The Study of International Political Economy

By Kalim Siddiqui

I. Introduction

The study of the international political economy refers to an interdisciplinary academic subject area of study that analyses economics, politics and international relations. International Political Economy helps us to understand the global structures and power dynamics that regulate finance and trade, which have a large impact on the distribution of wealth and poverty across the world and within countries. I think such an approach provides a better understanding of power structures and how international relations and trade drive globalisation. (Siddiqui, 2020a; 2020b) Within the political economy, the focus of the study is about interactions between markets and government policies. 

International Political Economy helps us to understand the global structures and power dynamics that regulate finance and trade, which have a large impact on the distribution of wealth and poverty across the world and within countries.

Moreover, those who study the international political economy seek to understand how history, culture, international relations and politics and its impact on economic performance and overall economic development. It also takes into account the international impacts on local economies. The international political economy is ultimately concerned with how political forces influence economic policy structures, and how institutions shape systems through global economic interactions and affect a country’s economic performance.

Economics is too important to be left to politicians alone. As the subprime crisis of 2008 has shown, the working of free markets and market efficiency has been far from perfect. The mainstream model assumes that under the free market, the full information about financial products will be available to customers, but it was obscured, which certainly had an impact on decision making. 

I find that mainstream economists ignore the important role played by power and politics in making international economic relations, where all social groups do not benefit equally. Understanding past history is important because it helps to draw a lesson of past economic development and also impacts on formulations of future relations between nations. For example, recently the US President Joe Biden announced US$ 4 billion aid package to the Central American countries. Therefore, we need to analyse the US role in the past in the region. The US policy was created to militarise the region. The neoliberal economic development model was imposed on Central American countries by the IMF (International Monetary Fund) and other international financial institutions with the US and European support. The currently announced US aid package, which is stated to help the region to fight natural disasters and also to encourage their economic development. Even natural disasters such as hurricanes are caused by human activities e.g. climate change. Hurricanes do not affect all people equally and depend on social structures. Those with better means and assets i.e. the rich, suffer far less than the poor. The US economic aid is linked to security and promoting exports by creating more favourable environments for foreign investors. (Siddiqui, 1998) This means that economic aid is aimed at promoting and safeguarding the interests of foreign capital. 

Moreover, the ‘export-oriented model’ has destroyed the Central American economy for the past several decades. It did not help to improve the living conditions of the people, and has only helped the big US companies to exploit natural resources and cheap labour in the region. It has helped to raise profits for foreign investors and to produce cheap agricultural products such as tea, coffee, sugar, clothes, fruits and vegetables and minerals for US and European markets. When in 1980s, Nicaragua tried to help workers by raising minimum wages and forming a workers’ union, the US opposed it and tried to overthrow the elected government. (Siddiqui, 1998) Similarly in 2009, the Honduras government tried to help their workers by legislating minimum wages and protecting their interests, such measures were bitterly opposed by the US. The Arbenz government in Guatemala was overthrown in 1954 by a US-sponsored coup to protect the profits of the United Fruit Company. The US also overthrew other elected governments by a military coup, such as Liaquat Ali Khan in Pakistan in 1951, Mosaddegh in Iran in 1953, Sukarno in Indonesia in 1965, Lumumba in Congo in 1961, and Allende in Chile in 1973. (Siddiqui, 1990a).

More recently, the local elites and military adopt a number of ways to unseat elected governments, which often find support in the advanced economies. For example, Lula served as Brazil’s president from 2003 to 2010. During his presidency, Brazil’s economy boomed, poverty fell and Brazil emerged as a major player in world affairs. In 2014, from his Workers Party, Dilma Rousseff, was re-elected and it was the fourth straight victory for the Workers Party (PT). The elites and right-wing parties decided that something needed to be done to stop Lula and PT party from coming to power again and fake corruption charges named “Operation Car Wash” was investigated under Judge Sergio Moro, which found Lula da Silva guilty for accepting bribes and he was jailed. In 2019, Jair Bolsonaro, a right-wing former army official was elected as Brazil’s President and he invited Moro to join his cabinet as law minister. The Brazilian Judge Moro was also invited by the Wilson Center in Washington, DC in the US to speak about “Handling political corruption cases in Brazil” in 2016. Appearing under the headline, “Sergio Moro, the Brazilian judge who brings down presidents”, Moro was chosen as one of the 50 “personalities of the decade” by the Financial Times newspaper. While in Brazil, it was not just the economy that has spiralled downwards. In five years since the impeachment of Rousseff, Brazil has sunk on important parameters like democracy, media freedom, poverty, hunger, per-capita income and life expectancy. On all important socio-economic indicators, the country is in a worse position than it was in 2016. The practice of Lawfare is present across Latin America. “In Argentina, ex-president Cristina Kirchner was subjected to judicial persecution; Rafael Correa, the former president of Ecuador, was forced to go into exile due to lawsuits; and the Bolivian justice tried to arrest ex-president Evo Morales. What is common in these cases? All were left-wing governments, committed to policies aimed at the most disadvantaged. Lawfare seems to be the substitute for military dictatorships because in all the cases we are faced with economic elites who refuse to include the poor in the policies. In the past, they resorted to the military. Now, they use the justice system,” (The Wire, 2021).

