Category Archives: Real economy

Rosa Luxemburg: An Introduction

Previous posts have commented on a diverse set of economists – Krishna Bharadwaj, Pierangelo Garegnani, Alfred Marshall, V K R V Rao, Knut Wicksell among others. In a similar manner, this blog post discusses the main ideas of the economic theorist, Rosa Luxemburg (1870-1919). Born in Zamosc, she studied philosophy and natural sciences and then moved to economics. Her PhD thesis is an empirical analysis of Poland’s industrial sector which was seen to depend on backward eastern markets. This statistical finding would later develop into a theoretical one.

She studied Marx’s work closely and critically. The three volumes of Capital demonstrate the workings of a capitalist economy characterised by wage labour and profit maximization. According to Marx, a capitalist system is able to reproduce itself by maintaining a sizeable reserve army of labour and by appropriating the surplus value created by the workers. However, Marx sees the possibility of crisis in a capitalist economy where production decisions are unplanned and are coordinated by different markets. Luxemburg asks a related yet different question: how does capitalism survive in the real world? Or, in her words, ‘what are the objective historical limits to capitalism?’ This question resulted in her main work, The Accumulation of Capital.

Luxemburg answers this question by extending Marx’s analysis after making certain modification. First, Marx conducts his analysis by examining the fundamental units of capitalism – that of a commodity and the workings of individual capital. This working is succinctly encapsulated in the relation M-C-M^ where M^ is greater in value than M. Second, his theoretical investigation is restricted to that of a capitalist system. Luxemburg looks at the total capital, an aggregate magnitude. Some commentators consider this to be one of the early attempts at a macroeconomic analysis. Moreover, in her attempt to understand the workings of capitalism in the real world, she introduces a real-life facet – that of the existence of both capitalist and non-capitalist systems. These modifications lead her to the conclusion that capitalist systems depend on and exploit non-capitalist systems for their survival. The exchange which takes place between these two systems stops the capitalist enterprise from crumbling.

In The Accumulation of Capital – An Anti-Critique (1972), she clarifies the differences involved in studying individual units versus aggregate ones: “…the standpoint of total capital differs basically from that of the individual employer. For the individual, the luxury of’ high society’ is a desirable expansion of sales, i.e. a splendid opportunity for accumulation. For all capitalists as a class, the total consumption of the surplus value as luxury is sheer lunacy, economic suicide, for it is the destruction of accumulation at its roots” (p. 56). This important methodological fact has been overlooked by neoclassical economics where the aggregate is seen to behave in a similar way as its individual parts. This is clearly untrue and their reasoning commits the fallacy of composition. Such discussions by Luxemburg were certainly a methodological improvement.

The major (historico-)theoretical insight she provided relates to the manner in which capitalist systems avoid permanent crises. Luxemburg argues that capitalism survives based on its coercive relations with non-capitalist systems. She poses the question thus:

“After we have assumed that accumulation has started and that the increased production throws an even bigger amount of commodities on to the market the following year, the same question arises again: where do we then find the consumers for this even greater amount of commodities?” (p. 57).

Her answer follows.

“They must be producers, whose means of production are not to be seen as capital, and who belong to neither of the two classes – capitalists or workers – but who still have a need, one way or another, for capitalist commodities” (p. 57).

She elaborates this further.

“In reality, capitalist production is not the sole and completely dominant form of production, as everyone knows, and as Marx himself stresses in Capital. In reality, there are in all capitalist countries, even in those with the most developed large-scale industry, numerous artisan and peasant enterprises which are engaged in simple commodity production” (p. 58).

To conclude, Luxemburg made positive contributions to economic methodology and theory. Her analysis of accumulation can prove useful in countries like India where non-capitalist production systems are very prevalent. In addition, it can enrich the analysis of economic relations between the developed and developing countries.


(1951), The Accumulation of Capital, trans. Agnes Schwarzschild, intro. Joan Robinson, London: Routledge & Kegan Paul.

(1972), The Accumulation of Capital – An Anti-Critique, ed. and intro. Kenneth Tarbuck, trans. Rudolf Wichmann, New York: Monthly Review Press.

To Economists: please pay attention to the ‘real’ problems

A talk by Arundhati Roy and watching Peepli Live has motivated the contents of this post largely. I have been forced to rethink what ‘economics’ as a discipline should do in a country like India. How can it contribute to economic growth and human development. It is often forgotten that, economics studies the big black box that transforms the labour of the labourers into commodities for consumption by the labourers. People or rather, people who work, appear at both the ends of the tunnel. The black box or the tunnel consists of varied actors, markets, institutions, laws, power groups, social classes, etc.

