Karl Marx Theory of Economic Development

Karl Marx, the father of scientific socialism, is considered a great thinker of history. He is held in high esteem and is respected as a real prophet by the millions of people.

Prof. Schumpeter wrote  “Marxism is a religion. To an orthodox Marxist, an opponent is not merely in error but in sin”.

He is regarded as the father of history who prophesied the decline of capitalism and the advent of socialism. The Marxian analysis is the greatest and the most penetrating examination of the process of economic development. He expected capitalistic change to break down because of sociological reasons and not due to economic stagnation and only after a very high degree of development is attained. His famous book ‘Das Kapital’ is known as the Bible of socialism (1867). He presented the process of growth and collapse of the capital economy.

Marxian economic theory of growth is based on certain assumptions:

1. There are two principal classes in the society.

(1) Bourgeoisie and

(2) Proletatiat.

2. Wages of the workers are determined at subsistence level of living.

3. Labour theory of value holds good. Thus labour is the main source of value generation.

4. Factors of production are owned by the capitalists.

5. Capital is of two types: constant capital and variable capital.

6. Capitalists exploit the workers.

7. Labour is homogenous and perfectly mobile.

8. Perfect competition in the economy.

9. National income is distributed in terms of wages and profits.

Marxian Concept of Economic Development:

In Marxian theory, production means the generation of value. Thus economic development is the process of more value generating, labour generates value. But high level of production is possible through more and more capital accumulation and technological improvement.

At the start, growth under capitalism, generation of value and accumulation of capital underwent at a high rate. After reaching its peak, there is a concentration of capital associated with falling rate of profit. In turn, it reduces the rate of investment and as such rate of economic growth. Unemployment increases. Class conflicts increase. Labour conflicts start and there is class revolts. Ultimately, there is a downfall of capitalism and rise of socialism.

Relevance of Marxian Theory and Economic Development in UDC

The countries like India, Egypt, Burma and Ghana have followed the Marxian Departmental scheme in their development plans. The basic strategy has been to increase investments in capital goods industries and services, and to increase the supply of consumer goods by increasing investment and production in agriculture and small scale sector.

The Marxian theory is not applicable directly to UDCs. Marx did not think about the problem of such poor countries. He talked of colonial exploitation and foreign backwardness of colonies but he never analyzed the problem of their development. Recently most of the UDCs are trying to develop their economies under the conditions of controlled capitalism, or mixed economy with planning as pre-dominant characteristic. Thus, Marxian notion of planned development also seems to appeal to those backward countries which are in a great hurry to industrialize at the risk of excessive national belt tightening. Marx’s Departmental scheme is applicable to UDCs. Such a country consists of two sector economy-capitalist sector and a subsistence agriculture and small scale sector which may represent Marx’s two departments. Expansion of economic surplus or capital accumulation is the basic requirement of these economies. It is the capitalist sector which yields more surplus while the subsistence sector yields small surplus. Rapid economic development requires reorganization and modernisation of the sector by bringing about both structural and technological changes.

The countries like India, Egypt, Burma and Ghana have followed the Marxian Departmental scheme in their development plans. The basic strategy has been to increase investments in capital goods industries and services, and to increase the supply of consumer goods by increasing investment and production in agriculture and small scale sector.

The primary aim is to create larger employment opportunities to increase purchasing power and fresh demand, to build strong capital base and increase productive and technical capacities within the economy. The greatest lesson which the planners of underdeveloped countries can learn from Marxian economics is that accelerated development means complete reorganization of the economy both technologically and structurally.

In short, following points may be relevant for underdeveloped countries:

(1) Unequal Exchange and Exploitation: The society is divided between rich and the poor in UDCs. The poor is exploited by the rich. Because of the elastic supply of labour workers are paid just the subsistence wages. Concentration of wealth with the richer section of the society is clear indicator of the Marxian hypothesis. Existence of Bonded Labour in such countries itself speaks exploitation of labour by the rich classes.

(2) Reserve Army of Industrial Workers: Marxian observation that growth of capitalism causes reserve army of the unemployed workers is also true in case of poor countries. Further, adoption, of capital-intensive technique of production in these countries has displaced lots of labour causing the mounting problem of unemployment. Widespread poverty, starvation and unemployment are very common.

