in 1993: 413). Prebisch claims that, “Of course, no classical economist, ancient or modern, holds that in reality there are equilibriums. What I do want to say is that the system by its own forces that move it, tends toward equilibrium; but that, naturally, external disturbances always intervene to prevent it attaining this equilibrium. I maintain that these disturbances that intervene and prevent it attaining equilibrium, which lend the system its characteristic wave pattern stem from the interdependence of the curve” (Prebisch 1949a in 1993: 462). See graphics at the end of the chapter. For Ralph W. Souter equilibrium involves, “the conception of a continual attempted adaptation toward real equilibrium which is continually thwarted in some degree by the inequality of time-coefficients plus the constant emergence of new evolutionary changes” (Souter 1930: 82).

34 “The very economist who speaks of typical equilibrium has devoted himself (…) to the study of the economic cycle and flits from one thing to the other without the slightest theoretical scruple. (…) in a first part, they have expounded their theory of equilibrium for us with great doctrinaire rigor, and in a chapter on the cycle expound the theory of disequilibrium for us without any concern for the fact that they cannot combine two fundamentally different theories; if the cycle were a mere accident occasionally registered in the economy, it would be possible to combine them. But as the economy’s way of moving is the cycle, the theory of economic movement can be nothing but cyclical” (Prebisch 1948a in 1991c: 502). Possibly one of the best discussions of this set of issues is found in Mirowski (1985).

35 It was Prebisch himself who called for a “respectful revision of classical theories” (Prebisch 1993: 325).

36 “A scientifically satisfactory economic theory would have to explain cyclical movement for us because the type of movement presented to us by reality is a wave pattern, [as well as] the reason [why] the capitalist economy does not take full advantage of its productive factors, and at the same time give us an interpretation of the periodic phenomenon of unemployment” (Prebisch 1993: 303).

37 “Time is a fundamental element of reality, it is not possible to eliminate it arbitrarily as Keynes does, nor to view it with the subterfuge of classical economists. A good deal of the investment that has been -and still is being- made throughout history has been via a mechanism different to the supply and demand for saving; and a good deal of the saving invested is not the result of what society may choose to do spontaneously according to one of its inclinations or tastes, or the interest rate” (Prebisch 1993: 278). I translate “artificio” as subterfuge.

38 “I call the interest rate a logical subterfuge produced by classical economists to solve the problem of time because, after long reflection and observation of the facts, I have become convinced that the interest rate does not in fact play the regulatory role in production and distribution that classical economists ascribe to it. (…) the formation of capital in society is quite different, and the interest rate only minimally plays the regulatory role ascribed to it by the classical school. (…) If the interest rate does not perform the functions in the production and distribution of products assigned to it by traditional doctrine, the problem then arises of substituting it with a theory different to the Keynesian one, for such are its inconsistencies that it is not, in my opinion, possible to use Keynes’s theory even as an instrument to explore reality, since it also has serious defects” (Prebisch 1993: 278).

39 “It is through price rises that consumer items are transferred to those responsible for the formation of capital. The saving market has only a supplementary function. The increase returns to businessmen in the form of profits, thus again performing its function in the accumulation of capital” (Prebisch 1993: 300).

40 “And one wonders,” says Prebisch, “whether handing this instrument of inequality from private hands to the hands of the State is enough to lead us to the conclusion that inequality has disappeared” (Prebisch 1993: 302).

41 “Income that, at different stages in the process, businessmen pay to the productive factors employed by their companies” (Prebisch 1949a in 1993: 417).

42 According to Jaime Puyana Ferrara: “It is clear that there was a very solid trust in the analytical instrument available, particularly in the formal interpretation of Keynes, as outlined initially by John Hicks and Alvin Hansen in the late 1930s. It was mainly through this interpretation, better known as the IS/LM model, (…) that key aspects of Keynes’s thinking were eliminated, making him a very special -almost aberrant- case in a much broader theoretical approach whose roots are deep in general Walrasian equilibrium. (…) It comes as no surprise therefore that this construction has been christened “neoclassical synthesis” (Puyana 1992: 25). See also Guillén (1990: 17).

