Political Economist

1. How do Smith, Ricardo and Marx analyze the evolution of the rate of profit over time? Analyze the mechanisms involved. What implications can one draw from the trajectories implied by the different theories?

Classical political economists share a lot of theoretical aspects in common. Among them is the long term falling tendency of the rate of profit. However, their explanations are different from each other. In this essay, I will present their theory of profit briefly, and then draw some implications.

First, Smith approaches this issue when he analyzes the effects of competition. According to him, competition among capital will lead to the rate of profit to fall. However, he did not provide with systematic explanations to his argument. He seems to be confused or identify the ‘equalization of profit’ with ‘the falling rate of profit.’

In contrast to Smith, Ricardo attributed the falling rate of profit to the rise of food price and rent. In his critical analysis of Smith’s theory of rent, Ricardo argues that as population grows the more land which has less fertility and quality will be introduced in order to supply food. This new cultivation of land and competition to obtain more fertile land among agricultural capitalists will lead to the rise of rent. According to Ricardo, the rise in the price of land and rent, in turn, results in the decrease of the amount of profit for capital. In this way, Ricardo attributed the falling rate of profit to the rising rent and the expensive food price. That is why Ricardo advocated the abolition of the Corn Law which prevented cheap corn and foods from importing from outside England.

Finally, Marx also pointed out the falling rate of profit in his analysis of capital accumulation. At first, he analyzes the increasing ‘organic composition of capital.’ The competition among capitalists forces individual capital to introduce new machines and production technologies. This mechanization of capital will lead to the changes of ratio between ‘constant capital’ and ‘variable capital,’ the latter of which is the only source of ‘surplus value.’ The more the capitalist introduce new machinery and technologies in order to reduce the production cost or unit labor cost, the faster the aggregate profit appropriated from production process will be reduced. In this way, Marx explained the falling rate of profit through the mechanization process of capital forced by competition.

In this connection, the falling rate of profit is intrinsic characteristics of modern capitalist mode of production. Even though there are also countervailing tendencies and effect, the falling rate of profit cannot be superseded until the profitability and profit remain the only motive for production.

2. Contrast Ricardo’s theory of international trade with that derived from Smith and Marx. What are the specific points of departure within the general theory of competition? What are the differing implications for the opening up of trade between countries that are competitively unequal (as is currently proposed by the World Bank and the WTO)?

The role of international trade in the development of an economy is one of the most controversial issues in modern development economics. While Ricardo argues that international trade would bring about mutual benefits to both countries which are engaging in international trade, Marx pointed out that there would be ‘unequal exchange,’ and thus be chronic trade deficit in less developed country.

First of all, Ricardo argues that international trade will give rise to ‘trade balance’ between countries. Unlike his previous labor theory of value, which can be summarized as the relative price of commodity is regulated and/or determined by the relative quantity of labor required for its production, Ricardo introduces different kind of price/value theory, namely ‘quantity theory of money’ when dealing with the effect of international trade.

According to him, if two countries which have different production levels with different technologies start to export and import their relatively advantageous commodities, the money inflow and outflow would result in trade balance in the long run. More specifically, if England starts to engage in foreign trade with Portugal which has absolute advantage in every production sectors, the money will flow from England to Portugal. This money inflow in Portugal will increase the general price level in Portugal on the one hands, the money outflow in England will lead to lower the price of commodities in England on the other hands. The effect of money flows, according to Ricardo, would result in the loss of absolute advantage in Portugal, and in the end, both countries will gain benefits from each other.

Unlike Ricardian perspective, Marx’s treatment of international trade is closely related to his theory of competition. As most classical political economists agree, the behind logic of capital accumulation is profit and profitability. In order to gain much more profit from investment, every capitalist introduces new machinery and technologies. This capital movement is forced by real competition among capitals.

Marx’s theory of international trade is, thus the analysis of the effect of this competition among capitalists on different regions and countries. According to Marx, the effect of competition on different countries has radically different meanings and results: unlike the competition within an industry or different industrial sectors within the same region, international trade or competition between countries does not equalize the rate of profit.

Rather, foreign trade between countries which have different technologies and ‘unequal’ productivity will lead to chronic trade deficit and economic dependency in underdeveloped countries. Unlike Ricardo’s ‘quantity theory of money,’ money outflow from the underdeveloped countries or the Third World countries will be owned by the capitalist in the developed countries or the ‘center’ of ‘the world capitalist system.’

This money can also be invested in the Third World countries, thus sometimes create the employment opportunities for the workers in the Third World countries. However, this so-called ‘job creating effect’ of foreign direct investment is usually accompanied by the undermining endogenous economic development, destroying domestic firms and thus increasing job instability, increasing rate of unemployment.

In sum, while Ricardo argued that foreign trade would lead to trade balance and effective factor endowment (specialization of industry) through quantity theory of money, Marx pointed out the devastating effect of international trade on less developed countries in analyzing and extending his theory of competition.

Finally, considering the income gap and inequality among countries, and the detrimental effects of foreign trade, especially the effect of foreign direct investment and the financial speculation, the economic urge of the IMF and the WTO toward the underdeveloped countries is the ideology for the interest of the capitalist in the developed countries. If so, it is necessary for underdeveloped countries in East-Asia, Latin America and Africa to search for alternative economic developmental strategies unlike that of the IMF and the World Bank. And in this context, understanding of different economic development patterns from historical and comparative perspective seems to be necessary.