Pol Eco 1 Notes

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Political Economy I (University of Delhi)
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ECONOMY, STATE & SOCIETY

Authors:
Gaurav Poddar
Jalnidh Kaur

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ACKNOWLEDGEMENTS
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Dedicated to the time-strapped semester

reader whose marginal utility from this
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eleventh hour...

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PREFACE
Dear Reader
After the fantastic success of our ‘Economic History of India’ title and
the chain of thank-you emails and messages we received, we were even
more encouraged to write another help-book aka ‘Wow-Book’. What
you hold in your hands at the moment, is the result of persistent and
unrelenting effort over the past few months by the EurekaWow team.
As you would have grasped by now, ‘Economy, State and Society’ is a

logical paper with a focus on understanding ideologies, perspectives and
theoretical underpinnings. Like true economics students and for our
true economics readers, we have tried our best to maintain ‘economy
of expression’ to economize on your space and time, while not
compromising on the quality of the content. This Wow-Book covers
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How to Study?
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Highlight stuff that you need to memorize.
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somewhere too. This way, you will hedge yourself from
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. According to Nobel Laureate Daniel Kahneman, it really
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Since most economics students are not adept at the art of writing long
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writing your final answer in the exam. Since the material is structured,
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Authors
Gaurav Poddar
Jalnidh Kaur

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CONTENTS
1. Materialist Conception of History and Political Economy
[J. Gurley and O. Lange]………………………………………………………….10
2. History of Economic Thought
[E.K. Hunt]………………………………………………………………………………26
3. Capitalism in History
[Irfan Habib] ………………………………………………………………………….33
4. Behind The Veil of Economics
[R. Heilbroner]………………………………………………………………………..39
5. Theory of Capitalist Development
[P. Sweezy]……………………………………………………………………………..47
6. Economic Crises and Falling Rate of Profit
[Anwar Sheikh]……………………………………………………………………….76
7. The Recent Crisis in Global Capitalism
[Vamsi Vakulabharanam]……………………………………………………….86
8. Capitalism, Socialism and Democracy
[J. Schumpeter]………………………………………………………………………93
9. The Political Economy of Growth
[P. Baran]……………………………………………………………………………..110
10. Fordism and After
[Fran Tonkiss]……………………………………………………………………….119
11. Post-Fordism
[Ash Amin]……………………………………………………………………………126
12. Political Aspects of Full Employment
[M. Kalecki]…………………………………………………………………………..134
13. The Role of The State
[R. Heilbroner]………………………………………………………………………140
14. Financialization of Global Economy
[Ronald Dore]……………………………………………………………………….146
15. Multi-national Corporation and The Law of Uneven
Development
[S. Hymer]…………………………………………………………………………….155

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16. Trans-national Corporations

[R. Kiely]……………………………………………………………………………….171
17. Lenin’s Theory of Imperialism Today
[Prabhat Patnaik]………………………………………………………………….183
18. Meaning of Economic Imperialism
[James O’Connor]…………………………………………………………………195
19. Nationalism and Economic Policy in the Era of Globalization
[Amit Bhaduri]………………………………………………………………………203
20. Paper I and Paper II………………………………………………………………219
Please Note:
► Chapters 10, 11, 14, 15 and 16 are not a part of 4th Semester
Syllabus for B.A. Economics (H) (2nd Year students)
► Chapter 19 is not a part of Annual syllabus for B.A. Economics
(H) Part III (3rd Year students)
However, we recommend the readers to go through all the chapters!

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UNIT 1
Analyzing Social Change in Historical
Perspective
References:
1. J. Gurley, “The Materialist Conception of History”
2. O. Lange, “Political Economy” Vol. 1 Chapters 1 and 2
9 Economy, State and Society

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Chapter 1
MATERIALIST CONCEPTION OF HISTORY
AND POLITICAL ECONOMY
(J. Gurley and O.Lange)
Introduction
Marx and Engels developed a theory about the movement of history
that purports to explain why feudalism gave way to capitalism and why
the latter will be succeeded by socialism. This view of social
development is called The Materialist Conception of History. According
to this Marxian theory, people in a society in any given time, have a
certain level of productive ability which depends on their knowledge,
skills, the technology available to them and on the bountifulness of the
natural environment that they live in.
These are called productive forces and they determine the way people
make a living. People relate to one another in producing and exchanging
the means of life. Marx referred to these production and exchange
relationships as the social relations of production. The productive
forces and the relations of production, together form the economic
structure of the society which shapes the superstructure. It is not the
consciousness of people that determines their existence, but their social
existence that determines their consciousness. (We will return to all
these terms in greater detail in a while.)
Political Economy
Political economy is the study of social laws governing the production
and distribution of the material means of satisfying human needs.
What are human needs and means of satisfying them?
Any human being in the society needs food, clothing, shelter, etc. The
needs can be individual or collective. Collective needs can be for
example national security. The means of satisfying the needs are

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material objects called goods, for example, houses, bread, books, etc.
These material objects are drawn from the nature by extracting and
processing them, by changing their physical, chemical and biological
properties.
Production Labour
The conscious and purposive activity of converting the material objects
drawn from nature into goods for use is called production. By labour,
man acts on nature and transforms it into a form useful to him. At the
same time, man transforms himself too by developing the ability to
perform better. In short, labour is a process in which man through his
own activity, initiates, regulates, and controls the material reactions
between him and the nature.
Means of production and Means of consumption

For a man to act on nature, he needs various material objects like
ploughs, machines, etc. These are called means of production. Means of
production can be divided into
- Objects of labour – Those that are processed by human labour
like soil, minerals, semi-finished and unfinished machinery, etc.
- Means of labour – Those which are used in processing objects of
labour, like tools, axes, buildings, land, etc.
If the good is used to satisfy the need of a producer to produce another
good, it is a producer good. If the good is used to satisfy consumers and
is not used for any further production process, it is called consumer
good. For example: A machine used to make cloth is a producer good,
and the cloth which is worn directly by man is a consumer good.
Production and Distribution – Their Social Nature

Any production of material means of satisfying needs is social
production. When there is collaboration in production, it is called
cooperation in which division of labour takes place. Distribution, by its
very nature is a social act. Goods are distributed to satisfy individual and
collective needs.

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Productive and Non-Productive Labour

The labour which is neither involved in the distribution of goods nor in
the activities which themselves directly satisfy human needs are called
non-productive labour because they do not produce any material object
as such. Example – the labour of a teacher or an artist. The means of
performing non-productive labour (also called services), are material
objects like school buildings, musical instruments, etc. The means of
performance of services are classified as consumer goods.
Productive forces
- The productive forces are the material means of production
that people use to gain livelihood from nature.
- These include: Machines, instruments, raw materials, tools and
natural resources. They also include human beings themselves,
their knowledge, talents, aspirations and needs.
- People make their living and themselves simultaneously.
Marxian view of social development emphasizes that man
initiates changes and by doing so, makes himself worthy of the
new conditions, i.e., transforms himself by improving his
productive ability.
- According to Marx, human nature is determined by the mode of
production and since the mode of production change, human
beings and their nature also changes.
Social Relations of Production

- In short, the social relations of production are the class
structure of a society revealed in the work process. The mode of
production of a society is seen through its class structure, i.e.,
social relations of production.
- Social relations of production and exchange are the institutions
and practices most closely associated with the way goods are
produced, exchanged and distributed. This includes property
relations, the way labour is recruited, organized, the markets or
other means of exchanging the products of labour, etc.

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- Productive forces determine the social relations of production.

Productive forces grow over time. This creates conflicts with the
existing class structure. These conflicts, or internal
contradictions leads to a revolution (We will discuss this idea in
detail in a while)
Economic Relations
- Social relations that emerge in the economic process differ from
all other types of social relations in that they come into being in
connection with material objects that satisfy human needs.
These social relations are called economic relations.
- There are two types of social relations which together form the
economic relations
(1) Production relations – Those that appear in the process of
production
(2) Distribution relations – Those that appear in the process of
distribution
Production Relations and Social Productive Forces

- Production relations depend on the way in which man acts on
nature and on the way he himself is transformed by the activity,
i.e., Social Productive Forces.
- Production relations are formed in the labour process. The
social productive forces which include technical methods of
production, the means of production, etc. express the
productive potential of the society.
- The term material productive forces was used by Marx to stress
that productive forces express man’s relation to the material
world. They also express the active nature of this relation.
Dependence of Production Relations on Social Productive Forces;

Ownership of Means of Production
- Development of Social Productive Forces requires a specific
form of co-operation and division of labour in the process of

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production. The level of co-operation and division of labour in a

large factory differs from those in a craftsman’s workshop.
- It is the ownership of the means of production which decides
the ways in which they are used and which thereby determines
the forms taken by cooperation and division of labour.
- The ownership of means of production forms the foundation,
the organizational principle, of production and distribution
relations.
Distribution Relations and Production Relations

- Production relations are shaped according to the productive
forces, i.e., according to the way in which man’s action on the
nature is developed.
- Distribution relations are themselves dependent on production
relations. The way in which products are distributed in the
society is determined by the way in which men participate in
the social process of production.
- Distribution relations change when the production relations
change and hence production relations are the foundation of
the whole economic relations.
The concept of DIALECTICAL MATERIALISM

Marx’s view of social development is called Dialectical Materialism.
The Dialectics in Dialectical Materialism
- The natural world or cosmos is in a state of constant motion.
- Quantitative changes leads to qualitative changes. This is known
as the law of passage from the quantitative to qualitative
changes.
- It also includes the law of negation of the negation.
The Materialism in Dialectical Materialism
- World is a material, all phenomena in this universe consist of
‘matter in motion’

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- Marxian materialism maintains that ideas, philosophies,

religions, all take form within the influence of real material
conditions and are therefore determined by them.
- The driving force is man’s relation to matter, of which the most
important is his mode of production.
The five elements of Dialectical Materialism are:

 All things are in constant change
 The ultimate source of change lies within the thing itself
 The source is the struggle of the opposites, i.e., the contradiction
within each thing
 The struggle brings about qualitative changes, the things are
transformed into something else
 Practical critical activity resolves the contradictions
Marxian dialectics is the logic of constant change. A, which includes not

only itself, but its opposite non-A is in
continuous evolution. The fundamental
cause of change in all things lies in their
internal contradictions, in the struggle
of the opposites, in their self-
movement. According to the dialectical
law, everything includes its opposite (its negative); a thesis and an anti-
thesis. The struggle of the opposites leads to the transformation of the
thesis into some other and a higher form of being – synthesis. The
development of the thesis into synthesis doesn’t stop. It creates a
synthesis and its opposite, which again contradicts, leads to a struggle
and the emergence of a new higher synthesis.
Modes of Production
The social productive forces and the production relations connected
with them and based on a given type of ownership of the means of
production are jointly termed as the mode of production.

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Five basic modes of production are:

I. Primitive Community – The majority of the means of
production are a common property
II. Slavery – Both the mean of production and those who own
them are the property of others, the slave owners.
III. Feudalism – Land is partly private and partly state property or
belongs to Church. Those who till the land, the serfs can’t leave
it at will.
IV. Capitalism – The means of production are the property of a
certain section of society, the capitalists. Others work as free
wage-laborers, operating the means of production owned by
the capitalists.
V. Socialism – The means of production are the property of the
whole society.
Between any two modes of production, there are transitional stages.

We will see this clearly when we look at the transition from feudalism to
capitalism later.
Antagonistic and Non-Antagonistic Modes of Production

In those production relations, where not all members of the society own
the means of production and hence the society is divided into social
classes and the production relations, then the whole mode of
production is antagonistic. In such a mode of production, there are two
social classes – One comprising of those who own the means of
production and the other comprising of those who are deprived of it.
Those in the second class work for the first class and are exploited to a
large extent.
If all the members of the society share the ownership of the means of
production, such that there are no social classes, we call such a mode of
production to be non-antagonistic.

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Social Consciousness
- Social relations are conscious relations. Man is conscious of the
fact that he affects other individuals through his behaviour. He
is, however, unconscious of the economic relations and is
generally aware only of the distribution relations like collecting
wages, rents, etc. Certain production relations are also
conscious.
- Social conciousness includes – Ideology and Social Psychology
Ideology – Certain ideas take shape in man’s mind. He is
conscious of these social relations through the agency of these
ideas. There also emerge legal and political, moral and religious,
philosophical, scientific and artistic ideas, on the basis of which
man evaluates social relations. A system of such ideas is called
Ideology.
Social Psychology – Man also develops distinct psychological
attitudes towards various social relations. These attitudes
constitute Social Pcychology.
- An ideology or social psychology is an expression of the social
ideas and socio-psychological attitudes of either the entire
society or the part of the society such as social classes. We call
this social conciousness.

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Superstructure
- According to Marx, the economic structure of a society molds its
superstructure of social, political and intellectual life, including
sentiments, morality, illusions, principles, modes of thought and
views of life.
- The supertructure includes the ideas and the sytems of
authority, the supporting institutions (political, legal, military,
etc) which support the class structure of that society.
- The productive activity and the attending class struggles change
the economic structure of the society which eventually causes
the character of superstructure to change after ideological
struggles.
- Superstructure is indispenable for the exitence of a particular
mode of production. As can be seen from the flowchart above,
the supertructure along with the mode of production, is called
social formation or the social system. A social formation is an
internally balanced and a harmonized whole.
Base
The production relations proper to a given social formation are called its
economic base.
Law of Progressive Development of Productive Forces

We know that man acts on nature and tranform his natural
environment into a form which can be of use to him. The artificial
environment that man creates, continually supplements man’s natural
powers, thus strengthening his domination over nature. In this way, the
social forces of production are continually developing.

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The social ideas and the psychological attitudes are slow to change, but
the productive force are contantly developing and raising the
productive potential of the society. This pattern of regularity in the
development of the social productive force is called the Law of
Progressive Development of Productive Forces. This law states the
necessity of a continual change in productive forces, leading to a higher
productive potential of the society.

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First basic law of sociology - Law of necessary conformity between

production relations and the character of productive forces
We know that the production relations can not be arbitrary for given
productive forces. A given state of productive forces demands
appropriate production relations. Production relations adjust to the
productive forces to stimulate further development and if they don’t,
they will impede development.
Marx explains this by stating – “ The hand-mill gives you society with
feudal lord; the steam-mill, society with the industrial capitalist.”
Second basic law of sociology - Law of necessary conformity between

Superstructure and the Economic Base
Superstructure is not arbitrary. It adjusts to the economic base and
consequently to the entire mode of production. When the fundamental
production relations change, the superstructure changes as well. A new
social formation is born. This is the second basic law of sociology – Law
of necessary conformity between Superstructure and the Economic
Base.
When the economic base changes, the elements of social consciousness

which are incompatible with the requirements of the economic base
change with it. At the same time, new social relations and new elements
of social consciousness are developed.
These two laws of sociology are the laws of conservation of social

formations. They ensure inner harmony and balance of social
formations.
Conservative Character of Social Relations and Social Consciousness

Social relations are nothing more than continually repeated actions of
certain kinds, together with the social ideas and socio-psychological
attitudes which result from these social relations which have a tendency
to grow into habits and to form a complex of customary social
behaviour. Social relations and the whole of social consciousness tend

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to be slow to change, weighed down by conservatism and a peculiar

inertia which can only be overcome by external stimuli.
Explaining the schema of social structure and development (Refer to

the flowchart)
1. By the creation of the artificial environment by man,
contradictions are set up between his previous activity and the
stimuli to which this new environment gives rise to. These
contradictions are eliminated by the change in productive
forces. (The law of progressive development of productive
forces operates). Since nature changes continuously, the
productive forces also change.
2. When the productive forces change, contradictions arise
between the new productive forces and the old production
relations. To eliminate these contradictions, the production
relations change in order to fit the new productive forces. (First
basic law of sociology operates). Hence, the economic base
undergoes a change.
3. When the economic base or the production relations change,
contradictions arise between the new economic base and the
old superstructure. In order to eliminate this contradiction
which hampers the growth of the new economic base, the
superstructure changes to adjust to the new economic base or
production relations. (Second basic law of sociology operates).
4. This change in superstructure leads to the emergence of a new
social formation.

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Historical Materialism
The theory which maintains that there is a pattern of regularity in social
development as we have set it out is called the materialistic conception
of history, or historical materialism. It explains the entire development
of human society as a complex of dialectical processes.
Questions
1. “Just as Darwin discovered the law of development of organic
nature, so Marx discovered the law of development of human
history” Explain the above statement through the concept of
‘Historical Materialism’ and its importance in describing the
process of social change of one social formation into another.
2. Marx says, “ The hand-mill gives you society with feudal lord;
the steam-mill, society with the industrial capitalist.” According
to Gurley, this statement over-emphasizes technological to the
neglect of dialectical. Discuss.
3. “The whole development of the society is determined by
development of productive forces and consequent changes in
relations between men in production” Elucidate.
4. Explain the relationship between Economic Base and
Superstructure. Why is there a great resistance to change in
superstructure?
5. What do you understand by ‘Dialectical Materialism’? What are
the three levels at which dialectics operate to bring about a
change in the social formation?
6. Discuss the role of social productive forces in the Marxian
analysis of change in the socio-economic formation of a
country.
7. Explain the idea of materialistic conception of history as
expounded by Marx. What is the role of dialectical process in it?

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8. Bring out the relationship between productive forces,

production relations and the superstructure in the process of
transition from one social formation to the other. Why
successive social formations are considered “progressive” in
relation to the earlier ones?
9. Describe the relation between productive forces and production
relations (with emphasis on difference between physical
productive forces and human productive forces). Also describe
the process of determination of distribution relations by
production relations.
10. What is meant by class in Marxian theory? What role did Marx
think class struggle will have in the evolution of social
formations?
11. What is a mode of production? Distinguish between
Antagonistic and Non-Antagonistic modes of production with
illustrations.

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UNIT 2
The Transition from Feudalism to
Capitalism
References:
1. E.K. Hunt, “History of Economic Thought”
2. Irfan Habib, “Capitalism in History”

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Chapter 2
HISTORY OF ECONOMIC THOUGHT
(E. K. Hunt)
The historical development of the forces of production has resulted in a

continuously increasing capacity for societies to produce larger social
surpluses. In this historical evolution, societies have generally divided
into two separate groups – those who toiled and those who
appropriated the surplus. Within this framework of a mode of
production, capitalism can be explained in terms of its institutional and
behavioral arrangements elaborated in the four features below.
1. MARKET ORIENTED COMMODITY PRODUCTION

Under capitalism, products are valued not only for their use value
but also their exchange values. It is characterized by the existence
of a well developed market in which products can be freely bought
or sold for money. Under the system, a person’s productive activity
has no direct connection to that person’s consumption; exchange
and market must mediate the two. Thus the complex economic
interrelationships and dependencies exist that do not involve direct
personal interaction and association.
2. PRIVATE OWNERSHIP OF MEANS OF PRODUCTION

The second defining feature of capitalism is private ownership of
the means of production. This implicitly implies two things. One,
that certain individuals now have a ‘right’ over raw materials, tools,
machinery and buildings. Two, because of this right, certain
individuals can hence be ‘excluded’ from ownership or usage of any
of these assets. As things turned out to be, the history of capitalism
reveals that ownership eventually got concentrated in the hands of
a small segment of society – the capitalists, who would not
necessarily have to work to earn money but could earn simply by

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virtue of their ‘control’ over assets. This permitted the capitalist to

appropriate the social surplus.
3. LARGE WORKING CLASS

This domination implied the existence of a large working class with
no control over the means necessary to carry out their productive
activity. Thus the typical worker enters the market owning only his
labour power or capacity to work, to sell. He gets wage in return for
his labour expended. With the wage, he is able to buy back from the
capitalists only a portion of the commodities that he himself has
produced. The remainder is retained by the capitalist class.
4. INDIVIDUALISTIC, ACQUISITIVE, MAXIMISING BEHAVIOUR

Finally, most people under capitalism are motivated by
individualistic, acquisitive, maximizing behaviour.
- This was ensured by paying low wages to workers and by keeping
them at the verge of extreme material deprivation and
insecurity.
- Since capitalism is characterized by a competitive struggle among
capitalists to secure larger shares of social surplus, it is the threat
of extinction and being overtaken that fuels the maximizing
behaviour.
STORY OF EVOLUTION OF CAPITALISM

A. PRE-CAPITALIST EUROPEAN ECONOMY
The decline of the western part of Roman Empire left Europe
without the laws and protection that the empire had provided. Now
a system of feudalism came into being which had the following key
features.
 A feudal hierarchy was created which looked like the following
diagram: (See next page)
This hierarchy was held intact with a system of mutual obligations
and services up and down. For example, in return for payments of
money, food, labour or military allegiance – the overlords granted

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the right to use land to their vassals (who would go to war and
provide military security). At the bottom of the pyramid were the
serfs who tilled the land. The lord was
obligated to protect his serf as the
serf performed extensive labour for
the lord.
 The basic economic institution of

medieval rural life was the manor. A
dispute redressal mechanism existed
where disputes between serfs were
resolved in the lord’s court according
to the custom of the manor.
 The Catholic Church was the largest owner of land and exerted
great influence on the personal lives of the actors of the manor –
noblemen and serfs via the religious lords. The church provided
spiritual aid in exchange for the serf’s labour and the military
protection of the nobility.
 Towns were the main centres of manufacturing. The dominant

economic institutions in the towns were guilds – craft, professional
and trade associations that had existed in the Roman Empire.
 Medieval society was predominantly an agrarian society. The

social hierarchy was based on individuals’ ties to the land and the
entire social system rested on an agricultural base.
B. THE EMERGENCE OF CHANGE

Two key factors provided an impetus for change.
1. From two-field to three-field system
Under this new innovation in agriculture, land was divided into
three equal parts. New crops like rye or winter wheat could be
planted in the fall in the first field, oats, beans and peas in the

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spring in the second field and the third field would lie fallow.
Every year there was a rotation of these positions.
This led to planting of a) More crops and b) New crops and

resulted in a dramatic increase in output. Now, surplus was
available to sell in local and international markets.
Also, planting of fodder crops like oats supported more

draught animals and eventually horses became the principal
source of power replacing the oxen.  Also, greater efficiency
was achieved by this change.
2. From two wheeled to four wheeled pivotal axle

The costs of transporting agricultural products got further
reduced by the invention of four wheeled wagon instead of the
two wheeled pushcart. This led to three main changes:
 It made possible a rapid increase in population growth.
 A rapid increase in urban concentration also resulted.
 The growth of towns and cities led to rural-urban
specialization.
Overall, these factors weakened agricultural ties.
The question that is often debated is – What was the most important
force which led to the disintegration of medieval feudalism? Some
people believe that it was ‘trade and commerce’. But EK Hunt refutes
this on grounds that trade and commerce did not arise exogenously,
many internal factors in turn led to trade and commerce. Also,
commerce cannot be a principal force – a counterexample is Eastern
Europe where trade and commerce led to greater consolidation and
perpetuation of feudal relationships rather than the reverse!
Other Factors were also instrumental in this transformation, like

development of trade with the Arabs and Vikings in the north led to
increased production for export and to trade fairs. By the fifteenth

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century, the fairs were replaced by commercial cities where year around
markets thrived. This further led to the innovation of system of currency
exchange, debt clearing and credit facilities and modern instruments
like bills of exchange came into widespread use.
C. PUTTING OUT SYSTEM

The need for more manufactured goods led to increasing control of
productive process by the merchant capitalist. Earlier, the
craftsman worked as an independent entrepreneur and owned the
workshop, tools and raw materials.
Now they were replaced by exporting industries. The owner was

separated from the worker. The merchant capitalist would furnish
a craftsman with raw materials and pay him a fee to work the
materials into finished products. The worker no longer sold a
finished product to the merchant; rather he sold his labour power.
Effect: At a more macro level, these micro changes led to the

creation of a labour force which owned nothing to sell except their
labour power. Capitalist control was extended into the process of
production. The market and the search for monetary profits
replaced custom and tradition in determining who would perform
what task, how the task would be performed and whether a given
worker could find work to support himself. Capitalism became
dominant when the relationship between capitalists and workers
extended to most other industries in the economy.
Over time, capitalistic enterprises sought monopolistic positions

and erected barriers preventing ambitious poorer craftsmen from
competing with or entering new capitalist class.
D. DECLINE OF MANORIAL SYSTEM

 The peasants at the manors found that they could exchange
surpluses for money at the local grain markets, the money could

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then be used to purchase the commutation of their labour

services. This gave them incentive to produce more and
increased their surplus marketing. The cumulative effect was a
very gradual breaking down of the traditional ties of the manor.
 The lords also started feeling a need for cash to exchange for
manufactured goods and luxuries and began to seek ‘rent’ than
letting peasant farm their land directly with only labour service
obligations.
 The Hundred Years War between England and France followed
by breakout of plague in 1348 led to a huge fall in population.
As a result, supply of labour fell and wages rose. Land, now
relatively plentiful began to rent for less.
 The feudal nobility could not accept the low rents and high
wages and started to revoke the old arrangements. But they
found that now the clock could not be turned back. The result
was peasant revolts in England and Germany. Indeed,
fundamental structural changes in the economic and political
structure had occurred, although the price had to be paid in
terms of traumatic and violent social conflict.
E. CREATION OF WORKING CLASS

In the thirteenth century, the feudal nobility fenced off or enclosed
lands to graze sheep to satisfy the booming English wool and
textile industries’ demand for wool. The enclosures and increasing
population around this time further destroyed the remaining
feudal ties, creating a large new labour force.
Migration to cities meant more labour for the capitalist industries,

more men for the armies and navies, more men to colonize new
lands, and more potential consumers of products.
Other factors were also responsible for the creation of the working
class.

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 Numerous peasants, yeomen were bankrupted by exorbitant

increase in monetary rents and debts started mounting.
 The guilds became more exclusive and would not allow entry to
new members.
 Many of them became vagabonds and beggars. Repressive laws
prohibited people from being unemployed vagabonds.
 This left the class with no option but to join the working class,
selling their labour power.
F. OTHER FACTORS IN THE TRANSITION

Other sources of change were also instrumental in the transition to
capitalism. This included:
1. INTELLECTUAL AWAKENING
This fostered scientific progress which was put to practical use in
navigation. Telescope and compass enabled discovery of new
areas. These discoveries led to rapid and large flow of precious
metals to Europe and also ushered in a period of colonization.
2. INFLATION
During the sixteenth century, prices rose in Europe between 150
and 400 percent. Prices of manufactured goods rose much more
rapidly than either rents or wages. This led to inequality –
capitalists profited while workers suffered.
G. CONCLUSION
This reading tries to sum up the historical evolution of capitalism as
a system. E.K. Hunt has outlined many factors responsible for the
evolution and does not pin the causality on a single factor alone.
According to him, four main sources of primitive accumulation for
capitalism were rapidly growing volume of trade and commerce,
putting out system of industry, the enclosure movement and the
great price inflation.
There were other sources as well – colonial plunder, piracy and
slave trade but these were somewhat ‘less respectable and often
forgotten’.

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Chapter 3
CAPITALISM IN HISTORY
(Irfan Habib)
Irfan Habib offers an analysis of the debates surrounding few main

questions regarding the evolution of capitalism:
1. What is the ‘name’ of the phase between the decline of
feudalism and the rise of capitalism?
2. What were the chief factors which caused transition from
feudalism to capitalism?
3. What were the ‘main sources of primary accumulation’?
A. THE QUESTION OF NOMENCLATURE

The period between 1400 and 1750 was an interregnum period.
Feudalism declined by 1400 and full scale capitalism developed only
after industrial revolution i.e. by 1750.
In the period in between, what was actually happening? As we have

noted in E. K. Hunt, the following scenario was emerging.
 Enterprises emerged where wage labour was employed to
produce for the market
 But these incipient ‘capitalist enterprises’ still accounted only a
small portion of the total production. Peasant and artisanal
production was still the dominant form.
 Artisans and peasants were now increasingly tried to grow into
‘small capitalists’ engaging in hired labour
 There was a rising predominance of merchant employers.
What should the phase be called? Different scholars have advance

different names for this period. Here is a summary:
1. Some historians called it ‘feudalism’ by the logic that anything
that is non-capitalist is feudal. However, this logic is clearly
spurious. Irfan Habib finds this nonsensical – it is as if ‘by a

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sleight of hand, Marx has termed the three and a half crucial
centuries as feudal’.
2. Maurice Dobb called it ‘serfdom’ with a view to cover not only
a peasant tied to the land and rendering labour service or
paying rent-in-kind, but also a legally free tenant paying money
rent to the landowner. However, Marx states that the two are
essentially different as money-rent presuppose a considerable
development of commerce, urban industry and commodity
production in general.
3. Marx himself called it ‘petty mode of production’, which exists
also under slavery and serfdom but which unleashes its whole
energy only when the labourer is the private owner of his own
means of labour.
4. Tawney specifically called the changes in the countryside as
‘agricultural capitalism’ which was the bedrock of the rise of
the gentry in England.
5. Mendel called it ‘proto-industrialisation’ where putting out
system increasingly came into vogue and merchant-capitalists
would put out their funds to make contracts with rural
households that produced goods for sale on their own.
Advantage lay in the fuller use of family labour and the
cheaper costs of domestic employment during the slack times
of agricultural seasons.
B. WHAT REALLY WAS THE CAUSE FOR TRANSITION?

There are differing viewpoints detailing the causes for the transition
from feudalism to capitalism:
- According to Marx, capitalism was ‘an evolutionary natural
successor’ to feudalism since there were forces endogenous to
the system of feudalism which automatically led to the
emergence of capitalism.
- According to Maurice Dobb too, all major changes in the mode
of production arose out of internal factors or contradictions.

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- However, according to Irfan Habib, these views miss out the

essential features of the actual genesis of capitalism: the role of
force and the subjugation of external economies on the world
scale. These twin elements made capitalism a dominant mode
of production.
However, Marx recognized that the developments in this transition

period could give no more than a ‘snail’s pace’ to capitalist
development. Left to itself, the spontaneous tendency within petty
mode of production was to intensify landlord-exploitation and enlarge
merchant-capital at the expense of small producer’s capital. Thus there
is nothing natural from the transition from the manufactory to the
factory.
- Even technology is not an independent factor. The ordinary
attribution of the industrial revolution to a sudden spate of
mechanical invention in post 1760 England is quite
unsatisfactory.
- This is because these technological improvements themselves
were linked to the ‘state of industry and of economic resources’
from which the impetus needed to come.
C. WHAT WAS THE SOURCE FOR PRIMARY ACCUMULATION?

Primary accumulation means the primary source from which capital
for capitalism came from. Irfan Habib asserts that there were two
main pillars of primary accumulation: internal and external.
1. INTERNAL
Internal factors mainly refer to internal exploitation,
constituting the expropriation of the peasantry. Here are the
main internal factors:
i) When serfdom declined, lordship in England began to be
converted into landlordism, and the manor into lord’s
private estate. He became a private landowner charging

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RENT. This drive for rent only led to enclosures and further
revolutionary changes.
ii) This increase in rent-revenues kept in pace with the
creation of a rural proletariat which became a reserve army
for the British town industry. The two processes were
complementary to each other.
iii) Landlords’ new accumulation started being invested in
banks and stocks and this accumulation provided industrial
capital. Data suggests that nearly a third of the stock
invested in canals came from the landowner.
2. EXTERNAL
However, Marx regarded colonial plunder as the second major
source of primary accumulation. It took place as follows:
i) Spain conquered Mexico in 1518. It was able to seize
control over its silver mines and got all its silver free. Nearly
112.5 metric tons of silver were annually transported to
Spain through official standards. This generated capital in
Western Europe that could ultimately ignite industrial
revolution.
As silver stocks rose in Western Europe, it gained a
continuous advantage over rest of the world in the
transactions of trade. Western Europe exported over 100
tons of silver annually.
ii) In the seventeenth century, Amerindian population
declined steeply, need arose for alternative source of labour
for Brazilian, Caribbean and American plantations. This was
supplied by the enslavement and transport of Africans.
Around 8 to 11 million were forcibly transferred hence. This
has been termed as the greatest forced migration in history.
The slaves worked on sugar, tobacco and cotton
plantations. Britain thus got free annual imports of these
items from West Indies worth 3.9 million pounds.

