A Note on External Markets and Capitalist Development Author(s): P.

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A Note on External Markets and Capitalist DevelopmentAuthor(s): P. PatnaikSource:

The Economic Journal,

Vol. 82, No. 328 (Dec., 1972), pp. 1316-1323Published by: Blackwell Publishing for the Royal Economic SocietyStable URL:

http://www.jstor.org/stable/2231308

Accessed: 07/11/2009 09:41

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ANOTE ONEXTERNALMARKETSANDCAPITALISTDEVELOPMENT'I

THEmportance of externalmarketsto theprocess ofcapitalist develop-menthasfor alongtimebeen asubjectofdebateamongeconomists,especially those ofMarxistpersuasion.Thetheoretical modelof Marx'sCapital tself didnotspecifically incorporatethequestion ofmarkets. Marxlookedmostly atthecapitalist sectorin isolationandassumed thatcompetitionbetween capitalists withinthis sector wasenough tomaintainthetempoofaccumulationandgrowth.Againstthisposition,RosaLuxemburgargued thataconditionforaccumulation inthecapitalistsectorwas the fact that itwas notisolated.Amongotherthings,thissectorneeded"external"marketsto maintainaccumulation andgrowth in thelongrun.2 By"external"marketsofcourse she meantmarketsor sourcesofdemand outside thecapitalist sectorproper-in otherwords shemeant notonly the"under-developed"economies andthenon-capitalistsectors of the"developed"economies but alsogovernmentexpenditure onarmaments,etc.Afrequenttheoreticalcriticismagainsthermodelhasbeen thatwhatisrelevant forgrowthisnot"exports"assuchtothe"external"marketsbut an"export"surplus.3Exports,if matchedbyanequalamountofimports,cannotgenerateapositivetrendbecause"theimportedgoodsabsorbpurchasingpower justlikethosehomeproducedandthus to theextent thatexportsare offsetby importstheydo notcontribute totheexpan-sion ofthemarkets

.

."

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Itisthenarguedfromhistoricalevidence thatexportsurplusesromdevelopedtounderdevelopedandlargelypre-capitalistcountrieswereoflimitedsignificance; henceexternalmarkets(leavingasidegovernmentoperations)musthaveplayeda minorrole.Thepurposeofthisnote is(i)to refutethiscriticismand(ii)tomakeafewgeneralcommentsontheroleof external markets.Againstthiscriti-cism, itisargued(a)thatit istheoreticallyinvalid, i.e.,in aworldconsistingofonlytwo sectors-acapitalistandapre-capitalistone-theformer couldderive a stimulusforgrowthby exportingto the latter even iftheseexports

1

In writing this noteIhave benefited from discussions with Maurice Dobb, MichaelEllman,Joan RobinsonandtheEditorswho made several valuable suggestions for improving an earlierdraft.I wishtothank them and also inparticularRobertRowthorn with whom I have hadnumerousdiscussionson thesubjectofthe note. The errors which remainare,ofcourse, mine.

2

RosaLuxemburg,Accumulationf Capital, (New York,1964edition)Ch. XXV.

3

MostMarxist economistshavemade thispoint.SeeM. H.Dobb,OnEconomicTheoryandSocialism(London,1956edition) p. 270;P. M.Sweezy, Theoryof CapitalistDevelopmentNew York, 1964) p. 205;M.Kalecki,SelectedEssayson theDynamicsoftheCapitalistEconomy, Cambridge, 1971)p. 152.

4

Kalecki,ibid.

1316

DEC. 1972] NOTE ON EXTERNALMARKETSAND CAPITALISTDEVELOPMENT 1317

werematchedby imports; (b) furthermore, evenifthe theoretical criticismwere valid and"export" surpluses alone mattered, international tradestatisticsmightnotbe relevant. A country might have balanced trade with outsidepre-capitalist economies while within it the capitalist sector had an"export" surplus with the pre-capitalist sector. This would not onlystimulategrowthinthe capitalist sector, but if this growth offset the declineofthepre-capitalist sector, might even raise the overall level of activity inthe country. Yet the role of the internal pre-capitalistmarketswould not bereflectedintradestatistics.IILet us first examine why"external"markets may be at all importantforcapitalist development. Logically,afterall, itispossible to visualisean isolatedcapitalist economy growing steadily solelyonthe basis of itsinternal markets andinresponsetoendogenous stimuli,andseveral modelshave been built around this idea. Underperfect competition,forexample,each firm believes thatit canexpand output without reducing prices. Thelimitto investmentneach period thereforearisesnot on the side of demand-i.e., availabilityof suitableprojects-butonthesupply side,where distribu-tionofincomeandcapitalists' consumptionoutoftheirshare determine themaximumpossibleevelof investmentto which actual investmentcorresponds.However, perfect competitionwithvery largenumbersofsellersis anunrealisticassumptiontomakeundercapitalism.Apre-conditionforsetting upinbusiness is thepossession of capital.Eventheavailabilityofloans usually depends upon the amount of own funds. More realistically,therefore,within thecapitalist sectorthere havealwaysbeenalimited num-ber of firms(thoughthese numbersmayalso have shrunkovertime),andtheyhaveoperatedunder conditionsof marketimperfections.Firmsmayhavefaced elastic demandover certainperiods,butthis could bepreciselybecause externalmarketswereavailable,wherepre-capitalist producerswereeasily eliminated;andindeedfromthebeginningthecapitalistsectorhas made inroads intopre-capitalistmarkets. From thisfactofelasticitytherefore,theexistence of a state ofperfectornear-perfect competitionwithinthecapitalistsector cannot bededuced. Weshallconfineourselvesthereforetothe caseof marketimperfections.When therearemarketimperfections,additionaloutputcan besoldeitheratlowerpricesor withhighersales effort. Firmscan not take demandforgrantedanddemandprospectshavetobecarefullyassessed beforeinvestmentisdecidedupon.Theexpected growthof marketsmaystillbesolargethatinvestment islimited on thesupplysidebythe level ofcapitalists' savingsatfullcapacity output:1butthepossibilityarises ofinvestmentnotreachingthis level.Moreover,ifgrowthisinresponsetoendogenous demands,thentheexpected growthof marketsandhence

1Weareassuminghe existenceof areservearmyoflabour.

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