Malthusian TheoryThe TheoryThe Concept of Development: He regarded the process of development as a result of consistent efforts rather automatic.For him the process of eco.dev. Was one of the ups and downs of economic activity rather than smooth.He was concerned with the progress of wealth of a country means eco. Development.-Economic Dev. Through increasing the wealth of a country.-Wealth= Qty. of produce + valuation of the produce.Population Growth and Economic Dev.According to him population growth itself is not sufficient for ece.development. Economic Dev. =Population growth +development process.Increase in population is the result of proportionate increase in wealth. Because increase in K accumulation demands more labor thus more population. And population growth increases wealth through effective demand.Hence mere increase in pop. growth does not increase wealth.

Malthusian TheoryRole of production and distributionHe regarded production and distribution as two grand elements of wealth. If combined in right proportions, they can increase the wealth of a country in a short time otherwise it would take long time for development.He emphasis on max. production and optimum allocation of resources to produce wealth of a country.

Malthusian TheoryFactors in Economic Dev.Economic and Non Econ. Factors.Size of potential GNP depends upon land, labor, capital and organization.The above factors max. the production in two major sectors: agriculture and industrial sector.Non Economic Factors: security of property, good constitution and excellent laws, hard working nature etc.

Malthusian TheoryProcess of Capital AccumulationCapital accumulation is the most important determinant of eco. Dev.Capital formation= profitsaving of capitalists.Profits comes from capitalists savings rather then poor income earners.Deficiency of Effective DemandIs based on the denial of Says law of markets.Commodities are not always exchanged with commodities. In fact great mass of commodities is exchanged directly for labour. Since workers (who are consumers) receive less then the value of the product they produce. Therefore, they can not buy all commodities which results in surplus.

Malthusian TheoryEconomic StagnationSupply of labor is inelastic in the short run. But the supply of capital can be increased faster as compared to population.Capitalists invest on productive labor--- wage rises due to competition. But increase in wage don't create effective demand bcz workers prefer leisure over increased consumption. So there is a glut of commodities in the market.Resultantly price fall---profit fallsinvestment falls and both the power of accumulation and the motive to accumulation are strongly checked.The gluts leads to stagnation.

Malthusian TheoryMeasures to promote Econ.dev.1.Balanced growth.Division of economy in agri. Sector and industrial sector. It is technological progress in these two sectors that can lead to economic dev.Capital inv. In agri. till all land is brought under cultivation. After that there in no more opportunity for profitable investment in the sector due to diminishing return. Then move to industrial sector. However, diminishing return in agri. Sector can be avoided if technological advancement in industrial sector is rapid enough to absorb most of the population growth in industrial sector, permitting reduction in wages in agri. Sector.2. Raising Effective Demandi) By more equitable distribution of wealth and landed property. Low income proprietors create less effective demand as compared to rich proprietors.

Malthusian Theoryii) Effective demand can be increased by the expansion of the internal and external trade. As trade increases wants, tasts and desire to consume.Trade keep up the market price of commodities and prevent the fall of profit.Iii) Maintenance of unproductive consumers to increase effective demand. As production can be raised through raising consumption. Therefore, unproductive consumption by land lords and rich persons can increase effective demand. iV) Malthus suggested public works schemes to remove unemployment and increase effective demand.

Malthusian TheoryConclusion: It is under consumption that leads to gluts of commodities in the markets and is the main cause of underdevelopment.For dev. Both agri. And industrial sectors should be developed to get max. production. This will come through technical progress, equitable distribution of wealth and land, expansion of internal and external trade, increase in unproductive consumption and increase in employment opportunities. Besides, there are non economic factors such as education, moral standards, hard working habits, good administration and efficient laws.

Malthus TheoryCritical Appraisal1. Stagnation not inherent in capital accumulation.He says capital accumulation leads inherently to stagnation. This is wrong. According to Malthus there is possibility of permanent under consumption of all commodities, but actually it is not so because it is a temporary phenomena. 2. Commodities not exchanged for commodities directly.He said that commodities are exchanged for labors. In fact labor is not a correct measure of commodities. In the real world, we use real prices to measure commodities.3. Unproductive consumers retard progress. He suggests spending by unproductive consumers to support under consumption and to increase effective demand. It is wrong as it support the idle persons. This measure will slow down the econ. process.