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iii) A high tribute was imposed on Asian shipping which

constituted a drain of wealth. This tribute in turn funded the
spurt in African slave trade.
Thus, England obtained large revenues out of external sources. The

history of primary accumulation establishes beyond any doubt that
capitalism could not have arisen without destroying its peasantry and
without subjugating and exploiting external economies all over the
world. The arrival of capitalism was not a natural internal process:
subjugation of other economies was crucial to the formation of
industrial capital within it.
Questions (from E.K. Hunt and Irfan Habib)

1. Discuss the role of primitive accumulation in the transition from
feudalism to capitalism.
2. “Many Historians have argued that the spread of trade and
commerce was the single most important force leading to
disintegration of medieval feudalism” Discuss.
3. Discuss the difference in the standpoint of E.K. Hunt and I.
Habib regarding causes of decline of Feudalism in Western
Europe.
4. What according to Irfan Habib are the pre-requisites for the
development of a capitalist society? Explain clearly how he
asserts the importance of primitive or primary accumulation, in
the development of capitalism.
5. What are the basic characteristics of feudalism as distinguished
from the modes of production that prevailed before it? Explain
with illustrations from countries.
6. Discuss the process of emergence of capitalism from feudalism.
Was it completely an internal process?
7. What are the primary causes for the transition to capitalism
from pre-capitalist societies? How would the Marxist theory of
social change explain this transition?

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UNIT 3
Capitalism as an Economic System
References:
1. R.L. Heilbroner, “Behind The Veil of Economics” Chapter 2
2. P. Sweezy, “The Theory of Capitalist Development” Chapters 2,
4, 5, 6, 8, 10
3. Anwar Sheikh, “Economic Crises” and “Falling Rate of Profit”
4. Vamsi Vakulabharanam, “The Recent Crisis in Global
Capitalism: Towards a Marxian Understanding”

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Chapter 4
BEHIND THE VEIL OF ECONOMICS
(R.L. Heilbroner)
Part 1
Capitalism as a Regime
It’s a very difficult task to define capitalism. The conventional
description defines capitalism as an economic system, whereas
Heilbroner defines capitalism as a regime which has both conscious
implications (economic and political) as well as unconscious implications
(psychological).
In the pre-capitalist societies, the focus was on use value whereas in

capitalism, the focus is on exchange value. Wealth amassed by
capitalism differs in both quality and quantity as compared to the pre-
capitalist societies.
Smith and Marx stressed on the importance of expansion of commodity

form of wealth. Smith explained it through rise in labour productivity
whereas Marx used his M-C-M’ circuit to explain it.

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According to Smith people have a desire for bettering their conditions

by maximizing utility. A capitalist’s expansive drive for capital is both a
conscious and an unconscious drive and it is this need and the
unconscious drive of the capitalist that is reflected in his desire for
power, prestige and domination. According to Heilbroner, capitalism is
a larger cultural setting in which the pursuit of wealth fulfills both
conscious and unconscious purposes. In this context, he calls capitalism
a regime.
Comparison of Pre-capitalist and Capitalist societies

Pre-capitalist societies Capitalist societies
Concerned with use value Concerned with exchange value
Workers were forced to work on Workers cannot be forced to work
the land
There is power of assertion; the There is power of refusal. A
ownership of land is not with an capitalist who owns the land can
individual. decide not to use it at all, no one
can say anything – This is the
negative form of power
Those who work on the land could There was a wage-labour contract.
get a portion of the harvest or Those who worked got wages and
security from those at higher were exploited.
levels.

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In a capitalist society, inequality exists. Inequality due to knowledge-

differences leads to mercantile gains and those due to productive
capability leads to capitalist gains. According to Marx, the main aim of
the capitalist is to maximize profits. Just like in any regime, in capitalism,
there is a superior class (capitalists) and a class below it (workers). Just
like in a regime, the lower class people are exploited by the superior
class to maximize their profits. Profit is a “victory” for a capitalist.
Hence, Heilbroner calls capitalism as a regime.
Part 2
Themes of Capitalism
Capitalism can be understood by distinguishing three themes:

1. The transfer of the organization and control of production
from the imperial and aristocratic strata of pre-capitalist states
into the hands of mercantile elements (ECONOMIC)
The transformation into capitalist class took centuries to
complete and was not legitimated until the English and the

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French revolutions. There are two aspects of this

transformation:
(1) Economic transformation: The mode of production changes
(Social Relations change). In the pre-capitalist societies,
there were serfs who worked for the lords and paid them
the output. In the capitalist societies, it is the workers who
offered their wage-earning labour services. Labour was a
commodity which was exchanged for wages to buy goods.
Thus, the system of feudal lords changed in moving to
capitalist societies.
(2) Political transformation: The economic revolution that we
saw above is possible only after a political convulsion in
which one social order is destroyed and a new social order
comes. We saw the disruption of social change in England
when the peasants were dispossessed from communal land.
There were conflicts and strikes. Serfs left to exercise
freedom in towns and cities, there was putting out and
enclosure system and there was inflation because of
imports of Spanish gold in the 16th century.
2. The historical evolution of capitalism emphasizes a related but

a distinct aspect of political change (POLITICAL)
This involved two realms:
(1) The state was responsible to maintain law and order and
the declaration and conduct of war. State retained the
monopoly of legal violence and remained the centre of
authority. This was unlike the feudalistic society where any
conflict between the serfs was resolved by the lords.
(2) The second realm was limited to the production and
distribution of goods and services, which was like a semi-
independent state within a state.
The two realms had two major effects:
(1) On the structure: State could intervene in the capitalist
system, vis-à-vis the sphere of production and distribution.

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The two realms perform activities that are essential for the
maintenance of social formation and a structure of
capitalism.
(2) On the freedom: Capitalism led to both economic and
political freedom. The workers could easily deny offering
their labour services. They were no longer forced to work
like serfs. They could move to the towns and cities and
exercise their freedom. The capitalists were also free to do
whatever they wanted with the land that they owned. They
could even choose not to produce anything on the land.
This was “natural liberty”. However, capitalism is not a
sufficient condition for freedom.
3. The evolution of capitalism calls attention to the cultural

changes that have accompanied and shaped its institutional
framework (PSYCHOLOGICAL)
It is mainly this theme of capitalism that makes it a regime and
not merely an economic system. Behind capitalist’s conscious
motivation to increase profits, there is hidden an unconscious
drive of power, prestige and domination. It is a set of belief
systems to which the ruling elements of the society themselves
turn for self-clarification and explication.
Differences in Ideology
Pre-capitalist society Capitalist society
The ruler is divinely chosen The ruler is the capitalists and
elite. the government.
They focus on religious They focus on science and are
doctrines and religious secular, i.e., they have diverse
cosmology. strands.
Work and life are the natural Work and life is a complex web
order of things. of interactions between the
capitalists, workers and the
state. This is taught through
political economy

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Part 3
In capitalism (M-C-M’ circuit), there is a drive to expand M’, i.e., to
increase M’-M = ∆M. The force exerted in this expansive process can be
divided into two broad categories:
1. Internal changes – Arises from the expansive pressures of the
core process of capital accumulation.
2. External changes – The macroeconomic movement; Changes in
institutional structure, etc.
Internal changes
 Capitalist hire workers; pay them wages and produce goods.
These goods have to be sold in the market against the efforts of
other capitalists (competitors) to do the same. It is this
competition which forces the capitalists to introduce
technological and organization change to reduce the cost so
that they can compete in the market and ensure as high a profit
as possible for themselves. There is constant revolutionizing of
techniques and commodification of material life.
 Internal change also arises because of pressures in capital
accumulation. A capitalist faces a labour-capital tradeoff. In the
quest to cut down the costs, if a capitalist can’t reduce the
wages further (if it’s at a minimum subsistence level) then he
might shift from labour to capital which will increase the
capacity and reduce the costs. This creates unemployment.
 A capitalist always tried to match the demand and supply
without political intervention. This cybernetic capacity is a
feature of capitalism not found in the rigid systems of pre-
capitalist societies where allocation is done by tradition or
command.
External changes

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 There’s a tendency to amass wealth. However there are two

neglected aspects of this increase in wealth that requires
mention:
(1) It leads to the development of the underdevelopment.
Capital has no national limits. There is a self-reinforcing and
a cumulative tendency towards strength at the centre to
which the surplus is siphoned and weakness in the
periphery from which it is extracted. It is somewhat like
imperialistic hegemony.
(2) Increase in the per capita GNP, both increases output as
well as lead to the extension of the M-C-M’ circuit. This is
manifested in a continuous implosion of the accumulation
process within capitalist societies – the process of
commodification of material life and its explosion into
neighboring non-capitalist societies.
 Capitalism has led to changes in the institutional texture. In
capitalism, there is heterogeneous texture of enterprises, and
of very large and powerful public sectors.
- The skewed size distributions of the enterprises can be
traced from the pressures generated by the M-C-M’ circuit.
There are defensive business strategies, differential rates of
growth of different units of capital, mergers winnowing
effect of disruptions on smaller and weaker units of capital.
All these results in a heterogeneous texture of enterprises.
- The growth of large public sectors results after the
concentration of industry has taken place. The crucial
change lies in the increasing instability in the market
mechanism.
 There is a tendency for interruptions and failures to break the
general momentum of capital accumulation. This can be
because of low consumption, saturation of markets, high wages
which reduces the profits, anarchy of production, government
policies and monetary disorders. There might be fluctuations in

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the rate of growth because of “lumpy” character of investment

or volatile expectations.
Questions
1. Why does Heilbroner refer to capitalism as a “regime” and not a
system as envisaged by conventional economics? Trace the
thematic changes that occurred in the passage from feudalism
to capitalism. (Refer To E.K. Hunt and Irfan Habib too)
2. In what sense does capitalism reflect the centrality of the M-C-
M’ circuit? Elaborate on the distinctive features and major
themes of the capitalist system which arise specifically from the
discussion of the circuit.
3. Discuss the various features of capitalism which makes
Heilbroner call capitalism a regime and not just an economic
system.

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Chapter 5
THEORY OF CAPITALIST DEVELOPMENT
(P. Sweezy, Ch 2, 4, 5, 6, 8, 10)
PART 1 - THE QUALITATIVE VALUE PROBLEM
A commodity is anything that is produced for exchange. Marx begins by

his analysis on ‘Simple commodity production’ – a society in which each
producer owns his own means of production and satisfies his manifold
needs by exchange with other similar products.
According to Adam Smith, this exchange is tied closely with division of

labour which is the foundation of increase in productivity. Exchange and
division of labour are bound together indispensably and are the joint
pillars which support a civilized society. He focuses on quantitative-
value problem.
According to Marx, division of labour is a necessary condition for

production, though production is not necessary for division of labour.
He believed in qualitative-value problem and the fetish character of
commodities.
Use value: Use value is an expression of a certain relation between the

consumer and the object consumed. In simple terms, when a
commodity that is produced is directly used by the consumers and gives
them utility, then it is said to have use value. All products of human
labour in all societies have use value.
Exchange value: Exchange value is a quantitative relation between the
commodities itself. It is the value in terms of the other good when it is
exchanged.
Labour has two aspects: (1) Corresponding to the use value (2)
Corresponding to the value of the commodity it produces. What use

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value is to value in case of the commodities, useful labour is to abstract

labour in the case of productive activity.
Useful Labour: The labour, whose utility is represented by the value in

use of its product, or which manifests itself by making its product a use
value, is called useful labour.
Abstract labour: It is represented in the value of the commodities. All
characteristics which differentiate one kind of labour from the other are
ignored, and this is the essence of capitalism which forms an important
part of Marx’s thinking. When we see labour in terms of ‘labour-hours’,
there can be mobility of labour and the labour is chosen from the
aggregate labour force, then we say it is abstract labour.
“The quantitative relation between things, which we call exchange

value, is an outward form of the social relation between the
commodity owners”
When one commodity exchanges for another commodity, then we say

that there is a quantitative relation – A relation of the exchange value.
In capitalism, the commodities are exchanged, and the commodity
owners do not come in direct contact with each other.

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It is this hidden relationship between commodity owners, which Marx

calls as The Fetish Character of Commodities. The fetish character of a
commodity is a property of the commodity and not an illusion. It is
Mystic character of the commodity, according to Marx.
The social relations that are hidden behind any exchange can be:
1. A relation between the two commodity owners as discussed
above.
2. A relation between the commodity owner and the laborer. The
capitalist draws “abstract labour” from the total labour force
that is available.
These relations do not show up directly when material objects are

exchanged. It is the REIFICATION OF SOCIAL RELATIONS which forms
the essence of Marx’s doctrine of Fetishism. All of his works are based
on this doctrine. Marx says that man is not the master of the
commodity he produces. The producer deals with his fellow men only
through market which is characterized by price fluctuations and the
quantity demanded. The process of production has the mastery over
man instead of being controlled by him.
Behind any exchange of material objects, a social relation is hidden

which determines the exchange value of the commodities. Various
examples have been given:
 Laissez faire: It believes in the impersonal and automatic
character of the economic order. In simple, it means free trade.
Commodities are exchanged internationally and have exchange
value. But, behind this exchange social relations are hidden
which differ from one country to another.
 Invisible hand: Adam Smith’s Wealth of Nations talks about the
invisible hand of the market, where if the consumers and
producers are left to do what they want, then community as a
whole will benefit.

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Reification of social relations has a profound influence on traditional

economic thinking in two respects:
1. The traditional economic systems have made their judgments
based on the embryonic version of the modern capitalism.
Keynes compared the Pyramid and the Cathedral in medieval
Europe with the social public-work programs that took place in
England in the 20th Century. But, there are very different social
relations that prevailed during medieval age and the 20th
century and hence it can’t be disregarded.
2. The attribution of independent power to things is not clear than
the tradition division of the factors of production into land,
labour, capital, each of which can produce an income for its
owners.
In the beginning since abstract labour is hired by these commodity

owners, all stand on a perfectly equal footing. They differ only in the
way they generate surplus value. Capitalism is thought of as natural
especially by those within the system. Hence, the most essential
element of Marx’s works is the hidden relation behind any exchange,
the qualitative relation and not the quantitative relation.
PART 2 – SURPLUS VALUE AND CAPITALISM
Simple Commodity Production and Capitalism

 Under Simple commodity production, each producer owns and
works with his means of production, whereas under capitalism,
there is a set of individual who owns the means of production
and the work is performed by another set of people.
 In Simple commodity production, the producer sells his product
in order to purchase other products which gives him utility,
whereas in capitalism, the capitalist purchases commodities
with money and then after value-addition is done, that is
process of production is completed, he returns to the market

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with a new product having a value higher than the product he

purchased.
 Marx designated Simple commodity production as the C-M-C
circuit and capitalism as the M-C-M’ circuit where M’>M.
M-C-M’ circuit is central to the process of capitalism because it shows

the sole motive of the capitalist, which is to continually maximize ∆M =
(M’-M) and try to keep the rate of profit (∆M/M) above the usual rate of
profit. Only if ∆M is positive, is there an incentive for the capitalist to
produce. The capitalist never aims for use value or profit from one
transaction, but for a never-ending process of profit making. M to M’ to
M’’ to M’’’ and so on where M’’’>M’’>M’>M.
Surplus Value (s)

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In the process of production, the labor power is the source of the

surplus value. The labour power is the laborer itself. The value of the
labour power is the value of the means of subsistence necessary for the
maintenance of the laborer. Let us see how surplus value is generated.
A capitalist buys labour power at a wage which is equal to the minimum

subsistence. Now suppose the length of the working day is 10 hours and
the value of the workers means of subsistence is 6 hours. So, in the first
6 hours, the worker adds value which is sufficient for getting minimum
subsistence. But, still the worker continues to add value in the next 4
hours. This value is more than that required for minimum subsistence.
Hence, a surplus value is generated because of the value addition in the
last 4 hours.
The first 6 hours of a 10 hour-long working day is the Necessary Labour.

The last 4 hours is the Surplus Labour, as he generates surplus value in
this period. The product of the Necessary labour goes to the workers in
the form of wages (minimum subsistence) while the product of the
Surplus Labour is appropriated by the capitalist. In short, the workers
are exploited and this is common in capitalism.
Total value
Total value = c + v + s
1. c – Constant Capital – It represents the value of the machineries
and the materials used up during the process of production but
do not undergo any alteration in their value.
2. v – Variable Capital – It replaces the value of the labour power,
undergoes alteration in their value which is equal to its own
value and an excess surplus value.
3. s – Surplus Value – It is generated because of the surplus labour,
i.e., exploitation of the workers.
Rate of Surplus value (s’)

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It is the ratio of the surplus value to the variable capital. It is the

capitalist form of what Marx called the rate of exploitation. Notation
form: s’ = s/v
The rate of surplus value s’ depends upon:
- Length of the working day: Greater the number of working
hour, greater will be “Surplus Labour”, hence greater s, implying
greater s’
- Quantity of commodities entering the real wage: If more
commodities enter the real wage, the minimum subsistence will
go down; the Necessary Labour will reduce, increasing the
Surplus Labour even if length of working day remains constant.
Hence s’ increases.
- Labour productivity: Increase in productiveness will increase the
surplus value and hence s’.
Marx assumed that s’ is the same in all branches of the industry and in
all firms within each industry. This implies there must be a mobile,
transferable and homogeneous labour force. Also, it implies that the
technique of production is the same and each industry and firm first
uses the amount of labour which is socially necessary under the given
circumstances.
Organic Composition of Capital (q)

It is the ratio of the constant capital to the total capital (constant capital
𝒄
+variable capital). Notation form: 𝒒 = 𝒄+𝒗
The organic composition of capital depends upon:
- Labour productivity
- Level of technique
- Rate of real wages
- Extent of capital accumulation in the past
Rate of Profit (p)

It is the ratio of the surplus value to the total capital. Notation form:
𝒔
𝒑= 𝒄+𝒗

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We are making a few assumptions:

First, we are assuming that no part of the surplus value is paid to the
landlord in the form of rent.
Second, we assume that all the capital has an identical turnover period
of one year. Each capital is bought at the beginning of the year and gets
exhausted at the end of the year.
p can also be expressed as: p = s’ (1-q)

𝒔 𝒗𝒔 𝒗𝒔+𝒄𝒔−𝒄𝒔 𝒔(𝒄+𝒗)− 𝒄𝒔 𝒔(𝒄+𝒗)
Derivation: 𝒑= 𝒄+𝒗
=
𝒗(𝒄+𝒗)
= 𝒗(𝒄+𝒗) = 𝒗(𝒄+𝒗)
= 𝒗(𝒄+𝒗)
−
𝒄𝒔 𝒔 𝒔 𝒄 𝒔 𝒄
𝒗(𝒄+𝒗)
=𝒗− 𝒗
∗ 𝒄+𝒗
= 𝒗 (𝟏 − 𝒄+𝒗)
𝑐
We know (s/v) = s’ and 𝑞 = 𝑐+𝑣
Therefore, p = s’ (1-q)
We also assume that p is the same between industries and the firms.
Thus, we have assumed that both p and s’ are constant across industries
and firms. Hence, q must also be constant for p = s’ (1-q) to hold true.
But, even though there may be a tendency for q to be same between
firms, there is no tendency for it to be same between industries. Thus,
in the real world, the law of value is not directly controlling.
PART 3 – ACCUMULATION AND THE RESERVE ARMY
Simple Reproduction (SR)

Simple Reproduction refers to a capitalist system which preserves
indefinitely the same size and the same proportion among its various
parts.
Conditions for SR:
 Workers must spend all their wages on consumption.
 Capitalist must spend all their surplus value on consumption.
 Capitalists must replace all capital worn out or used up every
year.

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An industry is divided into 2 branches:

Producer goods branch Consumer goods branch
In this branch means of In this branch means of
production are produced. Let the consumption are produced. Let the
output of the producer goods output of the consumer goods
branch be w1 Then, w1 = c1 + v1 + branch be w2 Then, w2 = c2 + v2 +
s1 = Total value s2 = Total value
Given the conditions of SR,

1. The constant capital should be equal to the output of the
producer goods branch.
c 1 + c 2 = w 1 = c 1 + v 1 + s1
2. The combined consumption of capitalists and workers must be
equal to the output of the consumer goods branch.
v1 + s1 + v2 + s2 = w2 = c2 + v2 + s2
From (2) we get v1 + s1= c2. This is the condition of SR. It says that the
value of the constant capital used up in the consumption goods branch
must be equal to the value of the commodities consumed by the
workers and capitalist engaged in producing means of production.
SR scheme provides a unified framework for analyzing the

interconnections between the output and the income. We have talked
about output from the producer goods branch and the consumer goods
branch. Income is divided into 3 categories:
1. Income of the worker
2. Income of the capitalist which is spent on consumption
3. Income of the capitalist which is spent on the means of
production
Output constitutes the aggregate supply of commodities whereas
income constitutes the aggregate demand for commodities. In
equilibrium, aggregate demand is equal to aggregate supply.
Each item in SR scheme is an element of demand and at the same time

an element of supply. Few examples:

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Demand Supply
c1 Demanded for the means Supply of means of
of production (Branch I) production (Branch I)
v1 + s1 Demand for means of Supply of means of
consumption (Branch II) production (Branch I)
c2 Demand for means of Supply of means of
production (Branch I) consumption (Branch II)
v2 + s2 Demand for means of Supply of means of
consumption (Branch II) consumption (Branch II)
For demand and supply to match, Demand for means of production
(Branch I) = Supply of means of production (Branch I)
Which is v1 + s1= c2
This is the condition for SR that we showed earlier.
Roots of Accumulation
SR does not reflect the true aim of the capitalist. Under SR, use values
have to be regarded as the true aim of the capitalist, but we know that
the true aim of the capitalist is value-expansion, to expand his capital.
As Marx puts it – “To accumulate is to conquer the world of social
wealth, to increase the mass of human beings exploited by him, and thus
to extend both the direct and the indirect sway of the capitalist” A
capitalist is concerned about accumulation, with less desire to expand
consumption.
Theories on Capitalist’s Consumption

Abstinence Theory Waiting Theory (A. Marshall)
If a capitalist is accumulating, then This theory emphasizes that
he is abstaining from consumption. ultimately the capitalist consumes
Accumulation is painful and whatever he owns. If the capitalist
therefore as a reward to is not consuming everything now,
accumulating, interest on capital is it means, he wants to wait and
paid. However, according to Marx, then consume in the future with
a capitalist wants to increase his interest.
wealth and hence accumulating

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gives him pleasures too. Just as This theory denies the capitalists
accumulation is abstinence from drive to accumulate wealth as
consumption, similarly, we can say explained by abstinence theory.
that consumption is abstinence
from accumulation.
Accumulation and the value of the Labour Power

We saw how SR does not explain the main aim of the capitalist. Hence,
Marx gave an explanation of the Expanded Reproduction, showing the
interrelation of supply and demand when accumulation is taken into
account.
The Problem:
- Accumulation involves an increase in the demand for labour
power.
- When the demand for labour power increases, its prices rise,
i.e., wages rise. (Workers have better bargaining power)
- There is no equality between the wages and the value of the
labour power.
- Surplus value = Value of the commodity – Value of the labour
power. If the value of the labour power rises, the surplus value
goes down, which is something a capitalist wants to maximize.
- Hence, the problem is how to stop the value of labour power
(wages) from rising?
Ricardo’s solution/explanation
Ricardo’s solution is based on the theory of population which forms an
integral part of the theoretical structure of classical political economy.
According to him, every commodity has a natural and a market price
and if the market price deviates from the natural price, it’ll have a
tendency to conform to it. In this problem, it is the population which
ensures the equality between the market and the natural price. When
there is accumulation and the demand of labour power increases, the
wages rise above the conventional subsistence level. These high wages
are followed by increase in population. Increase in population implies

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the supply of labour power also increases. Since both the demand and
supply of labour power has increased, it helps in restoration of the
wages back to the conventional subsistence level.
Marx’s solution/explanation
Marx’s was aware of the problem of rising wages caused by
accumulation (due to demand-supply mismatch). His solution is based
on the ‘Reserve Army of Labour’ which is also called ‘Relative Surplus
Population’
Let’s first explain the Reserve Army and The Industrial Process.
o In the middle, at the top, there is a large mass of workers who
are employed in the industries. Below that is a Reserve Army
comprising of those people who are unemployed but they
haven’t retired, i.e. they are looking for jobs.
o Any individual enters the process through (1.)- see diagram. If
he gets employed, he goes straight to the mass of industrial
employment in the top. If he is unable to find a job, he becomes

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unemployed and through (2.) moves to the Reserve Army of

Labour.
o If anyone from the Reserve Army of Labour (who is currently
unemployed) is able to find a job, then he moves from The
Reserve Army to The Industrial Employment (through 4.)
o If anyone who is currently employed is fired, then he moves
from The Industrial Employment to The Reserve Army (through
3.)
o Those who are employed leave The Industrial Employment
leave the process through (6.) when they retire. Similarly, those
who are unemployed leave the process through (5.) when they
retire.
Now let’s see how this Reserve Army explains The Accumulation
problem.
When accumulation takes place, the demand for labour power rises.
When the demand for workers increases, the unemployed workers
move from The Reserve Army to The Industrial Employment (through 4.)
These unemployed workers in The Reserve Army through their active
competition in the labour market exercise a downward pressure on the
wage level. Earlier, when we said wages rise, it was because supply of
labour was not increasing, but if we have a Reserve Army, we have an
excess supply and hence any increase in demand (due to accumulation)
will be matched by equal supply (from The Reserve Army) thereby
keeping wages equal to the conventional subsistence level.
During the prosperous phase of business cycle, The Industrial

Employment gains at the expense of The Reserve Army, whereas, in
case of crisis and depression, there is a contraction of The Industrial
Employment and filling up of The Reserve Army. Therefore, wages are
regulated and surplus value is maintained within the system itself.

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What happens if The Reserve Army gets depleted?

Suppose there is a rapid burst of capital accumulation due to the
opening up of a new market or a new industry. In such a case, the
demand for labour power will increase tremendously, and The Reserve
Army (comprising of unemployed workers) might get depleted (Ex:
Demand increases for 100 workers and The Reserve Army has only 50
workers). If that’s the case, then wages will rise and we again have the
same problem – surplus value will be diminished.
As soon as the diminution touches the point at which surplus labour is

not supplied in normal quantity (i.e. The Reserve Army gets depleted) a
reaction takes place – a smaller part of the capitalist’s revenue is
capitalized (Displacement of labour by machinery). This results in
accumulation lags, reduces the demand for labour and prevents the
wages from rising. When there is displacement of labour by machinery,
crisis and depression takes place and The Reserve Army is refilled. This
process goes on.
Nature of the Capitalist Process

Any economic progress is arrested by two laws: The Law of Population
and The Law of Diminishing Returns. According to the Classical Political
Economy, there is an imminent end of the economic progress. This is
because they leaned heavily on the Malthusian population theory. But,
accumulation indirectly stimulates the growth of the population. With
increase in population, the necessities of life can only be produced at a
constantly increasing cost in term of man-hours.
According to Marx, change in the technique of production has an

immense influence on the ideological and the institutional structure of
the society. Invention and discoveries lead to changes in productive
methods which is a necessary condition for the continued existence of
the capitalist production. It is only in the continued existence of The
Reserve Army that surplus value and the class which it supports can
drive.

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PART 4 – THE FALLING TENDENCY OF THE RATE OF PROFIT
The accumulation of capital is accompanied by a progressive

mechanization of the process of production. The same amount of labour
now works with efficient and highly elaborate equipments which lead to
a continuous increase in labour productivity. In other words, the organic
composition of capital (q) rises steadily. From these trends, Marx
deduced his famous “Law of falling tendency of Rate of Profit”
We know rate of profit is given by: p = s’ (1-q)

If we assume the rate of the surplus value (s’) to be constant, then p
and q are inversely related. So, with a tendency of q to rise, there’s a
tendency for p to fall. It’s just a tendency because s’ might change to
compensate or over-compensate for the effects of change in q.
s’ q p Compared to the initial condition in (i),
i 1/2 1/2 1/4 As q rises in (ii) with s’ constant, p falls.
ii 1/2 2/3 1/6 As q rises in (iii) along with rise in s’, p remains
iii 3/4 2/3 1/4 constant (compensated)
iv 1 2/3 1/3 As q rises in (iii) along with rise in s’, p increase
(over-compensating the effects of changes in q)
Hence, the law has been critiqued on various grounds. One of these is
that if both q and s’ are assumed to be variable, then the direction of p
is indeterminate, unless we know the proportions of the changes which
itself is difficult to determine.
The Counteracting Causes

Marx enumerates 6 counteracting causes which thwart and cancel the
general law of the falling rate of profit, leaving it to merely the character
of a tendency.
1. Cheapening of the elements of constant capital: With the

increase in labour productivity, there is an increased use of
machinery which lowers the value per unit of constant capital.
So, even though q increases, the increase in q might be offset by

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the lowering of the value of constant capital, thereby creating

an upward pressure on the rate of profit.
2. Raising the intensity of exploitation: A worker can be exploited
in three ways – lengthening of the working day, ‘speed up’ and
‘stretch out’. Lengthening of the working day raises s‘ by
increasing the amount of surplus labour without affecting the
amount of necessary labour. ‘Speed up’ and ‘Stretch out’
compresses the length of the necessary labour, keeping length
of working day constant. This implies increase in surplus labour.
Hence, exploitation increases the rate of profit.
3. Depression of wages below their value: Marx assumed that all
prices and wages are market-determined, but in capitalism, we
might expect some aggressive wage policy by the capitalist. If
the wages are cut, then the rate of surplus value increases and
hence has an upward tendency on the rate of profit.
4. Relative overpopulation: Relative overpopulation refers to The
Reserve Army, i.e., there are unemployed workers. Thus the
bargaining power of workers goes down, which keeps the wages
low and hence the profits high. These unemployed laborers
provide a conducive environment to the setting up of new
industries with a relatively low organic composition of capital
and hence a higher rate of profit.
5. Foreign Trade: Foreign trade cheapens the elements of
constant capital and the necessities of life for which the variable
capital is exchanged. It becomes easy to acquire raw materials
and necessities of life more cheaply. Hence, it tends to raise the
rate of profit by raising the rate of surplus value and lowering
the value of constant capital.
6. It is mainly concerned with how the rate of profit is calculated
and hence not covered here.
Thus, Marx formulation of the law is not very convincing.

 If q rises, the labour productivity rises. Now for s’ to be
constant, real wages should increase in the same proportion.