The inequality in relations between nations is not studied by mainstream economists and they also ignore how this gross inequality between nations came into being. In fact, their studies do not take into account how the global division of labour and the imperialist system transferred surplus from the periphery to the centre and thus, created both development and underdevelopment simultaneously. (Siddiqui, 2019b) Achieving global equality is crucial for any prospects of establishing long-term peace among nations. Such a Eurocentric view of economic history has paid little attention to colonialism, military conquest and their impact on class formation in the world. (Wolff, 1974; Siddiqui, 1990b)  

In the 18th and 19th centuries, the rise of capitalism in Britain was celebrated by Adam Smith and David Ricardo, especially the rise in productivity and division of labour, which led to the development of industries and technology. However, Marx in the mid-19th century, while recognising the rise in output and productivity, also pointed out the workers’ misery who had to give up their freedom. They had to sell their labour power in order to survive. In his labour theory of value, he found that what is common among all commodities is labour. What makes everything valuable is the labour in it. Part of what workers produce goes to them to sustain them, such as food, clothing, and shelter, but the rest is kept by their employers. The surplus is over and above what they get for their necessary consumption in return for the sale of their labour power. This is how capitalism works. Therefore, capitalists accumulate the surplus; they are in the business of making profits and that is the sole reason for being in business. Marx (1977) said here lies the instability, inequality and injustice of the capitalist system. Marx probably represented the most outstanding trends in critical thought; the classical political economy’s main shortcoming was to assume capitalism was an invariable datum of economic analysis. Marx argued that existing economic theories assumed a misleading view of the world, particularly the relationship between the ‘economic’ and the ‘natural’ and the place of human beings within it. 

The study of economics needs to include an analysis of the production and distribution of economic surplus, including the role of power relations in determining economic relationships. In fact, the study of economic systems, and tendencies should be linked with it, and the importance of employment to be given priority as it was the case during the post-war economic boom, such as Classical Political Economists, Marxists, and Keynesian Economists. As reality is not static, we deem it as crucial to new ideas and new thinking and appropriateness of these theories and methods in the light of empirical data.

The study of economics needs to include an analysis of the production and distribution of economic surplus, including the role of power relations in determining economic relationships.

Since 1980s the government in the advanced economies have extended support to neoliberalism, which is based on belief in the subjectivity of a “free market” market-led society and its importance on democratic structures and ethos. The neoliberals assume that western development is based on laissez-faire. I find that their understanding of political economy remains at its core Eurocentric and imperialist. Marx and Engels in The German Ideology (1845) noted that “the class which is the ruling material force of society, is at the same time its ruling intellectual force.” Neoliberalism emphasises the economic development of West Europe and North America was based on laissez-faire industrial policy at home i.e. low barriers to international flows of goods, capital and labour and macroeconomic stability which was generated by the Gold Standard and the principle of a balanced budget. (Chang, 2002: 14) The return to protectionism following World War I was key factor that led to the Great Depression in 1929 and the rise of fascism and eventually World War II.

In fact, the selective reading of Western history extends to ignorance about the violence, famines and expropriation of resources in the colonies, which marked industrialisation in Europe. (Hobsbawm, 1962) They ignore that prior to the European domination i.e. imperialist era, the Asian economies (i.e. namely the China and India) dominated the World’s economy, and such approach on the “core” of the global economy totally excludes any logical explanation of the world economy before the rise of Europe from their narration of the history. 

