Marxian theory of Economic Growth

Karl Marx, the father of scientific socialism is considered as the greatest thinker of the 19 th
century. Based on the number of followers, he is ranked equal to Jesus Christ and Mohammed
the prophet. His magnum opus’ Das capital’ undoubtedly paved the way for the beginning of a
new era in economic doctrine and is considered as the Bible of socialism. Marx through his
writings presented the growth process and final collapse of the capitalist economy. At first, Marx
gives a materialistic interpretation of history and then specifies the motivating forces of capitalist
development and its collapse. Finally, Marx gives an alternative path of development based on
planned economic development.

Marx applied the philosophy of dialectical materialism to the historical evolution of

humanity. There are four different stages through which the relations of production or society
moved in. They are primitive communism (or Asiatic stage), Slavery, feudalism and capitalism.
Relations of production include some measure of the interaction between techniques of
production and the social and economic organization of the society. Primitive communism was a
classless society in which all output is owned in common. The only division of labour occurs
between sexes. Specialization of labours took place with the possibility of domesticating and
breeding wild animals. Agriculture made its appearance. This new possibility opens up an
avenue for the exchange of surplus produce. It increased the demand for labour. Primitive
communism gives its way to Slavery. In this period slavery was the dominant relation of
production. Further division of labour takes place. The emergence of new towns and new classes
of merchants who acted as an intermediary between producers and consumers arose. The
introduction of metallic money, private property, etc. are the peculiar features of this stage.

As the productive forces developed, feudalism replaced slavery. In the

countryside, the prevalent form of production was serfdom, in which the serf was tied to the land
but had a certain amount of personal dignity. The flourishing of agriculture and handicrafts leads
to the emergence of new industries. The feudal political form became a hindrance to the further
growth of the productive powers of the economy. A class of capitalist who is the owners of the
means and instruments of production and property less but free proletariat emerged. The
technical conditions of production have undergone a vast transformation. In short in all these
changes, economic factors have played a decisive role. In each case, the internal contradictions
generated by the system lead to the breakdown of the existing system and the emergence of a
new one.

The theory of class struggle is a corollary to the economic interpretation of

history. According to Marx, the capitalist society is divided into two classes-the rich and the
poor, the haves and have-nots, and the exploiters and exploited. To Marx, the history of all the
hitherto existing society is the history of class struggle. At every stage of history, society is
divided into two classes like freemen and slaves in slavery, lord and serf in feudalism, capitalist
and proletariat in capitalism etc. A clash of interests has been the main feature of such a social

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system. In capitalism, the capitalist class owns all the means of production and exploited the
working class. In agreed for more and more profit, capitalist classes introduce new machines and
techniques that displace the labour. This unemployed reserve army began to organize into a
class. A ‘class in itself becomes a ‘class for itself. It leads to a fierce war between the two
classes. The end result of this class war is the revolution This revolution leads to the overthrown
of capitalism and the establishment of the dictatorship of the proletariat. To Marx class struggle
is a means of social change. Under the new social order, a well-satisfied labouring class will
emerge and works for the progress and development of the society

The Marxian production function is something like that of classical, i.e.

Y=f (K, L, N, S)

Karl Marx was an ardent believer in the labour theory of value. According to Marx, only
labour can produce a surplus. To Marx, the land is a free gift of nature and is spontaneously
provided by nature. On the other hand capital (K) is the sum of the pains and sacrifice of
ancestors of the labour class. In other words capital is a sum of exploitations made by the
capitalist in the previous period. ‘S’ shows technology and relations of production. In short in a
capitalist mode of production, only labour deserves a reward. But the capitalist in the name of
owning all other means of production appropriates a lion’s share of the value by giving a
subsistence wage to labours.

To Marx, technological progress depends on investment

S=f(I)

Investment in turn depends on the rate of profit. The term profit in Marxian theory is
known by another name, surplus value.

I=f( R1) R1= rate of interest

According to Marx, the gross output of an economy is composed of three elements.

They are variable capital ’v’ or the wage bill. Next, the constant capital ‘c’ includes plant and
raw materials used in production. The term ‘c’ shows the capital stock. Finally, there is a surplus
value‘s’ or value-added in production. For Marx, the absolute amount of profit is equal to the
absolute amount of surplus value. Surplus value also shows the degree of exploitation.

In short, the value of output in an economy is the sum of these components.

C =c+v+s

These components have been used by Marx to explain the following three ratios.

a) The rate of surplus-value

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 The ratio of surplus value‘s’ to variable capital (v) is called the rate of surplus value or
the rate of exploitation. The‘S1’ is expressed in percentages.

S1= s x 100
v S1= rate of surplus value
b) The rate of profit

The ratio of surplus-value ‘s’ to the total capital (constant and variable) is called

The rate of profit.

P= s/c+v (P = Rate of profit)

c) The organic composition of a capital

The ratio of constant capital (c) to the variable capital (V) i.e. c/v is called the Organic
composition of capital

Q= c
v Q= Organic composition of a capital

The rate of profit in a capitalist economy depends on the rate of surplus-value s/v.
Technological progress is a vehicle with which capitalists can raise the surplus value.
Technological progress all are labour-saving devices. The introduction of labour-saving
techniques result in surplus manpower and Marx calls them an industrial reserve army or
relative surplus populations. This increase in labour supply will reduce the wage rate.
Competition among labour for a job further decreases the wage rate. A declining wage
rate enhances the surplus value and it is a further encouragement for the capitalist to use
technology. The existence of a reserve army keeps the wage rate at the subsistence level
and progressively raises the surplus value. An increase in surplus-value increases
capital formation and hence it is known as development.