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But, according to Marx, this will never happen. Hence p can

increase or decrease depending on the amount of change in q
and s’.
 The rate of profit will fall if the percentage increase in the rate
of surplus value is less than the percentage decrease in the
proportion of variable to total capital.
Proof: We know, p = s’ (1-q). Let (1-q) be equal to q’ which is
the ratio of variable to total capital. Then, we get, p = s’ q’
Differentiating, dp = s’ dq’ + q’ ds’ (The first terms on RHS is
essentially negative and the second term is essentially positive.)
Therefore, dp is falling if |s’ dq’ | > |q’ ds’|
𝒅𝒔′ 𝒅𝒒′
This implies rate of profit will fall if | 𝒔′ | < | 𝒒′
|
 According to Sweezy, even though the volume of machineries
increases, we do not know about the value of the constant
capital. Hence, assuming that q rises rapidly is a faulty
assumption. This is presented by Marx also as his first
counteracting cause where he mentions that rise in productivity
might cheapen the elements of constant capital.
 Since the earlier explanation is unconvincing, another
explanation is given as – In capitalism, there is accumulation
which increases the wages and hence s’ falls which puts a
downward pressure on the rate of profit.
Other forces that tend to depress the rate of profit

1. Trade unions: Reserve army of labour is the biggest hindrance
which prevents the wages from rising. However, if the workers
can come together in the form of trade unions and control the
supply of labour, then the capitalists will be forced to increase
their wages. This will reduce the rate of profit by lowering s’.
2. State action designed to benefit labour: The state can give
benefits to the workers like unemployment insurance, legal
limitation of the working day, etc. This will prevent the

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exploitation of the workers and prevent the surplus value and

hence the rate of profit from rising.
Other forces that tend to elevate the rate of profit

1. Employers’ organizations: Such organizations improve the
bargaining power of the capital as compared to the labour,
thereby elevating the rate of profit.
2. Export of capital: Capital export acts to relieve the pressure on
the domestic labour. It prevents accumulation (which results in
increase in demand of workers) from having its full depressing
effect on the rate of profit.
3. Formation of monopolies: Individual capitalists look for creating
monopolies as it gives them higher power and opportunity to
exploit workers (as they have no other alternative) and elevates
rate of profit.
4. State action designed to benefit capital: Policies like protective
tariffs are in the interest of the capitalist and leads to an
increase in the rate of profit.
PART 5 – THE NATURE OF CAPITALIST CRISES
Crises are extremely complicated phenomena shaped to a large extent

by the economic forces. According to Marx, “The real crisis can be
explained only from the real movement of capitalist production,
competition and credit. By ‘competition’ and ‘credit’ he meant the
entire organizational structure of markets and financial machinery
which makes the actual economy so much more complicated.
Simple Commodity Production and Crisis

Usually, a barter system is represented by C-C (commodity against
commodity). In this system, a producer has to search for someone who
wants what he has and at the same time has what he wants. This makes
this system of transactions very difficult.

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This barter system of exchange, under the conditions of developed

commodity production becomes C-M-C, commodity-money-commodity.
Here, money splits the act of exchange in two parts which can be
separated in time and in space, i.e., a producer can sell what he has, get
money in return, and then use that money anytime, anywhere, as per
his convenience, to buy what he wants. In this way time is also saved
and specialization also takes place in the form of increased productivity.
In a society which has advanced beyond the stage of barter, a well-

recognized and more or less stable currency becomes necessary. The
organization of production through private exchange carries with it a
possibility of crisis.
Crisis – How it takes place?

Let’s suppose that in an economy, there are n producers named 1, 2,
3,… n. Now, suppose producer 1 sells his product and then he is unable
to buy from producer 2 for whatever reason. Producer 2 having failed to
sell to Producer 1, fails to buy from Producer 3, Producer 3 having failed
to sell to Producer 2, is unable to buy from Producer 4 and it goes on till
it affects all the n producers, i.e., the entire economy.
Every producer has produced more than what he can sell. In other
words, there is overproduction. It is this overproduction that results in
the crisis. However, crises are possible but rather unlikely under Simple
Commodity Production. The C-M-C circuit certainly contains a possibility
of a crisis, but at the same time it signifies production for consumption.
Since consumption is fundamentally a continuous process, there is little
chance of a crisis taking place.
Say’s Law
Say’s Law rules out all possibility of a crisis in Simple Commodity
Production. The law states that any sale is followed by a purchase of an
equal amount. So, if producer 1 sells his product, then there is no
reason to believe that he won’t be able to buy what he wants from

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producer 2. There will be no interruptions in the circulation in the C-M-C

circuit, and hence no overproduction and no crisis.
Ricardo’s View
Ricardo also denied the possibility of overproduction. According to him,
a producer produces with a view to sell his product, but mainly because
he wants to consume too. He sells only with an intention to buy some
other commodity which is useful to him. He believed that money is the
medium by which exchange is affected.
Marx’s view
Both Ricardo and Say gave a wrong thesis that crisis an overproduction
are impossible under all circumstances. They are unlikely, but not
impossible. According to Marx, sale and purchase are separated both in
time and in space. Money is not only the medium by which exchange is
affected, but a medium which splits the transactions into two separate
transactions (namely, sale and purchase) which can take place any time.
So, if producer 1 sells his product and then doesn’t buy immediately
from producer 2, there is overproduction and the crisis takes place.
Capitalism and Crises

Marx designated Simple Commodity Production as the C-M-C circuit and
capitalism as the M-C-M’ circuit, where M’>M. We have already seen
that Simple Commodity Production is production for consumption. It is
the use values that matter more. We also saw that overproduction and
crisis are unlikely in this system.
Capitalism is production for profits. It is characterized by M-C-M’ circuit

about which we have already seen in Part 2. The sole motive of the
capitalist is to maximize the rate of profit; ∆M/M. Capitalism is highly
susceptible to crises and overproduction. Any interruption in the
circulation process, any withholding of buying power from the market,
can initiate a contraction in the circulation process, leading to

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overproduction, which ofcourse will lead to curtailment of production

itself.
Now let’s consider two cases.

1. ∆M/M is negative or zero – This means that M’≤M. Under this
condition, a capitalist won’t have any incentive whatsoever, to
produce. He’ll withdraw his capital, leading to contraction in the
circulation process. Ultimate result is a crisis followed by
overproduction.
2. ∆M/M is positive but too low – This means that M’>M at least,
so the capitalist has some incentive to produce. Still, a capitalist
can curtail their operations to a large extent if the rate of profit
is too low, below the usual rate of profit. This is sufficient to
bring on a crisis.
It is to be noted that assuming the entire process of capitalism as M-C-

M’ would lead to two errors:
1. The error of assuming that under capitalism everyone wants to
make profits.
2. The error of assuming that under capitalism everyone is
interested in use values.
It is the producers who are driven by profit motive, but the workers in a
capitalist society are still concerned with the use values. They still follow
the C-M-C circuit. They sell commodity, i.e., their labour power, get
money in return, i.e., wages. With this money they buy commodities for
consumption (use values). The workers main objective is to maximize
the use value and not profits.
Under capitalism, a capitalist has two choices – either to reinvest the

capital or to hold it in money form. Ofcourse, there’s also a possibility
that the capitalists instead of reinvesting or holding it in money form,
might increase their personal consumption when faced with abnormally
low rate of profit. If this happens there will be no interruption in the
circulation process and hence no crisis. However, it’s unreasonable to

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take this possibility into account because we know that use values are
not the sole concern of the capitalists. They are profit-driven.
So, how does the crisis take place?

It is the postponement of reinvestment of capital that leads to crisis in
capitalism. Let’s see how.
Let’s say the rate of profit goes below the usual rate of profit in any
particular industry. The capitalist will shift his capital out of that industry
into some other. But, what if, it happens in all the industries
simultaneously. The capitalist would not invest in such unfavourable
circumstances. All he would do is to wait for the condition to become
conducive for investment. This postponement of reinvestment is an
interruption in the circulation process and leads to overproduction and
crises.
The crisis is a part of mechanism through which the rate of profit is

restored either completely or partially to its previous level.
Capitalist class can be divided into two sections:

 Entrepreneurs who organize and direct the process of
production.
 Money Capitalists who supply of funds (loans) to these
entrepreneurs and charge interest on loans.
If the rate of profit goes below the rate of interest, production is
curtailed, crisis sets in.
PART 6 – REALIZATION CRISES
So far we have looked at crises resulting from postponement of

reinvestment by the capitalist. We have seen how there is curtailment
of production when the rate of profit is below the usual value. In short,
what we have looked so far is the profitability crisis.

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Now, let’s look at the realization crises. When the capitalist’s inability to
realize the full value of commodities which he produces leads to decline
in profitability, then it results in the outbreak of a crisis called the
realization crisis. There are two types of realization crises:
1. Crises arising from disproportionality among the various lines of
production
2. Crises arising from underconsumption.
Crises arising from disproportionality

In principle, if all commodities are sold at their values, then the relative
proportions in which the various commodities were produced would be
correct. But the correct proportions are unknown to the capitalist
before the production. What each capitalist does is to estimate the
market size based on the knowledge which is not complete. Since, what
a capitalist produces is subject to his understanding of the market and
may lead to underproduction or overproduction.
This asymmetry in production is reflected in the prices of the

commodities which are either above (in case of underproduction) or
below (in case of overproduction) their true values. In order to
compensate, the best thing for the capitalist to do is to contract the
production of the commodities which were sold at a price lower than
the true values, and expand the production of the commodities which
were sold at a price higher than the true values.
If the methods of production, labour productivity, etc. didn’t change

then eventually the correct proportions will be known to the capitalist
by a system of trial and error. But, in real world, these conditions do
change and hence capitalists can only approximate the market size.
However, a crisis emerges when there’s disproportionality between the

various branches of production. If there is contraction in one branch, it
will lead to deficit in demand. There is no guarantee that this
contraction in one of the branches will be followed by an expansion in

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other branches, thereby compensating for the deficit in demand. And, if

this is the case then there is an interruption in the production process
which leads to the origin of crisis and engulfs the whole economy. These
crises reflect the plan less, anarchic character of capitalist production.
Tugan rejected the two explanations of crises advanced by Marx

 Crises are produced by the falling tendency of the rate of profit
 Crises result from the underconsumption of the masses
According to him, disproportion among various branches of production
was the reason for all crises. If there were no problems of
disproportionality, then there would be no overproduction or shortage
of demand regardless of what happen to consumption.
Expanded Reproduction Scheme

Before looking into how the crises take place due to underconsumption,
let’s look at the Reproduction schemes. We have already looked into
the simple reproduction scheme, in which the equilibrium condition was
v1 + s1= c2. We saw the limitations of this scheme which we try to cover
up in the Expanded Reproduction Scheme.
Assumptions:
- Workers continue to consume their entire incomes.
- Capitalists re-invest a part of their incomes, i.e., for purchasing
additional labour power and means of production.
- With expanding incomes, capitalists raise their own
consumption every year, by an amount less than the full
increase in surplus value.
In the Expanded Reproduction Scheme, surplus value is divided into 4

parts, namely:
- Sc – Amount spent on consumption which is just sufficient to
maintain capitalist’s consumption at previous year’s level.
- S∆c – An increment in consumption
- Sav – Accumulation which serves to augment variable capital

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- Sac – Accumulation which goes to purchase additional constant

capital
Now, the reproduction scheme in the two branches, producer goods

branch and consumer goods branch looks like:
c1 + v1 + Sc1 + S∆c1 + Sav1 + Sac1 = w1 (In producer goods branch)
c2 + v2 + Sc2 + S∆c2 + Sav2 + Sac2 = w2 (In consumer goods branch)
For equilibrium, the following must satisfy:
c1 + Sac1 + c2 + Sac2 = w1 = c1 + v1 + Sc1 + S∆c1 + Sav1 + Sac1
v1 + Sc1 + S∆c1 + Sav1 + v2 + Sc2 + S∆c2 + Sav2 = w2 =c2 + v2 + Sc2 + S∆c2 +
Sav2 + Sac2
Intuition for these is similar to that in Simple Reproduction Scheme.
Solving them we get the equilibrium condition as:
c2 + Sac2 = v1 + Sc1 + S∆c1 + Sav1
According to Tugan:
 If the part of the surplus that is annually added to capital is not
divided among the various departments and branches in correct
proportions, then crisis is inevitable.
 If the increment to capital is divided in the correct proportion,
then the equilibrium condition is satisfied and hence there is no
ground to expect a crisis.
Thus, Tugan by using the Expanded Reproduction Scheme clearly
justified his viewpoint that crises can take place only through
disproportionality among the various production lines.
Tugan observed that in the reproduction scheme, we are implicitly

assuming that the capital and labour cannot migrate from one
department to the other. He claimed that if the capitalists had complete
knowledge of demand and the power to direct labour and capital from
one branch to another, then there will never be a supply-demand
mismatch. For example, some of the newly accumulated capital can go
to each department while some of the variable capital can be shifted
from Department II to Department I. If proper proportions are
maintained, the output of Department I expands (as more labour and

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more mean of production are employed there), while the output of

Department II remains constant, the loss of labour exactly offset by
increase in constant capital.
Now, let’s try to prove that if there is accumulation in both

departments, then it is impossible that the social consumption will be
constant.
Proof of Contradiction: Let’s assume social consumption to be constant.
All accumulation must take place in the form of purchase of additional
constant capital and for social consumption to be constant; capitalists
must not increase their own consumption. This means S∆c and Sav terms
are zero.
Thus, the reproduction scheme becomes:
c1 + v1 + Sc1 + Sac1 = w1
c2 + v2 + Sc2 + Sac2 = w2
The equilibrium condition now becomes: c2 + Sac2 = v1 + Sc1
But, we know from simple reproduction scheme that: c2 = v1 + Sc1. This
implies that Sac2 = 0. In other words, no accumulation takes place in
Department II which is a contradiction because we had assumed that
accumulation takes place in both the departments. Therefore, we
conclude that it is impossible that the social consumption is constant if
there is accumulation in both the departments.
We have seen Tugan’s argument. Many economists think it is intuitively

wrong. Each capitalist is making his own decisions without knowledge of
what the others are doing and what the correct proportions are. As a
result, the chance that the process will go forward without any
interruptions is non-existent. Just like accumulation is inseparable from
capitalism, crises are also inevitable! Marx asserted that the last cause
of all crises remains the poverty and underconsumption of the masses.
Crises arising from underconsumption

This type of realization crisis mainly takes places because of the
following reason which we shall prove:

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Capitalism has an inherent tendency to expand the capacity to produce

consumption goods more rapidly than the demand for consumption
goods. In other words,
Rate of growth of consumption < Rate of growth of the output
of consumption goods
We have seen the four components of the surplus value.

- Sc – Amount spent on consumption which is just sufficient to
maintain capitalist’s consumption at previous year’s level.
- S∆c – An increment in consumption
- Sav – Accumulation which serves to augment variable capital
- Sac – Accumulation which goes to purchase additional constant
capital
The third and fourth constitute accumulation, while the fourth alone is
re-investment. So, a part of accumulation is consumed by workers and a
part is reinvested. A capitalist wants to accumulate as much as possible
and increase the rate of profit.
In order to increase the rate of profit, the capitalist tries to improve the
methods of production. In order to accumulate more, the capitalist has
to save larger proportions of this total profit. If this happens,
accumulation rises as a proportion of surplus value and re-investment
rises as a proportion of this accumulation.
Consumption increases because

- Capitalist increases his own consumption
- He gives a part of accumulation to the workers as increased
wages (Increased wages means workers consume more because
we have assumed that workers follow C-M-C circuit, concerned
mainly with use values)
Since, the increment of capitalist’s consumption is a diminishing

proportion of total surplus value, and since the increment of wages is a
diminishing proportion of the total accumulation, it follows that rate of

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growth of consumption declines relative to the rate of growth of mean

of production.
𝑅𝑎𝑡𝑒 𝑜𝑓 𝑔𝑟𝑜𝑤𝑡ℎ 𝑜𝑓 𝑐𝑜𝑛𝑠𝑢𝑚𝑝𝑡𝑖𝑜𝑛
𝑑𝑒𝑐𝑙𝑖𝑛𝑒𝑠
𝑅𝑎𝑡𝑒 𝑜𝑓 𝑔𝑟𝑜𝑤𝑡ℎ 𝑜𝑓 𝑚𝑒𝑎𝑛𝑠 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛
We assume that the relation between the stock of means of production
and output of consumption goods remain constant. Hence, the ratio of
their rates of growth will also be a constant.
𝑅𝑎𝑡𝑒 𝑜𝑓 𝑔𝑟𝑜𝑤𝑡ℎ 𝑖𝑛 𝑡ℎ𝑒 𝑜𝑢𝑡𝑝𝑢𝑡 𝑜𝑓 𝑐𝑜𝑛𝑠𝑢𝑚𝑝𝑡𝑖𝑜𝑛 𝑔𝑜𝑜𝑑𝑠
𝑐𝑜𝑛𝑠𝑡𝑎𝑛𝑡
𝑅𝑎𝑡𝑒 𝑜𝑓 𝑔𝑟𝑜𝑤𝑡ℎ 𝑜𝑓 𝑚𝑒𝑎𝑛𝑠 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛
The above two equations implies –
Rate of growth of consumption < Rate of growth of the output
of consumption goods
Hence, there is an inherent tendency for the provision of means of

production to exceed the requirements of means of production.
Therefore, underconsumption and overproduction are the opposite
sides of the same coin. An underconsumption crisis may first break out
in the sphere of production of means of production, while an
overproduction crisis may first break out in the sphere of production of
consumption goods. Hence, the underconsumption theory is a special
case of disproportionality.
According to Marx, capitalism concentrates only on production and

almost neglects consumption. So, there will always be a demand-supply
mismatch. This is the inner contradiction within capitalism, which
inevitably leads to crisis. So, should capitalists be concerned about
consumption, the use value of commodities? Well, this would contradict
the basic essence of capitalism, where capitalists are only concerned
about exchange values.
Questions
1. Ceaseless accumulation of capital is the objective and the
driving force of capitalism according to Marx. How is the surplus

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value churned out in this system? How is Marx’s explanation

different from other economists?
2. Crisis is inherent in capitalist system. Discuss.
3. Underconsumption and Overproduction are the opposite sides
of the same coin. Do you agree? Justify.
4. Discuss how Marx interpreted the quantitative relation between
material objects as an outward form of the social relation
between the commodity owners. With regard to this can you
explain Marx’s doctrine of Fetishism?
5. Marx unlike Ricardo did not make use of the Malthusian theory
of population to counter the tendency of wages to rise in
response to capital accumulation which is an essential part of
capitalism as seen in the scheme of Expanded Reproduction.
Elucidate.
6. How does the M-C-M’ circuit distinguish the capitalist system
from the pre-capitalist formations. What are the major features
of capitalism that help in the pursuit of this circuit?
7. Define the Marxian concept of abstract labour. How is this
concept used to define profit in capitalism, and thereby explain
capitalism as a class relation?
8. Write short notes on:
(a) Underconsumption crisis
(b) Reserve army of labour
9. Do you agree that the underconsumption theory is a special
case of disproportionality? Explain.
10. In what sense does capitalism reflect the centrality of M-C-M’
circuit? Elaborate on the distinctive features of the capitalist
system that arise specifically form the discussion of the circuit.

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Chapter 6
ECONOMIC CRISES AND FALLING RATE OF
PROFIT
(Anwar Sheikh)
PART – 1
ECONOMIC CRISES
While we were looking at analysis of crises by Marx (in Sweezy) we saw

how in a capitalist production, the capitalists’ desire for profit
periodically collides with the necessity of division of labour. We saw
how crises are intrinsic to the capitalist system to reintegrate the two.
We saw how crises results in a widespread collapse of political and
economic relations of production.
Marx constantly refers to the laws of motion whenever he talks about

capitalist system. We saw Marx’s law of falling tendency of rate of
profit. We also looked at the counteracting tendencies given by Marx
only, which annul or cancel the effects of the general law. Sheikh talks
about two ways in which a law emerges from the tendency and the
counter-tendency:
» First is to conceptualize the various tendencies as operating on
an equal footing. Capitalism gives rise to a set of conflicting
tendencies and the system’s final direction (whether the rate of
profit will rise or fall) will be determined by the balance of
forces existing at a particular historical conjuncture. Two things
are of great potential here:
(1) State Intervention
(2) Structural Reform
» Second is to look into the tendency of the fall in rate of profit as
a dominant tendency and consider the counter-vailing

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tendencies as sub-ordinate ones which operate within the limits

of the dominant tendency.
- Marx explained this by saying that the dominant tendencies
arise out of the very nature of the capitalist system and
have a very powerful momentum which channels the
subordinate tendencies in a definite direction.
- Structural reform, State intervention and Class struggles are
of limited potential because they end up being
subordinated to the intrinsic dynamic of the system.
- So, are crises inevitable in capitalism?
Anwar Sheikh through the description of Possibility and Necessity

Theories of crises tries to answer (1) Role of state intervention and
structural reform and (2) Are crises inevitable in capitalism? These two
theories correspond to two different methodological approaches to
Capitalist history:
Possibility Theories Necessity Theories

Based on the notion of law as the Based on the notion of the law as
resultant of the conflicting the expression of an intrinsic
tendencies, in which general dominant tendency that
crises occur if and when there is a subordinate countervailing ones in
conjunction of historically which the periodic occurrence of
determined factors. general crises is inevitable.
Possibility Theories
It has two main sub-groups –
(1) Under-consumption stagnation theories
(2) Wage squeeze theories
Under-consumption stagnation theories
We have looked into the crisis due to under-consumption in Sweezy.
However, later under this section we will look into the role of
government intervention too.

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The demand gap

The workers’ consumption generates a demand gap. In a capitalist
system, the workers are exploited; they are paid less than the total
value of the net product. Their consumption is never sufficient. The
greater the share of profits to wages, the greater is the demand gap.
In Keynesian fashion, this is called leakage from the demand. The

capitalists consume a part of their profits which helps to fill this demand
gap to a small extent.
Filling the gap?

- Contractionary force - In order to fill the demand gap
corresponding to the capitalist’s savings, the capitalists are forced
to consume all their income. There is no net investment, no growth
and hence stagnation. If the demand gap corresponding to the
capitalist savings is not filled then a part of the output won’t be
sold and this will lead to the contraction of the whole system.
- Expansionary force - The demand includes not only consumption
demand but also investment demand. So, if a capitalist increases
investment demand and less of consumption demand, then there
will be higher level of employment and production in the system
leading to growth.
The two forces, one of contraction and the other of expansion act
together to decide whether there will be growth depending on which
force is stronger.
When do capitalists invest?

(1) Capitalists invest when a critical mass of new product, new
technologies all happen to coincide.
(2) The foundation for large scale commerce and trade is provided
when the hegemony of the particular capitalist nation allows it
to coordinate and enforce international political and economic
stability.

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Monopolies and Stagnation

In modern capitalism, we find that there are few firms (players) who
dominate the industry. They act as monopolies; restrict output, raise
prices, and earn profits at the expense of the workers and smaller
capitalists. These large capitalists save more and restrict investment
because of which available investment outlets are curtailed.
Thus, the demand gap widens; there are contractionary forces that
build up as the investment opportunities weaken. We conclude that
monopolies make stagnation totally unavoidable.
State Intervention
In order to overcome the threat of stagnation, we require an
intervention which can direct the expansionary forces.
Keynesian view – According to Keynesian economics, the state can help
to overcome the stagnation in the economy by either increasing its own
spending or by stimulating private spending which will help achieve
socially desirable levels of output. Thus, they focus on stimulating
aggregate demand.
The under-consumption theorists’ view – According to them, Keynesian

view is practically not possible. This is because, when the state
stimulates aggregate demand, then the monopoly capitalists can
respond by raising prices rather than expanding output employment.
This worsens the situation because it leads to stagnation + inflation =
stagflation! And if the state backs away from this stagflation situation,
then there is recession.
Crisis – A Political phenomena?

The appearance of crisis is essentially a political phenomenon because
of the unwillingness of the state to tackle the monopolies. The state
can control monopolies through price controls, regulation and forceful
economic planning which will prevent inflation and increase social

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welfare expenditures and even higher wages which will make everyone
better off and will benefit the capitalist system as a whole.
Conclusion – The economic contradictions that take place in the

capitalist system can be easily resolved within a political sphere if the
state is ready to bear sufficient pressure.
Wage squeeze theories

It attempts to link general crises to a sustained fall in the rate of profit.
The starting point is what happens due to the rise in the real wages and
increase in the length and the intensity of the working day.
» Rate of Profit
- If the rate of profit falls, the rise in real wages will intensify
this fall.
- If the rate of profit rise, then there should be sufficiently
rapid rise in real wages for the actual rate of profit to fall
» Profit-wage ratio
The wage-squeeze theory is based on the assumption that if the
real wages don’t change, then the rate of profit rises because of
𝑃𝑟𝑜𝑓𝑖𝑡𝑠
technical change. Hence, the ratio 𝑊𝑎𝑔𝑒𝑠
rise.
Impact:
- The rise in the profit to wages ratio directly fuels an
investment boom.
- The rise in the profit to wages ratio and increase in the
monopoly power increases the demand gap and hence
exacerbates system’s tendency towards stagnation. The
state is able to offset this and sustain the boom.
In the wage-squeeze theory it is the labour that stands behind the crisis.
If the investment boom lasts long for the market so that the labour
starts demanding more, then the crisis breaks out. The wage-squeeze
theory looks for real wages rising faster than productivity.

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What turns an under-consumption tendency into a wage-squeeze?

According to Kalecki, it is the state intervention that does so. A rise in
real wages relative to productivity is neither necessary nor sufficient to
generate a falling rate of profit. The crisis bursts out only when the
workers’ wage increase become excessive. The state can cause recovery
if both the capitalists and the workers make sufficient concessions.
Conclusion – The proponents of the possibility theories believe that

even under capitalism, politics can command the system. This theory
ends by endowing the state with the power to determine the basic laws
of motion of capitalism.
Necessity Theories
Based on the notion of the law as the expression of an intrinsic
dominant tendency that subordinate countervailing ones in which the
periodic occurrence of general crises is inevitable. The necessity theory
is basically Marx’s theory of falling rate of profit that we have seen
earlier.
What is the capitalist’s motive?

(1) To increase profit and surplus value. For this a capitalist must
increase labour productivity and increase the length of the
working day and exploit labour to the fullest so as to increase
the surplus labour.
(2) Lower the unit production costs so as to compete effectively
with others.
How can the capitalist achieve it?

He can achieve it by increasing the fixed capital.
𝐹𝑖𝑥𝑒𝑑 𝑐𝑎𝑝𝑖𝑡𝑎𝑙
- Increase in 𝐿𝑎𝑏𝑜𝑢𝑟
means rise in labour productivity.
𝐹𝑖𝑥𝑒𝑑 𝑐𝑎𝑝𝑖𝑡𝑎𝑙
- Increase in 𝑂𝑢𝑡𝑝𝑢𝑡
means reducing unit production
costs.

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How does it work?

» Reduction of unit production costs implies that a capitalist can
reduce the prices. Reducing prices means the competitors will
be thrown out of the market. Now, this capitalist gets a larger
market share which will offset the smaller rate of profit.
» This causes the average rate of profit to fall. Though there are
factors that counteract this (which we have seen in Sweezy) but
these factors operate within strict limits, so that there is a net
fall in the rate of profit (dominant tendency)
» This downward trend in the rate of profit has an effect on
investment in the long run which produces a long wave in the
mass of total potential profits. This accelerates, decelerates and
finally stagnates.
What happens thereafter?

Later, the investment demand falls off. There is excess capacity.
Productivity growth slows down because of lack of investment.
However, the real wages may for a brief period of time rise relative to
productivity. The underconsumption and wage squeeze like phenomena
appear as effects of the profitability crisis. However, these do not cause
general crises.
Natural Recovery mechanisms

Each general crises precipitates because there are in-built mechanisms
within the capitalist accumulation that adjusts capacity to effective
demand. There is destruction of weaker capitalists. Only the stronger
ones remain. The intensified attacks on labour help restore
accumulation by increasing centralization and concentration and also by
raising overall profitability.
Conclusion
- Since the problems of unemployment and stagnation arise from the
capitalist accumulation itself, they cannot be managed away by
state intervention even it has a progressive nature.

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- Politics will definitely not command the system because capitalist

solution to a crisis requires an attack on the working class and the
socialist solution will require attacking the capitalist system itself.
PART – 2
FALLING RATE OF PROFIT
Long periods of accelerated growth are necessarily followed by

corresponding periods of decelerating growth of eventual widespread
economic convulsions. This is known as the law of falling rate of profit.
We saw in Part – 1 above that the main motive of a capitalist is to
maximize profits and in doing so it battles with labour and other
capitalists in the following -
1. Labour – A capitalist strives to increase the labour productivity
or increase the length of the working day to maximize the
surplus labour. Labour-mechanization emerges as a dominant
form for increasing the production of surplus value.
2. Other Capitalists – A capitalist battles with other capitalists in
the circulation process, over the realization of surplus value. In
order to survive, a capitalist must reduce its unit production
costs. This is the prime weapon to fight competition.
According to Marx, the use of more advanced methods of production

(more capital intensive plans) will reduce the unit production costs.
Greater quantities of fixed capital per unit output are primary means
through which economies of scale are achieved. This would imply higher
depreciation charges and higher auxiliary materials per unit output.
Hence, for more advanced methods of production –

- The higher capitalization implies higher unit non-labour
costs (unit constant capital c)
- The higher productivity implies lower unit labour costs (unit
variable costs v)

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- On balance, the unit production costs, c + v must decline, so

that the labour effect must more than offset the
capitalization effect.
According to Sheikh, the more advanced methods of production tend to

achieve a lower unit production cost at the expense of a lower rate of
profit. However, competition forces the capitalists to switch to more
advanced methods because by doing so they can reduce their unit
production costs and hence can reduce their prices. Lowering prices will
help a capitalist to expand at the expense of other capitalists by gaining
a larger share of the market.
So, each capitalist strives to capture the largest possible share of the
market. This results in organic composition of capital rising faster than
the rate of surplus value, even when the real wages and the length of
the working day are constant, so that the general rate of profit falls
independently of any impetus on the part of the labour.
A fall in the rate of profit leads to a crisis through its effect on the mass
of profit.
- Positive effect – Accumulation adds to the stock of capital
advanced and thus adds to the mass of profit so long as the
new capitalist’s rate of profit is positive.
- Negative effect – On already invested capital, any fall in the
rate of profit reduces the mass of profit.
The movement of the mass of profit, hence, depends on the strengths
of the two effects.
A falling rate of profit weakens the incentive to accumulate and as

accumulation slows down, the negative effect begins to overtake the
positive effect till the point when the total mass of profit begins to
stagnate. This phase marks the beginning of the crisis. The crisis is
conditioned by concrete institutional and historical factors.

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Questions
1. What is meant by Marxian economic crisis? Distinguish between
possibility theories and necessity theories of Economic crises.
2. Discuss about falling rate of profit and economic crisis as
analyzed by Anwar Sheikh.
3. Distinguish between possibility theories and necessity theories
of Economic crises. To what extent does the choice between
one and the other have a bearing on the effectiveness with
which the state under capitalism can effectively intervene to
avert the economic crisis?
4. Is the occurrence of “Crises necessary in capitalism”? Discuss
the various theories about this.
5. Distinguish between possibility theories and necessity theories
of Economic crises. In that light examine how Keynesian theory
of effective demand is different from the Marxian analysis?
6. Crises in capitalism have its genesis in the very nature of
capitalist production. Substantiate the statement by discussing
the law of falling rate of profit and wage squeeze theory.

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Chapter 7
THE RECENT CRISIS IN GLOBAL CAPITALISM
(Vamsi Vakulabharanam)
Vamsi has explained the recent financial crisis of 2008 as qualitatively

different from the profitability crisis of late 1960s and 1970s. The crisis
of 2008 was a Realization Crisis. According to Vamsi, the roots of the
2008 crisis lie 125 years ago, since 1870s.
Since 1870s, the real wages were increasing at 1.3% while the
productivity was increasing at 2%. Both workers and producers were
happy. In 1929, Great Depression took place which was a realization
crisis.
After World War II, 1945-1960 was the Golden Phase of Capitalism. In
this phase, the real wages were increasing. There was increased
Consumerism and productivity was increasing. In the late 1960s and
1970s, profitability crisis took place. The various causes of the
profitability crisis of 1960s were:
- Profit squeeze
- Falling tendency of rate of profit
- Productivity growth slowdown because of reduced workers’
effort
- Foreign Competition
It was a profitability crisis because the principal concern was generation
of the surplus value.
We know that, p = s’ (1-q) where p is the rate of profit, s’=s/v is the rate
𝒄
of surplus value and q = is the organic composition of capital. As
𝒄+𝒗
accumulation was taking place during the golden phase of capitalism, it
led to increase in c and fall in v, but the net effect of v was more, hence
𝒄
𝒄+𝒗
rose.

