Terms of Trade and Class Relations

An Essay in Political Economy

Ashok Mitra

• Publisher: Routledge
• Year: 2005
• Topic: Economics
• eBook ISBN:
  9781135781422
• Subtopic: Economic Theory
• Index: Economics

Published in the year 1977, Terms of Trade and Class Relations is a valuable contribution to the field of History.

CHAPTER 1

Economic Theory and the Class Question

Consider the state of economic theory even as late as on the eve of the Second World War. By and large, it was the domain of peaceful-looking geometrical curves, representing either indifference surfaces or technical transformation possibilities; first- or second-order derivatives of the tricks of calculus contributed their mite, and occasional footnotes acted as conductors of esoteric knowledge. In the lecture rooms, marginalism and perfect competition held sway. Since both Joan Robinson and E.H.Chamberlin had already produced their tracts, it would have been singular bad manners not to set aside a certain number of sessions to discuss imperfect market structures. The students were therefore told, in harum-scarum fashion, of those freak cases where the conditions of perfect knowledge, perfect mobility, infinite number of sellers, infinite number of buyers, et al., failed to obtain, and where market forces accordingly came to rest at a point different from the arcadia defined as perfect competition. Following this somewhat breathless narration, the students were hustled out of the classroom and into the examination hall.

In such a pre-packaged navigation of the essential ports of call, little scope existed for deviationary drifting. There was an obvious absurdity in discussing the notion of market imperfection without relating it to the fact of mal-distribution of assets and incomes in society. The inconvenience was tackled in a somewhat roundabout way. Market realities, it was acknowledged grudgingly, do not always conform to the pattern laid down in the text-books; however —the reader would be assured—not much was, on balance, going to be lost by a failure to delve deeper into the mysteries of imperfect market structures, for the latter constituted only peripheral phenomena. True, a feeble group of protesters were already around —an occasional Joseph Schumpeter or a Paul Sweezy, a doubting Michal Kalecki or an Oscar Lange; but their collective voice did not carry very far.

Questions, such as what constituted the ingredients of market demand, or what determined the structure of supply, were therefore taboo. Demand, as it expresses itself in the market, reflects the command over goods and services on the part of different members of the community. One was, however, not supposed to ask how the members of the community come to obtain their respective allotments of purchasing power which make the exercise of this command possible, or why such allotments differ from one another. There was evidently no time to spare for an enquiry into the law, if any, according to which the community’s purchasing power is distributed, nor for one exploring the link between a given structure of asset holdings and the pattern of income distribution. The new generation of students were dutifully taken on a guided tour of the economic problems of socialism and were also told, in an aside, of the Keynesian prescriptions for tackling the scourge of unemployment. They were therefore vaguely made aware that income distribution, whether between persons or between factors of production, has a certain relevance to economic realities. But that it has a relevance to the distribution of property and the alignment of classes was carefully left unstated.

The cultural lag persists. While major qualitative shifts have taken place in economic theory in the three decades since the end of World War II—for example, the re-emergence of the issues of growth as a principal quaesitum and the spreading disenchantment with the tenets of equilibrium analysis and the Pareto optimality,¹ little effort has been made to integrate the role of property relations and income distribution, as reflected in institutional and structural factors, into the corpus of theory. These continue to form disjunctive categories.

The organic relationship between the distribution of assets and incomes in society on the one hand and the structure of prices on the other has thus rarely been discussed in orthodox economic theory. The distribution of assets and incomes is a major determinant of prices, but prices too in their turn influence the distribution of incomes and assets. If one imagines a bartering community consisting exclusively of sellers (who are simultaneously buyers too), the division of the community’s assets between its members determines to a large extent the inter se terms of trade between the groups who exchange commodities or services among themselves; but the terms of trade in their turn determine the allocation of real incomes between them, and over time therefore influence the distribution of real assets. Where the community is made up of one group exclusively of buyers and another group exclusively of sellers, a rise in the price level by a certain order would imply a shift in income distribution in favour of the sellers on ceteris paribus assumptions; to that extent, the relative income of the buyers would decline. If, on the contrary, the price level falls over a period, the distribution of income would, other things once more remaining the same, shift in favour of the buyers. One of the principal aims of all political activities in a class-ridden society is to influence not just the distribution of property, but also the structure of market prices, since, apart from confiscation or appropriation, it is only through an adjustment of prices that the relative shares of assets and incomes going to different social groups and classes are reallocable.