Malthusian Theory4. One sided saving baseHe believed that it is only the land lords who save. But this is an erroneous view because the major source of savings in a society is the income earners and not profit earners.

Malthusian TheoryApplicability to Underdeveloped countriesMalthuss division and analysis of an economy into the agriculture and industrial sector is highly realistic.Lack of capital is the main cause of poverty in the agriculture sector.Technological advancement can lead to dev. In both sectors.The link b/w population growth and eco. Dev.Valid policy reforms of balance growth, increase in effective demand, increase in trade etc.Contradictions: According to Malthus lack of effective demand was due to parsimony of capitalists. The remedy he suggested was unproductive consumption by rich peoples.

The classical theory1. Laissez-Faire Policy: classical economists believe on the free market economy. The operation of invisible hand.Existence of free market perfectly competitive market.2. Capital accumulation.The theory regarded capital accumulation as a key to eco. progress and it will be through saving.The saving will come from capitalists and landlordsThe working class incapable of saving as it get wages equal to subsistence level.3. Profits, the incentive to InvestmentLarger the profits, greater the capital accumulation.

The classical theory4. Tendency of Profits to DeclineProfits decline due to increase in competition. As wages increases due to competition.5. Stationary stateClassical economists visualize the stationary state as the end of process of capital accumulation. When profit starts declining, it ends till profit become zero, population and capital accumulation stop increasing and wage rate reaches the subsistence level.According to Smith, stationary occurs due to scarcity of natural resources.Malthus establishes correlation b/w population growth and food security. He said if population growth remained unchecked then it would outrun the capital growth and hence the means of subsistance.Mill points out that in the absence of technical improvement in agri., the profits starts decline and ultimately the stationary state.

The classical theorySummaryIncrease in profitsincrease in inv.increase in capital stock and improved techniques---this will increase wages---increase in population---increase in food demand----need additional labour and capital---but due to diminishing return to land increases additional cost----reduce profits---reduction in investment---retarded technological progress---diminishing wages and population growth and capital accumulation.

Critical Appraisal1. Ignore middle class: In England two classes capitalist and labourers.2.Neglects public sector: i.e. the role of public sector in accelerating capital accumulation in recent years.3. Unrealistic laws.-According to classical economists the end result of capitalist dev. Is stagnation due to diminishing return and malthus theory of population.-But technological dev and recent trends in population in developed countries reject the unrealistic laws.

Critical Appraisal4. Wrong Notions about Wages and Profits-Wages have not tended to be at the subsistence level. There has been a continuous increase in money wages without a corresponding decline in profit rates.5. Less importance to technology:Theory assumed technological knowledge to be given and unchanging overtime.

The Marxian Theory Marx contributed to the theory of economic development in three respects:1. Broader respect: In it he provided an economic interpretation of history 2. Narrower respect: In it he specifies the motivating forces of capitalist development. 3. Alternative respect: Here he suggested alternative path of planned economic development.

Materialistic Interpretation of HistoryAll historical events are the results of a continuous economic struggle b/w different classes and groups in society.

The main cause of struggle is the conflict b/w mode of production and 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 relates to the class structure of a society uniquely characterizes by the following components

The Marxian TheoryOrganization of labor in a scheme of division and co-operation, the skill of labor, and the status of labor in the social context with respect to degree of freedom or servitude.The geo-graphical environment and the knowledge of the use of resources and materialsTechnical means and processes and state of science generally.According to Marx, every society class structure consist of propertied and 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 societys class structure. Resultantly, social revolution starts which leads to class struggle----the struggle b/w haves and have-nots. This ultimately overthrows the whole social system.

