THE POLITICAL ECONOMY OF THE'RETREAT OF THE STATE' 45 mentioning these consequences because the progress of different economies along this path of transition has been uneven; and even for particular economies, the progress has been marked by complexities, so that the need arises for transcending the empirical level; besides, as we shall see later, the consequences of this transition for developed and underdeveloped capitalist economies are vastly different, and to understand that difference, a preliminary general discussion is in order. 2. The questions that immediately arise are: are these three consequences mutually compatible? And how do they follow from the package of policies that are usually associated with the so-called 'retreat of the State? To see the connections clearly let us visualise a highly simplified world consisting of workers and capitalists (both industrial and financial), in which the workers consume whatever they earn and the current account of the balance of payments is balanced. Profits would then equal the sum of investment, capitalists1 consumptiori ,and the budget deficit.3 Let us first consider the case where the size of the budget deficit remains unchanged, but within this unchanged size there is a reduction in welfare expenditure Cthe social wage') matched by an equal amount of transfers to capitalists via tax-cuts. Since a rupee spent on welfare expenditure generates a larger direct and indirect demand than a rupee transferred to the capitalists (who would save a part of it), even this unchanged budget deficit would lower the level of activity and employment in the economy while leaving the amount of post-tax profits unchanged. With this reduction in the level of activity, however, less money will be required in the economy for transaction purposes, so that the banking system will witness either a reduction in the demand for credit, or a substitution of cash-deposits by term-deposits, entailing in either case a loss of income. Contraction of activity in other words is, from this point of view, against the interests of the financial oligarchy. Privatisation of State-owned production units, on th^ other hand, has a counteracting effect. At first sight, such privatisation appears merely to substitute one form of private wealth by another, namely, private claims upon the State by titles to actual physical assets. Suppose, for instance, the State sells the equity of public enterprises and uses the proceeds to retire Treasury bills held by the banking system. It would appear at first sight that the private sector's wealth does not increase as a result of this swap. Even in this case, however, this switch in the form of wealth holding is profitable for the private sector, and especially the banks. If private holding of public sector equity is financed by bank-credit, from the banks' point of view it means the substitution of say, Rs 100 of credit for Rs 100 of Treasury