The mainstream economic theories rely on market-based theory and their assumptions that the market always leads to the best outcome for consumers. Why is the market solution to economic problems so important and everything deviating from it about market failure? This question relates to the long-standing debate on whether or not economics is value free and how it is possible to best promote positive analysis over normative. The economists often attempt to disguise normative conclusions behind positive analysis, subjective factors are inevitably involved in the development of scientific ideas, and these are theory-based because they are identified from the perspective of a paradigm. The study of economics must include into their discussions about pluralism, meaning that there are different ways to investigate an economic phenomenon, and competing ideas and methods often lead to different policy implications. (Siddiqui, 2020b)


II. Literature Review

Adam Smith in the opening of the Wealth of Nations affirmed that value is rooted in labour: “The annual labour of each nation is the fund which originally supplies it all the necessaries and conveniences of life.” He further insisted that labour was a superior measure to money. Ricardo wrote soon after the Napoleonic Wars and argued to end ‘Corn Laws’, which prohibited grain imports into England. (Armstrong and Siddiqui, 2019; 2019a) The farmers had to resort to cultivating less fertile land to produce more food, which led to rising food costs. According to Ricardo, the solution lay in the repeal of ‘Corn Laws’ so that cheap food could be imported to feed the workers, as a result, wages could be kept low and profits would increase. (Siddiqui, 2018a)

Adam Smith and David Ricardo both provided a clear explanation about the origin of the production relation in capitalist society. The classical political economy considered value to be rooted in labour, which is distinct from price and independent of, though not unaffected by, supply and demand. But soon after a rupture took place and the political economy was turned into what is known as marginal revolution. Marx (1977) called this the ‘vulgar economy’, with its abstraction from social reality characterised in the works of classical economists. By assuming that in capitalist society economic relations were in conformity with the laws of nature, the marginalist revolution completely lacked historicity – for Marx it was a loss of scientific methods of investigation. Eventually, in the 20th century, the marginalist revolution led to the birth of mainstream economics, also known as neoclassical economics. Mainstream economics replaced value with individual utility and price and was determined by changes in the supply and demand alone.

By assuming that in capitalist society economic relations were in conformity with the laws of nature, the marginalist revolution completely lacked historicity – for Marx it was a loss of scientific methods of investigation. 

‘Vulgar economics’ focuses on superficial aspects of economic outcomes rather than the underlying system of production relations. Thomas Malthus stated his proposition that demand is independent and that joint conditions determine wages, profits and rents within the markets. Marginal revolution proclaimed that the value of the commodities in demand is based on subjective preference and marginal utility, and led to the construction of an independent demand schedule. Neo-classical economists, namely Alfred Marshall (1920) proposed an independent demand schedule based on subjective preferences with an independent supply curve based on the cost of production using marginal analysis. This provided the basis for mutual reconciliation to a point of equilibrium with stringent assumptions applied to construct a demand schedule and to isolate supply conditions. Here the demand is related to subjective preferences and gradually incorporated into defining economics in terms of scarcity. 

Karl Marx pointed out that James Mill’s mistake was interpreting equilibrium as a natural economic law necessary occurring in any circumstances. Mill ignored the fact of any change behind the economic phenomenon is human labour. Marx argues: “The community of men or the manifestation of nature of men, their mutual complementing the result of which… this community is conceived by political economy in the form of exchange and trade. Society, says Destutt de Tracy, is a series of mutual exchanges. It is precisely this process of mutual integration, Society, says Adam Smith is a commercial society. Each of its members is a merchant. It is seen that political economy defines the estranged form of social intercourse as the essential and original form corresponding to man’s nature.” (cited in Lampa and Abeles, 2020:1017)

Marx emphasised the social dilemma of labour, where according to him, it is essential to assume that labour is inescapably connected to the relations among humans in any society. But under capitalism, such relations are different from any other mode of production, since division into classes is determined by the ownership of capital. Marx well-known description of its dual character: “it appears that the capitalist buys their labour with money and that for money they sell them their labour, But this is merely an illusion. What they actually sell to the capitalist for the money is their labour-power.” (cited in Lampa and Abeles, 2020: 1018)

Labour is a precondition of human existence in society. It is through labour which humans are able to transform nature in order to produce the means necessary to satisfy their needs. While to understand fully about capital, then one needs to investigate a social relation of production, which Marx notes in Capital: “Accumulated labour that serves as a means to new production is capital. So say the economists. What is a Negro slave? a man of the black race. The one explanation is worthy of the other. A Negro is a Negro. Only under certain conditions does he become a slave. A cotton spinning machine is a machine for spinning cotton. Only under certain condition does it become capital.” (cited in Lampa and Abeles, 2020: 1018) Marx emphasised that the use of labour power in production is capable of producing more than its own value that could yield the additional value which is over the value of labour and Marx called it ‘surplus value’. In Capital volume 1, he distinguishes use value and exchange value in general and it became critically important to trace the source of surplus value in the use value of labour.