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However, surplus value could not be generated enough because of

rising real wages. Hence s’ couldn’t compensate for rising q and rate of
profits fell.
In 1970s, Keynesian theory came to be known, where government

intervened to stimulate Aggregate Demand. This led to a fiscal crisis.
Hence there were 2 dimensions post 2nd World War:
1. Labour unions: Wages were increasing leading to fall in the rate
of profit. This led to the profitability crisis of 1960s.
2. Keynesian solution: This led to the fiscal crisis.
In response to the 1960s and 1970s crisis, various steps were taken,
both internal and external.
Internal External
 The Keynesian structure was  International Financial Capital
dismantled. mobility took place. Finance
 Fixed exchange rate was capital replaced the industrial
dismantled. capital.
 There was restructuring of  Countries were linked with IMF
capitalism. and World Bank
 Labour was more disciplined  There were free markets and
in terms of bargaining. open economy.
A new regime of accumulation called the Neo-Liberalism was

introduced in response to the 1960s-1970s crises. According to Marx,
this new regime of accumulation, generated surplus value, but the
surplus value was not realized which led to the crisis of 2008. All the
countries following neo-liberalism and those attached to it were
affected by the crisis. Addressing the profitability crisis, did not address
the problem of sustained realization of surplus value which led to the
realization crisis.
Another way in which the two crises (the 1960s-70s crises and the 2008
crisis) were different was the nature of capitalism.

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o Prior to the 1960s-70s, there was state capitalism. The

economy was not opened much and there was government
intervention.
o Prior to the 2008 crisis, there was market oriented capitalism.
The economy was opened up (trade liberalization with very
little government intervention). Even exchange rate was no
more fixed.
Let’s summarize the differences:

Crisis of 1960s-70s Crisis of 2008
It was a Profitability Crisis It was a Realization Crisis
The problem was the generation The problem was the realization of
of the surplus value the surplus value
Triggers: Triggers:
- Rising real wages - Improved productivity
- Profit Squeeze - Over accumulation
- Accelerated appropriation
- Fictitious Capital
Followed because of state Followed because of market
capitalism oriented capitalism
According to Marx, there are two modes of capitalist accumulation:

1. Primitive Accumulation (accumulation by dispossession) –
Primitive accumulation is that type of capitalist accumulation in
which there are two classes: One class who owns the means of
production and the other who does not own the means of
production and are the wage workers.
2. Extended Reproduction – In extended reproduction, the
capitalists employ the workers, pay those wages, and generate
surplus value which is either consumed or re-invested.
Reinvestment leads to extended reproduction.
There were two major fixes to the 1960s and 1970s crisis:

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1. Improved Productivity: Though there was cut in real wages, but

the productivity improved. This was because of improved
technology, the coming of internets, improved transport and
opening of the economy. There were gains to the capitalists.
The gap between earnings and productivity widened.
2. International financial capital mobility started. These financial
capitals generated capitalist gains. There was accelerated
appropriation.
Greenspan said that “We have entered into a new economy” There
were “profit booms” as never before. However, there were problems
with these fixes which in turn became the triggers for the current
financial crisis. Though these fixes solved the problem of generating
surplus value, they couldn’t solve the problem of Realization of surplus
value.
What went wrong with these fixes/strategies?

1. Strategy of Improved Productivity: As discussed earlier,
productivity improved because of technological advancement,
trade liberalization, coming of internets and easy mode of
transportation. Also there was reduction in real wages; mainly
because of increase in the supply of labour force (women
joining the labour force). The surplus value that was generated
was not realized. The rate of growth of output of consumption
goods was greater than the rate of growth of consumption.
There was overproduction.
2. Strategy of accelerated appropriation: With an increase in the
international financial capital mobility, the economy became
vulnerable. With real wages not increasing and increase in
‘accumulation by dispossession’ there was over-accumulation
and hence problem of realization crisis. The accumulation or the
surplus was mainly used to invest in FICTITIOUS CAPITAL.

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Fictitious capital is different from real capital in the sense that it

is usually not engaged in the production of the current surplus
value or incomes but has a claim over future surplus values or
incomes. It creates a speculative enclave. There were
investments in derivatives, collateralized debt obligations,
mortgage backed securities, credit default swaps, etc the value
of which is based on the underlying. These financial innovations
that were taking place were called in Marx’s terms ‘fictitious
capital’.
Speculation increased risk and volatility. The expected future

surplus value did not match with the surplus value generated.
Hence, the bubble of fictitious capital began to burst, first in the
U.S., and as the firms started deleveraging, the crisis spread
rapidly across the world. U.S. became the “market for last
resort” which created pressure on U.S. consumers. The U.S.
economy witnessed the savings and loans crisis in the 1980s, a
stock market crash in the early 2000s and the Global Financial
Crisis in 2008.
With 2008 crisis, there is a move again to State Capitalism as shown by

Obama’s Keynesian policies but it is not sustainable.
According to Keynes, free markets leads to crisis. Government

intervenes and corrects for shortages in effective demand. He believed
that the state must save capitalism from itself.
According to Marx, “The need is to change the system and not make
changes in the system”. Keynes suggested that when there is a
realization problem, state should intervene. Marxian disagreement with
the Keynesian view is that there is no such mix in the capitalism. Neither
the state capitalism nor the market oriented capitalism can achieve
long term stability.

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Hence, crisis seems to be inevitable. There are oscillations of state

capitalism and market oriented capitalism. State capitalism leads to the
profitability crisis (problem of generation of surplus value). As a
correction to it market oriented capitalism comes which leads to
realization crisis (problem of realization of surplus value). This is again
followed by state capitalism and the cycle continues.
Sequence of events
1870s Real wages rising, Real productivity rising
1929 Great Depression (Realization Crisis)
1945-60 Golden Phase of Capitalism – Increased consumerism,
real wages rising, productivity rising, profits rising
1960s Profitability crisis – Profit squeeze, productivity goes
down
1970s Profitability, fiscal crisis because of Keynesian framework
Post 1970s Increased productivity, accelerated appropriation,
fictitious capital, overaccumulation
2008 Global Financial Crisis – Realization Crisis whose triggers
were the strategies adopted post 1970s.
Questions
1. How does Vamsi Vakulabharanam explain the recent financial
crisis (2008) as qualitatively different from the profitability crisis
of the late 1960s and 1970s in global capitalism? Do you agree
that the strategies of accelerated appropriation and improved
productivity in response to the profitability crisis were the
triggers for the current financial crisis?
2. Looking at all the major crises that have taken place in the last
century – The Great Depression, The crisis of 1960s and 70s and
The Global Financial Crisis of 2008, would you conclude that
crises are inevitable in capitalism?

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UNIT 4
The Evolving Structure of Capitalism
References:
1. J. Schumpeter, “Capitalism, Socialism and Democracy”
Chapters 6, 7, 8
2. P. Baran, “The Political Economy of Growth” Chapter 3
3. Frank Tonkiss, “Fordism and After” Chapter 4
4. Ash Amin, “Post-Fordism, A Reader” Chapter 2
5. M. Kalecki, “Political Aspects of Full Employment”
6. R. Heilbroner, “The Role of the State”
7. Ronald Dore, “Financialization of the Global Economy”

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Chapter 8
CAPITALISM, SOCIALISM AND DEMOCRACY
(J. Schumpeter)
PART 1 – PLAUSIBLE CAPITALISM
19th century saw great economic advancement under capitalism. The

size of economic surplus increased drastically. Schumpeter attempts to
project into the future, the average rate of increase in total available
production that was obtained during the 60 years preceding 1938. He
did this with an intention to give a qualitative idea of what the capitalist
engine might possibly achieve if, for another half a century, it repeated
its past performance. However, such an extrapolation is not justified.
We must now provide a sufficient link between the performance and

the capitalist engine. For this we need to ask the following –
 Is there an understandable relation between the capitalist order
and the observed rate of increase in output?
 Given such a relation; was the rate of increase actually due to
capitalism or was it due to particularly favorable conditions
which had nothing to do with capitalism?
 Is there any reason why the capitalist engine for the next forty
years, fail to go on working as it did in the past?
Thus, we need to know whether capitalism was favorable to the
performance that we observe. And if they were favorable, then whether
those features may be reasonably held to yield adequate explanation of
this performance.
Few Features of Capitalism:

» In capitalism, there is maximum performance of an optimally
selected group: Unlike the class of feudal lords, the commercial
and industrial bourgeoisie rose by business success. Success
came through a mixture of luck, competence and efficiency. The

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capitalist arrangement, as embodied in the institution of private

enterprise, effectively chains the bourgeois stratus to its task. It
consequently creates such conditions that make the bourgeois
class perform and strain themselves to improve profitability.
The same apparatus which conditions for performance the

individuals and families that at any given time form the
bourgeois class, also selects the individuals and families that are
to rise into that class or to drop out of it. As a result, in the
capitalist system, the man who rises first into the business class
and then within it, is also an able businessman and he is likely to
rise exactly as far as his ability goes.
So, what we have is maximum performance of an optimally

selected group. The ones at the top are the best, since only the
best will rise and can survive there.
» Maximum profit vs. maximum welfare – In capitalism, it’s the

former that matters and not the latter: We know that in
capitalism, the performance is of an optimally selected group as
discussed above and it is aimed at maximizing profits instead of
social welfare.
Classical Economist’s viewpoint:

The so-called classical economists believed that under
capitalism, the manufacturers’ and traders’ self-interest made
for maximum performance in the interest of all, and thus
welfare was maximized automatically. Therefore, they
attributed the observed rate of increase in total output to free
enterprise and the profit motive.
However, this viewpoint is flawed because it is reasoned in

terms of a particular historical situation which they idealized
and from which they generalized.

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We will now look at two strides: First, which was found in the first
decade of the 20th century and second, which cover some of the post-
war developments of scientific economics.
Perfect Competition
Alfred Marshall and Knut Wicksell claimed that in the case of perfect
competition, the classical proposition – the profit interest of the
producer tend to maximize
production – was conserved. It
can be shown, within the
general assumptions of the
Marshall-Wicksell analysis, that
if the firms cannot influence
price of their products then
they will expand their output
until marginal cost just equals
the price (MC=P), i.e., point Q*. This level of production is the socially
desirable level of output to produce. In this case, there exists a state of
equilibrium in which all outputs are at their maximum and all factors
fully employed. This is usually referred to as perfect competition.
Monopolistic Competition
It was seen that in the real
world there were cases that
didn’t conform to the perfect
competition. They were
thought of as exceptions to
the general rule. Later, it was
found that most firms had
special markets of their own in
which they set prices instead
of merely accepting them. The conditions necessary for perfect
competition were not prevalent except probably in agriculture. All large

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scale firms were able to manipulate prices and what we had in reality
were heterogeneous firms differentiated through advertising, product
composition, quality, etc. giving rise to oligopoly or a monopoly.
Oligopoly
Under such a situation, there is no equilibrium at all and there is a
possibility of an endless sequence of moves and countermoves, an
indefinite state of warfare between firms. In such a situation, the
‘beneficial’ competition of the classical type is replaced by ‘cut-throat’
competition. This kind of competition leads to ‘social wastes’ along with
costs of advertising campaigns, suppression of new methods of
production and so on.
Under oligopoly, even if there I equilibrium, it does not guarantee full

employment or maximum output. Schumpeter is a firm believer in
monopolistic competition. He considers it the best form of capitalism
and finds monopoly capitalism most conducive to economic growth!
PART 2 – THE PROCESS OF CREATIVE DESTRUCTION
The capitalist reality is unfavourable to maximum performance in

production. This can be shown through the theories of monopolistic
and oligopolistic competition.
 We have seen that all along the output has been expanding in
spite of the secular sabotage by the bourgeoisie. To prove this
we need to produce evidence to the effect that the observed
rate of increase can be accounted for by a sequence of
favourable circumstances unconnected with the mechanism of
private enterprise and strong enough to overcome the
resistance by the bourgeoisie.
 Capitalism once tended to favour maximum productive
performance but that the later spread of monopolistic
structures, killing competition, has now reversed that tendency.

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Schumpeter points out that this involves the creation of an

entirely imaginary golden age of perfect competition that at
some time somehow metamorphosed itself into the
monopolistic age, whereas it is quite clear that perfect
competition has at no time been more of a reality than it is at
present.
 The rate of increase in output did not decrease from the 1890s
after which the prevalence of the largest-size industries can be
dated. Time series of total output does not show any ‘break in
the trend’, and evidence suggests that the modern standard life
of the masses evolved during the period of relatively unfettered
big businesses.
According to Schumpeter, these are fragmentary analyses and no

conclusions about the capitalist reality can be drawn from them. He
believed that in dealing with capitalism we are dealing with an
evolutionary process. Capitalism is by nature a form or method of
economic change and it can never be stationary.
The evolutionary character of capitalist process is because –

- Economic life goes on in a social and natural environment which
changes and by its change alters the data of economic action.
- The fundamental impulse that sets and keeps the capitalist
engine in motion comes from the new consumers’ goods, the
new methods of production of transportation, the new markets,
and the new forms of industrial organization that capitalist
enterprise creates.
These impulses give rise to a process of industrial mutation that

incessantly revolutionizes the economic structure from within,
incessantly destroying the old one, incessantly creating a new one. This
essential fact about capitalism is called the process of Creative
Destruction.

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Why evolutionary?
Capitalism in the light of creative destruction is a process whose every
element takes considerable time in revealing its true features and
ultimate effects. There is no point in appraising the performance of this
process at a given point of time; we must judge its performance over
time.
» According to Schumpeter, any economic system that at every

given point of time fully utilizes its possibilities to the best
advantage, may yet in the long run be inferior to a system that
does so at no point of time, because the latter’s failure to do so
may be a condition for the level or speed of long-run
performance. This clearly justifies why we should not study
capitalism at a point in time.
» Capitalism is an organic process, and while dealing with it,
analysis of what happens in any particular part of it – say, in an
individual industry – may indeed clarify details of the
mechanism but is inconclusive beyond that. Every piece of
business strategy acquires its true significance only against the
background of that process and within the situation created by
it. Hence, every strategy must be seen in its role in the
perennial gale of creative destruction; it cannot be understood
irrespective of it or on the hypothesis that there is a perennial
lull.
In capitalism, the competition is not within a rigid pattern of invariant

conditions. We know that the methods of production change, there is
competition from the new commodity, new technology, the new source
of supply, and the new type of organization. This type of competition
requires cost or a quality advantage to survive the ever-present threat.
This, in the long run, enforces behaviour very similar to the perfectly
competitive pattern.

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Schumpeter illustrates this through an example of retail trade which

faces competition not from the additional shops of the same type, but
from the departmental store, the chain store, the mail-order house and
the super market which are bound to destroy others.
PART 3 – MONOPOLISTIC PRACTICES
Was Schumpeter a Marxist?

“Can capitalism survive? No. I do not think it can.” – Schumpeter in
Capitalism, Socialism and Democracy. We might think on the basis of
the quote, that Schumpeter was a Marxist. But the analysis that led
Schumpeter to his conclusion differed totally from Marx’s. Marx
believed that capitalism would be destroyed by its enemies, whom
capitalism had allegedly exploited, and he relished the prospect.
Schumpeter believed that capitalism would be destroyed by its
successes, that it would spawn a large intellectual class that made its
living by attacking the very bourgeois system of private property and
freedom so necessary for the intellectual class’s existence. And unlike
Marx, Schumpeter did not relish the destruction of capitalism.
Capitalism sparks entrepreneurship

Capitalism, Socialism, and Democracy is much more than a prognosis of
capitalism’s future. It is also a sparkling defense of capitalism on the
grounds that capitalism sparks entrepreneurship. Indeed, Schumpeter
was among the first to lay out a clear concept of entrepreneurship. He
distinguished inventions from the entrepreneur’s innovations.
Schumpeter pointed out that entrepreneurs innovate not just by
figuring out how to use inventions, but also by introducing new means
of production, new products, and new forms of organization. These
innovations, he argued, take just as much skill and daring as does the
process of invention.
Innovation by the entrepreneur, argued Schumpeter, leads to gales of

“Creative Destruction” as innovations cause old inventories, ideas,

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technologies, skills, and equipment to become obsolete. Creative

destruction, he believed, causes continuous progress and improves the
standards of living for everyone.
Views on Perfect Competition and Monopoly

Schumpeter argued with the prevailing view that perfect competition
was the way to maximize economic well-being. Under perfect
competition all firms in an industry produce the same good, sell it for
the same price, and have access to the same technology. Schumpeter
saw this kind of competition as relatively unimportant. Schumpeter
argued on this basis that some degree of monopoly is preferable to
perfect competition. Competition from innovations, he argued, is an
ever-present threat that “disciplines before it attacks”.
We have seen that the impact of new technologies, markets, products,

etc. on the existing structure of an industry considerably reduces the
long run scope and importance of practices that through restricting
output, aim at conserving established positions and at maximizing the
profits accruing from them. Schumpeter argues that such practices
which are considered restrictive in a stationary state or in a state of
slow and balanced growth, acquire a new significance against the
background of the process of creative destruction.
Schumpeter claims that in the perennial gale of creative destruction,

monopolistic practices protect rather than impede the long run
process of growth.
In the cases of a stationary state or in a state of slow and balanced
growth, the restrictive strategies would produce no result other than an
increase in profits at the expense of the buyers. But in the process of
creative destruction, restrictive practices may do much to “steady the
ship” and to alleviate temporary difficulties.
Arguments given by Schumpeter

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» Monopolistic practices are necessary for encouraging Long-term

Investments
We know that long-term investments under rapidly changing
conditions in the process of creative destruction are highly risky. As
a result, any producer would not like to undertake long run
investments, unless there are proper incentives to do so. Given the
huge risks and long gestation periods attached to large scale
investment, such investment would be unattractive if a producer is
not ensured of earning high monopoly profits. This can be thought
of as a reward for taking risks.
Hence, it becomes necessary to resort to such protections as

patents or temporary secrecy of processes or securing long-period
contracts in advance. So, in analyzing such business strategy (1)
With reference to a given point of time, the investigating
economist or government agent sees price policies and restrictions
of output that seem to him synonymous with loss of opportunities
to produce. (2) He fails to see that restrictions of this type are, in
the conditions of the perennial gale, unavoidable incidents of a
long-run process of expansion which they protect rather than
impede.
» The concept of Rigid Prices

One of the major criticisms of monopolistic competition is that it
leads to rigidity of prices. However, Schumpeter claims that prices
are not as rigid as they seem to be. He defines price rigidity as
follows: “A price is rigid if it is less sensitive to changes in the
conditions of demand and supply than it would be if perfect
competition prevailed”.
According to Schumpeter, there are many reasons why what in

effect is a change in price should not show in the statistics -
1. In the capitalist process of production, there is a continual
intrusion of new commodities. Now a new commodity may

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effectively bring down a pre-existing structure and satisfy a

given want at much lower prices per unit of service and yet
there may not be any change in the recorded price. So,
“flexibility in the relevant sense may be accompanied by rigidity
in the formal sense”. In fact, sometimes price reduction is the
sole motive of bringing out a new brand while the old one is
left at the previous quotation – again a price reduction that
does not show.
2. A great majority of consumers’ goods are at first introduced in
an experimental form and hence the entire potential market is
not conquered. Hence, improvement in the quality of products
is a practically universal feature of the development of
individual concerns and of industries. Given this, a constant
price per unit of an improving commodity should not be called
rigid without further investigation. The quality improvement
must be taken into account, whether or not this improvement
involves additional costs.
3. Sometimes prices are kept constant as a matter of business
policy or because it is difficult to change a price set by a cartel
after laborious negotiations. However, Schumpeter points out
that this rigidity is essentially a short-run phenomenon, and
that there are no major instances of long-run rigidity of prices.
He claims that whichever manufacturing industry or group of
manufactured articles we choose to investigate over a period of
time, we always find that in the long-run prices adapt
themselves to technological progress, and mainly they fall.
4. Another common observation is that prices are rigid and do not
fall in recessions and depressions. However, the point of the
matter is whether or not this short-run rigidity have any
injurious effects on long-run development of total output (like
reduce the rate of increase in total output below what it would
have been in the absence of those rigidities). Two arguments
have been put forth in this regard:

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 Let us assume that an industry which refuses to reduce prices in

recession sells exactly the same quantity of product which it
would sell if it had reduced them and that the consumers are
the kind of people who spend all they can. So, the industry
profits have increased by the amount of the rigidity. If this
increment is not spent but kept idle or used for unproductive
purposes for instance, repaying bank loans, then the total
expenditure in the economy will be reduced. Similarly, other
industries or firms may suffer and if they do the same, then we
may get cumulative depressive effects. Hence, rigidity may so
influence the amount and distribution of national income as to
decrease balances or to increase idle balances. Such a case is
conceivable but its practical importance is very small.
 Price rigidity might have dislocating effects (increase
unemployment or render employment unstable) if, in an
industry, it leads to an additional restriction in output, i.e. to a
restriction greater than that which must in any case occur
during depression. The practical weight of this argument is
reduced by the fact that price rigidity is motivated by the low
sensitivity of demand to short-run price changes within the
possible range. Also, price reductions may not lead to an
increase in demand because they may not be considered
enough by the consumers, especially if it induces expectations
of further reductions.
Both these arguments are quite inconclusive as they assume the

ceteris paribus condition which is inadmissible in dealing with
our process of creative destruction. We must realize that refusal
to lower prices strengthens the positions of the industries which
adopt that policy either by increasing revenue or by avoiding
the chaos in their markets. As a result, rigid prices may keep
total output and employment at a higher level than what they
would have been if depression was allowed to play havoc with

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the price structure. They may prevent depressions form

becoming worse.
Hence, Schumpeter says that, under the conditions created by
capitalist evolution, perfect and universal flexibility of process
might in depression further destabilize the system, instead of
the contrary. So, in most cases what looks like rigidity may be
no more than regulated adaptation.
» Conservation of capital vs. Cost-reducing improvement

 In the era of big-business the maintenance of the value of
existing investment – conservation of capital – becomes the
chief aim of entrepreneurial activity and bids fair to put a
stop to all cost-reducing improvement. Hence, the capitalist
order becomes incompatible with progress because
progress entails destruction of capital values in the strata
with which the new commodity or method of production
competes. In the case of perfect competition, the old
investments must be sacrificed or abandoned owing to the
competition, but when there is no perfect competition, big
established concerns can fight back and try to avoid losses
on their capital account, and hence they stifle progress
itself.
 Schumpeter points out that every modern concern
establishes a Research and Development Department, as
soon as it can afford it, with the sole aim of devising
improvements. This practice does not suggest aversion to
technological progress.
 If a potential cost-reducing improvement is introduced,
then it will render the total cost per unit of production
smaller than the prime cost per unit of products with the
method actually in use. If this condition is not fulfilled, then
according to the above mentioned view-point, private
management will not adopt the new method until the
existing plant and equipment becomes obsolete whereas

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the social management would, to the social advantage,

replace the old by any new cost-reducing method as soon as
such a method becomes available, without regard to capital
values.
 Schumpeter argues that all that a private management does
is to try and maximize the net present value of the total
assets. It will adopt a method of production which it
believes will yield a larger stream of future income per unit
than does the method actually in use.
 According to Schumpeter, there is another element which
profoundly affects behaviour in this matter and is more
often than not overlooked – ex ante conservation of
capital. A new type of machine is often expected to be a
link in a chain of improvements and may presently become
obsolete. This will as a rule involve some waiting in order to
see how the chain behaves. And to an outsider this may
well look like trying to stifle improvement in order to
conserve existing capital values.
» Old Concerns and Established Industries

Old concerns and established industries may survive in the
perennial gale. Situations like general crises and depressions
emerge in the process of creative destruction, in which many firms
perish and there is no point in trying to conserve obsolete
industries. Their coming down in a crash leads to cumulative
depressive effects such as widespread unemployment. Cartels
based on tacit understanding about price competition may be
effective remedies under conditions of depression. They may in the
end produce not only steadier but also greater expansion of total
output than could be secured otherwise. Therefore, restrictive
practices help alleviate temporary difficulties. However, it is to be
noted that there may be some restrictive practices which hamper
long-run development of output.

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Schumpeter’s argument is not against state regulation of

monopolies but against the indiscriminate prosecution of everything
that qualifies as a restraint on trade.
Arguments given by Schumpeter in favour of monopoly

o By a monopolist we mean those single who face a demand
schedule that is independent of their own actions. Given this
definition, it becomes evident that pure cases of long-run
monopoly must be of the rarest occurrence.
o In the short-run, genuine monopoly positions or those
approximating monopoly are much more frequent. However,
new methods of production or new commodities do not per se
confer monopoly. The product of the new method has to
compete with the product of the old ones and the new
commodity has to be introduced, i.e. its demand schedule has
to be built up.
o Simple and discriminating monopoly teaches that monopoly
price is higher and monopoly output is smaller than competitive
price and competitive output. According to Schumpeter, this is
true only if the assumption made that the method and
organizations of production are exactly the same in both cases
is true. But we know this is a wrong assumption because there
are superior methods available to the monopolist which either
are not available at all to a crowd of competitors or are not
available to them so readily
o Even if the opportunity to set monopoly prices was the sole
objective, the pressure of improved methods would tend to
shift the point of the monopolist’s optimum toward or even
beyond the competitive cost price, thus doing the work (partly
or wholly) of the competitive mechanism, even if restriction is
practiced.
Arguments given by Schumpeter against Perfect Competition

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o The perfectly competitive arrangement displays wastes of its

own. The firm of the type that is compatible with perfect
competition is in many cases inferior in internal, especially
technological, efficiency. Hence, it wastes opportunities.
o Perfect Competition in its endeavors to improve its methods of
production waste capital because it is in a less favourable
position to evolve and to judge new possibilities.
o According to Schumpeter, once an equilibrium has been
destroyed by some disturbance, the process of establishing a
new one is not so sure, prompt and economical as the old
theory of perfect
competition made
it out to be; and
the possibility that
the very struggle
for adjustment
might lead to such
a system farther
away from, instead
of nearer, to a new equilibrium. In many cases this happens
because of lagged adjustment. For example, the case of Cob-
web phenomenon. Such phenomena suffice to show up the
glaring weakness in the mechanism of perfect competition.
o Perfect competition implies free entry into every industry,
which is a condition for optimal allocation of resources and
hence for maximizing output. This is, however, only in the case
of a world consisting of a number of established industries
producing familiar commodities by established and substantially
invariant methods. The introduction of new methods of
production and new commodities is hardly conceivable (due to
lack of incentives) with perfect competition. Hence, economic
progress is incompatible with it. In fact, perfect competition is
and has always been suspended whenever anything new is
being introduced.

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o The type of excess capacity that owes its existence to the

practice of building ahead of demand or providing capacity for
the cyclical peaks of demand would in a regime of perfect
competition be much reduced. As a result, it cannot have the
quantity or quality of capacity that big businesses were able to
create precisely because they were in a position to use is
strategically.
o Rigidity is a type of resistance which perfect competition
excludes because in the traditional theory, such a resistance
spells loss and reduces output. However, we have seen that in
the process of creative destruction, the opposite might be true
and perfect and instantaneous flexibility may even produce
functionless catastrophes.
According to Schumpeter, we must accept that monopolistic capitalism

has become the most powerful engine of progress and in particular of
the long-run expansion of the total output. Perfect competition is not
only impossible but inferior, and has no title to being set up as a model
of ideal efficiency.
Schumpeter concludes that perfect competition may be better at a

point of time but in the long-run monopoly is better and it is thus
superior. However, in his entire argument, Schumpeter never made
completely clear whether he believed innovation is sparked by
monopoly or by the prospect of getting a monopoly as the reward for
innovation. Most economists accept the latter argument and, on that
basis, believe that companies should be able to keep their production
processes secret, have their trademarks protected from infringement,
and obtain patents.
Questions
1. Why does Schumpeter preclude evaluating capitalist system at a
given point of time? How does he use this argument to prove

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the superiority of monopoly capitalism over competitive

capitalism?
2. Discuss how monopoly capitalism is conducive to economic
growth.
3. How does Schumpeter use his concept of creative destruction
to justify monopoly practices under capitalism even though
their use violates the generally prescribed conditions for
economic efficiency?
4. What is the process of creative destruction? How does
Schumpeter assert that monopolistic practices are a part of the
deliberate strategies adopted to confront ‘the perennial gale of
creative destruction’?
(Q.5 requires you to read ‘The Political Economy of Growth’ by
Paul Baran)
5. Evaluate Schumpeter’s thesis of ‘creative destruction’ in light of
Baran’s argument against monopoly capitalism.

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Chapter 9
THE POLITICAL ECONOMY OF GROWTH
(Paul Baran)
As outlined in the previous chapter, capitalism evolved over time – first

existing with a perfectly competitive market structure and then with a
monopolist phase. This chapter basically compares capitalism’s
competitive youth with its monopolistic old age and examines whether
the relation with economic development changed over time.
Rate and direction of economic development = f (size and mode of

utilization of economic surplus)
Size and mode of utilization of economic surplus = f (degree of
development of productive forces, structure of socio-economic
relations, system of appropriation of surplus by those relations)
I. MODUS OPERANDI OF A CAPITALIST ECONOMY

There are two key processes in the dynamics of capitalism as a
system which form its raison d’être:
1. Maximization of Output
How is output maximized? The striving of an individual
entrepreneur in an environment of competition propels him to
use available productive resources into useful employment and
to improve the methods of production. Cost reduction becomes
the dominant concern of the profit maximizing capitalists; waste
and irrationality are eliminated from the system.
Secondly, the occurrences of crises under capitalism, which

purge it from inefficient units, promote general progress and
survival of the fittest. This serves as powerful engine of
expansion of aggregate output.

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2. Maximization of Surplus
How is surplus maximized?
 Reserve army (existence of surplus labour force) keeps rising
wages in check, thus reducing costs and maximizing surplus.
 Absence of extravagant lifestyles contrary to feudal courts
ensures no encroachments upon the economic surplus.
 Absence of a corrupt state: the state was viewed as a
gluttonous claimant to the economic surplus because of its
inefficiencies dating back to the feudal age.
 Frugality and will to reinvest the economic surplus on the
part of capitalist businessmen ensured that maximum
surplus would be attained. The rationale for the value of
frugality was grounded in three foundations. One,
competitive mechanism compelled businessmen to
accumulate by continuously reinvesting. Two, the business
class rose from humble backgrounds, so exhibited a
propensity to work hard and save. Three, the advent of a
‘capitalist spirit’ infused the values of thriftiness and
accumulation was seen a supreme virtue.
II. CLASSICAL CONDITIONS FOR GROWTH

There are four classical conditions which are seen as necessary for
economic growth:
1. Full employment of resources
2. Maximization of economic surplus
3. Productive investment/utilization of economic surplus
4. Availability of sufficient outlets for investment
III. TO WHAT EXTENT WERE THE CONDITIONS SATISFIED UNDER

MONOPOLY CAPITALISM

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Condition 1: Full utilization of resources
- Capitalism under monopoly phase has been generating an

output smaller than what would have been possible with the
available equipment, natural resources and manpower.
- We can’t really measure the gap between actual and potential
output but we can surely compare rates of growth in different
countries, however it seems from other complementing
evidence that the gap has grown considerably larger.
- Data shows that rates of growth have been declining markedly
since the Civil War from 13.5% to less than 3% – the period
commonly associated with advanced or monopolistic capitalism.
- A vital factor responsible for the slowing down of the growth of
output is the considerable reduction in the number of hours
worked per week. Also, violent fluctuations in economic activity
and employment greatly diminished the rate of capital
formation representing both the cause and effect of these
fluctuations.
Hence, the first condition has hardly been satisfied in the course of
capitalist development. It was not even fulfilled in the competitive
phase and is far from fulfillment in the monopolistic phase too.
Condition 2: Maximization of economic surplus
This condition basically demanded the existence of ‘largest possible

surplus’ with the ‘lowest possible wages’. However, as we know
maximum output only sporadically materialized in the course of
capitalist development with underproduction more pronounced
under advanced than under competitive conditions. Classical
economists took a ‘subsistence minimum’ for granted. But
subsistence minimum also changes over time. We can better gauge
how capitalism fared, using some statistical evidence.