43 Gottfried von Haberler: “the process of monetar y expansion by way of reciprocal stimulation of consumption and investment -the so-called Wicksellian process” (Haberler 1937: 306). A good synthesis of Wicksell’s ideas can be found in Pribram: “Wicksell’s dictum that any theory of money worthy of the name must be able to show how and why monetary or pecuniary demand for goods exceeds or falls short of the supply of goods in given conditions. The consideration implied a repudiation of Say’s law of markets, since the validity of that ‘law’ was predicated on the assumption that demand for and supply of money were equal. (…) Wicksell questioned the traditional relationship which had been established between the volume of money and the volume of exchange transactions as a means of defining the price level. In support of these doubts he pointed to the observation that the loan rate of interest had been low during periods of low prices -periods of limited supply capital supply -and had been high when the supply of capital was obviously abundant and prices were rising. (…) Wicksell attack[ed] (…) the almost generally accepted ‘banking principle, ’ according to which the supply of money was automatically adjusted to the requirement of the economy when the prevailing rules of short-term lending were strictly observed.” (Pribram 1983: 323)

44 “In other words, that part of the increase in the money supply left in the economic space is higher in the cyclical upswing than the amount of the increase in production which is gradually stored from new investment” (Prebisch 1993: 332).

45 “but there is one fundamental difference between the value of the products in process that are created at each stage, and their respective income. The value created at each stage is not the value of an immediately consumable product. (…) It therefore involves a series of values that are gradually added, but that are not immediately consumable until the productive process ends. However, the income businessmen pay one another and those paid by the productive factors at each of the stages, are immediately expendable, and can immediately be transformed into demand for finished articles. The producer of raw materials paying income to factors and receiving profits can spend this income immediately, long before the final production of consumer items manufactured with the raw materials that he himself produced has appeared in the marketplace. (…) In this fundamental difference between the nature of the created value, which is not immediately consumable except at the end of the process, and the nature of the income paid, which can immediately be transformed into demand, in this difference between the two phenomena [on the one hand, production, on the other, circulation] lies the germ of the wave movement.” (Prebisch 1949a in 1993: 417). “There are various businessmen distributed across the various different phases; and no one waits for the final sale to liquidate the profit by distributing it among participants in the process. Businessmen pay each other profits in advance of the final sale; (…) set precisely by the duration of the process. We are again faced with the time factor” (Prebisch 1993: 338, my emphasis).

46 “If profits were reversible or only occurred at the final sale, investments could even conceivably fall without causing disturbance, since prices and profits would fall as increases in money supply that had earlier made both rises were reabsorbed” (Prebisch 1948a in 1993: 339).

47 For modern discussions of the accounting illusions of the procedures see Mirowski (2007, 2010), Felipe (2008), Felipe & McCombie (2014, 2019).

48 For a presentation in modern vocabulary of the case outlined by Prebisch, see Cypher (1998).

49 “I will take it that the primary production stage takes place in the Periphery, and the other stages of elaboration and outlay at the cyclical Center. This is not the only characteristic of cyclical Centers; there are others (…) I mean that a cyclical Center and a Periphery can be contained in one and the same country, as in the United States, which has a large Periphery, unlike what happened in the British cyclical Center, which had the world economy as a Periphery” (Prebisch 1949a in 1993: 449).

50 Or Jorge L. Borges (1944).

51 The curves are shaped like sine waves and slopped indicating the different times at which they begin (horizontal plane) and vary in “amplitude” from one to the next. See my adaptation of Prebisch’s graphics at the end of the chapter. Perhaps there is only occasion in which Prebisch appears to be flirting with “geometrical” deductions as to the “height” and base of the curve; “the excess of circulating capital is represented by an amount equal to the vertical distance between the point of conjunction and the point of income. Before the demand would be above of production. Hence businessmen were being stimulated to increment production for which they would initiate developing a circulating capital, and from which, in time, a future production would result (Prebisch 1949a in 1993: 485, my emphasis); in other words, generally he evades talking about “minimums” or “maximus” of the curve (s), given the power-time asymmetry of the agents-countries in question, which means diverse and asymmetric “time periods,” this aspect of his ideas has being generally lost to modern interpretations.

52 “Some time elapses between the payment of income by businessmen (payments to productive factors and payments of profits to each other) and the return of this income to businessmen in the form of demand for the goods they produce. This period of return varies according to whether it involves the cyclical Center or the Periphery, and the different circulation processes” (Prebisch 1949a in 1993: 425).

53 “In the partial phenomenon -an industry or company- we can dismiss as insignificant the impact on demand of the rise in income stemming from the persistent efforts of businessmen to increase production. (…) But when it is not only the footwear manufacturer but all businessmen who, to one extent or another, respond to the growing impetus of the cycle, the income they pay over and above the completed production tends to increase demand in greater proportion than supply, and thus reactivates the process of cyclical growth until the point of conjunction is reached” (Prebisch 1949a in 1993: 441).