On the question of how surplus value was distributed among the major classes, Marx described how the social product took the form of value. In contrast to this, neoclassical economics, based on the premise of separation of the economy from society, state and autonomous markets, was deemed to determine the prices of goods, including those of labour, land, and capital through its own dynamics and unconnected with society and politics. Marx rejected Say’s Law and insisted that: “The ultimate reason for all real crises remains the poverty and restricted consumption of the masses.” (Marx, 1981: 615) Marx said that capitalism is the most unnatural of social forms. 

Marx discussion on finance, particularly in Capital volume 3, of interest-bearing and loanable capital, he notes: “capital for loan … is emerging spontaneously through the operations of industrial (and other) capital, by taking the form of idle money in the first stance.” And operating in a “set of markets and institutions (operating as separate capitalist concerns) that mobilise loanable capital.” He further made two important points: first he speaks of accumulation of value – that is socially necessary labour time embodied in retained capital. Second, he distinguishes production from finance. That was the reason Marx made a clear distinction between productive and unproductive labour.  As he argues: “profit is simply a deduction from surplus-value since they are dealing with only values already realised.” (Marx, 1981:438) Financial activity does not produce use value and such activity is parasitic. For instance, the former UK’s Chairman of Financial Authority Adair Turner said much of the banking activity has been “socially useless”. If bank creates value then in the UK the huge support they received after the 2008 crisis could have created growth and stability, but the economic crisis continued for another eight years. 

Marxists view the economy, particularly production, as the prime mover of capitalism. Labour creates both the use value that sustains society and the surplus value that capitalists appropriate is used to propel accumulation. Unlike liberals, Marxists view the political sphere not as a hindering distortion, but as a built-in requirement. The formal separation of economics from politics, they argue, legally alienates private property from public control in order to ensure and legitimize the class superiority of capitalists over the rest of society. In this way, economics and politics stand as the two essential pillars of the capitalist regime– the former generates exploitation, while the latter secures oppression.

Keynes (1967) saw the problem of effective demand in terms of the level of income related to problems of consumption and investment that creates long term issues of stability and growth within the economy. Lower income groups have a higher marginal propensity to consume, and thus greater income inequality reduces overall consumption, meaning a tendency of aggregate demand to fall. Thus, a fall in wage rates creates problems of domestic demand. Expanding global markets can maintain growth but such a strategy involves domestic wages falling. If we take all economies together then the problems of effective demands in a domestic economy are simply reproduced on a global scale. It means aggregate demand can be maintained by the deregulation and expansion of the financial system i.e. financialization. Credit creation leads to increasing consumer demand and thus higher consumption levels are maintained, but at the same time households’ debts also increase. 

As Keynes argues in General Theory (1967: 32): “The idea that we can safely neglect the aggregate demand function is fundamental to the Ricardian economics, which we have been taught for a century. Malthus, indeed, had vehemently opposed Ricardo’s doctrine that it was impossible for effective demand to be deficient, but vainly.” Another prominent Keynesian economist, namely Sraffa, provides an account of how value is created in an economic system through the conditions of production and distribution between different social classes. Keynes presents an account of both the instability of capitalism and the different growth trajectories inherent in different income distribution patterns.  

Capitalism is a system denominated, organized and regulated by prices. Any attempt to theorize capitalism hinges on the theorist’s ability to understand those prices, which is why liberalism and Marxism are based on a different theory of value, i.e. the utility theory of value and the labour theory of value, respectively. As they stand, both value theories rely on a basic distinction, first popularized by David Hume, between the “real” and “nominal” spheres of the economy. The real sphere is the domain of production and consumption, utility and wellbeing, labour and exploitation. The nominal sphere is the realm of money, prices and finance. (Patnaik, 2009)


III. Financialisation 

During the post-war boom, US foreign direct investment (FDI) resulted in the induced reproduction of US capital in capital receiving countries and they became dependent on the US for their own production. The US financial system has fully exploited these countries to enhance and sustain its imperial power since the 1973 economic crisis. Faced with double digit inflation, rising trade union militancy, the Vietnam War, and large outflows of capital, the US finally freed the dollar from its post-war commitments and raised interest rates. 