The Marxian TheorySurplus ValueClass struggle is simply the outcome of accumulation of surplus value in the hands of a few capitalists. Capitalism, according to Marx, is divided into two great protagonists: the workers and the capitalists. Labour power is like any other commodity which is bought on market rate. The value of labour like the value of any other commodity is the amount of labour that it takes to produce labour-power. In other words, the value of labour power is the value of the means of subsistence necessary for the maintenance of the labourer, which is determined by the number of hours necessary for its production. According to Marx, the value of the commodities necessary for the subsistence of the labour is never equal to the value of the produce of that labour. If a labourer works for a ten-hour day, but it takes him six hours labour to produce goods to cover his subsistence, he will be paid wages equal to six hours labour. The difference worth 4 hours goes into the capitalists pocket in the form of net profits, rent and interest. Marks, calls this unpaid work surplus value. The extra labour that a labourer puts in and for which he receives nothing, Mark calls surplus labour.

The Marxian TheoryCapital AccumulationMarx says that it is the surplus labor that leads to capital accumulation.Capitalist tries to max. profit in three waysBy increasing the number of hoursBy reducing the subsistence wageBy increasing the productivity of labor through technological change.The third method is more important . And the capitalist increase the productivity by reinvesting the surplus value.To explain the origion of profit and to analyse the relation b/w wages and profits, Marx separates capital into constant capital and variable capital, surplus value/profit=s.Marx divide the total output of the economy (w) into Department 1 and department 2. Department 1 related to production of capital goods and the department 2 relates to the consumers goods. The total output of each department is W1=C1+V1+S1 and W2=C2+V2+S2

C=constant capital, V= variable capital, S=surplus valueTotal value of output =w=c+v)+s.In order to analyze the nature of capitalist accumulation, Marx establishes certain relationships between c, v and s. C/ V = represents the organic composition of capital.S/ V = represents the rate of surplus value or the ratio of profit / wages. This is also called the degree of exploitation.

Department 1 related to production of capital goods and the department 2 relates to the consumers goods. The total output of each department is W1=C1+V1+S1 and W2=C2+V2+S2 The value of total constant capital in both the departments (c1+c2) must equal the output of the deptt. 1. (c1 +v2 +s1).i.e. C1+c2=c1+v1+s1C2=v1+s1Similarly the total consumption in both the departments (v1+s1+v2+s2) must equal the total output of department 2.

C2+v2+s2=v1+s1+v2+S2C2=v1+s1

This shows that the value of constant capital in department 2 is equal to the value of commodities consumed by workers and capitalists in department 1.

The accumulation takes place because the production of department1 is greater than the demand for constant capital in both the departments that is C1+v1+s1> c1 +c2v1+s1>c2This shows that accumulation is taking place which is being invested in employing more labour and means of production in department 1 then in department 2. These in turn increases the surplus value.

The Marxian Theory-Marx says that rate of profit is not dependent solely on the rate of surplus value.. the rate of profit can change even though the rate of surplus value remains constant. How? if a change occurs in the organic composition of capital (c/v). How? Technological progress ------increases the ratio of (C/ V)----concentration of capital in gigantic enterprises-----Increases the competition among the capitalists to cheapen their products---- introducing labour saving machines. The capitalists who are unable to replace labour with capital are squeezed out and their enterprises are taken over by big capitalists. Capital accumulation reduces the demand of labour or decrease in wages to semi-starvation level thus more surplus value. This is the law of increasing misery of masses under capitalism.

The Marxian TheoryDraw fig and elaborate.According to Marx, replacing the labour with capital is killing the goose that laid the golden eggs. He believes that technological progress tends to increase the organic composition of capital (c/v). Since the rate of profit is inversely related to the organic composition of capital, the profit tends to decline with capital accumulation. r = s / v C / V r= rate of profit.r varies inversely with organic composition of capital and directly with surplus value.Or r increases with the increase in surplus value and decreases with the organic composition of capital.

The Marxian TheoryCapitalist Crisis:When degree of exploitation increases----ratio of labor to total output falls----the rate of profit declines----production no longer profitable-----consumption declines as machines replaces labor and unemployment increases----Every capitalists tries to dump goods in the market resultantly small firms disappear. Now the capitalists crisis has begun. The ultimate cause will be poverty and limited purchasing power. Economic crisis appears in the form of an over-production of commodities, problem of finding markets, fall in prices and reduction in output which further reduce employment, workers will further ruined.