Some economists try to make sense of this complex interaction using tools such as game theory, which throws light of certain aspects of the interaction. This in turn is supposed to aid in the design of better institutions. A few study labour, the main actor in the whole economic process. Some look at institutions and how various legal arrangements affect the economic outcomes. It remains to be asked: outcomes for whom? In this manner, the entire profession of economics has been divided into various sub-disciplines, each specialising in a particular aspect of the economy. And it is evident that communication between the above mentioned sets of economists happen rarely. Very often, the larger picture is forgotten. Each group presents their results with a tremendous sense of certainty, which is entirely misplaced. And, the joke that economists love their ceteris paribus clause comes true here. Except that, the clause in this case, assumes as constant the remaining processes or aspects of the economy!

Who are the real producers in an economy? What role do farmers (small, marginal and large) play in our society? Do they live in dignity? When inflation occurs, do these farmers get more incomes? Or do the intermediaries pocket the increase? Are proper institutions in place to provide them with adequate credit? Can these formal institutions compete with the informal ones, such as money lenders and chitti funds?

It is accepted that farming is not a profitable enterprise any more. Policy makers are calling for industrialisation. They want the farmers to come away from their lands and work in industries. And so arises the slums in and around major cities, where their living conditions are perhaps worse than in the villages. Or, most of them are forced to become construction workers. Urbanisation implies buildings, which creates construction jobs in plenty. Once the space in big cities are exhausted, the urbanisation will take place in small cities. Workers will be in demand. In short, labour migration and increasing labour distress, owing to improper housing conditions will become even more intense. It is time, serious attention is paid to farmers and the role of farming in the development of India.

To conclude, it is time we paid more attention to the condition of India and not blindly follow academic fashions. It is the duty of the civil society and especially, the academicians to study the problems and issues thrown up by the society. When the problems of the majority of the population in India –those who live in the rural areas, those who work in the informal sector and those who are farmers– are forgotten and relegated as “deviations from the normal” or “problems of the Indian economy” and not as characteristics of the society we live in, it is indeed a pitiable situation.

India and it’s ‘Segregated Growth’

This article tries to show that high rates of GDP in India need not trickle down to the rest of the masses and also strives to explain why ‘segregated growth’ further fuels inequality. By ‘segregated growth’, I refer to growth which takes place in sectors which employ relatively a small percentage of the total labour force.

The IT revolution is happening but the GDP contribution of agriculture is decreasing.  One inference from this change could be that, labour from agriculture is migrating to the services sector; but that is not the case in India. India is witnessing farmer suicides, increased debts, droughts and low productivity in the agricultural sector.

Sustained economic growth requires progress in several dimensions – education, health, infrastructure, legal institutions, etc. [Noll 2006] For the whole of the population to enjoy sustainable growth, it is essential that growth takes place in all sectors of the economy. Otherwise, it will lead to growth, but only in a few sectors, like the IT boom which India faced. This growth is not sustainable in the long run. Another consequence of such ‘segregated growth’ is that, the GDP figures will show an increase. And as the GDP is the most commonly used (By the media) measure among the masses to portray economic growth, the picture presented will appear rosy.

Moreover, the per capita income will also show a rise due to the increase productivity coming from ‘such sectors’. This increased GDP will not trickle down as many economists and others state. This increased income accruing to the denizens of ‘such sectors’ will only be spent in conspicuous consumption. Thorstein Veblen coined the words ‘conspicuous consumption’ in his book ‘The Theory of the Leisure Class’. The basis on which good repute in any highly organised industrial community ultimately rests is pecuniary strength; and the means of showing pecuniary strength, and so of gaining or retaining a good name are leisure and a conspicuous consumption of goods. [Veblen 1899]

On Poverty

And though the country (India) has made significant strides – poverty levels are roughly 35%, down from close to 60% in the 1970s, (by the World bank’s $ 1 a day definition of poverty, though precise numbers are the subject of never-ending debate) – the benefits of this rapid growth are yet to trickle down to the masses. [Bhusnurmath 2006]

Development agencies define poverty as an income of less than $2 per person per day (about $3,000 annually for a family of four). By this standard, nearly 3 billion people are poor. [Noll 2006]

I wonder why India still defines poverty as an income of less than a dollar per day for a person. I had argued for a restructuring of the current poverty line in another article of mine. Probably the present estimate makes it easier to state that poverty levels have come down from 60% to around 35%!

On Development

Amit Bhaduri, in his recent paper in the Economic and Political Weekly, wonders if it is Developmental Terrorism or Development which is taking place.

Destruction of livelihoods and displacement of the poor in the name of industrialisation, big dams for power generation and irrigation, corporatisation of agriculture despite farmers’ suicides, and modernisation and beautification of our cities by demolishing slums are showing everyday how development can turn perverse. [Bhaduri 2007]


Thus, the Indian populace is dichotomized in terms of economic growth; there are certain areas where growth levels are very high along with a majority of sectors which are witnessing a decline. Thus, this kind of ‘segregated growth’ fails to ‘trickle down’ to other sectors of the economy.


