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Marx rejected some principal features of the classical theory of economic growth and offered his own theory within a socio-historical framework in which economic forces play a major role. In Marxist theory, the law of diminishing returns has been discarded because Marx believed that the classical theory of stationary state was actually a creation of human actions rather than the end product of a natural, immutable law. For a similar reason, Marx also castigated the Malthusian theory of population.

Marx looked at economic development from a social and historical standpoint. Each stage of economic growth was regarded as the product of Hegelian dialectics of a game of contradictions where a thesis created its anti-thesis and the conflict between the two produced a synthesis. Marx also emphasized that, with capitalism, social relations of production are much more important than exchange relations between goods. The social character of labour has been stressed in particular. Marx argued that labour productivity

‘is a gift, not of nature, but of history embracing thousands of centuries’ (Marx 1906: vol. 1, p. 562).

However, the Marxist concept of relations of production is rather vague. It has been interpreted as an

‘organic whole’ characterized by labour organization and skill, the standing of labour in society, technological and scientific knowledge and its use in a certain environment (Bober 1950). In the Marxist analysis, these ‘relations of production’ determine the socio-cultural set-up of a society. Marx believed that capitalism would not end up in a quiet classical ‘stationary’ state; rather, it would break up with a ‘bang’

‘when the expropriators are expropriated’. Here, we shall only analyse the economic views in the Marxist theory, abstracting from social and institutional issues.

The Marxist model of economic growth depends on some major dynamic ‘laws’:

1 the law of capitalistic accumulation which says that the prime desire of the capitalists is to accumulate more and more capital;

2 the law of falling tendency of the rate of profit which plays a crucial role in the breakdown of the capitalistic system (this law is illustrated below);

3 the law of increasing concentration and centralization of capital which tells us that, with the growth of capitalism, cut-throat competition among capitalists will lead to the annihilation of smaller firms by bigger ones which will lead to the growth of monopoly and concentration of economic power;

4 the law of increasing ‘pauperization’ which implies the growth of the misery of the working class with the advancement of capitalism, reflected in wages being tied to the subsistence level coupled with a rise in the proportion of unemployed people or what Marx called the ‘industrial reserve army of labour’, made possible by the substitution of capital for labour in the process of technical change.

The simultaneous working of these laws would generate contradictory forces which would eventually sharpen the class conflict between capitalists and workers or between ‘haves’ and ‘have-nots’. Capitalism would face a violent death in the final confrontation when the expropriators would be expropriated. Hence, Marx gave the clarion call: ‘Workers of the world, unite’, as they have nothing to lose except their ‘chains’.

The Marxist notion of the falling tendency of the rate of profit plays a crucial part in the whole process of change and can now be illustrated. According to Marx, the value of a commodity (w) is given by the sum of

‘constant capital’ (c) or the plant and machinery used up in production plus the ‘variable capital’ (q) or the wage bill plus the ‘surplus value’ (s) or the value that labour produces in excess of necessary labour to produce a commodity. If the working day consists of 8 hours and only 4 hours are required to produce a commodity then for the remaining 4 hours the worker is producing a surplus value which is expropriated by capitalists (Sweezy 1942). More formally,

w=c+q+s and

x=s/q

where x is the rate of surplus value or the rate of ‘exploitation’. Thus, in the above example, 4 hours/4 hours=100 per cent=x

The rate of profit (p) in the Marxian analysis is given by or

Let s/q=x, i.e. the rate of exploitation, and c/q=j or the ‘organic composition of capital’. Then we have

Now, it is clear that if x remained constant, p and j would be inversely correlated. A rise in j would take place as capitalism developed with continuous accumulation. Also, capitalists would substitute capital for labour whenever wages tended to rise above the subsistence level to maintain their rate of profit. The process would lead to higher unemployment among the working class and sharpen the polarization of forces. On the other hand, the crisis of capitalism would be reflected in the periodic fluctuations of growth and a falling tendency of the rate of profit. Such a falling tendency of the rate of profit would lead to cut-throat competition among the capitalists which, in its turn, would lead to monopoly. Eventually, the conflict between the ‘immiserized proletarians’ and the capitalists would toll the death knell of capitalism.

