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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