UNIT III

Sit Dolor Amet

Marx
◦ Alessandra Roncaglia
◦ PPT
Marx
HISTORICAL MATERIALISM
◦ Marx’s general ideas about society are known as his theory of historical materialism.
to quote Marx, it is the ‘guiding thread’ of all his works.
◦ Materialism is the basis of his sociological thought because, for Marx, material conditions or
economic factors affect the structure and development of society.
◦ His theory is that material conditions essentially comprise technological means of production
and human society is formed by the forces and relations of production.
◦ “materialist conception of history”- influenced by Hegelian theories about society- marx
worked with young Hegelians- who found defects in Hegel’s ideas and they proceeded to build
a new system of thought- which marx could come up with.
Assumptions of H.M
◦ historical materialism emphasises the fundamental and causal role of
production of material conditions in the development of human history.
◦ 1Society as an Interrelated Whole: Marx views human society as an
interrelated whole. The social groups, institutions, beliefs and doctrines within
it are integrally related. Therefore, he has studied their interrelations rather than
treating them separately or in isolation. Such aspects as history, politics, law,
religion or for that matter education cannot be treated as separate spheres.
◦ 2. Changeable Nature of Society: Marx views society as inherently mutable, in
which changes are produced largely by internal contradictions and conflicts.
◦ 3. Human Nature and Social Relationships: According to Marx there is no permanent persistence of
human nature. Human nature is neither originally evil nor originally good, it is, in origin, potential. If
human nature is what human beings make history with, then at the same time it is human nature which
they make. And human nature is potentially revolutionary. Human will is not a passive reflection of
events, but contains the power to rebel against circumstances in the prevailing limitations of ‘human
nature’.
◦ It is not that people produce out of material greed or the greed to accumulate wealth. But the act of
producing the essentials of life engages people into social relationships that may be independent of their
will. In most of human history, according to Marx, these relationships are class relationships that create
class struggle.
theory
◦ In brief, we can say that Marx’s theory of historical materialism states that all
objects, whether living or inanimate, are subject to continuous change. The rate
of this change is determined by the laws of dialectics. In other words, there are
forces which bring about the change. You can call it the stage of antithesis. The
actual nature of change, i.e., the stage of synthesis, will be, according to Marx,
determined by the interaction of these two types of forces.

◦ different schools of Marxism provide differing explanations of this theory.

THE MARXIAN THEORY OF INCOME
DISTRIBUTION- surplus value
◦ The Marxian theory is essentially an adaptation of Ricardo’s ‘surplus theory
◦ his analysis reaches diametrically opposite conclusions
◦ The Marxian analysis of income distribution rests on the labour theory of value, which Marx took over
from Adam Smith and Ricardo.
◦ According to Marx’s labour theory of value, the value of a commodity is determined by the labour time
necessary for its production. It is the labour alone that is the ultimate source of all value.
◦ equipment and raw materials do not create value ; they merely transfer their own value to the
commodity.
◦ unique characteristic of labour power that it creates more value than its own value
◦ value of labour power is determined by the cost of reproduction of labour- subsistence wage.
◦ labour produces more than the value of its labour power- remunerated less- this is the basis of theory of
surplus value
Theory of surplus value
◦ It explains the distribution of aggregate income into wages and profits in a capitalist
economy.
◦ capitalists own the material means of production such as capital equipment, land and raw
materials with which labour is employed to produce goods and services.
◦ Surplus generated by labour is appropriated by capitalists as profits- represents the exploitation
of labour
total value of output is composed of three
elements
◦ 1. constant capital-C: (value of the capital and raw materials)
◦ 2. variable capital-V: value of labour power
◦ 3. surplus value S: from where profits are derived
◦ In case of whole economy C will contain only the consumption of fixed capital, since raw
materials are intermediate products and value will be included in that of final goods.
◦ If we subtract the value of C from the total output, we get the net output
◦ So increase in profit share means- reduction in wage share ---- more exploitation.
◦ S/V equation is the essence of marxian theory of income distribution.
◦ according to Marx, wage cannot rise above the subsistence level except in the very short run-
◦ Coz In Marx’s analysis, it is the prevailing excess of labour supply over the demand for labour
that prevents the wages from rising above the minimum subsistence level.
◦ “the reserve army of labour”– ssL> ddL
three ways of increasing the surplus value or
rate of exploitation
◦ The wages being fixed at the minimum subsistence level, efforts to increase in the output of
labour (competition b/w firms)will raise the rate of exploitation.
◦ 1. lengthening the working day
◦ 2. increasing the intensity of labour
◦ 3. raising the physical productivity of workers through technical progress.
◦ technical progress can be achieved only if there is capital accumulation- more competition-
more exploitation (not a choice but a necessity-I)
◦ As capitalist economic system develops- more tech progress- more k
accumulation- more exploitation
◦ Consequently, with the development of capitalist economic system, the relative share
of wages (labour’s share) in the national income will fall and the relative share of
profits (capitalists’ share) will rise.

