Process of Economic Growth (4 Heads)

According to Marx, the study of growth process can be discussed under following headings:

1. Materialistic Interpretation of History.

2. Capitalistic Theory of Marx or Theory of Surplus Value.

3. Capital Accumulation.

4. Capital Crisis/Cyclical Fluctuations.

1. Materialistic Interpretation of History:

According to Marx, “Foundation and evolutionary cause of all social life is materialism”. This implies that all the historical events are influenced and determined by economic conditions and all other non-economic forces exert only a minor influence on historical developments. He attempts to explain the foundations and evolutionary cause of all social life. Marxian key to social behaviour is the mode of production and the relation of production. The mode of production determines the general character of social, political and spiritual processes of life.

The relations of production relate to the class structure of society characterised by following components:

(a) The organization of labour in a scheme of division and co-operation, the skills of labour in social context with respect to the degrees of freedom.

(b) The geographical environment and the knowledge of the use of resources and materials.

(c) Technical means and processes and state of science.

The change in the relations of production and the cultural super­structure of society tend to lag behind the development of material forces of production.

Therefore, Marx distinguishes social systems in history into four parts:

(i) Primitive communism

(ii) Ancient slave stage

(iii) Feudalism

(iv) Capitalism

Under the first stage, the factors of production are owned and controlled by community and individuals get their requirements according to their need. In other three stages, the class that controls the factors of production also controls the society. In these stages, there are always two groups of people-dominant and depressed.

It is the domination of one group of people over the other which creates tension and conflicts. Marx observed that, “All the social, political and intellectual relations, all religious and legal systems, all the theoretical outlooks, which emerge in the course of history, are derived from material conditions of life”.

In other words, we can say that economic environment influences the shapes and structures of the society. But ultimately the character of life is influenced by the economic system. The basis of social structure is the system of production, exchange and distribution. Thus, the final cause of all social and political changes is the mode of production and distribution.

The concept of materialism has been stated by Dr. Engles as “the ultimate causes of social changes and political revolution are to be sought not in the minds of men, in their increasing insight to external truth and justice but the changes in the mode of production and exchange, they are to be sought not in the philosophy, but in the economics of epoch concerned”.

2. Capitalistic Theory of Marx on Theory of Surplus Value:

This theory provides the framework on the basis of which Marx has developed his theory of capitalistic development. According to this theory, labour is the sole source of value in a commodity. In the short run, the value of commodity may be determined by the forces of demand and supply, but in the long run, the value is determined by the amount of labour spent in production of commodity. Marx defines commodity as concealed labour and value as crystalized labour.

Society consists of two types of people-workers or labourers and capitalist 6r employers. In a capitalist society the production is owned by small group of people called capitalists. Those who sell their labour to capitalists are called workers. The production of commodity commands a certain value in market. The difference between the market price and the wages paid to the workers constitutes the surplus.

The rate of surplus value is manifested in terms of degree of exploitation. To quote Marx. “Capitalists are not interested in producing those goods, which are useful and needed by the society, but in extracting as much surplus value as possible”. So exploitation of labour creates surplus value and its reinvestment ensures the progress of society under capitalism.

The net output of the economy is given as:

C + V + S

C = Value of material and machinery

V = Amount of labour used during particular period

S = Surplus value.

The ratio of surplus value to variable capital is called rate of surplus value i.e. Sv = S/V

The ratio of the surplus value to the total capital is called rate of profit i.e.

P =S/ C +V

The ratio of the constant capital to variable capital is called organic composition of capital, Symbolically.

Q = C/C+T

The relation between these ratios is expressed as under:

P = Sv/Q+1

This equation implies that rate of profit is directly proportional to the rate of surplus value but inversely proportional to the organic composition of capital.

Prof. Marx argues that the best way to increase the surplus value is to increase the productivity of labour class. The capitalist who first introduces the new machinery or new production instruments would gain advantages over his competitors.

He would tend to increase amount of economic surplus and hence, initiate capitalist development. Thus, economic surplus has a great role in the development process of a society. To increase the surplus, Prof. Marx advises of “accumulate, accumulate that the Moses and prophets”. Hence, capital accumulation serves as cradle for development.

3. Capital Accumulation:

According to Prof. Marx, it is the surplus value that leads to capital accumulation. The main aim of the capitalist is to increase the surplus value which goes to swell his profits.

He tries to maximize his profit in following three ways:

1. By increasing working hours. If the working hours are extended from ten to twelve, the surplus will automatically increase from four to six.

2. By decreasing the number of hours required to produce labourer’s subsistence.

3. By increasing the productivity of labour. This requires a technological change that helps in raising the total output and lowering the cost of production.

Profits are determined by the amount of capital. As Marx points out,

“Capital is dead labour that vampire like only lives sucking living labour and lives more, the more labour it sucks”. Marx separates capital into constant capital and variable capital. The surplus value is denoted by s. So the total output is

W = C + V + s.

