Comparison Of Marx’s Theory Of A Falling Rate Of Profit With The Idea Of A Stationary State In Classical Political Economy

Compare and contrast Marx’s theory of a falling rate of profit with the idea of a stationary state in the classical political economy.
 

The Stationary State Concept

Economics as a subject has evolved considerably, experiencing substantial dynamics with time and changes in the global economic, social and political frameworks. However, there have been several key issues and questions of concerns which remained as primary topics for investigations, speculation and exploration for the economists over centuries and in all the corners of the world (Barr 2012). One of such issues of immense concern, among the economists, has been the issue of economic growth and development of different geographical regions.

Every country or economy is different from another in terms of their unique characteristics, inclusive of the demographics, resource patterns, and income generating activities, social and political contexts and also in terms of the governing or the regulatory framework under which the economic agents of these regions operate. However, regardless of these inherent differences, the growth pattern of the economies tends to have several common features and steps. Over the years, the economists have tries to identify, define and discuss such steps of development of the economies across the globe (Negishi 2014).

Keeping the above discussion into consideration, the concerned essay tries to discuss the concept of “Falling Profit”, one of the iconic theory of economic development, proposed by Karl Marx and compare the same with the concept of stationary state in , as has been proposed by different classical economists over the years, in the aspects of the different stages of development of an economy and the traits observed in the economic domains of the countries in the process of development (Clarke 2016). 

One of the foremost schools of thought, in economics, has been the Classical school of economists, with Adam Smith being considered as the father of this school of thought and also of economics as a discipline itself. The other eminent economists believing in this school of thought are David Ricardo, Mill, Malthus and Say. Each of these classical economists has contributed significantly in the arena of designating the characteristics of the economies in general, at different stages of growth or progress with time (North 2016). One of the primary characteristics of any economy in its growth path, which have been put forward by different classical economists from different perspectives, is the concept of the “Stationary State”. Though having different dimensions in the theories of different classical political economists, the concept of stationary state is viewed, in general, as the final state of economic growth in which all the economies are expected to devolve into (Van den Berg 2016). The stationary state is generally consisting of stability in all the growth variables, specifically the ones like the stock of physical capital and the growth trends in the population of the countries.

Adam Smith's View

The concept of stationary state, in its elementary form, was first proposed by the classical economist, Adam Smith. Under the belief that individual freedom in economic actions maximizes the profit of all the individuals in the economy, Adam Smith recognized three main factors of production- labor, land and capital, with the production function of the economy being:

Y= f(K,N,L), here, K is the stock of capital in the economy, L is the total labor force in the same and N is the land resources present in the economy (Blauwhof 2012). Adam Smith also incorporated the idea of increasing returns to scale in the production function, arguing that the real cost of production tend to diminish with time. The growth of an economy, as proposed by Adam Smith, is also characterized by division of labor, which leads to specialization and also by the process of capital accumulation. Smith sees these attributes in an economy as the drivers of economic growth and progress of the countries in general. 

According to the assertions of Smith, the growth process of any economy is cumulative, with the reinvestment of profits in the production process being one of the most natural behaviors of the economic agents. The continuous progress of agricultural sector leads to the development of the manufacturing industries and commerce in the economy. The prosperity of these sectors leads to higher capital accumulations, population increase and rise in the profits in the economy (Waterman 2012).

However, this leads to immense competition for more profit accumulation among the businessmen and over time, owing to the scarcity of the natural resources as well as the increased competition, the growth of the economy starts stagnating. The profits also start falling after a certain point of time, owing to the high competition and scarcity of natural resources, which in turn decreases the level of investments in the economy (Brown 2013). The stagnation of capital accumulation and decline of profits also makes the population stationary. The wages come down to a subsistence level and there no longer occurs any change in the per capita income or production in the country. This state of stagnation of the growth of all the growth variables in the economy leads to the creation of a state of stability in the economy, which Adam Smith refers to as the stationary state in the economy. 

However, the propositions of  Adam Smith, regarding the stationary state as an end state of the capitalist economy, has been criticized in the aspect that he defines stationary state as a steady situation with uniform and regular development. However this assumption is unrealistic as development in the real scenario cannot occur uniformly always (O'donnell 2016).

