CLASSICAL GROWTH THEORY:

KARL MARX: IDEA & APPROACH

Development Economics
R P Pradhan
BITS Goa

BITS Pilani, K K Birla Goa Campus

Proposed Objective?

 Understand Karl Marx’s perspectives

on K formation & the problem of
economic growth.
1) Marx’s method of historical analysis
2) Marx’s analysis of capitalism
3) Interpretation of “Value” as created
K
in Economy
4) Interface of K & L for value creation
5) How Marx compares with Smith,
Ricardo and other classical
economists
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Jenny von Westphalen
in the 1830s

Jenny Marx Longuet (left) &

her sister, Jenny Laura Marx
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 Youngest Daughter
Eleanor Marx Aveling
also known as Jenny
Julia Eleanor "Tussy"
Marx

Friedrich Engels, whom Marx met

in 1844; they became lifelong
friends and collaborators.
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BITS Pilani, K K Birla Goa Campus
Karl Marx is popular for 3 Things-

K- Formation
Value Theory
His Methodology- Dialectical Materialism

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 Back Ground & Marx’s Objective

 Book is acclaimed as the precursor to Marx’s

 Wage, Labour
important treatise “Das Kapital”. and Capital -
 This book deals with scientific rationale on his Essay on economics
ideas of "alienated labor," which in Marx’s
perspective would eventually lead to the
by Karl Marx,
Proletarian Revolution.
 Written in 1847
 Wage-Labor and Capital is considered by Marxists & 1st published
as an "in-depth economic and scientific
observation on how capitalist economy works,
in articles in the
Neue Rheinische
 Why it was exploitative, and ultimately why it Zeitung in April
would eventually implode from within". 1849.
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 Some of the main topics the book examines
are about labour & labour power, & how 1. The book deals with
labour power becomes a commodity. Labour as a factor of
Production
 It also presents the Labour Theory of Value
that further develops the distinct differences
between labour & labour power. 2. Commodification of
Labour
 The book also examines the commodity &
how the economic principles of supply & 3. Labour Theory of Value
demand affect the pricing of certain
commodities.
4. Labour Power
 Also, the book explores how capital &
capitalism do not service any purpose other 5. Non Productivity of
than to gain more of it, which Marx presents Capital & Capitalism
as an illogical method of living one’s life.
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 Marx’s Method -

 Marx uses a theoretical framework called-

The Dialectic or Dialectical Materialism –

which he borrows from Georg Wilhelm F. Hegel
(German Philosopher) in order to explain historical social
transformation. Thesis -
 The dialectic- Hegel argues that ideas progressed
through an argumentative process where a thesis is Anti Thesis -
first proposed,

 this is followed by an anti-thesis Synthesis-

 which opposes the thesis and the tension between
the two gets resolved through the formulation of a - Thesis
synthesis (which then becomes a new thesis).
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 Marx applies the dialectic principle to history in order to analyse
and explain social transformation process. According to Marx,
societies pass through certain phases
Primitive Communism, - Thesis (contradictions or Anti Thesis leads to Synthesis)
Slavery,
Feudalism,
Capitalism,
Socialism and Communism (These two he predicted)

 Each of which can be understood to be a thesis which after a point,

face certain inner contradictions (anti-thesis) and thereafter a new
stage emerges (synthesis) which then becomes a new thesis and
the same cycle repeats.
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 How does this Work?

1. In order for a society to survive and reproduce itself it has

to produce and reproduce the material requirements of life.

2. To do this, human beings enter into relations of production. Division of

Labour
3. They collectively work on nature but, all do not do the same leads to
work; Capital
Ownership
4. Division of labour & some become owners of the means of
production.

5. Relations of production are in turn determined by the

productive forces i.e. the means of production comprising
of tools, technology, raw materials, knowledge and abilities
used in the production process.
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 Economic Base of
 Productive Forces according to Marx Society
constitutes the economic base of society.
Institutions
 From this foundation arise political
institutions, ideology, culture, values, laws
etc. which make up a society’s
superstructure. Values, Ideology
etc.
 The causal factor behind a society’s
transformation is therefore - changes Social Super
occurring in its modes of production Structure
(Historical Materialism).
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 In this way Marx identified that historically
societies passed through primitive
communism, ancient society (slavery),
feudalism to capitalism.
Change of Tools
 Overtime, certain inner contradictions occur
& Technology
within each mode of production. changes mode
of Production
 This happens as the material productive forces
come into conflict with the existing relations of
production because -

 The relations of production are no longer able

to support new productive forces (anti-thesis).
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 Shift in Mode of Production
due to inner contradiction
 A new stage in social transformation is
reached when the dominant class is New stage in social
replaced by a new emerging class. transformation