It is interesting to observe that the law of a tendency for the rate of profit to fall may not always be observed within an economic system. This can easily be demonstrated within the Marxist model (see Adelman 1962). We have

Differentiating p with respect to time t we obtain

or

Note that the profit rate will rise if the rate of exploitation rises more rapidly than the organic composition of capital. Even if the rise in the organic composition of capital is higher than that of the rate of exploitation,

whether or not profit will fall depends on the difference between dx/ dt and the product of profit rate and dj/

dt. For profit rate to fall, pdj/dt (which is negative) must be greater than dx/dt. But a fixed rate of exploitation and an increase in capital intensity may not go together because a rise in organic composition of capital would raise labour productivity which would either raise the rate of exploitation (which Marx assumes away) or raise real wages (which Marx rejected). Inevitably, the internal consistency of the Marxist model has been questioned (Sweezy 1942; Adelman 1962). Further, as has been shown above very clearly, a rise in the organic composition of capital could increase the rate of profit with an increase of productivity and a change in technology. Under such circumstances, the intensity of competition among capitalists declines. Technical progress may be neutral or even labour-using (say, with the application of more and more seed and fertilizer in agriculture in LDCs). Thus the rise in the industrial reserve army of labour and a fall in the wage share in national income may not occur.

Other criticisms usually levelled at the Marxist model may also be mentioned briefly. It is contended that Marx’s correlation between the growth of the average firm size and an increase in the degree of concentration need not always happen. However, the proportion of unemployment has increased in both DCs and LDCs in recent decades.

Empirically, wage share of national income in most DCs remained fairly constant for a long time and this phenomenon seems to have weakened the Marxist law of increasing pauperization (Kaldor 1957). On the other hand, the Marxist prediction about the increasing concentration and centralization of capital is not rejected. However, the rise in the output-capital ratios in DCs probably reflects the growth of both accumulation and real wages, a phenomenon which Marx probably did not envisage within the strict framework of his analysis (Fellner 1957).

Marx and the LDCs

On the problems of LDCs Marx’s analysis was rather thin. Marx paid some attention to Indian economic problems. The Indian society was regarded by Marx as an assembly of small self-contained ‘village systems’ where people ‘agglomerated in small centres by the domestic union of agricultural and manufacturing pursuits’. The socioeconomic system of India stagnated because ‘these little communities [i.e. village systems] transformed a selfdeveloped social state into never-changing natural destiny’ (Marx 1853). Marx thought that British rule in India would administer an (albeit rude) shock to the static Indian society, through the introduction of modern science and technology, which would break down the static society and usher in capitalism. However, the verdict of history has been somewhat different.

The quintessence of the Marxist theory of underdevelopment is well summarized by Adelman:

‘underdevelopment is the consequence of a particular adverse combination of initial conditions and structural parameters, which results in economic and social stagnation. Development can occur only as a result of an exogenous shock, the essential effect of which is to change the initial conditions in such a way that self-sustained growth takes place’ (Adelman 1962:91).

Neo-Marxist theory of underdevelopment

The idea that the village system of LDCs could be changed by an exogenous shock has prompted some Marxist economists of today (whom we would call neo-Marxists) to use the Marxist model to analyse problems of LDCs (for a review of theoretical contributions to post-Marxian literature see, for example, Bose 1975). There are, of course, other sociological, political and historical reasons. Here, a very brief outline of the neo-Marxist theory of underdevelopment is given.