In each period of crisis stronger capitalists expropriate the weaker capitalists----a strong class of monopolists appears. Ultimately point reach where capitalists and labour become incompatible with there capitalists integument.

The Marxian TheoryThe expropriators are expropriated. This is the historical tendency of capitalist accumulation.Here the Marx provides the economic explanation of the necessity and inevitability of the revolutionary transformation from capitalist to socialist society.Capitalism leads to proletarian revolution wherby the dictatorship of the proletariat is established. Poverty will disappear. Each individual will contribute to national income according to his abilities and receive according to his needs.

Critical Appraisal of Marx theoryThe Marx theory was criticized for the following reasons1. Surplus value unrealistic: Because in the real world, we are concerned not with values but with real tangible prices. Thus Marx has created unreal and abstract and unreal value world.2. Marx---A False Prophet: Because there is no increasing miseries of labor in capitalist societies. However, the socialist countries have lagged behind capitalist countries.3. Technological progress helpful in increasing employment: As Marx pointed out that with increasing technological progress, unemployment will increase. But this was an exaggerated view. As technological progress has created more employment opportunities by raising aggregate demand and income.

Critical Appraisal of Marx theory4. Falling tendency of profits not correct:As Marx pointed out that with the increase in organic composition of capital, the profit rate will decrease. But he failed to visualized that technological innovation can be capital saving too. With this capital out put ratio will decline as a result of profit can raise due to high productivity.5. Marx could not understand the flexibility in Capitalism:Marx could not foresee the emergency of political democracy as the protector and the preserver of capitalism. Democracy has introduced social security measure, anti-trust laws etc.6. Cyclical Theory Wrong:Marx said, with the capital accumulation-----reduction of demand for consumption goods. He could not realized that with economic development the share of wages in national income need not fall, nor the demand for consumer goods.

The Marxian theory and the underdeveloped countriesThe Marxian theory is not applicable directly to underdeveloped countries.Marx was mainly concerned with problems connected with the development of capitalism in Western World.Foreign domination was regarded as the principle cause of economic backwardness of the colonies. The only remedy was their political freedom.Some of the variables of his analysis do exist in under developed countries.Exploitation of labor in such economies remained for the benefit of home country.

Even now in almost all the under developed countries that are also politically free, wages are near subsistence levels; increasing misery of the masses is visible, high unemployment, problem of under consumption.Marx perception of planned development- production of capital goods and production of consumer goods.

Marxs perception of planned development is applicable to underdeveloped countries as the countries are dualistic economies (capital sector and subsistence sector like agriculture and other small scale sectors). Capital sector produces large economic surplus while other small surplus. Transforming the subsistence sector into the former so as to increase the economic surplus.Countries like India, Egypt, Burma and Ghana have followed the Marxian schema in their development plans with the objectives to increase employment opportunities, purchasing power, to build a strong capital base and technical capabilities.

Marxs Stages of GrowthHistorically society has passed through the five different stages: 1. the Primitive Communal Stage2. The slave stage3. the feudal stage4. the capitalist Stage5. the socialist or communist stage

the Primitive Communal StageFrom the use of sticks and stones to making new implements like bows and arrows, boats etc.Learn how to make fire.People lived in groups, work on common lands with common tools.Start of land cultivation of cropsBeginning of barter systemIn the process of social evolution some producers began to produce more than requiredThe exploitation starts which paved the way for the emergence of slave society.

The Slave StageIn this stage the development of productive forces was based on the corresponding productive relations. The slave owner owned both the means of production and the slave.Emergence of slave city like Rome and Greece having different organs of powers and exploitation.The productive forces were further developed. Increase in irrigation facilities.Ore mining and smelting of metals beganCanals were built.Cloth and footwear making , pottery making and metal smelting and forging began.With the passage of time the slave societys class structure led to the conflict b/w the productive forces and the relations of production.