Domestically, for the last three decades or so, the US financial system is increasing liquidity in the financial market. This involved the extension of various types of consumer credit, mortgages, and the securitisation of assets. (Siddiqui, 2019c)The Wall Street drive towards financial innovation and credit creation directed world savings into the US and thus further boosted US imperial power. The US dollar as an international reserve currency is secured by US economic and military power and which shapes the international political economy. (Siddiqui, 2020d; 2020f)

The speculative claims of finance on the productive economy are structurally unsustainable. The extraction of surplus value cannot keep pace with the practical innovation and investment pattern of finance. The political economy helps us to understand the growth of finance within the wider economic context. Despite the talk of separation and decoupling from complex financial mortgages backed by securities, collateral debt obligations, and credit default swaps, government in advanced economies failed to control the excessive growth of the financial sector. Finance came to occupy a dominant position in the US and UK in particular, which is often, termed financialization. The process of financialization has enhanced capital’s profitability outside the productive process. In order to raise profits in the name of innovations, finances were extended to those people who could not provide any guarantee of repayment. The regular failure of borrowers to meet their outstanding obligations was an accepted feature of such investments, something that can apparently be controlled and managed through probability calculations and risk-based pricing. Under financialization, value production increasingly relies less on raw material production and workers in productive spheres, but more on the spheres of circulation and exchange, and the rent becomes profit. (Siddiqui, 2017a)

In developing countries, the adoption of neoliberal economic policies have widened wealth and income inequalities and increased economic instability. The spread of financialization of the economy has coincided with the reduction of investments in health and education, removal of capital regulation on foreign capital, and the elimination of protections for workers. Globally, neoliberal policies have reinforced contemporary imperialism. Neoliberalism imposes a new form of control associated with the financialization of economic life. (Girdner and Siddiqui, 2008) In fact, financial de-regulation in developing countries has undermined their national sovereignty, and the diversity of financial structures suited to their levels of economic development is being ignored. (Siddiqui, 2012) For example, in the recent past, East Asian economies have directed credit to specific industries, which resulted in the growth of the manufacturing sector. They created financial institutions such as development banks to facilitate and finance long term investments for specific manufacturing. 

It seems that without such policies no country has successfully industrialised. Even the most recent success story of industrialisation in China would not have taken place if the country had followed a financial liberalisation policy. (Siddiqui, 2019d; 2016a) Since the early 1990s, global financial institutions such as the IMF and the World Bank have supported financial liberalisation in developing countries, despite their differences in levels of development and especially during the balance-of-payments crises that revealed their external vulnerabilities. (Siddiqui, 2012; 2014a)The neoliberal policy related to trade, investment, and finance has reduced the policy autonomy of the developing countries and undermined the prospects of economic diversification and sustainable economic development. For instance, the WTO-led intellectual property rights and monopoly privileges given to MNCs (mostly based in the advanced economies) have reduced any possible emulation or transfer of technology that formed the basis of almost all past successful industrialisation of today’s rich countries, like the US, Germany, Japan, Taiwan and South Korea. The obsession with the ‘free market’ and trade and financial liberalisation, and the obsession with exports has sharply increased the importance of the primary sector like mining and forestry and thus forced many developing countries to divert their resources towards the primary sector and halt any efforts made towards structural transformation.

The effects of financial liberalisation in developing countries have a number of consequences such as substantially increasing risk by making them more crisis-prone. Financial liberalisation also reduces their policy autonomy. With increased exposure to global financial markets, it is very difficult for a country to control the amount of capital inflows or outflows, and their movements can create unexpected consequences. For instance, if foreign investors suddenly flood the market with increased portfolio investments, it can put pressure on the national currency to appreciate. As a result, exports will become expensive and imports cheaper, which will make domestic production less competitive. This would also result in shifting production away from exports to increase investment in the finance and real estate sectors. Financialization forces governments to adopt deflationary fiscal policies to appease global financial interests. Trade liberalisation has dramatically reduced governments’ tariff revenues, and financial liberalisation puts pressure on limiting corporation tax. (Siddiqui, 2015; 2009) All these factors put a limit on government incomes and thus reduce public spending on crucial social welfare programmes like education and health. 

Financialization forces governments to adopt deflationary fiscal policies to appease global financial interests.