This becomes obvious once the role of the State is taken into account. Prices are then revealed as a manipulable category, which can be a major instrument in the hands of those who want to use the apparatus of the State for furthering sectarian interest. To ignore this fact is to ignore the basic relationship between the polity and the economy. Those who join the fray of politics do so with the object of capturing power. But the seizure of power is not to give vent to an abstract religious passion, nor is it an exercise in pristine aesthetics; it is to shift the distribution of assets and incomes in society in favour of those groups who support you—and to whom you look for support. Throughout history, assets have been commandeered by war, plunder, confiscation. The instruments for acquiring such a command, and thus effecting a redistribution of incomes and assets, today belong to the more common species of price policy, supplemented by policies which impinge on taxation and subsidies, borrowing and lending, and purchases and sales. All such policies have a direct impact on relative prices. Through a selective policy of, for example, taxation and subsidies, it is possible to lower or raise the prices of goods and services, as well as of capital assets, and thus affect the relative incomes of their buyers and sellers. Through the modality of borrowing and lending, it is again possible to expand or contract the output, as well as lower or raise the price, of a commodity or a factor. And certainly purchases and sales of commodities and services at different levels of prices have the profoundest effect on income distribution. The fact is usually slurred over in a milieu dominated by hypocrisy, but the entire frame of government operations is set up to ensure that groups who support the authorities add to their assets and incomes, while those ranged against suffer a loss.²

There is, quite clearly, an analytical gap here. At one end, we have the Marxian rubric which, in a vast historical sweep, delineates the process of transformation of human societies as a dialectical maturing of certain economic institutions; it analyses the organic link between property relations and the distribution of income and output at different phases of a nation’s economic life. A sizeable literature has by now come into existence which discusses the implications, under varying assumptions, of the Marxian schematics for the pattern of growth of economies marked by particular social formations. This magnificent endeavour has left no perceptible mark on conventional economic discussions.³ Marxian economics, to this day, remains the great outsider.

Largely as a consequence, studies concerning the impact of political institutions and class structures on the shaping of economic policy have been generally neglected. That economic decision-making is causally related to the political forces at work continues to be considered as a near-heresy in many quarters. Economists of the conventional school have grown accustomed to discuss the virtues and vices of socialist economies vis-à-vis those of the capitalist ones; but they have been chary to draw the logical conclusion that since differences in economic practices under the two systems mirror differences in political structures, the nature of the polity is itself the prime mover of the economic process.

The depression in the 1930s did cast a certain shadow. But only for a while. Once the crisis was staved off through the adoption of Keynesian prescriptions, and World War II intervened, economists in the West could get rid of whatever self-doubt was earlier engendered concerning their political and economic institutions. The species of economic welfarism expatiated upon in the Western countries in the past few decades has also not called for any detailed examination of the organic relationship between economic phenomena and the class basis of the State. Recent developments in most of these countries have brought the two principal contending groups—the bourgeoisie and the working class—to a state of relative equipoise. A stable pattern of income distribution is being taken for granted; both classes have seemingly concluded that it would be impossible to effect, either in the short or in the long run, any major shift in the balance of economic power. As no fundamental re-ordering of income distribution is any longer sought, the rationality of the economic structure is not questioned either. Only marginal adjustments are every now and then demanded by either of the groups; these are willy-nilly acquiesced in by the other.⁴ A majority of practising economists have been drawn into this zone of tranquillity; enquiries pertaining to institutional issues have receded to the background.⁵ The trend has caught on elsewhere, including in the underdeveloped countries. In these countries, the class composition of the economists themselves has been a contributing factor. The economists either spring from, or are in no time drawn into the folds of, the upper stratum of the community, who generally constitute the ruling class. Their attitude toward the establishment is not dissimilar to that of a family physician, quiet and unremonstrative. There are occasions when they find themselves in considerable disagreement with specific aspects of State policy. Even on such occasions, their recommendations are in the nature of friendly counsel. As a group, they have rarely, if ever, gone into the political and social roots of economic decision-making.

If issues concerning the structure are excluded from economic analysis, what remains is mostly either technical virtuosity or arid tautology, hardly able to keep away boredom. The desperate flight to mathematics of the second best to which the science has been reduced of late perhaps reflect this ennui. Economists find themselves in the state of John Osborne’s anti-hero. There are no great causes lying in wait, no great challenges; one hurriedly escapes into a world of make-believe.

The present work is modestly conceived. It seeks to explore, in one general area, the relationship between political and economic realities. It argues that it is not possible to study the course of economic policy in isolation from the politics of class relations. A number of political biases influence the formulation of economic policy in every country. The biases are not accidental, but follow from the given structure of property and income distribution. This structure in its turn is affected by the apparatus of the State, which represents the interests of particular classes and groups. In so far as property relations are evolving continuously, the economic aspirations of the ruling groups are not always fully—and evenly—articulated through official policy. To that extent, the bias in economic decisions is characterised by shifts and contradictions. In other instances, decisions are influenced by political arrangements entered into by different economic categories who agree to a sharing —temporary or otherwise—of power. More specifically, the essay will examine the impact of one element of decision-making, namely, shifts in terms of trade between industry and agriculture, on the relative economic position of the different classes in society and thus on accumulation and growth. It is, of course, not the contention here that in the mutual interaction between class relations and product-cum-factor price, it is the terms of trade which constitute the dominating variable. The terms of trade effect on relative income shares neither supplants nor substitutes the crucial part played by property relations. It merely reflects—and extends—the process set in motion by the latter: the structure of class relations represents the stock, movements in relative prices are only a flow at the margin. Nonetheless, since over time the flow too does modify the stock, there can be a certain advantage in studying the relationship between income distribution and economic growth as the outcome of movements in terms of trade—movements which, it will be maintained, are engineered by developments in the polity.