1) Roger Noll, The Foreign Aid Paradox, SIEPR Policy Brief, October 2006.

2) Thorstein Veblen, The Theory of the Leisure Class, 1899. (Full book available here)

3) Mythili Bhusnurmath, Time for a reality check,, November 25, 2006.

4) Amit Bhaduri, Development or Developmental Terrorism?, EPW, February 17, 2007.

The Real Economy of India

Economy: Main Constituents

Agriculture sector or otherwise known as the ‘primary sector’ comprises agriculture and allied activities like crop production, horticulture, plantation crops, farm mechanization, land development and reclamation, digging of wells, tube wells and irrigation projects, forestry, construction of cold storages and warehouses, processing of agri-products, finance to agri-input dealers, allied activities like dairy, fisheries, poultry, sheep-goat, piggery and rearing of silk worms.

Industrial sector or the Secondary sector consists mainly of mining and quarrying; manufacturing and electricity; gas and supply.

The services sector or the tertiary sector includes trade, hotels, restaurants, transport storage and communication; financing, insurance, real estate and business services; community, social and personal services and construction.

Gross Domestic Product(GDP)

According to the Central Statistical Organisation (CSO), the Indian economy recorded a real GDP growth of 8.0 per cent in the second quarter of 2005-06.

When an economy grows at, say 5 %, it implies that the average growth of the 3 sectors within the economy, namely agriculture, industrial and services are growing at an average rate of 5%.

The data by CSO says that, the agricultural growth in real terms during the second quarter (July-September) of 2005-06, is 2.0; industrial sector 7.6 and tertiary sector 9.8.

The slow growth of the primary sector has been mainly attributed to the weak monsoons.

Business Expectation: A digression

Business expectation surveys suggest that the current phase of industrial activity is likely to continue in the near future. According to the Reserve Bank’s latest Industrial Outlook Survey, the Business Expectations Index for January-March 2006 quarter increased by 2.4 per cent over the previous quarter. Survey results indicate that employment, selling prices, imports and profit margins are expected to improve during the quarter January-March 2006 vis-à-vis October-December 2005.

What the ‘growth’ comprises

The area under kharif crops was 1.2 per cent higher than a year ago, led by increased area under rice, maize, pulses and sugarcane. As regards rabi crops, the area coverage as on January 2, 2006 was 1.5 per cent higher than a year ago on account of increased coverage in respect of major crops such as wheat and rapeseed.

The mining and electricity sectors, on the other hand, recorded a deceleration. The sharp slowdown in the mining sector may be attributable in part to a decline in production of crude oil caused by the break-out of fire in the Mumbai-High oil field in July 2005 and the adverse impact of heavy rainfall on coal mining activities. Lower growth in the electricity sector is attributable to shortage of coal and gas.

Robust growth in the cellular subscriber base broadband connections supported the strong growth in the communication sector.

Sustained growth in bank deposits and non-food credit as well as increased exports of information technology enabled services boosted the sub-sector ‘financing, insurance, real estate and business services’.

These are some of the reasons mentioned by the RBI for the growth in real GDP.

Growth projections

Agencies like ADB, CII, CRISIL, NCAER, IMF and RBI have projected the Real Gross Domestic Product for India during 2005-06 to be over and around 7.0. This reflects a bright prospect for the people of India. Is it so?

Current Scene

Link: The Hindu


The current GDP rate is exuberating and so are the projections. All the hype is on the growth rate. The politicians’ rhetoric is that India is growing as its GDP is rising. The agricultural sector is weak, structurally. More reason to be worried is because of the fact that more than 50% of the Indian populace are dependent on agriculture for their livelihood. The number of farmer suicides in Vidarbha and even in highly literate states like Kerala, speaks of discontentment. Relying only on the GDP and expecting the ‘trickle down effects’ to comply is nonsensical. Even if the high rates of GDP brought forth positive externalities, the time lag required for ‘these benefits’ to reach the masses would be large.

It is a commendable and laudable fact that India is improving it’s IT related exports. IT sector definitely seems resplendent.

Even if ‘trickle down effects’ ensued, all the benefits have gone to the middle class sector. More people are becoming better off with this sector.

The main concern is that of sustaining the realised growth of services and improving upon the primary and secondary sectors. The issue of ‘sustainable development’ should be our main concern. Lop sided development cannot be sustainable in the long run. Therefore, resting on a weak agricultural base is dangerous.


1) RBI: Third Quarter Review 2005-06, The Real Economy .