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1. Kalecki finds a striking constancy of labour share in UK for

1889-1938 – This points to an almost stable wage earners
share.
2. For US, a slight but upward trend was seen however the
argument made by some was that this occurred not by
enhancement of relative position of the working class but by
expansion through the entry of more labourers in the market.
3. Thus under monopoly capitalism, a stability of relative share of
aggregate income accruing to labour has been observed.
However, the more important question is to check out the
distribution of profits. Voila, statisticians have found evidence
for the same. Here are two facts quoted:
a. 200 largest non financial corporations increased their
relative importance from ownership of one-third assets in
1909 to 48% in 1929 and 35% in the 1930s.
b. Victor Perlo’s study concluded that the top 1% in the US
owned between 50 and 55% of all savings, individual and
corporate combined.
4. Yet some people say that concentration is of little significance
because these giant firms are themselves owned by a very
large number of individuals. However, the point is that this
notion of ‘shareholder democracy’ is not really realistic. Large
share of aggregate profits are vested in a small number of
individuals who in turn receive bulk of distributed profits.
Last Word: So, definitely yes, economic surplus in monopoly

capitalism is higher than that in competitive capitalism but is
less than the largest possible level. However distribution is
important and the transition from competitive to monopolistic
capitalism has resulted in a tremendous increase of the
absolute volume of the economic surplus and in the shift of
control from relatively small capitalist to a few giant
corporations.

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Condition 3: Maximization of share of economic surplus available

for ploughing back into business
The individual capitalist under monopoly capitalism devotes a huge

part of surplus to investment – however the motivations are
different from competitive capitalism. It is not via thrift, frugality and
self denial but the incentive to REINVEST which leads a huge part of
surplus to be invested and a relatively small part of it to be
consumed.
Condition 4: Availability of sufficient outlets for profitable

investment
It is contended that there is inadequacy of investment outlets under

monopoly capitalism. Schumpeter pinned exogenous factors for the
same. Professor Alvin Hansen has given his theory of vanishing
investment opportunities which gives the following exogenous
factors as explanations for the same.
1. Population growth slowdown
2. Disappearance of frontier
3. Changes in tempo and nature of technical progress
IV. BARAN’s VIEW

Paul Baran dismisses the above theory and emphasizes the
‘endogenous’ rather than exogenous factors responsible for
vanishing investment outlets. The following dialogue tries to
summarize the debate between Paul Baran (PB) and Alvin Hansen
(AH).
AH: Population affects investment through its varied

influences. You see, more population means more purchasing
power and more purchasing power leads to higher aggregate
demand – stimulating investment avenues. Also it affects the
composition of consumption baskets. Not only that, business

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decisions heavily affected by population statistics. A young

population would lead to higher demand for diapers than hearing
aids.
PB: Okay taken, but there are other influences as well. Most
importantly – technical progress, discovery of new natural resources
and internal migration. Investment takes place regardless of
whether population is increasing, decreasing or stable.
AH: Population affects investment by affecting the supply of

labour. Higher supply of labour suppresses wages and leads to an
increase in profits.
PB: But that is not as unambiguous as you put it. Fall in wages
could lead to a fall in Aggregate Demand and lead to
discouragement of private investment. On top of that, abundance of
cheap labour might inhibit investment by reducing the incentive for
coming up with labour saving machinery.
AH: Economic frontier (a PPF) determines the level of

investment outlets.
PB: Frontier of economic expansion might be widely different

from a frontier of geographic expansion. For example, Belgium
though geographically small has developed great deal more than
geographically large Spain.
AH: Technical Innovations are an important factor determining

investment.
PB: It’s not innovation per se, but the application and usage.
Many technically sophisticated devices existed in the Middle Ages
but were not utilized as socio-economic conditions for their
realization were lacking.

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CONCLUSION: According to Paul Baran, Professor Hansen’s Theory is

“analytically inconclusive – amounts to an implicit acceptance of the
agnostic view that relation all contradictions of the capitalist system not
its inherent laws of motion but to random disturbance.”
Baran’s argument then goes on to emphasise the
endogenous factors in monopoly capitalism responsible for
diminishing investment outlets.
V. ENDOGENOUS FACTORS
Factors deep rooted in the basic structure of capitalism i.e.

growth of monopoly and oligopoly lie at the heart of diminishing
investment opportunities.
In the classical model, all the firms were price takers and
aggregate profits must be necessarily split up into a vast number
of small albeit unequal morsels. However, under monopolistic and
oligopolistic conditions, one firm innovates and reduces cost. The
rest will also introduce new methods ‘at the peril of extinction’.
This is the logic of Perennial Gale of Creative Destruction
according to Schumpeter. In this way, excessive productive
capacity tends to become eliminated.
However, there are factors as well.
 Desire to postpone investment
A monopolist is interested in reducing costs of production. Yet
the drive to reduce costs is counteracted by other
consideration. There is the desire to preserve the value of
existing investment and to postpone investment until the
available equipment is amortized. This means that technological
innovation does not necessarily lead to its immediate adoption.
Only major technological improvements have a chance of
‘breaking through’ while others would have to wait until the
existing equipment wears out. The above decision definitely

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depends on the investors’ decision to foresee the lifespan of the

new machine.
Thus while technological progress stimulates investment, under

conditions of monopoly and oligopoly, there may be a strong
tendency to wait with outlays on new equipment until the
technological condition have become settled or to suppress
technological advance until the existing equipment is written
off.
 Choice, not compulsion for an oligopolist

A competitive firm is always compelled by competition to
introduce a new machine. But under the monopoly principle of
obsolescence, new machines will not be introduced until the
un-depreciated value of the old machine will at least be covered
by the economies of the new techniques.
Thus progress is slowed down and outlets for new capital
formation available under a more ruthless competitive society
are cut off.
 Fear of price competition

The question is that why should an oligopoly not avail itself of
existing technical possibilities which lower unit costs by
expanding output so as to be able conquer the entire market?
The answer is fear of price competition. Under oligopoly, price
competition can intensify into price wars which can result in
more losses. As a result, more or less explicit agreements of the
‘price leadership’ type are adopted and cut throat completion is
eliminated. This is founded on the principle of ‘live and let live’
and thus high cost firms are not thrown out of the market but
are enabled to carry on. Also, consequently, excess capacity
that has developed either as the result of earlier economies of
scale or in order to meet fluctuating demand does not have a
tendency to be squeezed out of the industry.

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 Oligopolization => Concentration

At a much larger scale, these micro level dynamics have an
impact on the structure of industry as well. While the barriers to
entry are huge in an oligopolistic setup, an oligopolist
trespassing into another oligopolistic industry would also be
circumspect about doing the same. This is because he runs the
risk of retaliation in his own market on part of members of the
invaded industry who simultaneously exist in the invaded
industry as well. Thus, the threat and difficulty of such invasions
serve as a powerful stimulus to fortify a monopolistic or
oligopolistic firm’s position in the market, to lead it to spend
increasing amounts on advertising, entering vertical mergers,
developing and multiplying links with financial institutions etc.
The result is that monopoly and oligopoly spread from one

branch to another, large scale enterprise takes over the small,
economy as a whole becomes successively oligopolized.
CONCLUSION: While it is true that at a certain stage of capitalist

development, the growth of large scale enterprise, of monopoly and
oligopoly was a progressive phenomenon furthering the advance of
productivity and science. However, the same after a while has turned
into a retrograde force hindering and perverting further development.
Questions
1. How does Paul Baran critique monopoly capitalism as
essentially endogenous to the development of capitalism itself?
(Q.2 requires you to read ‘Capitalism, Socialism and Democracy’ by
Schumpeter)

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Chapter 10
FORDISM AND AFTER
(Fran Tonkiss)
Within the wider debates over globalisation, issues of ‘production’ play

a pivotal role. Key features of production include the dispersal of
industrial processes across international space, growth and economic
clout of multinational corporations and the increasingly immaterial
character of production based on knowledge. Within this context,
Fordism emerged as a system of production and had larger implications
on social and economic life.
A. Fordism – Concept and Features

According to David Harvey, Fordism started a mode of industrial
organization in 1914 when Henry Ford introduced the eight-hour,
five-dollar day for workers on his new car assembly line in
Michigan and produced Model-T car. This instituted in one move
the mechanized production of standard goods, a routinised labour
process and a set working day. The following are the main features
of Fordism as a concept:
 Mechanised Production: The assembly line signaled the

replacement of craft production in workshops with automated and
mechanized production on the factory floor. Piore and Sabel called
it the ‘first industrial divide’, as large scale production displaced
small-scale, more specialized and decentralized enterprises.
 Changes in Labour Processes: The shift to assembly line led to

changes in labour processes – the technical division of labour
simplified and routinised work, as the production process was
broken down into its parts and distributed among a number of
workers. This allowed for greater specialization and scientific

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management and made workers more productive. Michael Aglietta

analyses this effect as a shift from the production of ‘absolute
surplus value’ extracted via lower wages and longer working hours
to ‘relative surplus value’ achieved by increasing labour
productivity.
 Standardised Products on a mass scale: Mechanisation also

allowed for production of standardised goods on an expanding
scale, especially consumer goods. This was the basis for achieving
economies of scale; high volume production at low unit costs.
More than this, Ford integrated transport and distribution
functions under the direct management of the plant, economising
on overall production costs. Fordism thus refers not simply to
what happens inside the factory, but to the larger setting of work,
consumption and the socialisation of both workers and
consumers. Ford used the combination of force and persuasion
and employed mainly non-unionised immigrant labour.
 Spread of Fordism in the post-war period: In the post war

period, this model of mass production became more widely
generalised. The Fordist emphasis on efficiency, rationalisation
and productivity turned out to be well suited to growth industries
of the reconstruction - ship-building etc. Secondly, the stable
context of post war growth allowed for a brokered settlement
between capital and labour. In general, Fordist systems of
production proved compatible with a range of state and social
forms.
Fordist wage settlement was crucial to the larger stability of the socio
economic system. Fordism was after all, a mode of mass production
which depended on patterns of mass consumption. The Fordist wage
settlement rested on decent earnings for semi-skilled industrial workers.
This led to the emergence of a Fordist commodity aesthetic, where mass
production both fuels and in turn is fuelled by mass consumption.

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 Views of French Regulation School: The French Regulation

School provides an important reference for wider approaches to
capitalist restructuring within an inter-disciplinary framework. The
basic question asked is ‘How is it that capitalist economies, in spite
of their in-built contradictions and crisis tendencies are able to
reproduce themselves in a fairly stable way over extended periods?’
The answer is that this durability and resilience stems from the
following major aspects.
 Regime of Accumulation
The relative durability comes from the way that a complex of
production, distribution, exchange and consumption process hold
together as a regime of accumulation. Fordism is an example of
such a system which analyses things not only in terms of how they
are produced or how money gets made, but in the wider context of
economic life – in ordering practices and relations of work,
distribution and consumption.
 Mode of Regulation
The term describes the institutional setting of the government, law
and politics which underpins a given regime of accumulation. It
provides the formal regulatory framework within which capitalist
processes operate, as well as the political settlement between
different classes.
 Societal Paradigm
Certain theorists use the concept – ‘the social paradigm’ to refer to
the underlying social contract or mode of organization of social life.
This shapes social arrangement and identities beyond the
economic field.
Thus, ‘regime of accumulation, mode of regulation and societal
paradigm’ point to the way that the economy, politics and society
are integrated around a particular mode of capitalist development.

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B. The crisis of Fordism

External and internal pressures around mid-1970s led to the
appearance of cracks in the Fordist machine. A number of factors
were responsible.
» Economic relations became increasingly internationalized
from the early 1970s. While Fordism was based on the
system of production for domestic markets, the appearance
of transnational production arrangements with the advent
of multinational corporations upset the apple cart. It marked
a break between domestic production and domestic
consumption as imported goods became more available and
more attractive to consumer markets.
» There was also rise of new economic competitors – initially
West Germany and Japan followed by newly industrializing
economies of Southeast Asia. The entry of these players
transformed the export system to which Fordist economies
were accustomed.
» As incomes grew, demand became more heterogeneous and
standardization of goods became a bane rather than a boon.
People started preferring something different while only
black coloured cars were being produced by Henry Ford.
» Economic problems compounded when increasing
computerization and use of robotics along assembly lines
reduced the demand for workers to a great extent and led to
unemployment. This led to falling consumer demand and a
breaking up of the virtuous circuit of mass production and
consumption.
C. After Fordism
Piore and Sabel in their analysis of times after Fordism called it the
‘second industrial divide’, marking the move away from large scale
manufacture towards more flexible techniques of production. This
occurred in the 1960s and is termed as the shift to ‘neo-Fordism’ of
‘flexible specialization’. Production and labour became more

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responsive to changing condition of both supply and demand

geared to greater product diversity and ongoing innovation. Cost-
efficiency through economies of scale now gave way to more
flexible economies of scope. The following table neatly summarizes
the shifts.
FORDISM POST-FORDISM
Changes in production and labour
processes
- mass production - flexible or batch production
- standardized products - diversified products
- assembly line production - computer-controlled
Fordism was largely production
characterized by low diversity A more dispersed assembly line
and high volume production and had the potential to redistribute
rigidly structured firms. economic power. Flexible
specialization had the capacity
to increase workers’ skill levels
and offer them greater
autonomy over the labour
process.
Shifts in the spatial organization
of economic activity
-heavy (smokestack) industry - clean technology
-corporate hierarchies - horizontal networks
-semi skilled worker - polarization of skills
- focus on production of goods - Services like finance, research,
property became important.
Crisis in Fordism led to decline of The post-Fordist economic
industrial clusters like the geographies appear quite
Midwest rustbelt of US, the Ruhr diverse including advanced
in Germany etc. technopoles like Silicon Valley.
These models have horizontal
integration of firms, emphasis on

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skill and innovation and

competitive advantages arising
from co-location and economic
and social networks.
New patterns of consumption
-national economy - international economy
-industrial centres - new industrial districts
-mass consumption -differentiated markets
Fordist production was geared Post-fordist production focused
towards undifferentiated on customization of products
consumer markets and based on and differentiation of the market
uniform consumer preferences. If on the basis of a complex of
at all some product consumer practices, elective
differentiation was attempted it identities and cultural
was on the basis of standard associations – distinct life styles,
demographic variables like age, identities or market niches.
income, occupation, gender and
region.
D. Post-Fordist problems
The post-fordist problems are mainly analytical in nature that
raises critical questions concerning the application of Fordism to
contemporary economic conditions.
1. Production
The first issue is the primacy given to production in
accounting for socioeconomic change. Harvey believes that
it highly underplays the role of ever more flexible finance
capital in driving economic changes and overlooks the
extent to which the dispersal and reintegration of
production and exchange processes have been premised on
the idea of mobile money. It is not only ‘products and
production’ but workers that have become flexible.

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2. Labour Flexibility
The notion is open to contrary interpretations. Piore and
Sabel viewed the second industrial divide as potentially
reversing the centralisation and concentration of economic
power that marked the high modern period of industrial
production. In contrast, Fordism tried to forge a psycho-
physical nexus of developing automatic and mechanical
attitudes.
However flexibility can be interpreted in another way also.
When applied to labour, it implies casualisation and
weakened job security, heightened surveillance, lack of
control over or expertise within the labour process, erratic
hours and constant deadlines.
3. The issue of exploitation
At the same time, Fordisation in service sectors are
replicated in the growing outsourcing of routine service
work to developing economies where labour and other
costs were lower. However, this has led to exploitation of
labour in these countries where labour laws are not
stringent and Fordist mass production systems are able to
exploit extremely vulnerable women’s labour power under
conditions of extremely low pay and negligible job security.
Trigila calls this phenomenon as that of the ‘high’ and the
‘low’ road to flexibility where the high-tech worker in Silicon
Valley and the sweated worker in an off-shore factory exist
side by side.
Questions
1. What are the factors on the basis of which fordism and post
fordism modes differ on aspects of production, consumption
and organization of economic activity?
2. What is Fordism? In what sense does Fordism appear less as a
mere system of mass production and more as a total way of
life?

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Chapter 11
POST-FORDISM
(Ash Amin)
The post Fordist debate centres about the question of capitalism’s

future, its dynamics and its survival. It is a debate which gains fresh
impetus during periods of uncertainty and transition. The reading
summarizes three contrasting Post-Fordist perspectives and analyses
them in terms of their continued relevance in the current phase of
capitalist development.
1. NEO-SCHUMPETERIAN PERSPECTIVE
This perspective basically focuses on the role of technology and gale of

creative destruction in unleashing techno-economic paradigms causing
quantum leaps in industrial productivity. This is based on the Kondratiev
waves or K-waves theory which professes that supercycles are
phenomena in the modern capitalist world economy. Averaging fifty
years, the cycles consist of alternating periods between high sectoral

growth and periods of relatively slow growth.

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This view has been advanced by Freeman and Perez. According to this
view, the systemic nature of technological revolutions gives rise to the
notion of ‘techno-economic paradigms’ – qualitative changes in
capitalist production which usher in completely new worlds of work and
standards of efficiency, models for management, locational patterns,
new high growth sectors etc. Each techno-economic paradigm hinges on
a crucial input which plays a steering role:
a) Low and rapidly falling relative cost
b) Unlimited supply for all practical purposes
c) Potential all-pervasiveness in the production sphere (meaning
lots of backward and forward linkages)
d) Capacity to reduce costs and change quality of capital
equipment, labour inputs and other inputs to the system.
In this context, already four Kondratiev waves as shown in the
figure have already taken place – those steered by innovations
like steam engine, railways, electric equipment and
petrochemicals. Now, the post-fordist period is seen in terms of
the fifth Kondratiev wave steered by Information Technology
Revolution.
CRITICISM
However, this view is criticised on grounds of courting an excessive
degree of technological determinism. There is a predominant tendency
within the theory to accord a lot of importance to technology as a
dominant factor, while neglecting the socio-economic and institutional
system. This is essential a reflection of pre-existing reticence within the
Neo-Schumpeterian perspective to deal with social relations in general.
Tangible technologies have been given undue precedence over the less
palpable forces shaping economy and society.
Counter-example for N-S perspective

The Toyota paradigm in Japan is seen as that of ‘autonomation’ –
automation with a human mind. Japanese industry saw quantum leaps
in productivity. However it is extremely difficult to explain these

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advances in the neo-Schumpeterian sense. The reason is that Japanese

car production has been conceived to have more in common with the
running of a super market than the launching of a space rocket. There is
no inherent superior technology that is driving productivity here, but a
social innovation and managerial advance – ability to assure quality,
flexibility and continuity in production.
The basic aim of autonomation is an automatic control of defects

making it impossible for defective parts to pass unnoticed along the
production line. One example of the same is a spot welding station,
where a counter records the number of welds automatically and sounds
a buzzer if there is discrepancy between the numbers it has counted
and the number required. Therefore, in Toyota’s autonomated factories
smooth, faultless and flexible production is not typically guided by
advanced computer systems, but human discretion aided by an assorted
collection of buzzers and beams, multicoloured lights etc.
This example makes us conclude that allocating social innovations a

central role in the processes of technological change connected with the
post Fordist era means rejecting the neo-Schumpeterian preoccupation
with microelectronics as a key factor playing a ‘steering role’. Focus on
social innovations largely neutralises the hard and narrow technological
determinism view.
2. NEO-SMITHIAN PERSPECTIVE
This view has been advanced by Piore and Sabel who label the Post-
Fordist era as the ‘second industrial divide’. It is a new ‘branching point’
– a brief interlude of openness before the new technological trajectory
is established. Although P & S also take up the notion of technological
paradigms, but the emphasis is more on social innovation than on
technology. According to the theory, many competing technologies
inhabit the techno-economic landscape; it is the political forces and
exercises of economic power that decree which technological trajectory

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is to be followed. This is then overpowered by the emphasis on the twin

terms of ‘market forces’ and ‘market power’. However, this is subject to
criticism on grounds of advancing market determinism.
To understand the post-Fordist stance, we need to understand the

theory of industrial divides and dualism which explains the Fordist era. It
has been observed that a series of dichotomies exist spanning different
economic systems which include:
1. The dichotomy between a large, monopolistic sector and a
small, competitive sector
2. Between formal and informal sectors
3. Between high wage workers and low wage workers
The analysis of this dualism requires a move away from the basic tenets
of neo-classical economics to the realm of classical political economy
advanced by Adam Smith. This dualism can be largely explained in terms
of differing technologies. In the neo-classical analysis, technology is
treated as exogenous. However, Smith accounts for the development of
productive forces based on two postulates:
1. Productivity has a positive relation with the Division of Labour.
This is based on the following rationales:
a) Dexterity of workers increases as small number
of tasks lead to greater concentration
b) Time is saved as moving between tasks is made
unnecessary
c) There exist more opportunities for
improvements by concentrating on single tasks.
Division of labour is limited by extent of the market.
Thus both the postulates in totality imply that economic
progress is a matter of expanding markets and dividing labour.
2. The second postulate means that the division of labour rests on

the anticipation of the number of items produced and sold. If
the market for an item is small, the opportunities for an
extended DOL will be curtailed, if the market is large, the

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opportunities will be greater. The optimal market size will be

one that allows each worker to be fully employed executing a
single task. This ‘prefigurative’ (predictive) influence of the
market can be understood in terms of three crucial elements:
1. Standardization of output; that the reduction of complex
products to standardized parts greatly facilitates the
division of labour
2. Stability of market demand; that stability promotes
larger level of output and greater division of labour.
Instability, on the contrary promotes periodic
unemployment of capital which deters division of labour.
3. Uncertainty of market demand; in the face of instability
of demand, production schedules CAN be stabilized and
economies of divisibility realised however, inventory
investment will be discouraged when fluctuations are
unpredictable.
Thus, Piore provides a basis for explanation of the co-existence of large

and small scale producers in the same industry in developed economies.
A tendency for increasing economic concentration will become evident
as individual firms merge to gain a greater share of the market. Dualist
theory has also been used by Piore to explain the structure of industries
in developed economies which have failed to develop a large scale
monopoly sector. For example, in industries such as high-fashion
garment, the DOL has been curtailed apparently because demand has
been transitory and unpredictable.
Flexible Specialization
Post-Fordist period is the world of flexible specialization, according to
P&S. In the world of flexible specialization, further division of labour is
no longer an effective means for raising productivity- the greatest social
innovation of modern times is defunct. This is based on the notions of:
a) Saturation of mass markets
b) Break-up of mass markets

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These are seen as part of long term trend which offer a more
fundamental explanation. Just as ‘proto-industrialisation’ was seen as
referring to ‘industrialisation before industrialisation’, ‘flexible
specialization’ is seen as ‘industrialisation after industrialisation’. This
is a qualitatively different type of industrialisation where basic needs for
food, clothing and shelter have been largely satisfied and more ‘refined
wants’ can be expressed. Demand is much more heterogeneous and
diverse.
CRITICISM
» P&S claim that mass markets are reaching ‘saturation point’.
Karel Williams et al do not accept this and point to a large and
stable replacement demand for established consumer durables
and important product development by old mass producers.
» P&S fail to distinguish between extensive product
differentiation by established large-scale producers and market
fragmentation favouring new small scale producers. According
to Houndshell, the limits of archetypical Fordist mass
production were already reached in the late 1920s when
General Motors and Sloanism successfully challenged Ford’s
Model T. The early victory of Sloanism over Fordism in the
formative years of mass production paradigm represents the
early rule of marketing over pure production – it was pointless
to revolutionize the ways of producing cars without also
revolutionizing the ways of selling them.
» Although, politico-institutional forces and exercises of economic
power are introduced by P&S, their overwhelming attention to
market trends means that politics and exercise of power are all
too often brushed aside.
3. NEO-MARXIST PERSPECTIVE
Neo-Marxist perspective (also known as French Regulation School) is

based on two key concepts: Regime of Accumulation (systems of

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production and consumption) and Mode of Regulation (written and

unwritten laws of society which control the Regime of Accumulation
and determine its form). The French word ‘regulation’ refers to the
preservation of a set of norms and a ‘way of life’ than a process of
conscious adjustment.
The view emphasizes heavily on the social aspect, breaking the

compartmentalization of economic and politics. The result of this
marriage between Marxist political economy and institutionalist
tradition is a conceptualization of qualitative change within capitalism
which posits the existence of two fundamental dynamics forcing change
– regime of accumulation and mode of regulation.
At the same time, causality is attributed not to a single universal

dynamic but to specific cultural and political forms, the peculiarities of
national capitalisms take on a new significance. The regulation
perspective encourages greater faith in micro-level analysis to
conceptually inform problems that the other two perspectives still
phrase in term of macro concepts alone. Thus, it is said that during the
era of liberal capitalism, employers typically relied on coercion and the
economic whip of the market, now the shift is towards more diplomatic
means of guaranteeing sufficient labour.
Post-fordism is primarily considered to be the breakdown of ‘growth

compromises’ and the dissolutions of the protective frameworks
established in the post war period. Four tendencies have been identified
which have led to structural crisis within Fordism:
1. Increased division of labour became counter-productive.
2. Continued expansion of mass production and the pursuit of
even greater economies of scale have led an increasing
globalisation of production and sales. Competition has
intensified and domestic markets have penetrated, making
economic management at the national level increasingly
difficult.

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3. Fordism has led to growing social expenditure, leading to

imbalance and destabilizing inflationary pressures.
4. Consumption patterns of the affluent worker have gradually
changed and have diversified.
In general, the regulationists’ account of contemporary structural crisis

is broader and more politicized than that given by either the neo-
Smithian or the neo-Schumpeterian perspective. In this account, there is
no definite vision of the future. The shape of post-Fordism today is
considered to be ambiguous and the phase remains nameless within the
regulation perspective.
Questions (Tonkiss and Ash Amin)

3. What is Fordism? In what sense does Fordism appear less as a
mere system of mass production and more as a total way of
life?
4. Critically analyze the three contrasting post fordist perspectives
describing the nature of capital development.
5. What are the factors on the basis of which fordism and post
fordism modes differ on aspects of production, consumption
and organization of economic activity?

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Chapter 12
POLITICAL ASPECTS OF FULL EMPLOYMENT
(M. Kalecki)
Introduction
The maintenance of full employment through government spending
financed by loans has been a widely discussed and debated issue. The
discussion did not give due consideration to the political realities.
According to Kalecki, the assumption that a government will maintain
full employment in a capitalist economy if it only knows how to do it is
misleading.
The political aspect was first noticed in the Great Depression of the
1930s, when big business consistently opposed experiments for
increasing employment by government spending in all countries, except
Nazi Germany.
Reasons to expect why full employment should not be opposed by

industrial leaders (big business)
Higher output and employment benefits, not only the workers but the
businessmen as well, because their profits increase. Also, the policy of
full employment based on loan-financed government spending does not
encroach upon profits because it does not involve additional taxation.
The businessmen in a slump anxiously wish for a boom; then why do
they not accept the synthetic boom that the government offers them?
Reasons for opposition to full employment by industrial leaders (big

business)
The reasons for the opposition of the industrial leaders to full
employment achieved by government spending are as follows:
1. The dislike of government interference in the problem of
employment as such

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 Suspicion: Any widening of the state activity is looked upon by

business with suspicion, but the creation of employment by
government spending has a special aspect that makes the
opposition particularly intense.
 State of confidence: Under the laissez-faire system, the level of
employment depends on the ‘state of confidence’. If this
deteriorates, private investment falls, hence, output and
employment also falls. Therefore, anything that shakes the
‘state of confidence’ is avoided by the capitalist because it
would cause an economic crisis.
 Sound finance: Budget deficits necessary to carry out
government intervention must be regarded as risky. A ‘sound
finance’ means to make the level of employment dependent on
the ‘state of confidence’. Hence, there should not be
government spending based on a budget deficit.
2. The dislike of the direction of government spending (public

investment and subsidizing mass consumption)
 Public Investment: If the public investment is not confined only
to objects like hospitals, schools, highways, etc. which does not
compete with the equipment of private business, then the
profitability of private investment is affected and the positive
effect of public investment upon employment offset by the
negative effect of the decline in private investment.
 Subsidizing mass consumption: We might expect business
leaders to be more in favour of subsidizing mass consumption
than of public investment, for by subsidizing consumption the
government would not be embarking on any sort of ‘enterprise’.
In practice, however, this is not the case. In fact, subsidizing
mass consumption is much more violently opposed than is
public investment. For here, a ‘moral’ principle of the highest
importance is at stake. The fundamentals of capitalist ethics
require that everyone gets what they deserve and work hard for

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(Schumpeter’s argument); that “one shall earn one’s bread in

sweat”, unless he happens to have the private means.
3. The dislike of the social and political changes resulting from the
maintenance of full employment
 If there is full employment, then the workers will have a higher
bargaining power. They will demand increase in wages and
improvement in working conditions. There will be strikes by
these workers which will create political tensions.
 The increase in wages, will lead to increase in the price level,
even though the profits would not fall. This will adversely affect
only the rentier interests. However, discipline in the factories
and political stability are more appreciated by the industrial
leaders (big business) than are profits. Hence, they would prefer
less than full employment.
 All that a capitalist knows is that unemployment is an integral
part of the normal capitalist system. Lasting full employment is
unsafe.
 Under a regime of permanent full employment, “the sack”
would cease to play its role as a disciplinary measure. The social
position of the employer (boss) is undermined and the self-
assurance and class consciousness of the working class would
grow.
Fascism
Fascism is a form of radical authoritarian nationalism. Fascists seek to
unify their nation through a totalitarian state that seeks the mass
mobilization of the national community. One of the most important
functions of fascism as seen in the Nazi system was to remove the
objections to full employment by the industrial leaders (capitalists).
How is the opposition by the industrial leaders (big business) removed
in fascism?
 The dislike of government interference in the problem of
employment as such through spending policy is overcome under

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fascism by the fact that the state-machinery is under the direct

control of a partnership of big business and fascist upstarts.
 The dislike of government spending, whether on public
investment or on subsidizing mass consumption, is overcome by
concentrating government expenditure on armaments.
 The ‘discipline in the factories’ and ‘political stability’ under full
employment are maintained by the new order which ranges
from the suppression of the trade unions to the concentration
camp. Political pressure replaces the economic pressure of
unemployment.
However, the fact that armaments are the backbone of the policy of
fascist full employment has a profound influence upon its economic
character. It causes the main aim of the spending to shift gradually from
full employment to securing the maximum effect of rearmament. The
resulting scarcity of resources leads to the curtailment of consumption
as compared with what it could have been under full employment. If the
downswing is sharp, pessimism develops, the rate of interest and
corporate income tax falls and they have little or no effect upon
investment, output and employment.
According to Kalecki, the fascist system starts from the overcoming of

unemployment, develops into an ‘armament economy’ of scarcity, and
ends inevitably in war.
Conflict issues
The business leaders are not opposed to government intervention to
alleviate a slump. They know that something must be done in a slump.
However, there are two things on which the conflict continues:
1. What should be the direction of the government intervention in
the slump?
2. Should government intervention only alleviate slumps or secure
permanent full employment?

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Stimulating Private Investment – Does it help to alleviate a slump?

There is a notion of counteracting the slump by stimulating private
investment. This may be done by lowering the rate of interest, by
reducing the corporate income tax, or by subsidizing private
investment directly in one or the other form.
According to Kalecki, stimulation of private investment does not provide

an adequate method for preventing mass unemployment because:
o The rate of interest or corporate income tax is reduced sharply
in the slump and increased in the boom. In this case, both the
period and the amplitude of the business cycle will be reduced
but employment not only in the slump but even in the boom
may be far from full.
o If the rate of interest or corporate income tax is reduced in a
slump but not increased in a subsequent boom, the boom will
last longer but it will end in a new slump. One reduction in the
rate of interest or corporate income tax does not eliminate the
forces which cause cyclical fluctuations in a capitalist economy.
However, this implies that in some time the rate of interest
would have to be negative and the corporate income tax would
have to be replaced by an income subsidy.
What if there develops pessimism?