Following the global financial crisis in 2008, there has been a tendency within the mainstream analysis to place emphasis on various speculative mechanisms, rather than blaming capitalism or the uncontrolled growth of the financial sector among the advanced economies. The reason for this is that the ideology of neoliberalism and the free market means that financialization cannot be brought seriously into question since it is a very important part of capital accumulation at the current stage of capitalism. At most, financialization, as in Krippner’s (2005) work, is reduced to a cyclical process based on shifts in regulation and non-regulation, downplaying the underlying trends of cyclical crisis and stagnation under capitalism. In fact, financialization is a stage in capitalism in which profits mainly come not from exploitation in production, but from financial expropriation in circulation. 

Krippner’s research on financialisation (Krippner, 2005), although not explicit Marxist, but presented an important work on the rise of financial profits in the US. She defines financialisation as: “a pattern of accumulation in which profits accrue primarily through financial channels rather than through trade and commodity production.” (Krippner, 2005: 174) She points out the rising share of portfolio income in the revenue of non-financial firms, and the increasing share of profits generated in the financial in comparison to the non-financial sector since 1980s. More explicit study on financialisation in Marxist tradition is done by Ben Fine (2017), where he defined eight characteristics of financialisation, namely: the expansion of financial markets, institutions and instruments; financial de-regulation and liberalisation; growth of financial innovation; increasing dominance of finance over manufacturing; increasing reliance of governments, firms and households on market mechanism; the use of capital gains for collateral; penetration of finance in social spheres; and culture of reliance upon the market. Marxist analysis of financialisation has a considerable advantage of having a coherent methodology with which to approach the topic. 

Lapavitsas (2013) examined sectoral transformation in advanced economies in recent decades, assessing the changing modes of financing and investment of banks, businesses and households. In general, banks increasingly rely on wholesale funding markets and a huge proportion of their revenue comes from fee-based activities and lending to the household sector. The securitisation of assets and financial intermediaries has led to the growth of market capitalisation ahead of both GDP growth and earning capacity. Keynesian economists consider that firms turning to increasing financial activities have ‘crowed out’ investment in fixed assets (Stockhammer, 2004). It was said that declining fixed investment had negative impacts on capacity utilisation, profits and capital accumulation.  

What are the consequences of trade? Mercantilists supported trade to enhance state power in the 18th and 19th centuries, and the use of the military was seen as necessary to enhance trade and accumulate wealth. At present, protecting strategic industries and exports of high value products are now seen as the ideology to keep the technological edge over the developing countries. Liberalism was supported by Adam Smith, David Hume and others in favour of ‘free trade’ and to eliminate tariffs. Countries are suggested to produce and specialise in what they are best at. Marx saw that liberalism makes the rich richer and the poor poorer. Big corporations exploit poor countries for their resources such as cheap workers and raw materials. Marx wanted to protect workers and supported weaker nations in acquiring better economic trade policies. 

One of the major contributions of Karl Marx was to understand the contradictions of capitalism. It was assumed that people were paid for the work they did. They get paid for their capacity to work, and for their ability to work. Marx said primitive capital has to come from somewhere. He discovered that original capital came from very violent exploitation e.g. from slavery, colonisation, violence inflicted on indigenous peoples and dispossession of small producers. 

Karl Marx on the question of limits on workers’ demand discusses: “The workers are important for the market as buyers of commodities. But, as sellers of their commodity-labour power – capitalist society has the tendency to restrict them to their minimum price… the periods in which capitalist production exerts all its forces regularly show themselves to be periods of over-production; because the limit to the application of the productive powers is not simply the production of value, but also its realisation. However, the sale of commodities, the realisation of commodity capital, and thus of surplus-value as well, is restricted not by the consumers’ needs of society in general, but by the consumer needs of a society in which the great majority are always poor and must always remain poor.” (Marx, 1977: 391)

Rosa Luxemburg (2003) emphasised that the problem of consumer demand is an important one and posed the question that for successful accumulation to take place: “the desire to accumulate plus the technical prerequisites of accumulation is not enough in a capitalist economy of commodity production. A further condition is required to ensure that accumulation can in fact proceed and productions expand: the effective demand for commodities must also increase. Where is this continually increasing demand to come from which in Marx’s diagram forms the basis of reproduction on an ever-rising scale?” (Luxemburg, 2003: 104) Rosa Luxemburg is correct regarding the actual historical process of capital accumulation during the European occupation of non-European nations. In fact, the past five-centuries seem to validate Luxemburg’s thesis. Capitalism was born from a non-capitalist milieu and it has immensely enriched itself by plundering the world’s resources and the same value transferring has even continued to this very day. (Siddiqui, 2020c; 2020d)