(3) Falling Rate of Profit: As the population in underdeveloped countries is poor, the size of the market remains limited. Generally, entrepreneurs face uncertainty of demand for their products. This adversely affects the rate of profit.

(4) Departmental Division: According to this theory, the economy can be divided into two departments: Producer Goods Department and Consumer Goods Department. This type of dualism is very much evident in less developed countries. In these countries, only a small sector is confined to the production of producer goods, while a vast unorganized sector is engaged in the production of consumer goods.

In short, Marxian model is not of much relevance in understanding the problems of less developed countries. Yet, some of the elements of the theory ‘exploitation of labour’ concentration of capital, subsistence wages, ever-rising poverty and unemployment of the workers, and the like are found to be relevant in such economies.

Criticism:

Marx theory of capitalist development has been accepted by his followers as a Gospel of truth. It has a special application to a particular society named capitalist society.

Still, it has been severely criticized on the following grounds:

(i) Materialistic Interpretation of History is Partial Truth: The foremost point of criticism against Marx is that it is a partial concept. Marx has minimized the significance of other non-economic factors in the history. The non-economic factors like ethical, ideological, religious, cultural and the political conditions also greatly influence the history. Man does not live by bread only, other things are also necessary. Bertrand Russell has rightly remarked in this regard, “Larger events in our political life are determined by the interaction of material conditions and human passions”. Thus, the material and non- material factors play an important part in the development of various economic activities.

(ii) Theory of Surplus Value is Unreal: The whole Marxian theory is based on the theory of surplus value. In real world, we are not concerned with values but with real tangible prices. Thus, Marx has created an abstract and unreal world which has made it difficult and cumbersome to understand proper working of capitalism.

(iii) Marx-A False Prophet: According to some other opponents, Prof. Marx has been proved a false prophet. The countries which have toed the Marxian line of thinking have been curiously those in which capitalist development lagged behind. All the communist states had been poor and are even now so, as compared to capitalist countries. On the contrary, the real wages of workers have continuously increased in their value. The workers tend to become more prosperous with capitalist development and the middle class instead of disappearing, has emerged as dominant class. There have been also no signs of the withering away of the state in these countries.

(iv) Technology does not Create Unemployment: Marx contended that with the introduction of technology, industrial reserve army expands. But, this is an exaggerated view for the long run effect of technological progress. It creates more employment opportunities by raising aggregate demand and income. The improved techniques of production even if they may be labour saving can show better benefits on the labourers.

(v) Falling Tendency of Profits not Correct: According to Joan Robinson, “Marx’s explanation of the falling tendency of profits explains nothing at all”. Marx contends that as development proceeds, there is an increase in the organic composition of capital which brings decline in the profit rate. But this is wrong opinion because as development proceeds, capital output ratio falls and so the output increases and profits also increase.

(vi) Capitalist did not meet its Predicted Doomsday: Marx also could not understand the emergence of political democracy as the protector and preserver of capitalism. The introduction of social security measures, anti trust laws and the mixed economies have given a lie to the Marxian prediction that capitalism contains within itself the seeds of its own destruction.

(vii) Cyclical Theory Wrong: Marx emphasized that capital accumulation led to reduction in the demand for consumption goods and fall in profits. But he failed to realize that with economic development, the share of wages in aggregate income need not fall, nor the demand for consumer goods.

(viii) Static Analysis:

In the words of Schumpeter “It is unsuited for two main props being:

(a) Labour theory of value and

(b) Modified version of subsistence theory of wages.

Marx was analyzing the problem of growth with the help of tools which were essentially suited to static economic analysis.

(ix) Analysis of Crisis is Out-dated:

Marx considered the business cycle as an integral part of capitalist development but it lacks precision. The analysis of crisis is based on nature of capitalist production rather than on monetary and fiscal factors and the theory which neglects the monetary and fiscal factor is considered to be incomplete and inadequate. Marxian analysis of crisis at the most can be regarded as suggestive rather than analytical and convincing.

(x) Unable to Solve Various Complex Problems:

Regarding consumption theory, Marx did not attempt to break sharply with classical thinking, this analysis of the problem is inadequate. It is suggestive but vague. He fails to explain that how the rate of profit and investment depends upon consumption.