The reaction of the businessmen to the measures described above is
uncertain. If the downswing is sharp they may take a very pessimistic
view of the future, and the reduction of the rate of interest or corporate
income tax may then for a long time have little or no effect upon
investment, output and employment. Hence, even those who advocate
stimulating private investment to counteract the slump do not rely on it
exclusively but envisage that it should be associated with public
investment.
So, the industrial leaders (big business) tend to accept public

expenditure financed by borrowing as a means of alleviating slumps, but

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they seem to be consistently opposed to creating employment by

subsidizing mass consumption and maintaining permanent full
employment. Lasting full employment is certainly not what they want
because then the workers become uncontrollable.
Outcome of the opposition

In the slump, public investment financed by borrowing will be
undertaken to prevent large scale unemployment. But if attempts are
made to apply this method in order to maintain the high level of
employment reached in a subsequent boom, a strong opposition of
business leaders is likely to follow. This pressure would most probably
induce the government to return to the orthodox policy of cutting down
the budget deficit. A slump would follow, in which the government
spending policy would again become active. Thus, this regime of the
political business cycle would not secure full employment except at the
top of the boom, but slumps would be relatively mild and short-lived.
Questions
1. What are the arguments given by Kalecki regarding opposition
of big bourgeoisie (big business/industrial leaders) to the
programs of government intervention to achieve full
employment?
2. Explain why can’t the industrial leaders oppose to the policy of
full employment in fascism?
3. Discuss the stimulating of private investment as a method to
alleviate a slump? How does opposition by the industrial leaders
in a democracy ensure that there is no permanent full
employment?

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Chapter 13
THE ROLE OF THE STATE
(R. Heilbroner)
This reading explores the place of state within the capitalistic

framework by placing it in the context of economic and political realms
and their constant interaction.
Analysis of Bell’s view

Daniel Bell calls ‘modern society’ as the product of a ‘disjunction’ of
realms, none of which clearly dominates the whole. These realms have
been described by him as
Techno-economic
Polity
Culture
These realms are disjoint sets and have different rhythms of change.
They follow different norms which legitimate different and even
contrasting types of behaviour. This segregation can be construed as
functional rationality. Functional rationality is said to prevail in an
organisation of human activities in which the thought, knowledge and
reflection of the participants are virtually unnecessary; men become
part of a mechanical process in which each is assigned a functional
position and role.
This view was also intended to explain the contradictions of

contemporary society. But the question is “If the realms coexist in an
unordered, equivalent manner, how shall we distinguish the trials and
tribulations of modern capitalism from those of other societies in the
throes of their contradictions?”
Heilbroner takes a different stance and professes that the realms are
not that disjoint and have overlapping areas. The contradictions of
capitalism arise from the nature and logic of the system, that is, from

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the unfolding of a society under the peculiar stresses and strains

generated by its historically unique search for generalized surplus. In
contrast, the contradictions in other societies arose from specific
different sources – economic or political or cultural crises such as
breakdowns in political succession or religious convulsions.
According to Heilbroner, the influence of the economic realm on its

intertwined political and social realms does not therefore involve any
mechanical dependency or slavish passivity as embodied by functional
rationality argument.
Characteristics of Economic and Political Spheres:

PRE-CAPITALIST SOCIETIES
 There existed nothing like a ‘realm’ because of absence of
boundaries.
 Exercise of power by the state and direction of production and
distribution were not separate activities but thoroughly
intertwined.
 As a consequence, in all tributary systems there is but one
realm, that of the ‘political order’ – which may not always refer
to the ‘state’ but, may be a single ruler’s will too, depending on
the context.
 For example, a warlord collecting his tribute is at the same time
manifesting a political relationship of domination and
obedience and carrying out an economic function of surplus
collection and distribution.
However, in capitalist societies, there is existence of at least two
realms, not completely separate – economic and political realms.
Pre-requisite for economic realm to emerge: For an economic
realm to emerge, the rulership must yield up some portion of its
sovereignty, recognising the existence of an autonomous republic of
commerce and production within its own territory.
- It requires the imposition and social recognition of clear
constitutional constraints on the power of the state to

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intrude into or violate the private space of the

individual
- The twin views of ‘de jure equality’ and ‘private
property’ form the basis for liberal polity.
- It also requires the general exclusion of state power
from the workings of the marketplace.
The manifest implication of these conditions is that the state loses its
command over labour or materials, or even the money for assembling
its secular, religious or military might, except in unusual circumstances.
The state however gets a power to tax. The ability to tax presupposes
the existence of a working economy. Hence, it is self-interest on the
part of the state that drives it to advance the accumulation of capital.
STATE OF REALMS UNDER CAPITALISM:

1. In capitalism, the central organising economic structure is
divorced from the direct access to the means of violence on the
part of the state. This reflects the absence of direct coercion
and shows capital’s power at work on the surface of the society.
2. Historically, the development of an increasingly autonomous,
self-directing economic realm which was first dominated by
mercantile activity and then by industrial processes, disrupted
all political logic and new commodity flows became subject to
the directing forces of the marketplace.
3. At the same time, the economic logic assumes a characteristic
tension in the political nature of capitalism, with respect to the
gathering and disposition of surplus. Neither the state nor
economy can exist as separate islands nor do both need mutual
cooperation for successful operation.
The question is how much power exactly does the state hold?
- Although economic sphere is the source of energy that

suffuses the entire formation but the awesome potential of

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the means of violence remains a reminder that power is not

solely denominated in terms of capital.
- However, under normal circumstances, the state does not
wield much power as its hand is not forced on grounds of
sovereignty or national existence.
- Eventually, capital which arises within the state eventually
becomes capable of existing above the state. Capital even
defies political boundaries and moves to foreign locations if
they are profitable – as an affront to the logic of national
power.
- In fact, the state recognises this and advances the interests
of capital in a calculating fashion to promote its own
peacetime strength.
MASKING OF FUNCTIONS OF REALMS:

At the same time, there is an unnoticed masking of functions which are
mistakenly segregated between the two realms. The result is that the
business world also carries out a primary task of government, and the
state discharges a central task of economic provisioning. Masking refers
to the fact that under capitalism where a realm of economic affairs has
been separated from the body politic, the function of the realms takes
place in a way that conceals and disguises the actual processes at work.
First let us define: what is the basic function of the government and
what is the basic function of the economic sphere?
Government Economic Sphere
- Provision of laws - Production of goods

- Military affairs and services
- Building of public - Allocation of goods
works - Allocation of labour
- Social well-being
Now the political aspect enters the economic sphere because the social
engineer or entrepreneur is in the service of some dominant political

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group or lobby. He is guided by the prevailing interest system, which

plans both his means and ends.
Secondly, under capitalism, the direct allocation of labour is virtually

surrendered by the state, with the exception of its military forces.
Instead now the tasks of labour discipline rest in the hands of
employers.
In the words of Ellen Meiksins Wood, capitalism represents ‘the

ultimate ‘privatization of politics’ to the extent that the functions
formerly association with the coercive political power are now firmly
lodged in the private sphere.
At the same time, there is incorporation of economic functions within

the political arm of the capitalist state.
 There is immediate use of state power for the protection
of activities in the economic sphere.
 Provision of law and order is a prerequisite for the
smooth functioning of the economic sphere.
 Direct use of state power, diplomatic and military, to
encourage or protect economic activity
PROACTIVE ROLE OF THE STATE

Much less understood is the proactive role of the state – the duty of
erecting and maintaining public institutions which have great utility for
the society but any single individual can never pay for the same. (public
goods) This applies to building of infrastructure – network of railways,
canals, highways and airways while at the same time incorporating
social infrastructure – public education and public health.
These are essentially the tasks which the private sector, in its own
capacity is not able to singlehandedly perform. That which business
cannot do, but which requires to be done, becomes the business of the
public sector. Thus the division of extrinsic function – the political realm

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concerned with public needs, economic realm with private ones. The
essential difference is one of the possibilities of recapture of
expenditure in the marketplace.
CONCLUSION
Thus, according to one view, if we remove the regime of capital,
the state would remain, although it might change dramatically; but if we
remove the state then the capital would not last a day. In this sense,
politics is prior to economics in that domination must precede
exploitation. Thus this is the view of social formation in which capital
calls the tune by which the state normally dances but takes for granted
that the state will provide the theatre within which performance takes
place.
This view mocks the conventional view that public realm is

secondary to the private realm. However, in Heilbroner’s view, even this
paradox is endogenous to the system and reflects how capitalism has a
capacity to affect behaviour and belief.

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Chapter 14
FINANCIALIZATION OF THE GLOBAL
ECONOMY
(Ronald Dore)
Introduction
The recent crisis starkly revealed the instability of the world financial
system. Ronald Dore tries to trace the source of the increasing
dominance of the financial system on the real economy and the
increasingly comprehensive forms of intermediation between savers
and those in the real economy that need credit and insurance. He also
tries to explain the doctrine that maximizing shareholder value is the
sole objective of the firm that is being universally adopted and the
consequences of the promotion by governments of an equity culture.
Definition
Financialization may be defined as the increasing role of financial
motives, financial markets, financial actors and financial institutions in
the operation of the domestic and international economies.
Financialization is a bit like globalization. It is a term which is sometimes

used in discussions of financial capitalism which developed over recent
decades, in which financial leverage tended to override capital (equity)
and financial markets tended to dominate over the traditional industrial
economy and agricultural economics.
The changes that have accelerated over the last 30 years are:
1. An increase in the proportion of the income accruing to those
engaged in the finance industry in the developed countries.
2. The growth in intermediating activities, very largely of a
speculative kind, between savers and the users of capital in the
real economy.

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3. The increasing assertion of the property rights of owners as

more important than all other forms of social accountability for
business corporations.
4. Increasing efforts on the part of the government to promote an
equity culture in the belief that it will enhance the ability of its
own nationals to compete internationally.
PART – 1: Profitable Activity
In US, from 1946-1950, the profits earned by financial corporations

fluctuated within a narrow band averaging 9.5%. It accelerated
thereafter, reaching its peak of 45% in 2002. It then dropped to 33% in
2006 because of a sharp increase in the profits in the non-financial
sector.
The growth in the profits of the financial sector continued, with 16.7%
p.a. between 2000 and 2006 compared to a mere 9.4% from 1991-1996.
PART – 2: The scale of financial markets
The financial markets are growing at a rapid pace. There are various
complex financial instruments in the market like futures, currency
exchange derivatives, CDOs, etc. The markets are based on speculative
activity where the participants are gambling.
Following will show the scale of the financial markets:

 At the end of 2004, total derivative contracts amounted to $234
trillion (OTC contracts $197 trillion and exchange traded derivatives
$36 trillion). By 2007, OTC contracts were alone $516 trillion, which
is eight times the World GDP in 2006 ($66 trillion at PPP)
 Since 1970, after fixed exchange rates were abandoned, there has
been a steady growth of spot transactions in forex markets and
futures. In April 2007, the daily turnover in traditional forex markets
excluding derivatives was $3.2 trillion/day which is 100 times the

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transactions that would be needed if the daily total of world trade

were directly conducted across and not within currency zones.
 Tobin tax (international tax on forex transactions) has been killed by
the governments dominated by financial interests.
 Securitization - Securitization is the financial practice of pooling
various types of contractual debt and selling said consolidated debt
as bonds or collateralized mortgage obligation (CMOs), to various
investors.
 CDOs (Collateralized Debt Obligations) are issued now. Special
investment vehicles and investment banks have been introduced to
mobilize funds for investing. Aggregate insurance in the global CDO
market was estimated to be around $2 trillion in 2006. The
expansion of CDO is attributed to Gaussian copula model.
 Innovative techniques of risk management have been one of the
factors permitting vast expansion of financial markets. It’s no longer
a matter of a banker sizing up the riskiness of a borrower or
inspecting his collateral, it’s now just a matter of building complex
mathematical models.
When the crisis in the first decade of 21st century broke, there were
talks in the media about regulation. When the government stepped in,
the media buzzed with the talk of moral hazard, asymmetry of private
gains and socialized risks. The crisis made it obvious the danger of a
cascading collapse having a serious effect on the real economy.
According to Dore, what is challenging is the belief that these free,
competitive, global financial markets are the best way of providing
cheap capital to all who can most efficiently use it.
PART – 3: Shares in the value added of the real economy
The finance industry profits in the following ways –

1. The multiplication and inflation of transaction and management
charges in financial markets.

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2. Exercise of the property rights which legal systems confer on the

owners of equity capital through systems of corporate
governance.
There has been a transformation in American Capitalism from

managerial capitalism to investor capitalism. Look at the chart below for
details of this transformation.

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Two factors that may explain the evolution of Investor capitalism are:
o The increasing concentration of capital ownership
o Changes in dominant ideologies
The increasing concentration of capital ownership

 In 1960s-70s, there was dispersed ownership among a large
number of small investors. In 1980s, the re-concentration of capital
gained momentum in US with the growth of pension funds, life
insurance and mutual funds. US institutional investors owned 12%
of their equities in 1960, which rose to 45% in 1990 and further to
61% in 2005.
 These institutional investors pressured managers for higher
returns. To foster shareholder primacy, they demanded greater
board dependence, lower takeover barriers, large payouts to
shareholders and tighter links between CEO pay and firm
performance.
 These investors were interested in both long term and short term
yields. The intensification of pressure for short term yields came
from newer forms of concentrations of capital, the private equity
funds backed by investment banks, asset management firms and
hedge funds which gained importance since 1990s. These buy-out
funds would either replace the managers or harass them into
raising yields by taking away a significant stake.
 The toughening of the market discipline increased the concern for
the shareholders and also increased the devotion of managerial
resources to ‘’investor relations’’
Changes in the dominant ideologies

There had always been argument between those who held that
companies were public institutions with responsibility to a variety of
stakeholders, but chief among them their employees, and those who
held that they were property of their owners from which they had a
right to profit as best they could.

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In the 1990s, the latter view, known as the doctrine of shareholder

value came to dominate. Around that time, principal agent theory also
became popular. Based on those shareholder value assumptions, game
theorists explored the infinite variations on the conditions under which
the agent’s (i.e., manager’s) interests could be made to coincide with
those of the principal, i.e., the owner.
PART – 4: the equity culture
In recent years, governments of centre-left such as that of Britain have

started to adopt the notion of shareholding democracy as a means of
gaining popular support for the institutions of capitalism. Earlier it was
supported only by the conservative parties, particularly in the Anglo-
Saxon world. This is because everyone, the public sector employee, the
middle manager, the boardroom executive, even the senior civil servant
has an interest in the health of the equity market. The active promotion
of equity ownership began in the Anglo-Saxon economies in the 1980s.
Government promoted equity ownership because they believed that a
plentiful supply of equity capital promoted innovation, and hence the
competitiveness of the economy.
The Social Consequences

Ronald Dore believes that periodic bubbles and their implosion are
important but in the long run they have a corroding impact for social
structures and quality of life.
1. Income and wealth inequality
Gini coefficients (a measure of inequality) is rising the fastest in the
most financialized economies. Median incomes are stagnating and at
the same time the top percentile (especially the top permille) is
making spectacular gains. Example: In US, the top 1% owns 38% of
the total wealth; the top 10% own 85% of all publicly traded stocks
with the highest income going to those in financial services. The
accumulation of wealth at the top is increasingly a function of
growing inequality of labour incomes rather than inheritance. The

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labour share in GDP is reducing and is skewed in favour of those

working in finance.
2. Increased inequality of security

The wage and employment volatility have risen since 1980 because
of the increased pressure by the investors for larger returns. Pension
plans have shifted from defined benefits to defined contributions.
Employer provided health insurance is disappearing. There is an
association between shareholder power and the reduced levels of
employee tenure. There is unregulated competition among financial
agents and increasing difficulties for an ordinary citizen.
3. Change in the distribution of talent

The elite B-schools no more train the general managers but now
mainly train professional investors and financial engineers, especially
in the area of investment banking, private equity and hedge funds.
Physics students and engineers are also hired by investment banks to
make use of their sharp minds. Doctors earn more with health
insurance companies. Finance, once the servant of the real economy
firms, now robs them of their best potential recruits in order to
control them.
The sector which is losing talent is not private sector R&D but the
public sector. The relative number of civil servants aspirants is going
down even in Britain and Japan where administrations once had the
highest prestige and quality.
4. Erosion of trust – Depersonalization of relationships

A large range of inter-corporate and interpersonal relationships
between borrowers and lenders, owners and leasers have been
depersonalized, once they depended on trust as much as on
collateral, and carried some sense of personal or corporate
obligation. Now there are only contractual property relationships

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which can only be enforced in courts. This is resulting in erosion of

trust among the members of the society.
Conclusion
The real world economy is growing and there is need for credit and
insurance. The finance industry should grow. As material technology
improves, a declining fraction of labour force is needed to produce an
ever-expanding volume of material goods; more people are employed in
service sector. There is growth of the speculative element. This
ultimately harms even the ordinary person because they make their
own speculative decisions based on tenuous information and hence put
their security at risk.
Questions
1. Outline the trends that show the increasing financialization of
the global economy. According to Ronald Dore, is
financialization of the global economy good or bad?
2. What do you mean by financialization of the global economy?
What are its social consequences?
3. Explain the transformation that took place in American
capitalism in the latter half of the twentieth century.

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UNIT 5
Capitalism in Global Context
References:
1. S. Hymer, “The Multinational Corporation and the Law of
Uneven Development”
2. R. Kiely, “Transnational Companies, Global Capital, and the
Third World”
3. Prabhat Patnaik, “Lenin’s theory of Imperialism Today”
4. James O’Connor, “The Meaning of Economic Imperialism”
5. Amit Bhaduri, “Nationalism and Economic Policy in the era of
Globalization” Chapter 2

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Chapter 15
MULTI-NATIONAL CORPORATION AND THE
LAW OF UNEVEN DEVELOPMENT
(S. Hymer)
Introduction
Right from the Industrial Revolution, there has been a tendency for the
representative firm to increase in size. This growth has been qualitative
as well as
quantitative.
As the business
enterprises expanded,
they acquired a more
complex
administrative
structure to coordinate its activities and a larger brain to plan for its
survival and growth.
We are going to look at the evolution of corporations stressing the

development of a hierarchical system of authority and control.
Trends - Starting from MNCs from US, we now have the European
corporations, as a by-product of increased size and as a reaction to
American invasion of Europe. If the present trends continue, multi-
nationalization is likely to increase greatly in the next decade, and as a
result, a new structure of international industrial organization and a
new international division of labour will be born. However, this
evolution of the business enterprise has the tendency to produce
poverty as well as wealth, underdevelopment as well as development.

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We analyze the evolution of MNCs through two laws of economic

development –
 Law of Increasing Firm Size
 Law of Uneven Development.
PART – 1: The Evolution of the Multinational Corporation

(The Marshallian Firm and the Market Economy)
Giant organizations are nothing new in international trade. They were a

characteristic form of the mercantilist period when large joint-stock
companies, e.g. The Hudson’s Bay Company, The Royal African
Company and The East India Company, etc. organized long distance
trade with America, Africa and Asia.
Characteristics of the new form of business enterprise –

» The fore-runners of the modern MNCs are to be found in the small
workshops organized by the newly emerging capitalist class.
» The strength of this new form of business enterprise lay in its
power and ability to reap the benefits of cooperation and division
of labour.
» Rise in productivity
The reinvestment of these profits led to a steady increase in the
size of capitals, making further division of labour possible and
creating an opportunity for using machinery in production. A
phenomenal increase in productivity and production resulted from
this process and entirely new dimensions of human existence were
opened.
» Market and the Factory – Different modes of co-coordinating
Division of Labour
Market – Coordination is achieved through a decentralized,
unconscious and competitive process.
Factory – entrepreneurs consciously plan and organize
cooperation, and the relationships are hierarchical and
authoritarian

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» Capitalist system changed the structure at a micro-level :

Pre-capitalist system – The division of labour was hierarchically
structured at the macro level, i.e. for the society as a whole, but
unconsciously structured at the micro level, i.e. the actual process
of production. Society as a whole was partitioned into various
castes, classes and guilds, on a rigid and authoritarian basis, so that
political and social stability could be maintained and adequate
numbers assured for each industry and occupation. Within each
sphere of production, however, individuals were independent and
their activities only loosely coordinated.
Capitalist system – It turned the existing structure. The macro
system became unconsciously structured, while the micro system
became hierarchically structured. The market emerged as a self-
regulating coordinator of the business units (though, the State
remained above the market as a conscious coordinator to maintain
the system and ensure growth of capital). At the micro level,
labour was gathered under the authority of the entrepreneur
capitalist.
Marshall and Marx’s view

Both of them stressed that the internal division of labour within the
factory, between those who planned and those who worked, was the
chief fact in the form of modern civilization.
Marx – He emphasized the authoritarian and unequal of this

relationship based on the coercive power of property and its anti-social
characteristics. He focused on the irony that concentration of power in
the hands of a few and its ruthless use were necessary historically to
demonstrate the value of cooperation and the social value of
production. (Uneven development)
Marshall – He argued for the voluntary cooperative nature of the

relationship between capital and labour. In his view, the market
reconciled individual freedom and collective production. He argued that

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those on top achieved their positions based on their superior

organizational abilities, and their relation with their workers below
them was essentially harmonious and not exploitative. They obtained as
well as retained their authority by merit; for according to Marshall,
natural selection operating through the market constantly destroyed
inferior organizers and gave everyone (even workers) who had the
ability, a fair chance to rise to managerial positions. Capitalists earned
more than workers because they contributed more, while the system as
a whole provided all its members with improved standards of living and
an ever-expanding field of choice of consumption.
The Corporate Economy
The need for a new administrative structure

The evolution of the business enterprise from the small workshop to the
Marshallian family firm represented only the first step in the
development of business organization. In the 1870s, the US industrial
structure consisted largely of Marshallian type single-function firms,
scattered over the country. By the early 20th century, the rapid growth
of the economy and the great merger movement had consolidated
many small enterprises into large national corporations engaged in
many functions over many regions.
The administrative pyramid

To meet this new structure of continent-wide, vertically integrated
production and marketing, a new pyramid of administrative structure
evolved. Capital acquired new powers and horizons. The domain of
conscious coordination widened and that of market-directed division of
labour contracted.
Development of railways to meet the need

The Railways offered a model of new forms of business organization.
The need to administer geographically dispersed operations led the
railway companies to create an administrative structure which

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distinguished field offices from head offices. The field offices managed
local operations; the head office supervised the field offices.
Horizontal and Vertical Integration

The recently formed national corporations quickly picked up the existing
norm of vertical division of labour and faced the same problem of
coordinating widely scattered plants.
The administrative organ!

Business developed an organ system of administration.
Horizontal division of labour – The function of business administration
were subdivided into departments (organs) – finance, personnel,
purchasing, engineering and sales – to deal with capital, labour,
purchasing, manufacturing, etc. This horizontal division of labour
opened up new possibilities for rationalizing production.
Vertical system of control – There was a need for this to be devised so
as to connect and coordinate the departments. This was a major
advance in decision-making capabilities.
Head Office – It was created to co-ordinate, appraise and plan for the
survival and growth.

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Possibilities of growth
1. One possibility was to expand mass production systems very
widely and to make basic consumer goods available on a broad
basis throughout the world.
2. The other possibility was to concentrate on continuous
innovation for a smaller number of people and on the
introduction of new consumption goods even before the old
ones had fully spread.
The second possibility was chosen.
Unbalanced Growth
- A choice of capital-deepening was made instead of capital
widening in the productive sector of the economy.
- Business had to decide on the capital-labour ratio as the businesses
expanded,
- The ratio, capital per worker was raised and the rate of expansion
of labour was slowed down. As a result, a dualism was created
between a small, high-wage, high productivity sector in advanced
countries and a large, low-wage, low productivity sector in the less
advanced. (We have seen this during colonialism and imperialist
hegemony)
The uneven growth of per capita income implied unbalanced growth

and the need on the part of the business to adapt to a constantly
changing composition of output.
Product development and innovation

Producers’ goods sector – Firms continuously had to invent new labour-
saving machinery because the capital output ratio was increasing
steadily.
Consumption goods sector – Firms continuously had to introduce new
products since, according to Engel’s law, people do not generally
consume proportionately more of the same things as they get richer,
but rather reallocate their consumption away from old goods(cheap
ones!) towards new goods(expensive ones!).

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This non-proportional growth of demand implied that goods would tend

to go through a life-cycle, growing rapidly when they were first
introduced and more slowly later. Thus, if a particular firm was tied to
only one product, its growth rate would follow the same life-cycle
pattern and eventually would slow down (and perhaps even come to a
halt). If this corporation was to grow steadily at a rapid rate, it had to
continuously innovate and introduce new products.
Evolution of multidivisional structure

Product development and marketing replaced production as the
dominant problem of business enterprise. To meet the challenge of
constantly changing market, the business enterprise evolved the
multidivisional structure.
The new form was originated by General Motors and DuPont.

Corporations and were decentralized into several divisions; each
concerned with one product line and organized with its own head office.
At a higher level, a general office was to coordinate the division and to
plan for the enterprise as a whole.
- The new corporate form has greater flexibility. Because of its
decentralized structure, a multidivisional corporation can enter
a new market by adding a new division by leaving the old
divisions undisturbed.
- It can also create competing product lines in the same industry,
thus increasing its market share.
- It can plan on a much wider scale than before and allocate
capital with more precision.
Foreign Direct Investment

US corporations began to move to foreign countries as their new
administrative structure and great financial strength gave them the
power to go abroad. Also, their large size and oligopolistic structure

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gave them an incentive. Direct investment became a new weapon in

their arsenal of oligopolistic rivalry.
The first wave of US direct foreign capital investment occurred around
the turn of the century followed by a second wave during the 1920s.
The outward migration slowed down during the depression but
accelerated rapidly between 1950 and 69. Several important factors
account for this rush of DFI:
» First, the large size of the US corporations and their new multi-
divisional structure gave those wider horizons and a wider
outlook.
» Secondly, technological developments in communication
created greater awareness of the global challenge and
threatened established institutions by opening up new sources
of competition.
» A third factor was the rapid growth of Europe and Japan. This
combined with the slow growth of US economy in 1950s altered
world market shares as firms confined to US markets found
themselves falling behind in the competitive race and losing
ground to European and Japanese firms.
As a result, there was an outward thrust to establish sales and
production bases in foreign territories by the US corporations. This
strategy was possible in Europe since the government there provided an
open door for US investment, but was blocked in Japan, where the
government adopted a highly restrictive policy. European firms partly as
a reaction to US penetration of their markets and partly as a natural
result of their own growth began to invest abroad on an expanded
scale. US firms began to face a serious “non-American” challenge.
PART – 2: Uneven Development
Chandler & Redlich distinguished three levels of business administration

(decision making and policies), horizons, and levels of tasks:

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LEVEL I The top level, whose functions are goal determination and
planning. This level sets the framework within which the
lower levels operate.
LEVEL II It first made its appearance after the separation of head office
from field office. It is responsible for coordinating the
managers at Level III
LEVEL The lowest level, it is concerned with managing the day-today
III operations of the enterprise, that is with keeping it going
within the established framework
In the Marshallian firm, all three levels are embodied in the single
entrepreneur. In the national corporation, a partial differentiation is
made in which the top two levels are separated from the bottom one. In
the multidivisional corporation, the differentiation is complete. The
development of business enterprise can therefore be viewed as a
process of centralizing and perfecting the process of capital
accumulation.
LOCATION THEORY
The application of location theory suggests a correspondence principle
relating centralization of control within the corporation to centralization
of control within the international economy.
Location theory suggests –
LEVEL I Level I activities, the general offices, tend to be even more
concentrated than the Level II activities, for they must be
located close to the capital market, media and government.
LEVEL Level II activities, because of their for white collar workers,
II communication systems and information tend to concentrate
on large cities. Since their demands are similar corporations
from different industries tend to place their coordinating
offices in the same city, and Level II activities are
consequently far more geographically concentrated than
Level III activities.

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LEVEL Level III activities would spread themselves over the globe
III according to the pull of the manpower, markets and raw
materials. The MNC because of its power to command capital
and technology and its ability to rationalize their use on a
global scene probably will spread production more evenly
over the world’s surface than it is now. Therefore, in the first
instance, it may well be a force for diffusing industrialization
to the less developed countries and creating new centers of
production.
» Location of offices: The highest offices of the MNCs will be

concentrated in the major cities of the world. Lesser cities
throughout the world will deal with day-to-day operation of specific
local problems. These will be arranged in a hierarchical fashion: the
larger and more important ones will contain regional corporate
headquarters while the smaller ones will be confined to lower level
activities.
» Location of government officials: Geographical specialization will
reflect the hierarchy of corporate decision making and the
occupational distribution of labour in a city or region will depend
upon its function in the international economy. The best and most
highly paid administrators, doctors, lawyers, government officials
etc will be concentrated in or near major cities.
» Citizens of capital city: The structure of income and consumption
will tend to parallel the structure of the status and authority.
- The citizens of capital cities will have the best jobs and will
receive the highest rates of remuneration. The growth in the
hinterland subsidiaries implies growth in the income of capital
cities but not vice versa.
- Trickle-down effect: The citizens of capital cities will also be the
first to innovate new products. A new product is usually first
introduced to a select group of people who have discretionary
income and are willing to experiment with their consumption
patterns. Once it is accepted by this group, it spreads or trickles

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down to other groups via the demonstration effect. This is

called trickle-down or two-stage marketing.
In this process, the rich, the powerful gets more votes than anyone
else because:
1. They have more money to spend.
2. They have more ability to experiment.
3. They have high status and are likely to be copied.
» Relative position of the subordinates:

In each period, subordinates achieve the consumption standards of
their superiors in the previous period and are thus torn in two
directions:
1. If they look backward and compare their living standards
through time, things seem to be getting better
2. If they look upward they see that their relative position has not
changed. They receive a consolation prize which may serve to
keep them going by softening the reality that in a competitive
system, few succeed and many fall.
In the international economy, trickle-down marketing takes the form of

an international demonstration effect spreading outward from the
metropolis to the hinterland. The marginal profit on new foreign
markets is thus high and corporations have a strong incentive in
maintaining systems which spread their product widely. It is not
technology which creates inequality; rather, it is organization.
National Planning:
It is a public institution (unlike MNCs) that organizes many industries
across one region. This would permit the centralization of capital
(coordination of many enterprises by one decision-making centre) but
would substitute regionalization for internationalization. The span of
control would be confined to the boundaries of a single polity and
society and not spread over many countries.

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Advantages – The ability to remove the wastes of oligopolistic anarchy

(meaningless product differentiation and imbalance between different
industries within a geographical area). It concentrates all levels of
decision-making in one locale and thus provides each region with a full
complement of skills and occupations. This opens up new horizons for
local development by making possible social and political control of
economic-decision making.
MNCs reduce options for development in the following ways:

1. Lack of incentives to invest in education:
If an underdeveloped economy wishes to invest heavily in education
in order to increase its stock of human capital and raise the
standards of living then it would lead to brain drain
Brain Drain: In a market economy, it would be able to find gainful
employment for its citizens within its national boundaries. In the
MNC system, however, the demand for high-level education in low-
ranking areas is limited. An outward shift in the supply of educated
people in a country, therefore, will not create its own demand but
will lead to an excess supply and lead to emigration.
2. Discrimination based on ‘ethnic homogeneity’: The employment

opportunities for citizens of low-ranking countries are restricted by
the discriminatory practices in the centre. ‘Ethnic homogeneity’
increases as one goes up the corporate hierarchy. In part this stems
from the skill differences of different nationalities, but more
important is the fact that higher up one goes in the decision-making
process, the more important mutual understanding and ease of
communication become; a common back-ground becomes more
important.
MNCs are torn in two directions:

 They must adapt to local circumstances of each country –
decentralized decision making.