 ‘Whereby, the underclass liberates the New Emerging Class

productive forces with new relations of
production’ (synthesis).
Underclass liberates the
productive forces i.e.
 Other changes in the superstructure of Synthesis
society follow.
New superstructure of
society
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BITS Pilani, K K Birla Goa Campus
Modes of production through history

 This way, primitive communism – where there

Primitive
was predominantly collective production ----
Communism

 But, with domestication of plants and animals Slavery

(surplus could be produced, & Inequalities arose)
------ gave rise to contradictions and made way Feudalism
for slavery.
Capitalism
 Slavery broke down as it became increasingly
difficult to carry out production by conquering
slaves……

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 Aristocracy emerges which replaces it with
feudalism – characterized by many classes
Feudalism &
such as kings, lords and serfs. … Aristocracy

 Trade with other nations gives rise to a class of

merchants from whom the capitalist classes
emerge who turn antagonistic with the Trade
aristocracy and through a bourgeois revolution &
this leads to the next stage i.e. capitalism.
Capitalism

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 Karl Marx & Capitalism Analysis

 The bulk of Marx’s analysis is to understand the mechanisms of

capitalism (Das Kapital Vols. I, II & III)

 Capital Formation & Accumulation & -------

 Capitalist society is characterized: by private ownership of the means of

production (no longer in the hands of the monarch or aristocracy) by the
capitalist who aim to maximize profits.

 The economy is characterized by free-market but (many Marxist’s hold

the view that) the state intervenes to further the interests of the
capitalists.

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 Marxian Economic Growth & Value Creation Approach

In order to understand Marx’s The value of output / commodity

views on economic growth, it is comprises of three elements:
first important to understand
1. Variable capital or wages paid
his theory of –
to labour = (v),
i.e. S > V or (S is W dependent.)
How value is created?
2. Constant capital investments in plants,
V= Wages to L machinery & raw material = (c)
C= Constant Capital
S= Surplus Value 3. Surplus value = difference between
minimum wage & output per worker = (s).

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 Now wages are determined by the
minimum subsistence wage (cost of
reproducing labour)

Control of Means
 Surplus Value is created by labour
but, is expropriated by the capitalist of Production
because wages are less than the leads to
value of the final product.
Subsistence Wage
 This is possible because workers do
not own the means of production.
All they own and can sell is labour
power.
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 The Rate of Surplus Value therefore is
(degree of exploitation) - denoted by S / v
According to Marx –
 This determines the rate of profit given by
s/(v + c) The surplus (s)
is the mainspring of
capital accumulation
 fS = C- W
and driver of
economic growth.
 Therefore P(Profit) = (S/ V+C)
Also denoted as (s/v)/(1 + [c/v]).
(c/v is referred to as the organic composition of capital).
While C has to be spent, W is Negotiable
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 Contradiction in
Capitalism
How?
1. According to Marx, Technology innovations
were applied in the course of production
According to Marx
2. & these were often labour displacing
 Economic Growth does
3. creating what he referred to as an industrial
not carry on for ever
reserve army of Labour.
 Not because it reaches a
4. but it also caused immiserisation (economic
stationary state DRS from
impoverishment.).
land (Ricardo)
5. Which was compatible with capitalism
 But because of a crisis because-
in capitalism. a. it facilitated K accumulation & checked the
bargaining power of labour
b. so wages could be kept at subsistence
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Contradictions in Capitalism
 As techniques of 1. But here there is another problem; while
production become more there is no limit to c/v however there is a
K intensive, the organic limit to s/v i.e. Wages.
composition (c/v) rises
through time & 2. Marx saw no major problem as long as
surplus labour exists to keep wages
 as it does, the rate of down. However, he predicted that as
profit begins to fall unless capital accumulation accelerates, the
surplus value rises. ‘reserve army of labour’ would disappear
Classical Economists and full employment would drive wages
Analysis. up and profits down.

3. Now the capitalists would respond by

either trying to keep wages down
Contradiction 1 through higher technology leading to
immiserisation of workers
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 Global Comparative GDP
since 1st Millennia
3. Another problem that arises is, as capital is substituted for
labour, there is a problem that labour cannot consume the Contradiction II
goods produced .
Angus Madison Data Set

i.e. a problem of lack of effective demand ‘realization

crisis’ – Commodity Demand Crisis (Malthus) Labour Power
4. ‘Class consciousness’ occurs as workers realize that
Class
they are exploited and that they don’t own the
means of production. Consciousness

As fewer and fewer people benefit from capitalism,

leading to Class
this leads to a conflict between the workers and the Struggle
capitalists, leading to class struggle and social
revolution. & Revolution
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 The global contribution to world's
GDP by major economies from 1 AD to
2008 AD according to Angus
Maddison's estimates

Source:
[Link]
ds_in_%_GDP_contribution_by_major_economies_of_the_world.png BITS Pilani, K K Birla Goa Campus
Indian economy under British Rule
from 1858 to 1947. During this
period, according to British economist
Angus Maddison, India's share of the
world economy collapsed from 24.4%
to 4.2% between 1700 and 1950.