The plan of the book is as follows. The discussion in the next chapter endeavours to show that the neglect of the class question is a relatively recent development in economic theory, and that the link between shifts in terms of trade and class interests had in fact been a major issue in classical political economy. This is followed by an interpretation of Rosa Luxemburg’s model of accumulation and dwells on its implications for inter-sector income distribution and overall economic growth. The next chapter is devoted to an examination of the terms of trade models discussed in the Soviet Union in the 1920s. Some of Michal Kalecki’s formulations which have relevance to the issue are examined in a subsequent chapter, followed by a neo-classical digression which sheds, albeit partially, further light on the problem. A schematics of class relations, based exclusively on terms of trade factors, is then suggested. The schematics is examined in the final chapters of the book with the help of Indian economic data; the hypothesis is offered that the quasistagnation in the Indian economy in the recent period is, to a principal extent, the by-product of political processes refracted through movements in inter-sector terms of trade.

NOTES

1 See, for instance, J.Kornai, Anti-Equilibrium: On Economic Systems Theory and the Tasks of Research, North Holland, 1971, and N.Kaldor, ‘The Irrelevance of Equilibrium Analysis’, Economic Journal, December 1972, pp. 1237–55.

2 State power serves the purpose of promoting a particular distribution of incomes and wealth by other means too, such as through legislation and direct administrative devices.

3 There is a strong ground for suspecting that this neglect of institutional issues was deliberate. The neo-classical opprobrium cast out not only the socialist writers, it also extended to such economists as J.A.Hobson whose formulations were marked by structural overtones. Savings, Hobson had argued, produce cycles of prosperities and depressions because savers invest promptly and thereby enlarge the productive capacity of the economy to a point where demand fails to keep up; as most savings are done by the relatively rich, the ultimate cause of cyclical disturbances, he pointed out, is the social inequality of income, a conclusion which could hardly be palatable to the orthodox school. See J.A.Schumpeter, History of Economic Analysis, 1954, pp. 1130–1.

John Maynard Keynes does not seem to have read much of Marx beyond the latter’s correspondence with Engels (see Keynes’ letter to George Bernard Shaw, dated 1 January 1935, quoted in R.F.Harrod, The Life of John Maynard Keynes, Macmillan, 1951), but that did not deter him from using strong epithets (‘a certain method of carrying on and a vile manner of writing’), epithets which could only be the outcome of class-biased prejudice. It is this prejudice again which must have goaded Keynes to refer together to ‘the underworlds of Karl Marx, Sidvic Gesell or Major Douglas’. (The General Theory of Employment, Interest and Money, Macmillan, 1949 edition, p.32). We have it on the authority of Roy Harrod that Keynes was most unhappy that the list of prescribed textbooks at the Honours School in Oxford included Marx’s works! (R.F.Harrod, op. cit., p. 327.)

4 The spiralling inflation since the early 1970s had led to a partial resurgence of trade union militancy in a number of the Western countries; but this does not contradict the central point stressed above.

5 A major exception in the writings of the so-called ‘structuralist’ school in Latin American countries.

CHAPTER 2

Class Conflict and Classical Political Economy

I

As far as classical political economy is concerned, the conflict of class interests was a basic condition of economic life. Adam Smith, in the Introduction and Plan of Work of the Wealth of Nations, promises to enquire not only into the ‘causes’ of the ‘improvement’ in ‘the productive powers of labour’, but also into ‘the order, according to which its produce is naturally distributed among the different ranks and conditions of men in the society’. The moment one talks of ‘ranks and conditions of men’, one is, in fact, talking of classes. Consider also the following passage:

As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed and demand a rent even for its natural produce…He [the labourer] must then pay for the licence to gather them; and must give up to the landlord a portion of what his labour either collects or produces.¹

Is there the least doubt that landlords here represent a class, as labour does too, and that a relation of contradiction exists between the two? Later, in the chapter ‘Of the Wages of Labour’, Adam Smith reiterates, explicitly, the theme of class contradiction while discussing the formation of wages in the manufacturing sector:

What are the common wages of labour, depends everywhere upon the contract usually made between those two parties [that is, masters and workmen], whose interests are by no means the same. The workmen desire to get as much, the master to give as little as possible. The former are disposed to combine in order to raise, the latter in order to lower the wages of labour.

It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms. The masters, being fewer in number, can combine much more easily; and the law, besides, authorises, or at least does not prohibit their combinations, while it prohibits those of the workmen. We have no acts of pa...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Dedication
• Contents
• List of Tables
• Acknowledgments
• 1 Economic Theory and the class Question
• 2 Class Conflict and Classical Political Economy
• 3 Rosa Luxemburg and the Theory of Unequal Exchange
• 4 Terms of Exchange and Accumulation: the Soviet Debate
• 5 Relative Prices,Income Distribution and Growth
• 6 Immiserisation and Terms of Trade:A Neo-classical Digression
• 7 A Schematics of Class Relations
• 8 Class Bias in Indian Farm Price Policy
• 9 Farm Price Fixation:Two Cases of Asymmetry
• 10 Relative Price Movements and Industrial Growth
• 11 The Political Economy of Ateophy
• 12 An Epilogue
• Index