Economics and Karl Marx

‘History is economics in action.’ ‘ Karl Marx

The discipline of Economics has been improved upon by many individuals who have not been economists. One among them is Karl Marx (1818-83). Marx contributed to sociology, history, philosophy, literature and even arts. This article tries to bring out to the fore a few of his contributions and criticisms regarding Economics.

Marx’s theories revolved around the relationship between capitalist and worker. He posited that this relationship is an unstable one, as each sees the other as a rival. During his time, money and bargaining was associated with the Jews and they dominated the society. Marx suggested a reorganisation of society so as to do away with the evils of bargaining, which almost eventually resulted in the worker getting exploited.

The property owning middle class could win freedom for themselves on the basis of rights to poverty- thus excluding others from the freedom they gain- the property less working class possess nothing but their title as humanity. Such was Marx’s view of the exploited proletariat. Marx claimed that ‘total deprivation’ was a universal characteristic of the proletariat. [Singer 2006]

Marx began his critical study of economics in 1844. Marx criticised classical economic theories stating that they characterised worker as a commodity, the production of which is subject to the ordinary laws of supply and demand. [Singer 2006]

Marx contended that the main problems in the economy were caused due to the unequal ownership of private property. He wanted to abolish private property and to also regulate production. The solution he gave was ‘Communism’ in the ‘Communist Manifesto’ written jointly with Friedrich Engels. He also viewed the labourer and their labour as one. And one of the questions he posed was whether the labour was more important than the labourer.

Theory of Surplus value

Surplus-value is the social product which is over and above what is required for the producers to live.

The measure of value is labour time, so surplus value is the accumulated product of the unpaid labour time of the producers. In bourgeois society, surplus value is acquired by the capitalist in the form of profit: the capitalist owns the means of production as Private Property, so the workers have no choice but to sell their labour-power to the capitalists in order to live. The capitalist then owns not only the means of production, and the workers’ labour-power which he has bought to use in production, but the product as well. After paying wages, the capitalist then becomes the owner of the surplus value, over and above the value of the workers’ labour-power.

The capitalists may increase the amount of surplus value extracted from the working class by two means: (1) by absolute surplus value ‘ extending the working day as long as possible, and (2) by relative surplus value ‘ by cutting wages.

On Division of Labour

Marx talked about the ill effects of Specialization. He posited that increasing division of labour eliminates intellectual and manual skill and reduces the labourer to a mere appendage to a machine. [Singer 2006]

Looking at this statement, I feel it holds good even now. If a labourer could learn two or more trades, it is possible for him to perform efficiently in all the trades, except for the fact that, he would not be able to devote his entire time to a single trade. In this age, seldom do we come across people who are economists as well as physicists or historians as well as doctors, etc. ‘Specialization’ is said to be the need for the day.

Taking the case of a manual labourer in India, if he knows two trades, he would be better off. The labourer will be in a better bargaining position than otherwise.

Thoughts

Marx was of the view that we need to produce things for their use-value and not for their exchange-value. This is what he tried to achieve by Communism. But Communism rendered human inventions and innovations as useless. Though, people all had the basic necessities of life, they did not have the motivation or the zeal to bring out the best in them.

His insights of Classical Political Economy are laudable. A science progresses when it is criticized and when it’gets defended.

Writings in Economics

1) Das Kapital
2) Critique of Political Economy
3) Grundrisse

References

1] Marx: A very short introduction-Peter Singer
2] Encyclopedia of Marxism

HDR 2006 and India

The Human Development Report for the year 2006 has been released. This year’s HDI refers to 2004.India has moved one step up to be ranked 126 among a total of 177 countries. [Last year India was ranked 127] India’s HDI rank falls under the category of ‘medium human development countries’.

The HDI provides a composite measure of three dimensions of human development: living a long and healthy life (measured by life expectancy), being educated (measured by adult literacy and enrolment at the primary, secondary and tertiary level) and having a decent standard of living (measured by purchasing power parity, PPP, income). The index is not in any sense a comprehensive measure of human development. It does not, for example, include important indicators such as inequality and difficult to measure indicators like respect for human rights and political freedoms. What it does provide is a broadened prism for viewing human progress and the complex relationship between income and well-being. Read more on HDI here.

HDI Rankings

Norway is ranked first in this year’s HDR report, while the USA is ranked 8th, Japan 7th, China 81st and Pakistan 134th. And Niger is ranked last at 177.

India: Human Development [A few indicators]

1) HDI Rank: 126

2) The population below income poverty line of 2$ per day is 79.9%, though as per the national poverty line it is 28.6%.

3) The HPI (Human Poverty Index) for the 102 developing countries rank India at 55.

4) The Annual Population growth rate is pegged at a rate of 1.3%. [2004-15]

5) The Public health expenditure of India as a percentage of GDP is 1.2%, while that of the private is 3.6%. [2003]

6) The percentage of total population who are undernourished is 20%. [2001/03]

7) Life expectancy at birth: 63.1 [2000-05]

8] Infant mortality rate per 1000 live births: 62 [2004]

9) The public expenditure on Education as a per cent of GDP is 3.3% [2002-04] which has fallen from 3.7% in 1991.

An irony

‘Only 25% of the poorest households in developing countries have access to piped water in their homes as compared to 85% of the richest households.’ Says HDR 2006.

