Complete informations on the Ricardian theory of development
“Marx contributed to the theory of economic development in three respects, namely, in broad respect of providing an economic interpretation of history, in the narrower respect of specifying the motivating forces of capitalist development, and in the final respect of suggesting an alternative path of planned economic development.”
The materialistic interpretation of history attempts to show that all historical events are the result of a continuous economic struggle between different classes and groups in society. The main cause of this struggle is the conflict between ‘the mode of production and the relations of production.
The mode of production refers to a particular arrangement of production in a society that determines the entire social, political and religious way of living.
The relations of production relate to the class structure of a society “uniquely characterised” by the following components: (i) the organisation of labour in a scheme of division and co-operation, the skills of labour, and the status of labour in the social context with respect to degrees of freedom or servitude; (ii) the geographical environment and the knowledge of the use of resources and materials; and (iii) technical means and processes and state of science generally.
According to Marx, every society’s class structure consists of the propertied and the non-propertied classes. Since the mode of production is subject to change, a stage comes in the evolution of a society when the forces of production come into clash with the society’s class structure.
The existing property relations “turn into fetters” on the forces of production. Then comes the period of ‘social revolution.’ This leads to the class struggle-the struggle between the haves and the have-nots-which ultimately overthrows the whole social system.
According to Marx, it is surplus-labour that leads to capital accumulation. This supererogatory labour simply augments the capitalist’s profits. The capitalist’s main motive is to increase the surplus value which goes to swell his profits.
He tries to maximise his profits in three ways: (1) by prolonging the working day in order to increase the working hours of surplus labour. If the workings hours are extended from ten to twelve, the surplus will automatically increase from four to six; (2) by diminishing the number of hours required to produce the labourer’s sustenance.
If they were reduced from six to four, the surplus would again rise from four to six. It also tantamounts to a reduction in the subsistence wage; (3) by ‘the speeding up of labour’, i.e., increasing the productivity of labour.
This requires a technological change that helps in raising the total output and lowering the cost of production.
Of the three methods, according to Marx, increase in the productivity of labour is the likely choice of the capitalists, since the other two methods, of extending the working hours and reduction of wages, have limitations of their own.
So in order to make improvements in the productivity of labour, the capitalists save the surplus value, reinvest it in acquiring a large stock of capital and thus accumulate capital.
“Accumulate, accumulate! That is Moses and the Prophets,” and “Save, save, i.e., reconvert the greatest possible, portion of surplus value or surplus product into capital.” These are the capitalist’s methods.
Profits are determined by the amount of capital. As Marx says, “Capital is dead labour that vampire like only lives by sucking living labour and lives the more, the more labour it sucks.”
To explain the origin of profit and to analyse the relation between wages and profits, Marx separates capital into constant capital and variable capital.
Capital invested in stocks or raw materials or equipment which directly assists the productivity of labour, Marx calls constant capital (c) Capital devoted to the purchase of labour power in the form of wages or direct subsistence, he terms variable capital (v).
It is on the basis of this division of the total output that Marx introduces his Departmental Schema of Simple and Expanded Reproduction.
Marx divides the total output of the economy (w) into Department 1 and Department 2. The former is related to the production of capital goods and the latter to the consumer goods. The total output of each Department is shown as
The Simple Reproduction Scheme indicates a situation of stationary state in which all that is produced is consumed. Thus net investment is zero and there is no, accumulation or surplus. Therefore, equality prevails in both the Departments.
Development economics goes beyond the scope of either classical/neoclassical economics or Marxist economics. It, too, is concerned with the efficient allocation of scarce resources.
Its main concern, however, is sustained economic growth over time that improves the standard of living for the masses who live in poverty in developing countries.
To that end, one of the main goals of development economics is the formulation of public policies designed to bring about rapid economic growth. Development economists, however, do not believe that a single model can be universally applied, given the heterogeneity of developing countries.