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 They must coordinate their activities in various parts of the

world and stimulate the flow of ideas from one part of the
empire to another.
SOLUTION
Division of labour based on nationality: (1) Day-to-day management in
each country is left to the national of that country who, because they
intimately familiar with local conditions and practices, are able to deal
with local problems and local government. (2) Above them is a layer of
people who move around from county to country, transmitting
information from one subsidiary to another and from the lower levels to
the general apex office. These people, more often than not, are citizens
of the country of the parent corporation. Hence, there is discrimination
based on nationality and very few will be able to get much higher.
3. Effect on Tax capacity: The extent to which a government can carry

out growth promoting, potential enhancing and productivity
increasing expenditure on infrastructure, education and health,
depends on availability of finance – tax revenue. However, a
government’s ability to tax MNCs is limited by the ability of these
corporations to manipulate transfer prices and to move their
productive facilities to another country. This means that they will be
attracted to those countries where superior infrastructure offsets
higher taxes.
» Government of an underdevelopment nation will find it difficult
to extract a surplus from MNCs to use for long-run development
programs and for promoting other industries.
» Government of the advanced countries can tax the profits of
the corporation as well as the high incomes of top
management, i.e., capture some of its surplus generated by the
MNCs and use it to further improve their infrastructure and
growth.
4. Tendency of the MNCs to erode the power of the nation-states:
Most government policy instruments diminish in effectiveness the
more open the economy and the greater the extent of foreign

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investment. This acts to reduce the sovereignty of all nation-states,

but again the relationship is asymmetrical as the flow tends to be
from the parent to the subsidiary and not vice versa.
» A regime of MNC would offer underdeveloped countries neither
national independence nor equality.
» It would turn the underdeveloped countries into branch plant
countries. The subsidiaries of MNCs are typically amongst the
largest corporations in the country of operation and their top
executives play an influential role in the political, social and
cultural life of the host country.
» It’s hard to expect such a country to bring about creative
imagination and innovations to apply science and technology to
the problems of eradicating poverty.
PART – 3: The Political Economy of MNCs
The viability of the MNC system depends upon the degree to which
people will tolerate the unevenness it creates. The dualistic growth
under the MNC system does not offer much promise for a large
segment of the society. At most one-third of the population benefits.
The opposition of the remaining two-third continuously threatens the
system. The survival of the MNC system then depends on how fast it
can grow and how much trickles down.
The Threat –
- The center is troubled as the excluded groups’ revolt and even
some of the affluent are dissatisfied with the roles.
- Nationalist rivalries between major capitalist countries also
remains a major divisive factor and hence a concern.
- There is the threat presented by the middle class and the
excluded groups of the underdeveloped economies.
Hence, the MNC system must solve four critical problems for the
underdeveloped countries, if it is to foster the continued growth and
survival of the modern sector:

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 It must break the foreign exchange constraint and must provide

the under developed countries with imported goods for capital
formation and modernization.
Solution: Restructure the world economy allowing the periphery
to export even manufactured goods to the centre.
 It must finance an expanded program of government
expenditure to train labour and provide support services for
urbanization and industrialization.
Solution: An expanded aid programme and a reformed
government bureaucracy
 It must solve the urban food problem created by growth.
Solution: Agribusiness and Green Revolution
 It must keep the excluded two-thirds of the population under
control.
Solution: Population control, either through family planning or
counter insurgency
Bottlenecks
- It is doubtful that the centre has sufficient political stability to
finance and organize the program outlined above. Hence, it is
hard to see that the advanced countries could create a system
of planning to make these extra hardships unnecessary, and the
MNC may not survive.
- It is difficult to imagine labour accepting such a re-allocation.
- It is not evident that the centre has the political power to
embark on such a large aid programme or to readjust its own
structure of production
- It is unclear if the West has the technology to rationalize
manufacturing abroad or modernize agriculture.
Conclusion
The MNC represent an important step forward over previous methods
of organizing international exchange. It demonstrates the social nature
of production on a global scale. It eliminates the anarchy of

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international markets and brings about a more extensive and productive

international division of labour. The MNC destroys the possibility of
national seclusion and self sufficiency and creates a universal
interdependence. But the MNC is still a private institution with a private
with a partial outlook and represents only an imperfect solution to the
problem of international cooperation. It creates hierarchy instead of
equality and it spreads its benefits unequally.
Questions
1. In what sense multi-national corporations reduce the option for
development. Discuss the tendency of multinational
corporations to erode the power of the nation state in the light
of different development experiences.
2. How does MNC system lead to unbalanced growth? On what
factors does the survival of MNC system depend? What are the
threats it faces and what are the solutions to them? Are these
solutions realistic?
3. Explain the Law of Increasing Firm Size and the Law of Uneven
Development in the multi-national corporations. How does the
Law of Uneven Development challenge the system itself?

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Chapter 16
TRANSNATIONAL CORPORATIONS
(R. Kiely)
Definition - TNCs (Transnational Corporations)

A transnational corporation can be defined as a company that operates
in more than one country. Such operations entail the setting up of
productive activities, although production in this context may refer to
services and finance as well as factories, mines and plantations.
Growth of TNCs
Although TNCs have operated since the 19th century, they have grown in
significance since the 1950s, particularly in manufacturing. By the early
1990s, there were around 37,000 TNCs, controlling over 200,000 foreign
affiliates worldwide, generating sales of more than $4.8 trillion. The
combined sales of the world’s largest 350 TNCs totaled nearly one-third
of the combined GNPs of the advanced capitalist countries.
US-based transnational corporations responded to particular conditions

that existed within and beyond the domestic economy. These
conditions were:
- Market saturation in some sectors
- A developed international communications and transportation
system
- A growing economic challenge to the US from Europe and
Japan.
There was an increase in direct foreign investment by Japanese

companies from the 1970s onwards. By the early 1990s, there were a
small number of giant TNCs whose assets were comparable to at least
some developing countries’ GNPs. Examples –General Motors, General
Electric, Ford, Mitsubishi, etc.

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The growth of these TNCs represents a qualitative shift in the world

economy – from International Economy to Global Economy.
International Economy Global Economy
 It is based on trade between  Movement of economic
nations. activities across national
 Existed since at least the 17 th boundaries
century.  International trade remains
 Nation state continues to be important.
the core unit of analysis  There are investment flows by
because it governs the the TNCs, which are so mobile
trading relations between that national boundaries can
countries – for example effectively be ignored.
through controls over  Markets are of global character
movement of labour and because of TNCs impact on
capital. consumption.
The development of this global economy (globalization of production)

has enormous implications for the Third World countries.
1. Emergence of industrial countries of East Asia
- From the late 1960s, companies operating in the West and
Japan faced a profit squeeze because of high labour costs.
- They moved to Third World countries where labour was cheap.
Transport and communication developed as a result.
- This led to emergence of newly industrializing countries of East
Asia – South Korea, Taiwan, Hong Kong and Singapore.
2. Undesirable character of this industrial development
- Based on low-value production and the super-exploitation of
Third World workers.
- Export-processing zones (EPZs) have been established in Third
World in order to attract foreign capital. Such attractions
include low wages, minimal regulations and tax holidays.
- Growth of industrial employment but at the cost of low wages
and poor working conditions

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- The capacity of Third World states to regulate TNC behaviour is

severely undermined.
The development of this global economy (globalization of production)

has enormous implications for the First World countries also.
1. Deindustrialization and Unemployment
Since capital has relocated to lower cost areas, it leads to de-
industrialization and large scale unemployment.
2. Downgrade their economies in terms of labour costs and
conditions
In the mid-1980s, US firms accounted for the same proportion of
world exports as in the mid-1960s, but the US territorial economy’s
share of the world exports fell by one-quarter over the same period.
Hence, in order to compete in the global economy, First World
countries will have to downgrade their economies in terms of
labour costs and conditions.
A basic claim: The increase in the power and scope of TNCs has given
rise to a new global economy in which the capacity of nation states to
regulate their economies has been undermined by the hyper-mobility of
capital. For the Third World this has led to new types of production,
most notably the rise of industry.
Optimists – This is the way forward for the Third World as a whole.
Pessimists – The state is at the mercy of powerful companies that can
easily relocate to lower cost areas if they so wish.
Explaining Global Capital Flows

The claim that we are now living in an unregulated global economy is
exaggerated. Following facts support this view:
» Global capital flows is divided into manufacturing and services. In
the service sector there has been an increase in the foreign direct
investment (DFI) in recent years, which reflects the fact that there
are fewer restrictions on foreign investment in this sector, and the
fact that services account for an increasing proportion of economic

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activity in the developed countries. In the financial sector, it is the

case that money can easily be moved around the globe and
therefore hinders national regulation. It is this sector above all
others that can most accurately be described as globalised.
» For the period from 1991 to 1993, developing countries as a whole
received around 31% of the total global stock of DFI. This
investment was concentrated in Africa, Latin America, and East,
South and South-East Asia.
» In the early 1990s, around 28% of the world’s population received
91% of DFI.
» On the other hand, global hierarchies still exist and have intensified
in the global era.
» The share of DFI made by the First World TNCs in the Third World
has actually fallen in the recent years.
» Despite the growth of DFI, most TNCs continue to concentrate their
operations in the home region. This is the case of motor vehicle
companies like General Motors and Ford, electronic companies like
GE. Although picture if less clear in other sectors like food and
computers, the world is still one of national economies and
protected markets, in which domestic and regional markets remain
central.
» The share of exports as a proportion of GDP of advanced capitalist
countries rose steadily from the 1950s to 1980s but by late 1980s
this proportion was still lower than it had been in the post-First
World War period.
» The developing world as a whole has increased its global share of
exports; this improvement is largely accounted for by the export
performance of the four original Asian tigers, which produce around
half of the total manufacturing exports originating from the Third
World.
» Given the evidence and explanation for capital flows, it seems
unlikely that enhanced capital mobility would increase the
proportion of global capital flows directed towards the Third World.

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» GATT and WTO represent important movements towards a global

economy but still significant barriers like voluntary agreement
between countries, anti-dumping protection restrictions, import
quotas and national subsidies exist which affect the developing
world.
» DFI is not the sole explanation of industrialization of the East Asian
economies.
Nature and direction of capital flows

» Heavier industries and far less mobile than labour-intensive ones –
The mobility of productive capital is limited by the fact that
investment in plant and equipment is relatively immobile. This lack
of mobility increases the higher the level of capital intensity.
» More than the hyper-mobility of capital, it is the relative immobility
of productive capital, which is intensifying uneven development in
the global economy. In 1900, the gap between the poorest and the
richest countries was around 8:1, which in 1990s has reached to
59:1!
» Trade and investment flow between advanced states and a few
favoured newly industrialized countries. The rest have become
economically marginal. However, it must also be pointed out that
the concentration of capitals in certain areas is only tendential and
is subject to certain important counter tendencies:
(i) An important factor is the action of the states in different
localities within the world economy, which can act to
counteract these tendencies.
(ii) Another factor is the existence of such factors in which
there is greater mobility for capital and certain competitive
advantages for Third World economies – for example,
labour-intensive sectors such as textiles, toys and electrical
components, in which the fixed costs are not too high. It is
these cases which most closely correspond to the theory of
globalization of production.

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Definition - Global commodity chains

A commodity chain is a network of labour and production processes
whose end result is a finished commodity. A global commodity chain is
one that links such processes at the global level. There are two kinds of
global commodity chains:
1. Production commodity chains that coincide with the capital-
intensive sectors and where the site of production of final
product is less mobile. Thus, these tend to agglomerate which
the established areas of accumulation.
2. Buyer commodity chains that are characterized by more
mobility and production is more labour-intensive and therefore
more likely to take place in the Third World.
Producer-driven commodity chains are controlled by core firms at the
point of production; control over buyer-driven commodity chains is
exercised at the point of consumption.
Summarizing:
- The case for existence of a hyper-mobile capital is an
exaggeration. Much productive capital investment is relatively
immobile and this is a major reason why much of Third World is
marginalized from global capital flows.
- In the case of labour-intensive industries, there is greater capital
mobility and better investment prospects for the Third World
nations but there remain important barriers to entry in these
sectors.
- The tendency towards globalization has intensified, rather than
alleviated, the uneven development in the world system.
- States can also play a crucial role in upgrading capital-intensive
and high-technology sectors which are more reliant on skills and
can afford to pay higher wages in return for high productivity.
TNCs AND THE THIRD WORLD

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The impact of Direct Foreign Investment within particular Third World

nation-states is analyzed by an investigation of two issues
1. The economic impact of TNCs, particularly their impact on
production in the Third World countries.
2. The relationship between TNCs and the consumption patterns.
1. TNCs and Local Production
TNCs invest in Third World countries for a variety of reasons –

 To gaining access to domestic market, to specific raw materials
and cheap labour
 To avoid state regulations which may be stronger in the First
World
We examine the development effects of TNCs in five specific areas:
A. Capital stock and income

Arguments in favour: Investment increases the capital stock and
therefore income within a country, including foreign currency
earnings.
Critics: Investment does not necessarily increase the income of a
particular country as capital outflow may exceed inflow. Moreover,
TNCs may transfer price. This happens where two subsidiaries of the
same parent company trade with each other and so manipulate
prices paid for such goods. This practice enables the companies to
evade tax payments to the nation-state. Some states are thereby
deprived of their revenue through these actions of tax evading
TNCs.
Author’s view: (1) The investment leads to income expansion

argument is exaggerated as significant number of TNCs sub-
contract to local producers rather than investing directly. Even in
the case of direct investment, capital may be raised within the
country in which they invest.

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(2) The critics’ argument that outflows exceed inflows is very

unsatisfactory because it fails to account for the fact that the
money that stays within a country can be used for productive
purposes, and so act as a stimulant to economic activity. The
explanation for why capital flows often exceed capital inflows in the
Third World must lie with the potential for long-term profitable
opportunities existing in the world economy. Capital outflows
exceeding inflows should thus be seen as a symptom rather than
cause of uneven development.
B. Linkages
- The extent to which TNCs open up or close off linkages to the
rest of the economy depends largely on the state of the local
economy and the sector in which TNCs operate.
- TNCs have largely imported their requirements and hence
forward and backward linkages to the local economy have
been limited.
- TNCs may have a tendency to import greater amounts than
local capital, but this is less a product of the nationality of
capital and more a question of the sector in which the foreign or
local capital operates.
C. Technology
Arguments in favour: According to TNCs, they introduce the most
advanced techniques to the Third World, and therefore provide
them with the means to expand output and incomes and compete
effectively in the world economy. Moreover, such technology is
acquired relatively cheaply as the R&D expenses that promoted
such innovation were met by the First World.
Critic’s viewpoint: The acquisition of technology is no guarantee

that it will be used optimally, and that this is most likely to occur
through development of an indigenous R&D capacity. TNCs on the

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other hand, tend to concentrate such activities within their home

base, so that leakages to potential competitors can be avoided.
Question: To what extent should the imported technology be

appropriated for the Third World? Even the most advanced
imported technology may displace workers from jobs or at least not
create sufficient new employment opportunities. For example:
Capital intensive technology in the 1950s import-substituting
industries in labour-abundant Latin America had a limited impact on
job-creation.
D. Employment and Labour

Arguments in favour: TNCs create jobs, both through direct
investment in the Third World, and through positive spin-off effects
such as higher demand through wages and use of local suppliers.
Wages for workers employed in TNCs are higher than the wages for
workers employed by local capital.
To be kept in mind:
- TNC investment lead to the displacement of workers previously
employed by local capital, put out of business through the
operations of TNCs.
- Higher wages paid by TNCs are often more than offset by the
higher productivity in these sectors.
- Wages are likely to be less than those paid to workers in similar
jobs in the First World.
- In some labour-intensive industries like agriculture and textiles,
TNCs pay low wages and work conditions can be appalling. This
is especially true of the world market factories in the EPZs
(Export Processing Zones) and the plantation production in
agriculture.
- Few jobs are likely to be created in sectors using capital-
intensive or high advanced technology, while labour-intensive

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sectors are likely to create more jobs but at the costs of poor
working conditions.
E. Political stability
Arguments in favour: By promoting economic growth, TNCs also
promote long-term political stability.
Critics’ viewpoint: TNCs play an active part in undermining the
governments in Third World.
Examples cited: (1) Activities of ITT in Chile in 1973 (2) Food TNCs in
Central America throughout the 20th century.
Environmental damage by TNCs:

TNCs may take advantage of the Third World’s willingness to attract
foreign investment and so locate to pollution havens where
environmental controls are less strict. This may have disastrous
consequences, for example, as in the Bhopal Gas Tragedy in India.
Regulation – Policy measure:

States are not passive victims of the activities of the TNCs, and some
states have successfully regulated the activities of freeing capital for
their own developmental ends. Example: Taiwan and South Korea.
Such regulation has included state allocation of credit which has
favoured specific sectors, state-led R&D, and limitations on capital
outflows. Such policy was an attempt to control the negative
aspects of foreign investment, while constructively drawing on the
more positive ones such as technology transfer. Hence, it would be
one-sided to argue that global actors have made local actors
irrelevant.
The most important issue is the social and the political context in which
the TNCs and other capitals operate and not the ‘nationality’ of capital.
2. TNCs and Local Consumption

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Arguments by supporters of TNCs: Effect of TNC advertising has been to

create audiences whose loyalties are tied to brand named products and
whose understanding of social reality is mediated through a scale of
commodity satisfaction.
Critics of TNCs: The marketing strength of TNCs enables them to
manipulate choices so that consumers buy particular brand names.
TNCs are agents of cultural imperialism.
- Products banned in the First World are sold in the Third World.
- Some products are used as a kind of laboratory test in the Third
World before being made available in the First World.
TNCs claim that authentic, traditional and local culture in many parts of
the world is being bettered out of existence by the indiscriminate
dumping of large quantities of slick material and media products from
abroad. Three qualifications need to be made to this claim:
1. The evidence that TNCs advertise more than local companies is
far from clear cut – in pharmaceutical industries for instance,
local companies advertise more heavily than TNCs.
2. The problem is not only of TNCs imposing their will on passive
Third World countries, but also of the need to address the
failure of local states to regulate the behaviour of TNCs.
3. The question of how far can we generalize from examples and
condemn TNC behaviour across the board?
TNCs play a vital role in promoting the tendency towards a global

standardization of tastes.
- There is unequal distribution of consumption (linked to income)
in the Third World countries.
- TNC entry into the Third World markets has an impact on the
production and marketing strategies of local firms (making them
more aggressive).
Consumption operates in a particular social context of which TNCs are
just one part.

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Conclusion
» TNCs represent one important factor in the globalization of
capital.
» The size of TNCs and foreign investment flows has across
countries increased substantially, and this has affected both
production structures and consumption patterns in the Third
World.
» Both the optimistic and pessimistic advocates of the extreme
globalization thesis, which suggest that capital is hyper-mobile
and the nation-state largely irrelevant, are mistaken.
» The level playing field of the optimistic globalization thesis, in
which all participants in the world economy can equally benefit
from the global market forces, is a myth.
» Global capital flows can be affected by local action.
» The developmental effects of TNC investment are neither
uniformly bad or good but are, in fact, the product of a number
of contingent factors, such as the sector in which the TNC
operates, the character of local capital, the role of the state,
and specific interests within a country.
Questions
1. Discuss the implications of the globalization of production for
the First World and the Third World Countries.
2. Briefly trace the growth of transnational corporations. Do you
agree with the view that we are now living in an unregulated
global economy?
3. “The increase in the power and scope of TNCs has given rise to a
new global economy in which the capacity of nation states to
regulate their economies has been undermined by the hyper-
mobility of capital.” Discuss.
4. What are transnational corporations and why do they invest in
the Third World? What are its developmental effects on the
Third World?

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Chapter 17
LENIN’S THEORY OF IMPERIALISM TODAY
(P. Patnaik)
Lenin’s theory of imperialism not only explains imperialism and the

World War but also offers a reconstruction of Marxism which became
the basis for revolutionary praxis for the rest of the 20th century. He
was inspired by the crisis that engulfed the working class movement
upon the outbreak of First World War.
Context of Lenin’s Theory

Though Marxism has been quite popular over the European and
German working class movement, it was confronted with a new
challenge later and hence revision of Marxism was needed. Marxist
perception of the need for revolutionary overthrow of capitalism
derived from the view that it was moving towards an economic
breakdown. Since, this didn’t happen, ‘revisionism’ was required.
When 1st World War intervened, the extent of sway of revisionism

found expression in social patriotism and chauvinism. Three distinct
positions emerged in European Social democracy on question of war:
1. Social Chauvinist position
2. Centrist position held by Ramsay, etc. While opposing the social
chauvinists, they did not wish to break with social chauvinist
elements with social democracy. While opposing war, they
wanted to fight for peace, rather than evolution.
3. Position held by Lenin – According to him, the main enemy is
within the country. The problem of war can be solved only in a
revolutionary way. The proletariat should convert the
imperialist war into a revolutionary civil war to overthrow
imperialist bourgeoisie. They wanted to break from social
chauvinism and centrism, and setting up of revisionism.

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Widening the scope of Revolutionary Parxis

While addressing the problem of praxis of European working class
movement, it widened the scope of revolutionary praxis itself to cover
oppressed nations; delegates from India and China with Germany and
Britain. Lenin made the revolution in the East as much a business of
Communist International as that in imperialist countries. He had the
perception that the two revolutions were dialectically related.
According to Marx, “The Indians will not reap the fruits of new elements
of society scattered by British bourgeoisie till in Great Britain, the now
ruling classes shall be supplanted by industrial proletariat or till Hindus
themselves throw off the English”
The Perspective on Revolutionary Strategy

Lenin not only linked the two most powerful revolutionary streams of
20th century, but also gave a definite strategy to be followed within each
of them. He presented the strategy to be followed in the struggle for
national liberation in colonies and semi-colonies. His perspective had
two components:
» Communist International and Parties must support bourgeois-
democratic liberation movement in colonial and backward
countries.
» Special support must be given to peasant movement against
landowners and feudalism. Effort should be exerted to apply
basic principles of Soviet system in countries where pre-
capitalist relations dominate.
At the Second Congress, M.N. Roy objected Lenin’s thesis on grounds

that renewal of friendly relations had developed between bourgeois of
exploiting countries and that of colonies. So, the term ‘bourgeois
democratic’ was replaced by ‘national-revolutionary’.

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Phases of Imperialism
Lenin dated the imperialist phase of capitalism, which he associated
with monopoly capitalism, from the beginning of the 20th century, when
the process of centralization of capital had led to the emergence of
monopoly in industry and among banks. The coming together of the
capitals in these two spheres led to the formation of finance capital
which was controlled by a financial oligarchy. The struggle between
rival finance capitals erupted into wars, which offered each aggressive
country's workers a stark choice: between killing fellow workers across
the trenches, or turning their guns on the moribund capitalism of their
own countries, to overthrow the system and march to socialism. There
are three different phases of imperialism since then:
PHASE -I
In the first phase of imperialism, there was rivalry between different
finance capitals to repartition an already partitioned world bursting into
wars which in turn led to the formation of a socialist camp. This was in
accordance to Lenin’s analysis. The 2nd World War was the climax to this
phase of imperialism. The precise course of events included an
economic crisis (Great Depression), to which the disunity among
capitalist powers contributed, and which in turn created the conditions
for the emergence of fascism that unleashed the 2nd World War.
PHASE -II
The 2nd World War greatly weakened the position of financial
oligarchies. The working class in the advanced capitalist countries that
had made great sacrifices during the war emerged much stronger from
it and was unwilling to go back to the old capitalism. The socialist camp
had grown significantly and was to grow even further with the victory of
the Chinese Revolution. Capitalism had to make concessions to survive,
and two concessions in particular were significant: one was
decolonization; the other was State intervention in demand
management in advanced countries to maintain high levels of

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employment, which until then had never been experienced in capitalist

economies.
PHASE -III
This third phase of modern imperialism is marked by the hegemony of
international finance capital, which is the driving force behind the
phenomenon of globalization, and the pursuit of neo-liberal policies in
the place of Keynesian demand management policies in the advanced
countries and Nehru-style ‘planning’ in the third world.
Misconceptions about Lenin’s Theory

According to Lenin, imperialism is the monopoly phase of capitalism.
When there’s a shift from competitive to monopoly capitalism, crisis
occurs. Two theories have been given.
1. Under-consumption theory
With monopoly capitalism, inequality widens. A monopolist earns
more and more and the workers, petty producers and non-
monopoly capitalists earn less. There is income distribution because
of which there is reduction in consumption demand relative to that
in competitive capitalism. Consumption demand falls because for a
monopoly capitalist, the propensity to consume increases at a
slower pace than the increase in his income. This results in an
overproduction crisis. Such a crisis can be avoided if fall in
consumption demand is matched by increase in investment, but we
know that in an overproduction crisis, the level of investment falls
too.
A specific form of this argument is that the shift in the income

distribution will lead to a secular shift in terms of trade against the
primary producers and in favour of manufacturing, since petty
producers, in the form of peasantry are likely to be producing
primary commodities for processing in manufacturing sector
dominated by monopolists. A decline in the exports from
manufacturing to primary commodity sector without an offsetting

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increase in the internal demand of the manufacturing sector for its

own output will result in an overproduction crisis. It’s the Third
World Countries that suffer the terms of trade losses and there is
sluggishness of exports from metropolitan countries.
2. Under-investment theory
Even though consumption relative to output doesn’t fall, but in the
transition to monopoly capitalism, it is quite likely that the
investment relative to output will fall. This is because the
monopolist earns a higher than average rate of profit and hence he
would not take up any investment that gives just an average rate of
profit. Therefore, there is overproduction because of ‘under
investment’.
Imperialism can offset this tendency of overproduction if it involves

an export surplus financed by capital exports. The secular decline in
terms of trade for primary producers from the onset of monopoly
capitalism until 2nd world war is an example – this was because of
the sluggish export growth in Britain.
According to Lenin, imperialism is endemic to monopoly

capitalism. Imperialism is the way monopoly capitalism behaves;
hence distinguishing it from monopoly capitalism is misleading.
Post-War Developments in Capitalism

In this section we look into the relation between Leninist perception
and the post 2nd World War developments when capitalism is supposed
to have changed.
After the 2nd World War, capitalism was badly injured. The forces shifted
in favour of working class in the advanced capitalist countries. The
national liberation struggle in the colonies had reached its peak. A two-
pronged strategy was adopted for immediate survival:
 Isolation and repression of the revolutionary forces.

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 Concessions to and compromises with the demands of the

domestic working class and the colonial movements.
Golden Phase of Capitalism
Post-War period led to de-colonization, introduction of Keynesian
demand management policies to achieve near full employment at
home, and a number of welfare measures. These policies were highly
conducive to growth and there was a boom in the capitalist history in
the 1950s and the 1960s. This was the golden phase of capitalism.
Three elements went into this capitalist boom:

 The high levels of demand sustained through Keynesian
demand management, ensured that investment and growth
rate were high
 Introduction of innovations, resulting from war time
technological advances. This resulted in high productivity
growth and wages despite high employment.
 The Third World Countries wanted to step up industrialization
through imports of capital goods. As a result their terms of
trade for primary goods deteriorated with respect to the
manufacturing goods. Inflation was low which helped to prolong
the boom.
This reign of golden phase of capitalism and welfarism, where the

working class continued to prosper was more of an exception, a
deviation from the actual system brought by post-war situation rather
than by the system itself. We saw a very different look of capitalism
since the 1970s, after the golden phase ended in a crisis.
Nature of Contemporary Finance Capital

Globalization of Capital
The centralization of capital today is different from that seen in Lenin’s
times. Today, it has been accompanied and overlaid by a process of
globalization of capital that has transcended these rivalries themselves.

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Not only there is a qualitative change in a world frozen in the same

mould as in Lenin’s times but also there is a qualitative transformation
in the world itself.
Globalization today is not accompanied by any significant increase in

long term capital flows; it represents predominantly a globalization of
finance in the form of ‘hot money’ flows. Globalization of capital is not a
new phenomenon. It was there in Lenin’s time too. Capital flows today
are largely detached from the current account of BOP, and pertain
largely to the capital account.
FDI and other long term capital flows give rise to associated commodity
movements which are reflected in current account of BOP. Short run
financial flows do not generate commodity movements. Contemporary
capital flows by leading capital exporters are largely associated with
small current account surpluses and represents short run and
speculative capital flows.
Finance capital today is different from the finance capital of Lenin’s days
in three ways:
1. Lenin had talked about nation-based, and hence nation-aided
finance capital, but what we have today is neither amenable to
control or discipline of any nation-state.
2. We do not have the coalescence of industry and finance that
Lenin had endorsed. Instead, we have finance pursuing its own
objectives, which predominantly amounts to making speculative
gains through hot money flows.
3. This finance operates not in the context of inter-imperialistic
rivalries but in unity among leading capitalist powers. Rivalries
do exist, but they remain muted.
Globalization of finance is itself an enormous unprecedented

centralization, a carrying forward of the process that Lenin emphasized,
in 2 ways:

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 Financial institutions controlling and deploying enormous funds.

 Stimulate ‘herd behaviour’ among others in response to own
actions, so that they also influence the decisions of finance that
is not directly under their control.
Consequences of Globalization
For the Advanced World
» Slowdown and unemployment
Globalization-cum-centralization leads to prolonged slowdown
in the advanced capitalist world and high unemployment rates.
This restricts the scope for demand management by the nation-
state undermining Keynesianism directly.
» Depreciation and Inflation

Efforts by the state to expand economic activity make
speculators apprehensive about imminence of inflation,
exchange rate depreciation, political radicalism and financial
flows out of country. This results in actual depreciation and
inflation, forcing the state to curtail the activity to a level that is
comfortable for speculators. Hence, the control area of the
government is undermined and its capacity to intervene is
restricted.
For the Third World

Globalization and imposed liberalization which opens the Third World
markets for goods and services, and opens their economies for
unrestricted movements of international finance capital have adverse
consequences for the Third World countries.
» Poor standards of living

Drastic squeeze of living standards of workers and peasants in
Third World de-industrializes these economies and pushes them
to export agriculture which is detrimental to food security and
makes the peasants vulnerable by exposing them to fluctuations

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in the world prices. They get trapped in the market which is

based on the confidence of international speculators and where
state has no role. The net effect is stagnation, higher
unemployment, poverty and regressive transfer in income
distribution.
» Abrogates the economic and political sovereignty

As a part of the measures to retain the investors’ confidence,
the key positions in the government are often handed over to
the pro-imperialistic politicians and bureaucrats. The metropolis
exerts control over agencies such as the IMF and subverts the
autonomy of the Third World. Sometimes, personnel and the
bank are deployed in Economic Ministries. Thus, economic
decision making cannot be undertaken in an autonomous
fashion by the domestic state.
» De-nationalization
A progressive transfer of natural resources to foreign hands at
throw away prices takes place to retain investor’s confidence.
Privatization is imposed on these economies as part of IMF
conditionalities and the multinational corporations benefit.
Whenever international speculators threaten capital flight,
countries resort to de-nationalization of valuable assets as a
check.
» Attenuation of Democracy
All the above stated consequences like de-nationalization, poor
standards of living, abrogation of sovereignty reduce the
political power of the people, which is necessarily an
attenuation of democracy. Different bourgeoisie and petty
political parties, apart from triggering capital flight, swear
allegiance to the same set of policies of liberalization. So, the
population is denied any effective political choice. Satisfying the
caprices of international speculators on the one hand and

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respecting the will of the people on the other, are mutually

incompatible and one of the two has to be circumvented.
» Conflicts
The Third World countries become enmeshed in ethnic
conflicts, secessionist movements, communal conflagrations,
and fundamentalist threats once they liberalize their economies
and get caught in the vortex of institutional financial flows.
Deflation and unemployment are conducive to the exclusivist
and chauvinist movements of various kinds (Ex: Breakup of
Yugoslavia). Such struggles divide the people and act as a
barrier to the emergence of revolutionary challenges to
imperialism.
Globalization and Super-Imperialism

The phase of imperialism that Lenin wrote about was the one when
there was rivalry among different finance capitals. Today, the anti-
imperialist rivalries are muted and finance capital is international, hence
the state system operating it must also be different; it would have to be
a surrogate world state, towards which the existing state system would
tend to move.
According to Kautsky, Ultra-imperialism would help to create such a

surrogate world state, where internationally united finance capital is
engaged in a joint, relatively peaceful exploitation of the globe.
Lenin criticized Kautsky on the grounds that any such peaceful partition
of the world would be temporary, reflecting the relative strengths of the
rival finance capitals; with uneven development which is endemic to
capitalism. These relative strengths would again change, leading to a
new anti-imperialist rivalry and re-partitioning of the world among the
imperialist powers.