The Feudal StageThe development of productive forces was based on feudal relations of production where the feudal lord owned the land and the serfs as the main means of production.The serfs worked like slaves for the land lord.But unlike slave society, the peasants could own a plot of land, livestock, farming tools and implements etc.Much progress in agriculture.Feudalism gave rise to two types of class struggle: one is b/w the serfs and the feudal lords and second b/w the proletariat (industrial workers) and the bourgeoisie (middle class).

The Capitalist StageIn this stage the capitalist owns the means of production and uses them for individual profit. The worker is free to work for any capitalist.The worker does not has any means of production but sells his services. Exploitation of labour by capitalists.Long working hours and receive lessSurplus value.

The Socialist or Communist StageThis stage is the result of revolution by the proletarian. Each individual will contribute to the national product according to his abilities and receive according to his needs.

The Lewis Model of Modern-Sector Growth in a Two-Sector .Surplus-Labor EconomyThe model focused on the structural transformation of a primarily subsistence economy.The underdeveloped economies consist of two sectors.i. A traditional, overpopulated rural subsistence sector characterized by zero marginal labor productivity. Ii. High productivity modern urban industrial sector .Wage premiums in urban industry 30% above rural wages would encourage migration from rural to urban. Re-investment of profits would lead to a self perpetuating development.

Assumptions:i. level of wages in the urban sector is constant, determined as a given premium over a fixed average subsistence level of wages in the traditional agriculture sector. Ii. At constant urban wage, the supply curve of rural labor to the modern sector is perfectly elastic.

The Lewis Model of Modern-Sector Growth in a Two-Sector .Surplus-Labor Economy

Assumptions of the traditional sector:i. Surplus labor in the traditional sector. (bcz MPLA is zero ).ii. Wage=APLA

Whereas in industrial sector Wage= MPLM

As a result of this process, the surplus labor will be absorbed in industrial sector.

Criticisms of the Lewis ModelRate of labor transfer and employment creation may not be proportional to rate of modern-sector capital accumulationSurplus labor in rural areas and full employment in urban?Existence of constant real urban wages upto the point where the supply of rural surplus labor is exhausted.-Institutional factors such as union, civil service wage scale and MNC(multinationals company) hiring practices tend to negate it?Assumption of diminishing returns in modern sector. (Increasing return to scale)

Rostows Stages of Economic GrowthHe sought an historical approach to the process of eco. Development.He discriminated five stages of eco.growth.1. the traditional society. 2. the pre-conditions for take-0ff.3. The take-off4. the drive to maturity5. the stage of high mass-consumption.

The Traditional SocietyHe defined the traditional society as one whose structure is developed within limited production functions .The development of science was at its very initial stage.The social structure was hierarchical in which family connections played a dominant role.Political power was concentrated in the regions in the hands of the landed aristocracy supported by civil servants and army.

More than 75% of the working population was engaged in agriculture. Therefore, agriculture was the main source of income.

The pre-condition for take-offThe pre-conditions for take-off were encouraged by four forces.1. The new learning or renaissance,2. the new monarchy3. the new world 4. the new religion

These forces developed reasoning and scepticism against Faith and Authority. This resulted the end of feudalism and led to rise of national state, and inculcated the spirit of adventure which led to new discoveries and inventions and consequently the rise of the elite in the new mercantile cities.

These forces brought about the changes in social attitudes, expectations, structure and values.In any case the process of creating pre-conditions for take off form traditional society follows along these lines. the idea spreads that eco. Progress is possible and is a necessary condition for some other purposes e.g national dignity, private profit, the general welfare, better life for the children, better education etc.

The pre-conditions for sustained industrialization usually required radical changes in three non-industrial sectors.First, build-up of social overhead capital e.g. transport .Second, a technological revolution in agriculture,Third, an expansion of imports including capital imports.It was reactive nationalism---reaction against the fear of foreign domination.

The Take-off stageIn this stage the forces of modernization contend against the habits and institutions.It is the era of industrial revolution.This period to supposed to be short, lasting for about two decades.

Take off periods for different countries. See book.Conditions for take off1. rise in the rate of investment form 5% to over 10% of national income.2. the development of one or more substantial manufacturing sectors with a high rate of growth.3. the existence or quick emergence of a political, social and institutional framework for expansion of modern sector.

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