Thus, development economics has combined relevant concepts from traditional economic analysis with a broader multidisciplinary approach derived from studying the historical and contemporary development experience of the specific region or country in question. The tendency has been to first look at existing economic theories for inspiration or insight.
These existing theories are then modified or expanded upon so as to make them applicable to developing countries. The resulting theories have been used to explain the economic gap existing between developing and industrialised countries.
The goal of development economics has been to pinpoint the cultural, political, economic and institutional mechanisms, both internal and external, impeding economic development in order to modify them in such a manner as to bring about economic progress.
The brilliant British economist David Ricardo was one the most important figures in the development of economic theory. He articulated and rigorously formulated the “Classical” system of political economy.
The legacy of Ricardo dominated economic thinking throughout the 19th Century. Ricardo’s most famous work is his Principles of Political Economy and Taxation. Ricardo opens the first chapter with a statement of the labour theory of value.
Later in this chapter, he demonstrates that prices do not correspond to this value. He retained the theory, however, as an approximation. The labour theory of value states that the relative price of two goods is determined by the ratio of the quantities of labour required in their production. His labour theory of value, however, required several assumptions:
Both sectors have the same wage rate and the same profit rate;
The capital employed in production is made up of wages only;
The period of production has the same length for both goods. Ricardo himself realised that the second and third assumptions were quite unrealistic and hence admitted two exceptions to his labour theory of value;
Production periods may differ;
The two production processes may employ instruments and equipment as capital and not just wages, and in very different proportions. Ricardo continued to work on his value theory to the end of his life.
But the first chapter is but the introduction to a long book that discusses back and forth an extended series of comparisons and contrasts of the various points of views and of Ricardo’s own reasoning.
In the Chapter “On Value and Riches,” Ricardo makes effort to illustrate that exchange value is not the same as “value in use”. In this way, one can factor two often contradictory results. The capital employed in production must be made up of wages only for his value theory to hold, is answered by this:
that production may be made up of capital and machinery, but it doesn’t change the principle (which he attributes to Adam Smith) that he tries to lay out in this chapter. Machinery may add to one measure of value beyond almost all measure without adding one penny to the other measure of value.
In this way, one is able; Ricardo seems to show, to factor out somewhat contradictory assumptions which if confounded lead to equally contradictory results.
By making all things perfectly clear, or in attempting to, Mr. Ricardo seeks to resolve some of those ills of the democratic society in which he lived in so far as reason, and action, could resolve them.
In this pursuit, he took action, sitting in parliament, moving with his stirring, and amusing, speeches the inner policies of the British Empire.
The key point Ricardo seems to be aiming at, though, goes something like this: Accumulation of capital may add riches without detracting from the trade-able value of things, producing the possibility of a win-win situation.
He first attempts to show that new riches are not adding as much value as one would think because they always are detracting somewhat from the exchangeable value of what was previously being produced.
The decreasing value in exchange as value- in-use increases he finally extrapolates to infer that the sum world total of value in exchange is a fixed constant. And so, with the growth of the world economy, the first-world countries, he states, will eventually begin to lose value per trade, even to the purely theoretical extent of cutting into the base capital.
But on the other hand, Ricardo goes on to say, with more value-in-use, what one is likely to get a hold of personally, for Rich and Poor alike will be quite a bit more as the sharp-edge of competition is blunted by physical economic growth. Adam Smith, for instance, had thought that due to its effect on value, the growth of wealth of the poor beyond subsistence levels is likely to cut into the wealth of the society.
Economists on the left and the right to this day worry about that and undercut the wealth of the poor to maintain economic growth. Ricardo shows this not to be the case, if we simply measure value in exchange together with the growth of value-in-riches rather than by its monopolisation value.
The extremities of competition then, leave for Rich and poor alike an appearance of the growth of wealth without anyone personally feeling its result. Taking a step back and noticing the growth of actual value-in-use allows us, corporations and laborers, rich and poor alike, to see a way forward.