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What Lenin and Kautsky failed to visualize was the state of super-
imperialism. When the strength of one of the imperialist powers
exceeds that if its rivals by more than a critical margin, then this
difference persists and leads to a state of super-imperialism. This state
could be quite stable and have a considerable capacity to manipulate its
contradictions.
Example – US has emerged as a super-imperialist power. Super-

imperialism is exercised through nation states, decimating independent
states and by ensuring that the remaining are allies or client states or
puppet states.
Conclusion
Imperialism does not solve the basic problems that give rise to it. The
aim of the anti super-imperialist struggle in the Third World should be
building of an independent nation state. This requires an alternative
class base for struggle; alternative economic programme which rolls-
back globalization and activates the state to pursue a free development
path; an alternative agenda that promotes decentralized decision
making and protects the democratic rights of the people.
Relevance of Lenin’s Theory in today’s world

“The irrelevance of Lenin is his relevance.”
Even if the perception today is different from Lenin’s, it is arrived at by
using Leninist concepts, by adopting the Leninist approach and by
pursuing the Leninist problematique. Even when we demarcate today’s
world from that of Lenin’s we do so by taking Lenin as a point of
departure. Lenin’s work represents a practical engagement with
imperialism. Our practical engagement is different today but it is along
the theoretical route chartered by Lenin.

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Questions
1. What is meant by globalization of finance? How is it different
from globalization of capital in Lenin’s time? Discuss the
consequences with special reference to the third world.
2. The nature of capitalist growth is positively detrimental to much
of the Third World. Discuss.
3. Outline the various phases of imperialism. Do you agree with
the view that imperialism is the monopoly phase of capitalism?
Comment on the relevance of Lenin’s theory in today’s world.
4. Why is imperialism inevitable? Can it solve the basic problems
that give rise to it?

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Chapter 18
MEANING OF ECONOMIC IMPERIALISM
(James O’Connor)
Glossary of Terms
Imperialism: Imperialism means “the extension of political
power by one state over another.” Monopolistic privileges and
preferences, plunder of raw materials, seizure of territory, enslavement
of local peoples, nationalism, racism, militarism – all these phenomena
are closely identified with imperialism. Imperialism always involves the
massive export of capital to foreign countries for the purpose of
exploiting and dominating both their labor forces and their markets. It
is also defined as "the creation and/or maintenance of a country's
power and influence through military force."
Mercantilism: Mercantilism is the economic doctrine that

government control of foreign trade is of paramount importance for
ensuring the military security of the country. In particular, it demands a
positive balance of trade. Mercantilism dominated Western European
economic policy and discourse from the 16th to late-18th
centuries. Mercantilism was a cause of frequent European wars in that
time and motivated colonial expansion.
Capitalism: Capitalism is an economic system based on

the private ownership of capital goods and the means of production,
with the creation of goods and services for profit. Elements central to
capitalism include capital accumulation, competitive markets, and
a price system.
Colonialism: Colonialism is the establishment, exploitation,

maintenance, acquisition and expansion of colonies in one territory by
people from another territory. It is a process whereby the metropole
claims sovereignty over the colony, and the social

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structure, government, and economics of the colony are changed by

colonizers from the metropole.
We will now look into the two doctrines of imperialism which reflect the
period of European expansion which began during the 1880s and ended
in 1914.
The First doctrine of Imperialism

(Imperialism: A Political Phenomenon)
The first doctrine dissociates capitalism from imperialism. Schumpeter

defined imperialism as “a heritage of the autocratic state … the
outcome of pre-capitalist forces which the autocratic state has
recognized … [and] would never have been evolved by the ‘inner logic’
of capitalism itself’’ The inner logic of capitalism consists only of free
trade.
The reasons why Schumpeter and other bourgeois dissociated

capitalism from imperialism are –
1. They distinguish and identify imperial and colonial relationships
only on political grounds and not economic. (understanding
imperialism in terms of political power only)
2. They do not consider capitalism to be an exploitative system.
3. Historically, imperialism has contained features identified with
the theme of expansionism which is not uniquely associated
with any economic or social system.

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Differences between pre-capitalist and capitalist societies (In

connection with economic expansionism)
Pre-capitalist Societies Capitalist Societies

Irregular and unsystematic Foreign trade and investment are
economic expansion, not integral the engines of growth. Expansion
to normal economic activity necessary to maintain the rhythm
of economic activity
Economic gains from expansion Profits from overseas trade and
are windfall gains, in the form of investment are an integral part of
plunder national income
Home economy was relatively Exploited territories are
unaffected; plunder was fragmented and integrated into
consumed by conquering armies the structure of metropolitan
economy
The debate was whether to The debate is on what is the best
expand or not way to expand
Colonialism was the only mode of They have alternative, indirect and
control more complex forms of control
Mercantilism and Imperialism

The mercantile capitalist societies differ from industrial capitalist
societies. Another word for 19th century imperialism is ‘neo-
mercantilism’.
Differences
1. Related to the character of trade: The early mercantilism was
commercial capitalism. Middlemen exchanged goods for goods
and there were trade wars. (Ex: Anglo-Dutch wars of 17th
century) In the 19th century imperialism, a new dimension was
added to trade: capital goods financed by foreign loans and
investments, as well as consumer manufacturers, exchanged for
foodstuffs and industrial raw materials.

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2. Mercantilist monopoly trading was formed to minimize physical

and commercial risks along uncertain and distant trade routes.
Later, after the East India Company was dissolved, free trade
was adopted on principle because their control over advanced
methods provided a competitive advantage. New possibilities of
trade opened up.
Similarities
1. Both mercantilism and imperialism relied on active state
participation in the direction, organization and character of
trade or investment. But the nature of the state policy was
fundamentally different. Example – When the prohibition on
the export of bullion was abolished in England in 1663, the state
imposed import and export controls to maintain favourable
balance of trade. Multi-lateral trade emerged from bi-lateral
trade. The imperialist states of late 19th century inherited the
multi-lateral trade patterns. Their aim was favourable BOT with
world as a whole and not with any specific trading partner.
2. Both mercantilism and imperialism discouraged subsistence
production and the manufacture of commodities in the
colonies.
Differences between Mercantilism and Imperialism (With respect to

colonization)
Mercantilism Imperialism
It was impossible to imagine an An international ruling class is an
international ruling class accomplished fact
Industry was technologically There is struggle between fully
primitive, small-scale and not integrated corporations based in
vertically integrated. The the metropolitan countries.
exploitation of raw materials (Sharing of oil resources is an
resulted in fierce national rivalries example of cooperation between
integrated corporations.)

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Colonialism under mercantilism Imperialism exhibited an

was defensive in nature – Chief aggressive character – Chief
purpose was the mitigation of the purpose was to open up
hazards of trade and preservation possibilities for trade and
of monopoly control investment
Central goal was to ensure Expansion of output – Nursing of
maximum inflow of bullion to home industry and creation of
ensure favourable balance of employment became central goals
trade. It limited development of of state policy. Multi-lateral trade
commercial relations, seizure and patterns emerged
territorial conquests
Characteristics of industrial capitalist expansionism:

- It exhibited a more aggressive attitude towards underexploited
areas
- It was less particular, and more universal
- It more fully integrated underexploited economic regions into
the structure of metropolitan country
- It required the active participation of the state
- Internecine warfare between the economic monopolies tended
to be less acute
Contradiction in imperialism
On one hand, the national power elites seek to advance the economic
interests of their respective countries; on the other hand, the
integrated, multinational corporations or the international ruling class,
extend their sway irrespective of the interests of the countries in which
they were based.
Two schools of thought

1. M. Barratt-Brown argues that the decades after 1815 saw the
expansion and consolidation of the British Empire based on the
need to conquer and secure markets and keep trade routes
open.

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2. D. Fieldhouse claims that the acquisition and defense of the

colonies were motivated chiefly for reasons of military security
and administrative efficiency.
The Second doctrine of Imperialism

(Imperialism: An aspect of Monopoly Capitalism)
The second doctrine of imperialism, inspired by European expansionism

in the late 19th and early 20th century holds that monopoly capitalism,
imperialism and colonialism are basically the same phenomena.
This is a Neo-Marxist view.
Hobson and Lenin wrote about imperialism during 1885-1914 which was
the most significant economic-political phenomenon of the time.
Hobson’s theory of Imperialism
Hobson conceptualized colonialism as the reflection of the unfulfilled
promise of liberal democracy. The unequal distribution of wealth
affected the British working class which in turn hampered the industrial
capacity. The lack of profitable investment outlets at home forced the
British capitalists to go abroad to the underexploited continents. Thus
the imperialist conquests and colonization was a way to bring about
redistribution of income and hence the development of the home
economy.
According to Hobson, foreign investments were a crucial element in

British investment. British overseas investment rose from 785 million
pounds in 1871 to 3500 million pounds in 1911 and net foreign
investments were greater that gross domestic fixed investments. The
political struggle between major European powers was thus dissolved
into struggles for profitable investment outlets.

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Lenin’s theory of Imperialism

Similarities with Hobson’s theory:
1. The cause of capital exports was the excess supply in Britain and
the increasing demand in underdeveloped regions.
2. Lenin also linked foreign investments with the acquisition of
colonies.
3. Both of them equated imperialism and colonialism by making
colonialism as the focal point. Thus, they failed to understand
the significance of the imperialism of free trade (British
economic expansion 1840s-1880s)
Distinctive feature
The distinctive element in Lenin’s theory was related to the cause of the
surplus of capital.
According to Lenin, imperialism is a stage of capitalist development, and
not only one possible set of foreign policy options among many.
Imperialism is the monopoly capitalist stage. It has the following
features:
» The high concentration of production and capital creates
monopolies which play an important role in economic life.
» There is creation of a financial oligarchy on the basis of the
financial capital, resulting from the fusion of banking capital
with industrial capital.
» The export of capital which is different from export of
commodities has become extremely important.
» The formation of the international capitalist monopolies who
share the world among themselves.
» The territorial division of the whole world completed by the
great capitalist powers.
Monopolistic organizations develop from free competition in four ways:

1. The concentration of capital (growth in the absolute size) leads
to centralization of capital (growth in the relative size)
2. Monopoly capital extends and strengthens itself by the seizure
of key raw materials.

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3. Financial capital imposes financial ties of dependence upon all

economic and political institutions of contemporary capitalist
societies, including non-financial capital.
4. Monopoly grows out of colonial policy. The new colonialism
opposes itself to the older colonial policy of the free-grabbing of
territories.
The cause of surplus of capital is the tendency of the rate of profit to

fall. We have already seen various reasons for this to happen in the
earlier chapters. This surplus of capital is exported which leads to a high
rate of return in the economically underexploited regions.
Questions
1. What is Lenin’s theory of imperialism? How does it differ from
Hobson’s theory?
2. Explain the two doctrines of imperialism in the light of European
expansion.

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Chapter 19
NATIONALISM AND ECONOMIC POLICY IN
THE ERA OF GLOBALIZATION
(Amit Bhaduri)
Introduction
Amit Bhaduri talks about the rise of the nation-states which is the
ideology of nationalism. Nationalism is a complex notion which
encompasses the economy, the state and the society. It comprises of a
complex nexus of multiple loyalties of an individual as a member of the
society, duties and rights of the citizen in a reciprocal political
arrangement with the state, and the role of the individual as a producer
and consumer in the economy. While the balance among these
different aspects of nationalism evolved historically, in the present area
of globalization this balance seems to be shifting in favour of global
market forces. Its consequences for the nation -state, and the new role
that it needs to define for itself, especially in terms of economic policy
are discussed.
1. AN INTELLECTUAL BACKGROUND TO THE RISE OF THE NATION-

STATE
Definition - Nation State

Nation state is a state that self-identifies as deriving its political
legitimacy from serving as a sovereign entity for a nation as a sovereign
territorial unit.
The state is a political and geopolitical entity; the nation is
a cultural and/or ethnic entity. The term "nation state” implies that the
two geographically coincide.
The three-way merger of the state as a political entity, the nation as a

historical or cultural concept, and the economy as an organization of

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production and exchange activities has always been problematic.
» Smithian proposition - Market exchange is sustained by the

underlying social 'norms' resulting from sympathy, e.g. trust in
exchange, respect for contracts, etc. The state plays an
important role in either reinforcing or destroying these norms
which are essential for the functioning of the market economy.
» Smithian notion of sympathy raises doubt about the popular
view of a Leviathan state whose main purpose is to restrain
self-seeking individuals in times of destructive conflict with each
other.
» Neither the state and society nor the economy can function
exclusively on the basis of only one of altruism or egoism,
community feeling or selfishness.
» Social norms reinforce a feeling of togetherness but may
weaken after political freedom is achieved.
Commercial societies
- These societies are in the interest of trade and commerce
- They deviate from such rigid and explicit social norms,
bestowing the individual with greater social freedom.
- It creates other norms reinforced continuously by the needs of
trade and commerce, like respect for commercial contracts.
The modern 'nation-state', which tries to fuse together the economy,
the state and the society under the over-riding norm or ideology of
'nationalism' needs to be understood in this context.
Hegelian view – Keep the public and the private sphere separate. In
other words it meant authority of the state which is engaged in the
public sphere over the society which is engaged in the private sphere.
This became a powerful idea in the shaping of the nation-state.
Characteristics of a Nation State

» The nation-state is based on a reciprocal arrangement.

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Nationals accept territorial loyalty as over-riding, while the

nation-state protects their rights within that territory.
» The rights which the nationals of a particular territory enjoy are
determined by the sovereign state according to the vague
principle of self-determination of people. Sovereign state tries
to deal with the multiple loyalties of its nationals in terms of
ethnicity, language, religion or culture which often make
conflicting demands.
» The Hegelian requirement of placing the civil society with its
multiple loyalties as the 'private' domain, and therefore, under
the political authority of the state which belongs to the 'public'
domain, becomes a particularly convenient ideology for the
nation-state.
» The emphasis on the territorial integrity of the nation-state
means that its laws and regulations are applied to the
commercial activities carried out within its territory.
» National currency as a 'legal tender' within its territory is the
symbol not merely of commercial trust, but also of the authority
of the state over the economy.
» It creates a uniform national culture, through state policy and
has a more centralized and uniform public administration.
The current phase of globalization is important in the evolution of the

nation-state. Economic globalization challenges the political authority
which the nation-state had attained by undermining gradually many of
the norms of the traditional civil society.
2. ECONOMIC NATIONALISM AND THE MARKET SYSTEM
Government is the ultimate source of authority and judge of disputes

among its people. Citizens enjoy rights which are given and defended by
the state. This reinforces the ideology of patriotism.

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Who needs nationalism?

Both democracies and dictatorships need nationalism. Within each
nation-state the political authority of the national government seeks
legitimacy in one form or another. The more undemocratic a national
government is, the more it needs to appeal to some side of 'nationalism'
or patriotism for legitimizing its exercise of power over its people.
There are two opposite tendencies that operate:

1. A tendency of an appeal to reinforce particular loyalties.
Cultural or religious nationalism, or nationalism based on the
ethnicity of common people, provides examples of this
tendency in recent history.
2. Weakening of social bonds and norms because of expansion of
trade and commerce, creating commercially-oriented norms.
These opposing tendencies lead to tensions of modernization in the
building of a nation. The tension is highlighted by the inconsistency
between the faster pace of change in the market-oriented, and the
slower pace of change in traditional social norms.
Four important components that help to clarify the belief–system which

sustains the market culture today are:
 Individualism
 Rationality
 The 'invisible hand' as the guiding principle the market
mechanism
 Belief in the market process, and not merely in the ultimate
Pareto-optimal equilibrium outcome of the market
3. THE CONTENT OF ECONOMIC NATIONALISM: THE INTERNAL AND

THE EXTERNAL MARKET
Economic nationalism tends to manifest itself in two interrelated ways.

1. Nation-state depends to a large extent on the market forces in
matters of international trade, investment and finance. It tries

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to benefit from the external markets.

2. If the nation state is a weak player in the international economic
scene, then it has a tendency to rely heavily on the internal
rather than on the external market.
The relative importance of the internal and the external market

depends on
» Size of a country
» Stage of the country’s development
The argument for protecting the domestic market (protectionist

doctrine) runs two serious dangers.
» It fails to examine what determines the size of aggregate
domestic demand.
» It tends to overstate the danger of economic openness which
can also benefit the poor nation.
Implications of participating in the international market

(1) Criticisms by those who are economically weaker, and feel
threatened with marginalization, exclusion or other forms of
denial by the market.
(2) Distributional Implications:
For developing countries
- Limited resistance to international pressure because of
economic weakness.
- Paradoxical situation
Trapped between tradition – social, religious and cultural norms
AND the norms of an encroaching international commercial
society.
- Globalization is not imposed but accepted by them.
For the industrialized nations

- Less paradoxical situation.
- Dependence on the market becomes more a matter of routine.

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- It is the relative economic performance vis-à-vis other nations

which increasingly defines the 'nationalism' and the legitimacy
of the government.
Globalization -Implications
For developing nations
There is a compulsion to globalize, to assert internally within the
country the supremacy of economic over social norms to strengthen
some form of economic nationalism.
Externally vis-à-vis other nation-states, however, its economic

nationalism suffers because it is economically less powerful, and is
compelled to play more or less passively by the rules set by the more
powerful industrial nations.
For industrially developed nations

Economic performance is the main vehicle of expressing its nationalism,
within the domestic economy; internal economic compulsions may
become incompatible with better external economic performance.
Thus, consolidation of economic nationalism through globalization

operates as a double-edged weapon which often wounds the nation-
state, developing or developed, which tries to wield it. The danger is
usually greater for developing nation-states; but it is also real for
advanced industrial nations.
4. THE EVOLVING NATURE OF THE NATION-STATE AND

GLOBALIZATION
Process of eroding and reorienting the authority of the nation-state

This is the consequence of the economically active role which the
nation-state played in the past and also because of the process of
globalization. There are 4 tendencies that led to the same.

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1. The resurfacing of capital-labour conflict, especially in an era of

sluggish growth and high unemployment in several industrially
advanced nations
2. The consolidation of multinational corporations in production
related activities as well as in the field of international finance
3. The overwhelming quantitative importance of international
financial capital flows, mostly from private sources
4. Technological development especially in communication
technology.
1. Capital-labour conflict (Unemployment and Inflation)
Keynesian theory of demand management led to cracks in cooperative

capitalism. Increasing power of the workers through full employment
led to workers’ indiscipline. The demand for wages went up which led
to inflation.
According to Kalecki, “The government supported by captains of

industry would retreat from time to time from demand management,
perhaps in the name of 'sound' public finance and balancing the budget,
to precipitate 'political trade cycles' in order to impose discipline on the
workers” These political trade cycles are somewhat similar to Marx’s
reserve army of labour.
Hence, there was Unemployment-Inflation tradeoff (shown by the

Phillips curve). Monetarists denied the possibility of any trade-off
between inflation and unemployment in the long run. It is impossible to
reduce unemployment below Un – The natural rate of unemployment,
also known as 'non-accelerating inflation rate of unemployment'
(NAIRU).
Not only the captains of industry wanted to discipline organized labour

through maintaining a 'natural rate' of unemployment, but a wider
middle class with rentier interests also supported because they feared

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reduction in savings through inflation.
Political reason for the breakdown of the Keynesian framework

The vision of cooperative capitalism assumed a neutral state which will
manage aggregate demand to bring together the interests of capital
and labour. When the distributive conflict began to fuel a process of
inflation driven by conflicting claims, the neutral stance of the state
became weak.
Thesis - High wage is beneficial to both the classes

Anti-thesis - Profit and private investment driven economic expansion
This contradiction led to a new synthesis.
The new conservative view of demand management said that to attain
cooperation between capitals and labour, it is better to give it to private
business; direct state intervention should not be there, as the earlier
version of social democracy had advocated.
2. The rise and the consolidation of Multi-national corporations

(MNCs)
One the economy was opened; Kalecki - Keynesian framework was no

more applicable, because high wages and high prices would reduce
international competitiveness and lead to fall in aggregate demand.
With the internationalization of production by the multinational

corporations, international trade has grown and hence it becomes
important for nations to attract direct foreign investments (FDI) of the
corporations.
Thus, from ‘high wage’ policy, there was a shift to 'low wage' policy
directed at driving economic expansion, led by profit, private
investment and trade surplus.

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Why are MNCs important?

» MNCs influence the trade performance of the nation-state by
updating technologies in newly industrializing nations.
» MNCs are engaged not only in international production
activities, but also in finance.
» It is easy for a domestic firm in a developing country to raise
commercial loans internationally through joint ventures, and to
obtain a better internationally approved credit-rating, if it is
linked to a well-known MNC.
» Through MNCs, developing countries hope to attract increasing
share of other forms of international capital inflow, including
portfolio investments.
3. International financial capital flows
Nation -states view the process of globalization of finance as enormous

because of its magnitude. There are opportunities mixed with equally
serious dangers. The compulsion to be friendly to the day-to-day
sentiments of the international financial market has curtailed the
traditional autonomy of the nation-state in conducting economic
policies.
The erosion of authority of the nation-state in the face of globalized

finance occurs in several ways.
(1) The national governments have less control in managing
aggregate demand, because fiscal or monetary policies aimed at
expanding demand spill over partly into higher imports and
current account deficit.
(2) If the global financial market sentiments are in favour of import
liberalization, many national governments in developing
countries would have to accept contractionary pressures on
domestic economic activity with an artificially boosted exchange
rate in a liberal trade regime.
(3) National governments would have little autonomy to increase

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domestic corporate tax rates and to lower interest rates

because doing so would result in capital flight.
(4) National governments in both developing and developed
countries have a strong compulsion to pander to the widely
held sentiments, beliefs and prejudices of the globalized
financial markets.
4. Communication technology
Nowadays vast funds can be transferred across national borders at

lightning speed and efficiency with the aid of modern communication
technology. Also, it’s the age of electronic media.
Electronic media has tremendous power in shaping and influencing the

sentiments that drive transactions in financial markets. It is these
sentiments which impose the most serious constraints on the conduct
of national macroeconomic policies.
Cutting down government spending through balanced budget,

accepting a 'natural rate' of unemployment etc. are theoretical
concepts, which are propagated by the media to become popular
beliefs. These beliefs become the 'distilled truths' continuously served
by the media. When these 'distilled truths', become sufficiently popular
in a globally integrated financial market, they force the national
governments to act according to them.
5. THE NATION-STATE AND DEMOCRACY: ACCOUNTABILITY, SELF-

CORRECTION AND ECONOMIC NATIONALISM
The once powerful nation state has now become a leftover in this global
setting. They are still local, but MNCs have global reach. However, the
view that the nation -state is moving towards its end during the present
era of globalization is misleadingly because:
» It misunderstands the economic role that the state plays with

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respect to the market. The state and the market relate in terms
of accountability and self-correction embodied in the two
institutions.
» It fails to see the way in which the relationship between the
nation-state and economic nationalism is evolving over time.
1. The state and the market: accountability and self-correction
The acceptance of the market culture depends on

- The participants are justified with what they receive.
- The participants are justified with what is denied to them by the
market.
Who is accountable – Market or the State?

The market is not accountable to the participants, the state is. If the
minority is marginalized, the state as an accountable institution may
have to intervene, if only for the sake of legitimizing the market. If it
doesn’t, then the political authority of the state would be in question
for supporting an unjustifiable market system.
In developing countries, there is poverty, unemployment, illiteracy and

lack of health care among the majority. Since the state is accountable
and not the market, the state seeking legitimacy should is compelled to
intervene.
Self-correction – In markets or state?

Accountability is no guarantee of self-correction – State can perform
poorly on the economic front, and yet try to improve its 'image' of
accountability, remedy being cruder forms of nationalism like religious
fundamentalism.
Many believe that market has an in -built self-correcting mechanism.

This is flawed because:

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(i) The self-correction of the market mechanism is based on

unrealistic assumptions which need not hold in practice, like
full employment of resources.
(ii) Even if there is efficient equilibrium, the speed of

adjustment to the equilibrium is too slow to be of practical
relevance
2. Economic nationalism and globalization
Political myth – Both the market and globalization weakens many

aspects of economic nationalism.
In nations that lose:
There is a tendency to create a defence mechanism against
globalization by taking recourse to different aspects of nationalism.
In nations that gain:
The nation-states are geared towards serving the demands of a process
of globalization which is driven not by their political authority but by
MNCs in the international capital market.
Two opposing tendencies are tending to be fused together.

(i) The nation-state is being constrained and weakened in
exercising its economic and political authority.
(ii) The nation-state is being strengthened in ways to suit large
corporate interests in trade, investment and finance.
Thus, we do not see a demise of the nation-state but a reorientation

which is one of the most striking features of the current process of
globalization.
There is an emerging challenge both to the process of globalization, and

to the nation -state and its nationalism.
 Global 'rules of the game’ have to become more sensitive to the
democratic accountability of national governments.

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 The national governments need to recognize the gains from

greater international interdependence through trade,
investment and finance.
The challenge is to devise ways to take advantage of the international

interdependence without compromising their democratic accountability.
6. TOWARDS A POLICY FRAMEWORK
Globalization leads to
o Shifting the balance from the internal to the external market
o The nation-states acting passive in this process.
o Competition among nation-states.
An intelligent policy of shifting the balance globally, by relying more on

the internal and less on the external market by all nations can become
the guiding principle of macroeconomic policy without generating
conflictive economic nationalism.
Competition enhances productivity without affecting productivity of

other countries (it’s not a zero sum game) Division of labour as a source
of productivity growth is limited by the size of the market.
External market – Increase in productivity can materialize through
conflictive economic nationalism.
Internal market – The nation-state has a supreme role to play in
expanding the size rather than the share of the market, without
generating conflictive forces of economic nationalism.
Problems in demand management

 Fear of inflation.
 Fear of external payments imbalance which may lead to capital
flight due to speculation.

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Policies
Incorrect way of tackling Inflation
 Reduce unemployment to the 'natural rate' of unemployment.
Valid ways to fight unemployment:
 Expansionary fiscal policies aimed at increasing the internal
market
 Raising labour productivity
 Employment expansion through public works and the
simultaneous creation of productive assets
Internal and external market

 Demand management should be focused on expanding internal
market – Less conflictive capital-labour relation.
 Nation states focusing on market share and the external
market, rather than on the internal market – This would unleash
forces of conflictive economic nationalism.
 Internal demand management
» Deals directly with problems like unemployment and
business cycles in advanced industrial countries.
» Results in re-empowerment of the welfare state.
Thus, demand management with a view to productive employment

creation, should also be a focus of policy formulation in developing
countries.
Dealing with external balance problem

 Proceed along an International Clearing Union arrangement, by
which all member states would accept the debt obligation of
the Clearing Union – Symmetrical treatment of surplus and
deficit nations.
This has not found any place in policy agenda. So, there are two
questions that come up:
1. Are there other forms of international governance and policy
coordination that might be more feasible in the foreseeable

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future?
2. Without feasible agreements in the sphere of international
governance in the near future, can the nation-state find a way
to empower itself in a way which will enhance its democratic
accountability to its people?
 Proper timing if internal demand management. When all
countries expand simultaneously to raise each other's demand
for exports, the net effect on trade deficit and surpluses are
likely to be smaller, even if they are unevenly distributed among
countries.
 Simultaneous lowering of interest rates in support of
expansionary monetary policies.
Ideal scenario: Both, an International Clearing Union arrangement and
coordination of demand management.
 Attempts should be made to discourage international
speculative foreign exchange transactions through schemes like
the Tobin Tax.
 Current account convertibility needs to be suspended when it
contradicts the more pressing requirement of demand
management by the nation-state.
 International negotiations should be initiated by the IMF to
permit 'stand-still' agreements between private international
lenders and the nation-state in case of a speculative attack on
its currency.
The conventional wisdom which was the cornerstone of 19th century

liberalism is a natural harmony between public and private interest.
Harmony between public and corporate interest in the name of
globalization seems to have become the cornerstone of the late 20th
century neo-liberalism. It is high time that the democratically
accountable nation-states face this, both for their own survival, and for
the welfare of their ordinary citizens.

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Questions
1. Do you agree with the view that globalization does not lead to
demise of nation-state but results in its reorientation? Support
your answer with valid arguments.
2. “Consolidation of economic nationalism through globalization
operates as a double-edged weapon which often wounds the
nation-state, developing or developed, which tries to wield it.”
Discuss. Is the danger greater for developing nation-states than
the advanced industrial nations?
3. In the era of globalization the balance among different aspects
of nationalism seems to be shifting in favour of global market
forces. Do you agree? What are its consequences for the nation-
state?
4. “An intelligent policy of shifting the balance globally, by relying
more on the internal and less on the external market by all
nations can become the guiding principle of macroeconomic
policy without generating conflictive economic nationalism.”
Explain.

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PAPER - I
th
M.M. 75 (4 Semester)
Section – 1 (Answer any one)
1. “If colonialism was one of the necessary pre-conditions of
capitalism, imperialism was an equally necessary element of
capitalism once the latter had developed” Discuss.
2. “Consolidation of economic nationalism through globalization
operates as a double-edged weapon which often wounds the
nation-state, developing or developed, which tries to wield it.”
Discuss. Is the danger greater for developing nation-states than the
advanced industrial nations?
3. Marx unlike Ricardo did not make use of the Malthusian theory of
population to counter the tendency of wages to rise in response to
capital accumulation which is an essential part of capitalism as seen
in the scheme of Expanded Reproduction. Elucidate.
Section – 2 (Answer any three)

4. “The crucial point is that the current crisis (2008 crisis) is not merely
a financial crisis but a broader economic crisis” Discuss. Looking at
the crises that have taken place over the last century, due to think
crisis is inevitable in capitalism?
5. How does Schumpeter use his concept of creative destruction to
justify monopoly practices under capitalism even though their use
violates the generally prescribed conditions for economic
efficiency?
6. What are the arguments given by Kalecki regarding opposition of
big bourgeoisie (big business/industrial leaders) to the programs of
government intervention to achieve full employment?
7. In what sense does capitalism reflect the centrality of the M-C-M’
circuit? Elaborate on the distinctive features and major themes of
the capitalist system which arise specifically from the discussion of
the circuit.

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8. What is meant by globalization of finance? How is it different from

globalization of capital in Lenin’s time? Discuss the consequences
with special reference to the third world.
9. “The whole development of the society is determined by
development of productive forces and consequent changes in
relations between men in production” Elucidate.
PAPER - II
M.M.38 (Part III)
Attempt three questions in all. Q.1. is compulsory.
1. Marx says, “ The hand-mill gives you society with feudal lord; the
steam-mill, society with the industrial capitalist.” According to
Gurley, this statement over-emphasizes technological to the neglect
of dialectical. Discuss.
OR
“The increase in the power and scope of TNCs has given rise to a
new global economy in which the capacity of nation states to
regulate their economies has been undermined by the hyper-
mobility of capital.” Discuss.
2. Critically analyze the three contrasting post fordist perspectives

describing the nature of capital development.
3. Why is imperialism inevitable? Can it solve the basic problems that
give rise to it?
4. Distinguish between possibility theories and necessity theories of
Economic crises. In that light examine how Keynesian theory of
effective demand is different from the Marxian analysis?

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Eureka wow economy-state-and-society

Political Economy I (University of Delhi)

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16. Trans-national Corporations

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Means of production and Means of consumption

Production and Distribution – Their Social Nature

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Productive and Non-Productive Labour

Social Relations of Production

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- Productive forces determine the social relations of production.

Production Relations and Social Productive Forces

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production. The level of co-operation and division of labour in a

Distribution Relations and Production Relations

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- Marxian materialism maintains that ideas, philosophies,

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Five basic modes of production are:

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Law of Progressive Development of Productive Forces

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First basic law of sociology - Law of necessary conformity between

Second basic law of sociology - Law of necessary conformity between

When the economic base changes, the elements of social consciousness

These two laws of sociology are the laws of conservation of social

Conservative Character of Social Relations and Social Consciousness

20 Economy, State and Society