The same report states that only 14% of people in India lack access to an improved water source. This implies that 86% of people in India have access to improved water, thereby rendering India almost in par with developed countries in terms of access to an improved water source. This figure has been definitely deflated. One of the major reasons for this deflated figure is due to lack of adequate and complete statistics.

Conclusions

The HDI alone or the GDP alone cannot give the real picture of any economy. Both the HDI and the GDP do not take into account the inequalities. India is a country which is characterised by stark inequalities in wealth, income, education, health, land etc. India is the land of the billionaires as well as people who go hungry everyday and the land where little children are forced to work.

The authorities’ rhetoric of trickle down effects of an 8% GDP will not work, due to lack of proper institutions to cater to the needs of the poor. Microfinance, an institution which is working needs to be implemented more effectively and in a transparent manner, because the misuse of Microfinance institutions can lead to more trouble than not having them at all.

The main focus of this year’s HDR is on the Water Crisis which is plaguing countries both developed and developing alike. Adverse effects of pollution, increased green house gases can be witnessed in unanticipated floods and droughts plaguing many countries. And in the last few years, we had to face the Tsunami which wreaked havoc. According to Developments, “97% of all the deaths from natural disasters are in poor countries”.

The Indian populace has been repeatedly told that India is reducing its poverty and that it is well under 30%. They are right. [According to the official poverty line of a dollar per day] But keeping in mind the needs of the people for a decent livelihood, a family needs at least an income of 2000 rupees per month!

On the whole, there is nothing in the report that makes India proud. India needs to step up its expenditure specifically targeting education and health sectors. The draft to the 11th 5 year plan, speaks about inclusive growth, but adequate emphasis has not been given to sectors which need development.

References

1) Human Development Report 2006

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-‘-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

Conclusions

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.

References

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

Supply side Economics

Supply side economics revolves around the central concept that changes in economic growth can be brought about more rapidly by making changes in the ‘aggregate supply’ rather than changes in the ‘aggregate demand’.

Supply side economists prefer policies such as cuts in tax rate (Which increase the supply of workers and thereby increase employment, as a result increased incentive to work) to various other demand side policies such as changes caused about by monetary policies, such as an increase in the money supply or fiscal policies, such as a progressive tax.

Conservative economists are of the view that tax cuts need to be concomitant with cuts in government expenditure or purchases, so that the effect on the budget is neutral.

History of Supply-side Economics

Robert Mundell is the person who furnished the theoretical genius behind ‘supply-side economics.’ The ideas and premises of supply-side economics are described most lucidly in the writings of a political science and journalism graduate of UCLA, Jude Wanniski. Those writings, in turn, reveal that three individuals were primarily responsible for advancing the ideas of supply-side economics: Robert Mundell as the economic theoretician; Arthur Laffer as the pragmatic economist with a flair for public relations; and Jude Wanniski as the journalistic link between the two economists, the public, and the worlds of Wall Street finance and Washington politics. [Jett 2003]

America and Supply-side Economics

The US of A experimented with supply side policies in 1980. Ronald Reagan was the man behind it and his opponent, George H. W. Bush called it ‘Voodoo Economics’. Reagan cut the marginal tax rate on the highest income earners from 75% to 38%. His rhetoric was that if taxes were lowered, these rich would earn more and thus increase the gross taxes collected.

In a nutshell, here is Krugman’s account of the ascent and record of supply-side economics. Except for a few renegade professors like Arthur Laffer, supply-siders come from outside the economics profession. They come from journalism (Wall St. Journal columnists, Jude Wanniski, George Gilder), political staffs and think tanks. They convinced key Republicans that the cause for slowing U.S. economic growth was high taxation and excessive regulation. Supply-siders asserted big government was the problem. The cure required tax cuts, which would 1) bring back growth, 2) raise investment, and 3) enable deficit reduction. Disregarding sophisticated conservative economists like Martin Feldstein, politicians seized on the cruder, easy to peddle supply-side message that the economy would benefit from tax cuts – without concern for offsetting spending cuts.

The track record of early 1980’s tax changes can now be gauged from economic history regarding the three supposed benefits. Krugman presents and discusses the evidence summarized below.
1) The U.S. long-term rate of economic growth was not changed by supply-side tax cuts or by anything else since 1973. Productivity growth in the 80’s was 0.8% on an annual basis, compared to 2.8% in the prosperous period after World War II until 1973.
2) “By any measure, over any time period, investment fell” in the U.S. during the 1980’s, a result contrary to supply-side claims. As one example, net national savings was only 3.4% of GDP in the 1980’s, compared with 8% in the 1970’s.
3) In the absence of high economic growth or deep spending cuts, the deficit ballooned – to 4.9% of GDP in 1992 compared with 2.7% in 1981 when Ronald Reagan became President. The resulting debt will burden taxpayers for decades to come. [Neubauer 1996]

Conclusions

Pindyick and Rubinfeld say that some supply policies can shift actual output, but not all supply side policies can. Assistance of demand side policies is required.

If an economy is growing close to full employment level, i.e. with the presence of only natural unemployment(Frictional unemployment) then such ‘tax cuts’ will be beneficial. But, if such policies are implemented in developing countries, with the presence of large degrees of unemployment, all it will do is widen the inequalities of income between rich and poor.