Marx divides the total output of the economy into Department 1 and Department 2. The former is related to the reduction of capital and the latter to the consumer goods. The total output of each department is

The simple reproduction scheme indicates a situation of stationary state in which all that is produced is consumed. Hence, the net investment is zero and there is no accumulation or surplus. Therefore, equality prevails in both departments. Then, the value of total constant capital in both the departments must be equal to the output of department 1 i.e.

This shows that accumulation is taking place which is being invested in employing more labour (V₁) and means of production (C₁) in Department 1 than in Department 2. This, in turn, increases the surplus value S₁.

In order to study the nature of capitalist accumulation, Marx establishes a certain relationship between C, V and S. The ratio of constant capital to variable capital is determined as organic composition of capital. The rate of surplus value is defined as the ratio of surplus value to variable capital or of profits to wages.

This is called the rate of exploitation. The rate of profit is not dependent solely on the rate of surplus value. The rate of profit can change even though the rate of surplus value remains constant, if a change occurs in the organic composition of capital. The influence of technical progress is to alter the organic composition of capital. Hence, the tendency of industrial progress is to lower the rate of profit even though there is no decrease in the rate of surplus value.

Competition among the capitalists tries to cheapen their products which can be done by introducing labour saving machines which increase labour productivity. Those capitalists who are unable to replace labour by machines are squeezed out. The process of supplanting labour by machines creates an industrial reserve army which increases as capitalism develops. The larger the ‘industrial reserve army’, the worse are the conditions of employed workers. Capitalist are able to cut down wages to a surplus value.

This is the law of the increasing misery of the masses under capitalism. This is explained with the help of a diagram 1. The labour force is taken along X-axis and wage rate on Y-axis. D is the demand curve and S is the supply curve of labour. At the wage rate OW, there is increase in the industrial reserve army equal to LP (L₁P₁). As the industrial reserve army expands, capitalists start adopting labour saving machines and reduce the rate of minimum subsistence level OQ in order to have more surplus value.

But when the capitalist is replacing the labourers by machines, he is killing the goose that laid the golden eggs and there is continuous reduction in surplus value. Prof. Marx opines that technological progress tends to increase organic composition of capital. Since the rate of profit is universally proportionate to organic composition of capital, the former tends to decline with accumulation.

Marx explains the falling rate of profit as under:

Thus, the rate of profit varies inversely with organic composition of capital and directly with the rate of surplus value. Hence, the rate of profit V rises with the rate of surplus value and falls with the organic composition of capital.

4. Capitalist Crisis/Cyclical Fluctuations:

When the rate of profit declines, the production is no longer profitable. Consumption dwindles as machine displaces men and industrial reserve army expands. Every capitalist tries to dump goods in the market and in this process small firms disappear and a capitalist crisis begins.

Marx points out that the ultimate cause of the economic crisis is poverty and limited purchasing power of masses. During the crisis, unemployment increases sharply, the wages of workers are further cut, credit facilities break down and small employers are ruined. Marx wrote, “A crisis always forms the starting point of new investments. Therefore, from the point of view of society as a whole, a crisis is more or less a new material basis for the next turn over cycle”.

The various causes of economic crisis are:

1. Unbalanced Growth:

There is unbalanced growth in different sectors of the economy. Each producer produces according to his poor information of the activities of his competitors and imperfect knowledge of the market. As a result, too little of some and too much of other commodities are produced. This leads to a disproportionate growth of various branches of the economy which gives rise to general crisis.

2. Falling Rate of Profit:

The long run falling rate of profit is due to increasing organic composition of capital, while short run fall in profit rate is caused by rise in wages.

The increase in organic composition of capital will lead to decline in the rate of profit and vice-versa. The supply of labour being inelastic in short period, the wages will rise and unemployment will be reduced. The rise in wages will lead to a fall in profits and will discourage accumulation. When the demand for labour falls, the reserve industrial army increases, the profits rise and the accumulation is accelerated. Thus, the fluctuations in the rate of profit caused by changes in wages is the leading force behind the cyclical ups and downs in capitalist economy.

3. Under Consumption:

Under consumption is another factor leading to economic crisis in a capitalist economy. The tendency to accumulate enlarges the size of working class, increases unemployment and reduces the wage rate to subsistence level. The working class has a higher propensity to consume but cannot consume as its ability to consume is restricted by low income and poverty. On one hand, production increases rapidly, but consumption lags behind, the result being towards over production and economic crisis.

The capitalists find themselves caught in the web of economic crisis and when they find that their profits are shrinking and demand is declining the unemployment starts rising and mounting reserve army of unemployed workers willing to work at lowest wages. As a result, workers suffer, capitalist are crushed and socialism replaces capitalism.