◦ Therefore, the development of the capitalist economy involves the steady worsening of
the living conditions of the working classes. This has been called by Marx as “the
immiseration of the proletariat” or“the law of increasing misery of the working
classes”
◦ According to this law, technical progress and capital accumulation in a capitalist
society and consequently the growth in national income must lead to the fall in the
relative share of wages in national income and the rise in the relative share of profits
◦ “the fundamental cause of decline in the relative share of wages is technical
progress.
◦ with capital accumulation- relative share of profit increases but the rate of
profit will be falling.
◦ looks like a contradiction but Marx proved their co-existence
Schumpeter
◦ Theory of innovation- creative destruction
◦ Business cycle
 Joseph Alois Schumpeter (1883–1950)
◦ Major idea
◦ process of economic development is generated by a succession of innovations
achieved by entrepreneurs with the purchasing power supplied to them by bankers
◦ twofold political implications.
◦ entrepreneurs and bankers, the leading actors of the development process
◦ Schumpeter opposed Keynesian-type policy activism and considered crises a
necessary evil, needed to stimulate the very vitality of capitalism.
◦ Schumpeter was born in Triesh, then part of the AustroHungarian empire
◦ sent to study in the school of the young aristocrat
◦ 1901 to 1906 he attended the Faculty of Jurisprudence
◦ living as a lawyer, egypt
◦ professorship at Czernowitz University, todays Ukraine
◦ in 1912 Schumpeter published (in German) The theory of economic
development, and in 1914, again in German, the Epochs in the history of
doctrines and methods.
◦ 1919 he became member of the Austrian government led by Renner, a socialist
◦ his policy (extraordinary wealth tax, incentives to the influx of foreign capitals,
inflation aimed at reducing the real value of the public debt)-boycott – to the
nationalisation programme officially adopted by the gov
◦ In Harvard 1939 the monumental work on Business cycles appeared, in 1942
the provocative and successful Capitalism, socialism, democracy.
◦ posthumously in 1954, published History of economic analysis by the
economist Elisabeth Boody his 3rd wife.
◦ His students: Leontiev to Samuelson, from Sweezy and Goodwin to Minsky,
◦ an ultra-conservative, opposed to Roosevelt’s New Deal
◦ too soft on nazi Germany during the war years.
Innovation- creative destruction & business
cycle
◦ foundations of marginalist economic theory was the static system of economic equilibrium
 Creative destruction
◦ Technological change incessantly revolutionizes the entire economic system, bringing new
goods, firms, and professions into being and taking old ones out of service. It forces
profound changes on society and has both winners and losers. Harmonious progress is not
its business
◦ “dynamic” and “energetic” agent—the entrepreneur—and his “creative response.
◦ Not everyone is capable of this. People who have the requisite imagination, willpower,
and tolerance for risk constitute an “elite,”
◦ in his view they are the yeast in the dough of society and propel the system forward.
◦ “Such men create because they cannot help but do it.” They aspire to a “position of social
power” and rejoice in “victories over others.” Schumpeter even pointed out how “half-
pathological moments”
invention, innovation, and imitation
◦ Schumpeter distinguished among invention, innovation, and imitation.
Inventions, he stressed, are economically irrelevant unless they survive the test
of the market, gain economic weight, and so turn into innovations.
◦ Not everything that represents new knowledge is also economically valuable.
◦ The entrepreneur is typically not also the inventor, but someone who has the
talent to select from the stream of inventions those that can be profitably
marketed.
◦ Inventors do not usually have this capacity, as they focus on technical aspects
to the detriment of economic ones
◦ Innovations can, but need not, yield abnormally high profits. If they do, these
are transitory.
◦ People imitate and produce similar products
◦ The pioneer may at first reap high “monopoly profits.” Higher profitability
allows the pioneering firm to grow faster than its competitors. Via differential
rates of growth of firms, the new knowledge embodied in new goods, new
methods of production, and so on gains in importance relative to the old one
 The process of creative destruction