Keynes also realised the importance of the ‘market question’. It was later on taken up by Joan Robinson who notes: “appears to be concerned with the inducement to invest. What motive have the capitalists for enlarging their stock of real capital? How do they know that there will be demand for the increased output of goods which the new capital will produce so that they can capitalise their surplus in a profitable form?” (Robinson, 2003: xxix) According to her, Luxemburg recognised “savings and investment problem, for she takes it for granted that individual act of saving out of surplus is accompanied by a corresponding amount of real investment, and that every piece of investment is financed out of the surplus of the same capitalist who makes it.”  The role of consumption demand in capitalist reproduction are crises, which Luxemburg had already pointed out in the early 20th century the paucity of consumption demand required either capitalism reaches beyond itself to non-capitalist formation to find markets, meaning engages in invasion and occupation of other nations i.e. imperialism or must seek to broaden at-home market.  

More recently on this issue, prominent Marxist economist Prabhat Patnaik says that Marx always insisted that in any monetary economy there was always the possibility of a “hoard”, an un-invested portion of the profit which implies that Say’s Law cannot possibly hold and it means capitalism has a tendency of over-production. As Patnaik notes: “But neither Marx nor his followers pursued this fundamental contribution of Marx any further; they preferred instead to follow exclusively the other major theoretical discovery of Marx, namely, the one relating to his theory of surplus value. This is why three quarters of a century had to elapse before the same themes surfaced again during the Keynesian revolution through the writings inter alia of Kalecki and Keynes…” (Patnaik, 2009:3-4)


IV. Conclusion  

The neoliberal economic reforms, also known as ‘Structural Adjustment Programmes’, under IMF supervision were undertaken in the early 1990s by Argentina and it led to economic-ruin and nearly social collapse, an experience not uncommon in several other Latin American and the Sub-Saharan African countries during that decade. As Escobar (2004: 226) has noted: “the Argentinean crisis was caused not by insufficient integration into the global economy but rather because of an excess of it.” 

In short, the study of the international political economy helps us to understand global power relations and why some countries are able to benefit and thus acquire wealth more than others. The labour theory of value is essential to understanding the laws of motion of capitalism, both in general and in relation to monopoly-finance capital at present, which is merely a new phase of monopoly capitalism. The expropriation of assets plays a central role in Marx’s theory of exploitation: both exploitation and expropriation existed in dialectical tension in his analysis. According to him, workers are paid to keep them alive in order to go to work they are only paid to cover necessary consumptions. Workers are paid for their capacity to work and the capitalist subtracts some part from the workers’ produce. This unpaid value was called surplus value by Marx. The capitalists try to increase surplus value. They reap profits because they have capital but workers have nothing except the power to sell their labour. 

Karl Marx’s own economic analysis was set out in Capital volume I and II where he emphasised the labour theory of value and the inevitable tendency of the rate of profit to fall leading inevitably to a collapse of capitalism. The rise of inequality since the 1980s has led to the growing political power of the corporate and capitalist economies tends to go through long cycles of boom and bust. 

Marx pointed out that workers produce according to the needs of their employer, and they are trapped in a vicious circle. In a capitalist society, all members are formally said to be equal, but in reality, workers only have the right to sell their labour power. There is rising inequality, where at one extreme there is a huge accumulation of capital, while at the other end extreme levels of poverty. Capitalism does have huge distributional problems and market failures. It does bring rapid growth but also new forms of deprivation, a great deal of joblessness, pain, misery and uncertainty to a large number of people. Under capitalism, the political sphere is democratised, while the economic sphere is very feudal and hierarchal. People in power do everything to protect and maintain the exploitative system.

This article was originally published on August 4, 2021

About the Author

Dr. Kalim SiddiquiDr. Kalim Siddiqui is an economist, specialising in International Political Economy, Development Economics, International Trade, and International Economics. His work, which combines elements of international political economy and development economics, economic policy, economic history and international trade, often challenges prevailing orthodoxy about which policies promote overall development in less developed countries. Kalim teaches international economics at the Department of Accounting, Finance and Economics, University of Huddersfield, U.K. He has taught economics since 1989 at various universities in Norway and U.K.



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