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CHAPTER TWO
WHAT IS POLITICAL ECONOMY?
ECONOMICS
Economics is basically the study of what happens when wealth is exchanged – that is
when it is either bartered for other wealth or bought and sold for money. It is not the
study of the production and allocation of wealth as such, but the study of its exchange
and how this affects decisions about production and allocation. Exchange is not to be
confused with allocation.
Allocation (sometimes called distribution) is about the use, which people make of the
wealth they have produced: how much they consume immediately; how much they
store for future consumption; how much they use to build up or renew their stock of
tools and machines. “Allocation” is used here in preference to “distribution” because
the latter has acquired other meanings which can cause confusion; it sometimes means
transportation (which is really part of production) – but worse, shops, which are
exchange institutions, have taken to calling themselves the “distributive trade”.
In some past societies, the amount and kind of wealth that was produced and allocated
were decided according to some prearranged plan, even if this “plan” was just a set of
tribal customs or some other unwritten code of social behaviour. Wealth was allocated
directly for individual and communal use so that the sole aim of production could be
said to have been direct allocation, or use.
In societies where the bulk of the wealth is exchanged after it has been produced (and
before it is allocated) the production and allocation of wealth is no longer decided
according to human plans or customs. The decisions are of course still made by
people but within terms of reference outside of their control. Economics is the study
of these terms of reference, or of the laws or economic forces, which come into
operation once, production for exchange becomes widespread.
An exchange institution is a body set up to take economic decisions; that is, decisions
about the production and allocation of wealth in an exchange economy. A shop
(where products are sold) or a bank (where money is deposited) are obvious
examples. Not so obvious perhaps is the “enterprise” or firm, an institution for
making decisions about the use of the large-scale, collectively-operated workplaces
where the bulk of the world’s wealth is produced. The enterprise is the key modern
exchange institution since, apart from the sale of human energy for wages and the
purchase of consumer goods by wage-earners, exchange today takes place
overwhelmingly between enterprises.
An enterprise is an institution which seeks continually to increase the monetary value
of its assets (the instruments of production, the raw materials, the stocks and the cash,
including the wage fund, it controls.) The monetary value of these assets is sometimes
called “capital”; hence “capitalism” as the name for the modern exchange economy.
The aim of inter-enterprise exchange is profit, the difference between production costs
and sales receipts.
Enterprises aim to increase their capital through making profits, the ratio of the
increase in capital to its original value being the rate of profit.
The internal structure of the enterprise – who makes the decisions? Who gets the
profits? – varies from State to State according to their differing historical and political
conditions. The two most common types of enterprise are the joint-stock company
and the nationalised or state industry.
In the joint - stock company, the key decisions are made by a board of directors
elected by and responsible to the shareholders who supplied the money to buy the
assets of the enterprise. The profits are shared between the shareholders as dividends
and the directors (and sometimes the top managers) as fees and high “salaries”.
A management board appointed by the government usually controls the assets of a
state enterprise. Its profits can be, and are, shared in a great variety of ways. They can,
for instance, simply be handed over to the government to use to pay interest to those
who have lent it money. Alternatively, they could find their way into the pockets of
the state-appointed managers, once again through inflated “salaries”. Or they could be
used to maintain in comfort and privilege those who control the state.
What is significant about the enterprise from an economic point of view is not its
internal structure but its role as the mechanism through which the laws of the market
are transmitted to those who make the decisions about the production of wealth –
whoever they may be and however they may be chosen. The internal structure of the
enterprise could be, and in a few cases is, quite different from either private or state
enterprises. The workers could elect their own management committee or workers’
council, but not even this would make any difference to the enterprise’s economic
role. The workers’ council would still have to take decisions in accordance with what
the market dictated. Real control by the producers over the production and allocation
of wealth is not possible within an exchange economy.
The production of wealth is now a process involving millions of men and women in
every part of the world. What used to be the division of labour between individual
skilled workers has become, with the development of modern technology, a division
of the work of production between hundreds of thousands of collectively-operated
workplaces (farms, plantations, mines, ships, docks, railways, factories, offices,
warehouses) spread all over the world. Indeed, it is no exaggeration to say that every
article produced today is the product of the collective labour of the world labour force
co-operating within this worldwide division of labour.
Progressive globalization of capital and labour gradually unfolds the cosmopolitan
character of the two great classes of our time. Their integration started with the
advent of capitalism and the consequent development of the world market, the extent
and pace of which have magnified manifolds in recent years. This is primarily caused
by the enormous possibilities opened up due to the great technological advancement
in the information and telecommunication sectors and on the other hand the
necessities created by the inherent cyclical character of capitalism oscillating between
periods of recessions and booms. Events of late eighties and early nineties have led
the system see huge changes in global credit and the labour markets. There was an
unprecedented jump of the rate of demand generation through debt-creation on much
easier conditions especially in the sectors having a cascading effect (like housing,
infrastructure, etc.) [See “Credit Crunch”, Ch. Six below for details]. Moreover, the
opportunity of outsourcing specialized jobs (especially in the service sector
incidentally a major contributor to growth) was making a great impact on the
tendency to equalize the rate of wages not in positive but negative direction.