Some neo-Marxists trace the origin of capitalism to the idea of mercantilists who believed in the principle of accumulation. Historically, the development of capitalism in Europe led to imperialism and colonialism which created a wealthy and strong centre (the imperial power) and a weak, poor periphery, which mainly consisted of colonies. The capitalistic and imperialistic development at the centre is supposed to have taken place through the exploitation of colonies at the periphery, and this is supposed to have been reflected in the movement of the ratio of export price to import price, or the terms of trade, against poor countries (Prebisch 1964). Free trade became the convenient vehicle of ‘exploitation’. Hence: ‘Underdevelopment, no less than development itself, is the product but also part of the motive power of capitalism’ (Frank 1975, 1969; for an evaluation of the Prebisch thesis, see Chapter 10). The poor countries of today, despite their political independence, have become economically dependent upon the developed metropolis because of their historical past reinforced by the ‘neo-colonial’ ties of trade, aid and transfer of technology. As trading partners, the LDCs are dependent upon the DCs because the goods they usually produce (mainly primary commodities) are both price and income inelastic while the goods they want, they cannot produce themselves. It is argued that such a situation has led to ‘unequal exchange’ between the centre and periphery (Emmanuel 1972). The LDCs are further exploited and made more dependent upon the DCs with the growth of international capitalism and multinational corporations who in their global search for more profit can easily mop up ‘surplus’ from LDCs (and DCs as well) as they can direct their investment from low-profit to high-profit areas quite easily (Radice 1975). Productivity is likely to remain low in those LDCs from whence the ‘surplus’ or profit has been extracted and this could only perpetuate their poor economic conditions. The structural effects of such a system are seen in the prevention of the growth of indigenous enterprises and the perpetuation of a small market which usually caters for ‘elitist’ demand or the demand of the people who are included in the higher income groups in LDCs. Also, one finds the inadequate production of goods necessary for mass consumption, import of luxury goods which creates balance of payments problems and a choice of technology and products which are unsuitable for LDCs. Thus, the technology which is 65 capital intensive (often imported) usually creates more unemployment and poverty and accentuates the existing inequalities in income distribution. The indigenous ‘elite class’ in collusion with international capitalism perpetuates the self-reproducing, static, neo-colonial structures of LDCs. This, in a nutshell, is the underdevelopment and dependency theory (UDT) in the neo-Marxist writings of today.

The empirical support of the neo-Marxist theory is usually derived from the experiences of the poor Asian and the Latin American countries in the last twenty-five years. It is argued that, despite the modest growth of the real national income in these countries, both inflation and unemployment have soared. The increase in per capita real income has been slight, while in some cases it has actually fallen with poverty and inequality in income distribution increasing. This is regarded as the product partly of the UDT theory, partly of the so-called ‘socialist’ policies which consist of the manipulation of the Keynesian interventional policies rather than the restructuring of economies, say, on Chinese lines, and partly because of the unholy alliance of the international aid agencies, champions of state capitalism within the LDCs, who are against fundamental reforms and multinationals or the ‘fall guys’.

Evaluation of the neo-Marxist theory of underdevelopment

Many of the hypotheses on the UDT, put forward by the neo-Marxist writers, are not amenable to rigorous statistical analysis. Some of them will be dealt with in subsequent chapters. Suffice now to say that the debate on the movement of the terms against LDCs remains inconclusive even today (see Chapter 10). Protection and import substitution have sometimes resulted in real income losses in LDCs, and abdication of principles of free trade, over-valuation of currency and controls of trade have actually penalized exports and

agriculture and rewarded industry and urban areas in LDCs (see Chapters 8 and 10). Ironically, ‘protection’

has sometimes really meant the protection of the small sector of rich industrial monopoly capital at the expense of the vast agricultural sector where 70–90 per cent of people in LDCs live. However, the effects of multinationals on the economies of LDCs have been debated and the extent of ‘exploitation’ is not always known (see Chapter 6). It is also difficult to accept the argument that the effects of the flow of foreign resources to LDCs have always been harmful. The argument about the choice of wrong technology or of product does not always clearly follow from the UDT theory as such a choice is not only exogenous but also endogenous. In other words, even if multinationals wish to introduce from outside inappropriate techniques or products to LDCs, such an introduction or choice could not always be made without the internal support of recipient countries. At the theoretical level, it may be argued that the UDT defines the concept of development rather vaguely. It does not state clearly the ways to accomplish development; it is too much concerned with the analysis of how underdevelopment took place in the past rather than how development can be achieved in the future; it does not seek to estimate carefully the extent of exploitation. Naturally, statements like ‘Capitalism has created underdevelopment not simply because it has exploited the underdeveloped countries, but because it has not exploited them enough’ (Kay 1975, his italics) become difficult to evaluate. Indeed, it has been argued rather pointedly, ‘Curiously enough, it is not clear that UDT provides any explanation of why more capital was not invested and accumulated in the Third World in the past, nor of why it should not now take advantage of cheap labour and soak up vast pools of unemployed people in the Third World today’ (Leys 1977:96).

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