David Ricardo's View

Like Smith, David Ricardo also defines stationary state, but from a different perspective. According to his theory, there remains a natural tendency of the profit of an economy, over its course of growth, which leads the economy to the stationary state. According to him, with the increase in capital accumulation and profit, the production as well as the wages of an economy increases. This in turn increases population, which leads to a rise in the aggregate demand in the economy. This demand increase tends to the cultivation of comparatively inferior land resources too and the rents on the superior ones are subjected to increase, thereby reducing the wages of the labors as well as the profits of the capitalists (Ekelund Jr and Hébert 2013). This in turn reduces the profit and the wages also fall to the subsistence level and the same continues till the marginal output from the land covers only the subsistence wage of the labor, thereby making the profit level equal to zero. This initiates the stationary state in the economy, where the accumulation of capital stops, along with the stagnation of population and wages, which clubbed with excessive high rent, leads to an overall stagnation of the economy.

The views of both Smith and Ricardo talk about stationary state and the concept of primarily increasing and then declining rates of profits in the economy which leads to stagnation in the economic growth variables. In this context, the theory of falling profit in the growth path of an economy has also proposed by Karl Marx. Marx also proposed that with time and progress of an economy, the profit increases till a certain point of time, after which it declines. However the decline in the profit is explained by Marx from a perspective different from that of Smith or (Ricardo Lin and Rosenblatt 2012).

Unlike the assertions of Adam Smith or Ricardo, Marx does not attribute the long term falling rate of profit with time, to the wage increasing competition (Smith) or to the diminishing marginal productivity of the scarce land resources. According to the “Falling Profit” theory of Karl Marx, the profit of the economy declines with time and the same can be attributed to what is known to be the increase in the “organic composition of the capital”.

In the Marxian theory, the term “Organic composition of capital” is defined as the ratio of the constant capital to that of the variable capital in the economy. Marx defines constant capital as the capital circulating in the economy, like that of raw materials and variable capital as that of the compensations of labor, like that of wages given to the labor (Howard and King 2014).

Karl Marx's Theory of Falling Profit

Thus, according to Marx, y= c+v+s, where y is the output, v is variable capital, c is constant capital and s is the surplus values. 

Thus, the rate of profit r= s/ (v+c).

Marx assumes that the surplus value is only produced by the labors in the economy and he also defines the ratio of the surplus value to that of variable capital as the exploitation rate, showing the production of surplus for each unit of money spent on the labor resources. Keeping this into consideration, Marx asserts that with time, the organic composition of capital increases with time, while the exploitation rate remains fixed, thereby showing a decline in the rate of profit with time (Ruccio and Amariglio 2016).

This is because, with increasing surplus accruing to the capitalists, the surplus is reinvested to increase production, with output rising but labor supply remaining fixed, which leads to an increase in the wages, declining the rate of profit. To restore the same, labor saving technologies will be implanted, which in turn leads to unemployment (Fleetwood 2012). However, the temporary respite of increase in profit, is again expected to reinvestment of profit again, thereby leading to the occurrence of the cycle again, ultimately leading to a net decline in the rates of profit, because with each cycle, the probability of layoff will decrease even more and after a time no more labor can be released and the s/v cannot be backed up even more.

From the above discussion, it can be concluded that both classical economists as well as Marx have proposed the idea of stationary state and the incidence of decline in the profit of the economy with time. However, their perceptions and ways of interpreting the process by which an economy reaches to a state of declining profit vary considerably. While Smith and Ricardo explain the same with the help of increasing competitions among the capitalists or diminishing marginal productivity of land, Marx gives an entirely different explanation of the declining profit, from the perspectives of organic capital composition, surplus value production and exploitation rate. 

References

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Fleetwood, S., 2012. Laws and tendencies in Marxist political economy. Capital & Class, 36(2), pp.235-262.

Howard, M.C. and King, J.E., 2014. A History of Marxian Economics, Volume II: 1929-1990 (Vol. 2). Princeton University Press.

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Waterman, A.M.C., 2012. Adam Smith and Malthus on high wages. The European Journal of the History of Economic Thought, 19(3), pp.409-429.