Consequently, the wage rate of traditionally low-wage countries (like China, India,
Vietnam, and other so-called developing nations) went up at a relatively rapid pace
(though much lower compared to the rate of productivity growth), although the
traditionally high-wage countries (like USA, advanced European nations and Japan,
etc.) had to bear the burnt where the rate of real wage growth is either minimal or
even negative. Globalization – today’s buzzword – is setting aside, at least partially,
the national boundaries and identities, which were raising impediments in its way to
restructure itself by initiating the procedure to transform the staggered and fragmented
national labour markets into a truly global labour market.
Wealth production is no longer individual, local, or national; it is social and
worldwide. A single world society already exists but, because the workplaces of the
world are controlled by enterprises, it takes the form of a world exchange economy.
The fact that there is only one, worldwide exchange economy is obscured by the
political division of the world into states, each with the power to issue its own
currency, impose tariffs, raise taxes and pay subsidies. The different economic
policies of these states mean that conditions in the world market vary and give rise to
the illusion that rather than there being one world economy there are as many
“national economies” as there are states. However, although states can, and do, try to
change world market conditions in their favour, because of the worldwide character of
the productive process, they do not have the power to isolate exchange within their
frontiers from exchange outside. Far from it. World market conditions are in the end
the most important factor states have to take into account when formulating their
policies. They, like enterprises, have to work within the terms of reference of the
exchange economy. Of course, states do have the power to make laws about the
production and allocation of wealth, as about any other human activity, but enforcing
such law is another matter. So is their economic effect.
The natural and industrial resources of the world are now controlled by profit-seeking
private and state enterprises. In every state, only a small minority can draw on these
profits as a source of personal income. Whether or not they have title deeds to prove
it, they are in practice the owners of the means of production. This applies equally to
profit-taking politicians and managers and to shareholders and bondholders.
Collectively these owners form a class with exclusive control – a monopoly – over the
means of production. This class monopoly is the basis of modern society.
IN RETROSPECT
“Political Economy”, as economics used to be called, arose as a separate science in
the 17th century. Although in ancient societies of Egypt, Greece and India peoples
already dealt with such economic categories as property, barter, exchange, simple
commodity, money, price, rent, loan interest, tribute, commercial profit, etc.
We find fascinating records in ancient Egyptian papyri; the Code of Hammurabi, the
ruler of Babylonia; the Vedas of the Aryans in India; and in the ancient Greek poet
Homer’s Odyssey and other works. However, their ideas were embryonic.
The history of economic thought begins with the works of Xenophon, Plato and
mainly Aristotle, who took the first step towards a theoretical understanding of the
economy of the ancient Greek society at the threshold of demise of the primitive
communal system and the rise of slavery. Aristotle put across some significant ideas
about commodity exchange, money, and trading (commercial) and usury capital.
A long historical process through usage and combination of the Greek words:
“politikos” – state, social; “Oikos” – household or its management; and “nomos” –
rule of law, implying – “the laws of state management” – brought about the term
Political Economy.
Primitive accumulation through adventure, war, plunder, trade and commerce,
monetary operations and such likes eventually gave rise to early bourgeois
formations: Capitalist structures first started taking shape not in production, but in
circulation – trade and monetary operations, hence its theory – mercantilism that
expressed the interests of the merchant’s capital in the early 17th century in Italy,
England and France. Its principal proponents were William Strafford and Thomas
Mun in England, Antonio Serra in Italy, and Antoine de Montchrestien in France.
Antoine de Montchrestien initiated recorded usage of the term in 1615 writing
“Treatise of Political Economy”, wherein he recommended measures about state
policies to multiply country’s wealth.
This theoretical investigation into the causes of wealth, growth and change advanced
with Wiliam Petty (1623-1687, England) and Pierre Boisguillebert (1646-1714,
France), who were the first to formulate the labour theory of value.
Mercantilism apart, during the 17th century to 1830s there evolved Physiocracy
implying a society under a government according to the natural order. Its main
sponsors were Francois Quesnay (1694-1774), Anne Robert Jacques Turgot (17271781) and others. They shifted the emphasis of economic studies from the sphere of
circulation to the sphere of production.
The mercantilists and the physiocrats were the founders of Classical Political
Economy, which reached its peak in the works of the Scottish economist Adam Smith
(1723-1790) and the English economist David Ricardo (1772-1823).
Marx says in Capital, “… by classical political economy I understand that economy
which since the time of W. Petty has investigated the real relations of production in
bourgeois society.”1
MARX’S DISTINCTION
Marx made a distinction between such men as Petty, Smith and Ricardo and their
successors. He wrote of the former that they devoted their efforts "to the study of the
real interrelations of bourgeois production", while the latter were "content to elucidate
the semblance of the interrelations" and to act in effect as apologists for the capitalist
class.2 He called them “vulgar economists”.
“The nearer to our time the economists whom we have to judge, the more severe must
our judgment become. For while Smith and Malthus found only scattered fragments,
the modern economists had the whole system complete before them: the
consequences had all been drawn; the contradictions came clearly enough to light, yet
they did not come to examine the premises and still accepted the responsibility for the
whole system. The nearer the economists come to the present time, the further they
depart from honesty.”3
Notes
1
2
3
Marx, Capital, Vol. I, Moscow, 1974, p.81; also see Wage Labour and Capital,
p.6
Marx, Capital Vol. 1, Allen & Unwin, p.55
Engels, Outlines of a Critique of Political Economy, Collected Works, Vol. 3,
Progress Publishers, Moscow 1975, p.420