Method of analysis

Economy and''While our economists were developing a ‘method of analysis’ by reference back to the choice of individuals to exhibit the properties Tendencies in Economic Theory of Economy and Waste, the ‘subject matter’ of Economics—Wealth and Poverty—slipped into the background.1 Now it is this latter— the production and distribution of wealth and the social relations that they engender that was the preoccupation of the classical economists from Adam Smith down to, shall I say, -Karl Marx. For, with all the mysticisms and terminological vagaries that shroud the analytic content of Das Capital, was not Marx, the economic theorist, a disciple of Smith and Ricardo?

The canvas that Marx uses is undoubtedly of a bigger dimension—for he takes institutions, too, as a determinate of the system and not just a datum, as Smith or Ricardo did. But in respect of the type of economic questions that he asks and in respect of the mode that he adopts in answering them he was indeed very much of a ‘classical’.
It took long for us to recognize this. Even twenty-five years ago in the orthodox circle Marx would be mentioned only to be criticized. Now, while particular aspects of Marxian economics could be made an easy target by a clever marksman, the core of his theory which relates to economic development and crisis still stands and is reflected in what one might call Modern Economics. The cycle is complete, and we are now again asking very much the same type of questions as concerned Marx and we seem to be seeking answers very much in the same way as he did.

Thanks to the awareness concerning the state of stagnation of capital-saturated ‘advanced’ economies on the one hand and of capital-hungry ‘stunted’ economies on the other, Growth has again assumed the central position in economic theory. The former is a follow-up of the Keynesian theory of under-employment equilibrium and leads up to models of steady growth. The latter is a problem of ‘primary accumulation’ and leads up to models of accelerated growth. These are the problems on which Modern Economics is focusing attention. And they are essentially Marxian problems. The apparatus that is being used today for the analysis of the problems has also a family resemblance to the Marxian apparatus, couched as it might often be in a different language. You have the old emphasis on accumulation as the prime mover of the economic system and on surplus as the source of accumulation. You have also the division of the economy into ‘sectors’ and the typical Marxian way of setting out equilibrium conditions in terms of inter-sectoral balance—only you now have more sectors than Marx contemplated. Again, as in the Marxian system, consumption has come to be relegated to a subsidiary position and shown primarily as a function of the rate of Planning and Economic Growth

Accumulation. The concepts of ‘unlimited supply of labour’, ‘disguised unemployment’, ‘saving potential’ and so on that are today being so widely used in growth models in the context of underdeveloped economies are reminiscent of Marx’s theory of primary accumulation.1 Towards the close of the last century—within thirty years of the appearance of Das Capital, Bohm-Bawerk, one of the leaders of the Marginalist School, wrote a book which he called Karl Marx and the Close of His System. The centenary of Das Capital is soon coming; who knows ere it comes someone will not come with a companion volume—Karl Marx and the Revival of His System.
Indeed the pendulum has swung the other way, and we seldom hear nowadays of market-forms and prices. In the broad perspective that we are taking, it appears as though Marginalism came as a sort of an interlude in the development of economic theory. And if the explanation of the advent of Marginalism that I was suggesting has at all any validity, one may well wonder what the course of economic theory would have been had Marx shed his propaganda and remained the good classical economist that he really was.

Yet having got so far with the theory of relative prices, is it not tempting to see where is stands in relation to the theory of growth ? You cannot just throw the marginalist system overboard—for it does answer such questions as it raises more satisfactorily than does classical political economy. It does offer a more general theory of resource allocation, subsuming the classical labour theory as a special case. Witness, in contrast, the impasse that Marx creates by undertaking the impossible task of integrating the theory of relative prices into the labour theory of value. Surely the marginalist theory of relative prices and resource allocation with its emphasis on scarcity economy and choice has made its place in the general corpus of economic science.
Where, then, is the junction between these two strands of economy and theory—the theory of relative prices and the theory of growth?

The two theories have so far taken shape independently—often indeed at cross purposes. There is, however, no obvious reason why it should have been so. The economic universe, both in its static aspect and in its dynamic aspect, is the resultant of the process of allocation of resources operating through relative prices. When gross investment is just equal to depreciation, the significant problem turns out to be the horizontal allocation of resources—the problem par excellence of static analysis. When, however, gross investment exceeds depreciation, so that net investment is positive the vertical allocation of resources also assumes importance. And it is this vertical allocation operating through the rate of interest that determines the rate of growth.
This, however, is only the beginning of the problem of economic dynamics. For net investment leads to the formation of capital, and the form that the new capital takes on sets the pattern of future growth, and the process goes on irreversibly, with the distinction between data and determinates obliterated, as in the case of simple exchange set out earlier.

How do relative prices behave in this process of continuous growth, and in what way does the marginalist analysis of price fit in with the framework of long-run movement? What are the functions that relative prices perform in a continuously growing economy? How is growth in its turn, and technical progress that accompanies it, affected by a given system of relative prices ? These are the sorts of questions that a dynamic theory will have to answer, and one is tempted to suggest that it is in the search for an answer to such questions—in the construction of a synthesis, that is, between the theory of value and the theory of growth that the future development of economic theory will lie.

The relation between relative prices and economic growth is a two-way relation. Within any given environmental setting, the system of relative prices no doubt determines the rate of growth through its effect upon accumulation and the technique of production. Yet growth also in its turn does react on the system of relative prices via the pattern of investment and distribution of income.
So long as an economy can depend on entrepreneurship to usher in innovations and, within the framework of these innovations, to undertake investments adequate enough to secure a rate of growth such as would be warranted by the growth of population and labour supply, one could leave the problem of growth alone and concentrate on relative prices. Economy and it is these relative prices that are of immediate concern to individuals and groups. This is true of an economy which is in the ‘adult’ stage of its career and does not suffer either from capital saturation or from capital shortage. The major economic problem of such an economy is to be able to retain what it has already acquired by avoiding misdirection of resources and consequent waste. The age and environment of the Marginalists conform fairly closely to this description.

In the Keynesian world of advanced economies, on the other hand, where accumulation is retarded by  deficiency of effective demand, the problem of growth takes on a special significance, if only because a minimum of it is essential for the maintenance of a reasonable level of employment. Relative prices may in such an economy be left alone, to be determined by the required rate of growth. But for an economy whose progress has been historically stifled by the shortage of capital and entrepreneur-ship and which is marked by mass poverty, the problem is more complicated.While growth must be recognized here also as the governing force, relative prices cannot just be left alone to take their own course, nor can the allocation of resources be left to be regulated by the movement of relative prices, as the principle of economic liberalism would dictate.

You cannot permit a natural development of the price system and the corresponding pattern of resource allocation consistently with the required rate of growth in such an economy; forced pace of growth that the economy needs must inevitably be accompanied by control and direction of the price system as also of the allocation of resources.

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