◦ Firms following the “the impulse of enticing profits” of the first mover try to imitate the
innovator and copy its new device.
◦ This leads to an increase in the level of output of the commodity under consideration and an
intensification of competition among the firms producing it.
◦ In the example of a new method of production that allows for a reduction in unit costs,
sooner or later the price of the product will be bid down toward the lower production costs.
◦ This ushers in the second phase, since now all static firms are getting into trouble.
Producing so far with relatively low profits, they are now incurring losses. In “fear of total
annihilation” they are forced to modernize their firms, production techniques, and work
routines.
 Creative destruction
◦ The phases of expansion: take place when the innovation is imitated by a swarm
of new firms attracted by the temporary profits realised by the entrepreneur
innovator, and when the inflation induced by the bank’s creation of new
purchasing power stimulates productive activity.
◦ The phases of recession arrive when repayment of the loans provokes credit
deflation; furthermore, if firms are able to pay back the banks, it is thanks to sale
on the market of products obtained with new technologies, but this exerts a
downward pressure on the demand for, and prices of, the old products, which
leads to bankruptcy for firms that have remained anchored to old production
technologies, and especially those most directly hit by competition from the new
products.
◦ A reduction in money supply or credit availability is the reason for deflation in most cases.
◦ within the sector where innovation has taken place, prices fall below production costs for
those firms that have not adopted new production techniques (and costs have increased in
the meantime, as a consequence of increases in the prices of productive resources caused
by excess demand for them); thus, those who fail to keep pace by adapting to the
innovations are expelled from the market.
◦ If innovations were uniformly distributed over time, taking place now in one sector of the
economy, now in another, the phases of expansion and recession would concern different
sectors in different periods of time.
◦ while on average development would follow a regular path for the economy as a whole.
However, according to Schumpeter the development process is discontinuous.
◦ innovation implies a break in the traditional way of proceeding: in other words, the barriers
represented by the force of tradition should be overcome in order to implement the
innovative change, and such barriers are easier to overcome the more widespread the
change is within the economy.
◦ Schumpeter’s trade cycle theory thus has an essential characteristic: the
endogenous nature – that is, internal to the theory – of the relationship between
cycle and development.
◦ the situation at the end of a cycle must be different from the situation at the
beginning because of technological change, which is an essential part in the
cyclical movement of the economy.
◦ work on Business cycles, published in English in 1939, in two volumes and
more than a thousand pages packed with text and footnotes.
◦ Another contribution concerned an aspect of the development process stressed by
Schumpeter, namely the simultaneous presence of many cycles.
◦ In his historical-statistical analysis, in particular, Schumpeter utilised a scheme with
three cycles, short, long and very long run (respectively named Kitchin, Juglar and
Kondratieff cycles from the names of the scholars who – according to Schumpeter’s
own reconstruction – had first identified and analysed them), the fifty-year or
Kondratieff cycle having to do with ‘epoch-making innovations’ that affect the whole
of the productive system: railways with the transport revolution, electricity, or
electronics in our own times.