However, this device for capital formation also needs more and more labour
to operate the machine. Here also the capitalist can exploit the labour via three methods,

1. By increasing working hours

2. by lowering wages below a subsistence level

3. by improving the efficiency and productivity of the working class

Therefore profit depends upon the level of technology and wage

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 R=f (T, W) T= technology W= wage

Of these three options, capitalists select the last one. The best way to increase surplus
value is to improve labour productivity via technical progress. The other two options have their
limitations. The introduction of the latest technology can eliminate petty capitalists and can earn
a huge surplus value. The reinvestment of this surplus value further enriches the economic
growth process. The leading capitalist or the introducer of the latest technology initiates capitalist
development. ‘Accumulation and accumulation of capital became the motto of capitalist classes.

Karl Marx predicts that the end result of this growth is the end or decay of capitalism.
To Marx economic growth is not a continuous process in capitalism but the cyclical fluctuations
will affect the economic growth process. There are three reasons for the crisis of growth in a
capitalist economy.

1. The falling rate of profit

The falling rate of profit can be explained by the organic composition of capital. The
relationship between the rate of profit and the organic composition of capital can be derived
as follows.

P= S
C+V
Multiplying the numerator and denominator on the RHS with’V’ we get

P=S V
V(C+V)

P= SC+SV-SC
V(C+V) adding and subtracting SC in the numerator

P=S(C+V)-SC
V(C+V)

= S(C+V) - SC
V(C+V) V(C+V)
= S- S xC
V V C+V S1=S/V Q= C by P.M Sweezy
C+V
=S1-S1.Q

P=S1(1-Q)

It shows that the rate of profit(P) depends upon the rate of surplus value multiplied by
one minus the organic composition of capital(1-Q) The equation shows that there is an
inverse relationship between the rate of profit and organic composition of capital. An
increase in the organic composition of capital leads to a decline in the profit rate. The fixed

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capital(c ) increases in the long run. This increase in c brings about a similar increase in the
organic composition of capital. The increase in the organic composition of capital leads to a
fall in the profit rate

2. Disproportionality among various lines of production

In a capitalist economy, production is carried out independently. The capitalist’s
knowledge of market conditions is imperfect. This imperfect knowledge leads to
overproduction. Overproduction reduces price and profit.

3. Under consumption
In capitalism, wages depend on the level of investment

W=f (I) and consumption depends on the wage bill

C=f(W)

With technological progress unemployment increases. It may affect the consumption

level and demand for commodities by the largest spending community, labour. On the other
hand, greed to accumulate more and more capital, the consumption expenditure of capitalists
remains the same. Therefore the aggregate consumption expenditure falls and it leads to
overproduction, unemployment and crisis in a capitalist economy

To escape from this crisis capitalist opens up a new market for their product in
foreign countries. It will enhance foreign trade and sometimes to colonization. This will
eliminate indigenous products of colonies and their misery increases. It means there is an
export of evils of capitalism to poor countries. But this adventure of a particular capitalist
country to capture profit is not long-lasting. There are so many rich countries in the world
and competition among them to capture foreign market leads to imperialistic war and a fall in
profit. Finally, the unsatisfied labours all over the world will wipe out capitalism through a
revolution and thereby establish a dictatorship of the proletariat, socialism and communism.

Criticisms

For communists, Marx’s ideas were a gospel but to the non-communists, he is a false prophet. Some
of the criticisms that are levelled against Marxian theory are

1. The concept of historical materialism is open to objection

According to historical materialism or economic interpretation of history, human activities are
largely influenced by economic factors. In reality, human activities are influenced by non-
economic activities also. E.g religion

2. Theory of class war is criticized

In Marxian theory, capitalists and labours are in opposite camps. In the modern world,
there is a group of entrepreneurs, capitalists, technocrats, and managers who can understand very

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 well the feelings of labours and keep a brotherhood with labour, and there is no chance of class
war

3. The theory of surplus value is defective

The Marxian theory is based on the labour theory of value. But in real life, there are three
other factors of production also. It is the capitalist or entrepreneur who takes initiative in
production so he will derive a reward

4 Effects of technological progress

To Marx with technical progress unemployment increases but the experience of

advanced countries is that with technical progress employment opportunities increase

4. Analysis of crisis is outdated

To Marx crisis in a capitalist economy is due to a fall in profit and consumption and it will lead to
the collapse of capitalism. But present-day capitalist countries can effectively control these evils by
suitable fiscal and monetary policies

Applicability to LDC

Marx was mainly concerned with the problems of capitalist economies and there is no special
attention to the problems of UDCs. In these countries even now people are engaged in agriculture for
their lively hood and there exists a semi-feudal setup. To Marx, the principal cause of
underdevelopment in these countries is foreign domination. The only remedy to this is political
freedom

LDCs are overpopulated there is a scope for development by overthrowing capitalism and
imperialism because in these countries also there are some elements of class struggle like exploited
labour, the concentration of wealth in the hands of somebody, the existence of a reserve army,
subsistence wage, chronic unemployment. All these factors can lead to class struggle and the
establishment of the dictatorship of the proletariat. Marxian advocacy of planned development is
more congenial to the economic growth process of LDCs.