54 On the next line he says: “It is obvious, moreover, that if this increase in demand were not to vary -if it were to remain fixed- and, for whatever reason, the time the primary businessman took turned out to be shorter than for the businessmen in the Center, the quantity [of] profit in the Periphery would fall, while remaining the same in the Center: the total unit profit would then be lower than in the preceding case” (ibid.). Let us remember that these lectures were not revised by the author. It is perhaps one of the very few texts “published” in (Prebisch, 1949a in 1993) which show some typos and errors and fragments missing. The original text can be found in ECLAC or in El Colegio de México library: “Teoría dinámica de la economía. Con especial aplicación a las economías latino-americanas”” (February-March 1949).

55 “the typical form of capitalist accumulation (…) Is the result, therefore, of an inflationary pressure, through which distribution is altered within the collectivity, considerable share of the income to relatively small groups of businessmen with which they increment their savings capacity, and hence we arrive to this conclusion: the shortage of savings, a characteristic feature in the early stages of the cycle’s upward phase, generates the phenomenon of profit, and profit generates the growth of savings” (Prebisch 1949a in 1993: 447).

56 “I maintain that within the same system there are forces which tend to enlarge the deficit or insufficiency of peripheral demand with greater amplitude than the excess of the Center’s demand. As the upswing heightens both the excess of Center’s demand and peripheral insufficiency increase, but the Periphery’s insufficiency grows much more intensively than the excess, until it reaches the moment where the Periphery’s insufficiency is equal to the Center’s excess (points [sic] A in the Center and Periphery curves” (Prebisch 1949a in 1993: 459). See graphs at the end of chapter.

57 “Until its quantity has created an insufficiency similar to the excess” (Prebisch 1949a in 1993: 461).

58 “I believe that these disturbances that intervene and prevent it attaining equilibrium, which lend the system its characteristic undulatory pattern which result from the interdependence of the scheme’s curve” (Prebisch 1949a in 1993: 462).

59 “What happens while the peripheral insufficiency does not coincide with the Center’s excess? There is a net excess of demand over [the] supply at the cyclical Center, the consequence of which is the decrease in businessmen of final produce stocks, causing an increase in demand among them with the purpose of increasing production, and in turn brings about an increase in profits which, in our hypothetical scenario, goes largely to the Periphery. In other words, as long as the point of conjunction is not reached, there will be a continuous fall in stocks, a continuous rise in the demand of businessmen, continuous growth in profits, and a shift of profits toward the Periphery. Profits go on shifting more and more toward the Periphery, until their quantity has created an insufficiency equal to the excess. This is the spontaneous play of the system. The equivalence of magnitudes is reached through the pressure exerted by profits bound for the Periphery, and by the consequences this pressure has on the difference between production and income return” (Prebisch 1949a in 1993: 460).

60 “The smaller the exit coefficient of the circulatory mass is, the higher the magnitude of income retained to cause the regular increase that leads to positions of dynamic equilibrium, the farther away the point from which these positions of dynamic equilibrium are reached” (Prebisch 1993: . 464).

61 “I believe that where there are two diverse exit coefficients, it is quite impossible to reach equilibrium” (Prebisch 1949a in 1993: 466).

62 “A higher retention of income has been developing. This means a slower return, and although the distance between income and production continues to grow, a point will be reached at which, due to the saving invested, not in fixed, but in circulating capital, peripheral insufficiency coincides with the Center’s excess. The point of conjunction can be reached in different ways, but always by virtue of the disparity in the time of income return” (Prebisch 1949a in 1993: 476, my emphasis).

63 “It creates its own income in a much greater quantity than the Periphery would need in its passive function to respond to the Center’s demand. (…) It could happen that the magnitude of this expansion distinctive of the Periphery be such that, instead of the net peripheral insufficiency begetting downward the Center’s excess until it reaches the point of conjunction, we will have a net excess in the Periphery and that, in the cyclical Center, the excess of demand will be much larger than those cases we have considered” (Prebisch 1949a in 1993: 479).

64 See the recent account in De Vroey & Hoover (2004).

Table des illustrations

Légende Based on Prebisch 1949a in Prebisch 1993: 419.IP = Paid Incomes; PP = Production in progress; PT = Completed Production; IR = Returning Incomes; D = Demand; X = Intersection; Prebisch uses overwhelmingly the term “conjunción” which grammatically has the role to join two words, (i.e. “and”), on occasions, we also find “inflexión” (inflection).
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Légende Based on Prebisch 1949a in Prebisch 1993: 484.I = Total incomes paid, Center and Periphery; P = Production; D = Demand, (D = R) R = returning Incomes. Horizontal lines shows expenditure and circulation in the Periphery during the upswing. Vertical lines indicates circulating capital held in the Periphery during the upswing. After point A (supply and demand intersect), starts the downswing of the cycle, and incomes paid initiates their return to the Center.
Fichier image/jpeg, 22k


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