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China & India Combined Share of
World GDP

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China & India Combined Share of World
GDP & Economic Rise of USA

China & India USA

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Population Vs. Economy

China & India Combined Share of

World GDP Lessons of
China & India
History
USA
Europe 1. Technology
& ------
2. Change in
Mode of
Production …

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 Idea of Corporate Nation States!
Name Sector 2015 ($ 2016 ($ 2017 ($ Annual Budget 2017
Billion) Billion) Billion) $ Billion) Corporate Total
Wal-Mart Retailer 485.65 482.13 485.14 Australia 461
US$ 2155.3
ExxonMobil Oil and Gas 236.81 200.63 237.16 Belgium 249.7
Royal Dutch Oil and Gas 264.96 233.59 305.18
Billion
Russia 253.9
Shell
Apple Tech 231.28 214.23 228.57 Switzerland 223.5
Glen core Commodity 147.35 152.94 205.47 Denmark 173.5
Countries Total
Trading & US$ 2051.46
Mining
Samsung Tech 187.82 188.96 224.26
Billion
India 248.7
Electronics
Amazon E-Commerce 107.01 135.99 177.87 Saudi Arabia 171.6
Microsoft
Nestle
Tech
Food and
92.97
90.21
84.7
90.9
89.4
91.23
UAE
Poland
83.4
90.8 ?
Beverages
Alphabet Tech 73.59 89.73 111.02 Greece 95.36 Corporate
Uber Ride hailing

Huawei
service
Telecommuni
Nation
Technologies cations
Source: [Link] /
States
[Link]
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Vodafone Telecommunications 56.71 49.02 53.85 Singapore 53.4

Anheuser-Busch Beverages
Imbed
Maersk Shipping 42.99 29.09 32.35 Egypt 35.54
Goldman Investment Banking 7.73 9.03 12.58 Myanmar 9.21
Sachs
Halliburton MNC 23.63 15.89 20.62 Uzbekistan 20.11  Wal-Mart
Accenture Consulting firm 32.91 34.8 36.77 Kazakhstan 34.13 Alone is much
Mcdonald's Fast-food restaurant 25.41 24.62 22.82 Belarus 22.8 wealthier than
Emirates Airlines many
Facebook Social Media 17.93 27.64 40.65 Philippines 44.74 Developed
Alibaba E-Commerce 12.3 15.9 23.52 Oman 22.68 Countries put
Blackrock Investment Manager 11.52 11.21 12.65 Ethiopia 12.11 together.
Mckinsey Consulting firm
Twitter Social Media 2.22 2.53 2.44 Afghanistan 1.99
Source: [Link] / [Link]
factbook/fields/205

25 Developed &
25 Corporations Developing Countries
US $ 2413.55 Billion US$ US$ 2308,17
Corporate Budget Annual Budget
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 Assignments
 ExxonMobil: Oil and Gas: 2017- US $ 237.16 billion-
04 Candidates
 Royal Dutch Shell: Oil and Gas: 2017- US$ 305.18 Map their origin; growth
 Any 02 Others Oil & Gas Industry like British Petroleum etc & Revenue Profile &
Economic Impact

04 Candidates
 FANG Economy: Map their origin; growth
& Revenue Profile &
Economic Impact

04 Candidates
 4 Global Telecom Sector Companies Map their origin; growth
& Revenue Profile &
Economic Impact

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 REFERENCES

 Misra, S. K. and Puri, V. K. (2010), ‘Marx’s Theory of Economic

Development’, in Development and Planning: Theory and
Practices, 13th ed. Himalaya Publishing House Pvt. Ltd. Mumbai,
pp. 110 - 118.

 Thirlwall, A. P. (2006) ‘Classical Growth Theory’ in Growth and

Development with Special Reference to Developing Economies. 8th
ed. Hampshire: Palgrave Macmillan, pp. 129 – 130.

 Backhouse, R. E. (2002) ‘Karl Marx’ in The Penguin History of

Economics, London, Penguin Books, pp. 156 – 164.

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