iep~session 3

7/27/2019 IEP~Session 3

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Amity Business School

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MBA 2013, 3rd Semester

INTERNATIONAL ECONOMICS AND POLICY

Amanpreet Kang


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The role and significance of nation states Adam Smith

and Ricardo

Karl Marx (1818 to 1883) History of economic thought and philosophy

Paradise on earth, brotherhood, sharing talents and

wealth Social Man

Power originates in economic production Social classes

Theory of social change based on antagonism between

social classes

Conceptualization of Economic Systems


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Evolution of new needs when we find means to satisfy

the older ones

Humans organize the activities to meet the needs.Hence every society is built on an economic base.

Exact form of social organisation varies from society to

society and era to era.

Organisation of economic activities leads to division of

labor, which causes formation of classes.



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With time, these classes develop different material

interests and they become antagonistic.

Analysis of society will reveal its underlying economicarrangements.

Forces of production as a powerful variable in

influencing the rest of the social system.

We must examine the parts in relation to one another

and in relation to the whole. All phenomena are

dependent upon the economic base.



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The forces of production are the technology and work

patterns that men and women use to exploit their

environment to meet their needs.

The relations of production are the relations men (and

women) establish with each other when they utilize

existing raw materials and technologies in the pursuit of

their production goals.

Forces of production

Relations of production

Superstructure of society



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Property relations - Give rise to social classes

"The ideas of the ruling class are, in every age, the ruling

ideas

Ruling class, Oppressed, Revolution



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Perfect capitalism no monopolies, no unions, nospecial advantages for anyone.

Every commodity sells at exactly its proper price.

Proper price determined by Value

Value of a commodity, says Marx, is the amount of laborit has within itself.

Machines, overhead labor - everything is eventually reducible tolabor and it is the true source of value, determines the price ofgoods.

The commodities will be priced according to the amount

of labor, direct or indirect, that they contain.



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Labor power the worker enters the market to disposeof the one commodity he commands -- labor power.

The capitalist is an owner-entrepreneur

engaged in an endless race against his fellow owner-entrepreneurs;

strives for accumulation,

competitive environment, one accumulates or one getsaccumulated.

If everyone gets the exact value, what is the source ofprofits

How do profits accumulate

Price cannot be higher than the competitor

How can there be prof i t in the who le system if everything

exchanges for i ts honest wor th?



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Profits are easy to explain if we assume existence of monopolies

if capitalists may pay labor less than it is worth.

Labor as a commodity

Capitalists sell commodities and labor, labor power

Subsistence wage is the money that the worker needs

to exist

Labor time (work hours), wage rate, labor time incommodities



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Profits excess hours worked for the capitalists for whichthe labor is not paid

Marx called this layer of unpaid work "surplus value.

The worker is entitled only to the value of his labor-power(enough only for subsistence).

But the capitalist gets the full value of his workers' whole

working day. This is longer than the hours for which hepaid the worker.

The capitalists monopolize access to the means ofproduction themselves. They own the machines and

equipment without which men and women cannot work.



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Profits

Competition

Accumulation

Expand the scale of output

Expansion, need more labor, wage rate, surplus value

Improve technology

Labor saving machinery



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Labor saving machinery

Industrial reserve army

Fall in wage value to subsistence level

Unemployment

Machines true value is paid

Only one source of profit unpaid wages for the extra timefor which the workers worked

By reducing workers, reduces the chance of earning profit



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Commoditization

Profits shrink

Competition rises

More cost cutting machinery by all

The rate of profit falls Profits cut to point at which production is no longer profitable

Consumption dwindles

Scramble to dump goods on the market

Smaller firms go under

Capitalist crisis is at hand.



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Crisis is not end of the game.

Workers accept sub-value wages.

Machinery is dumped, the stronger capitalists can acquiremachines for less than their true value.

After a time, surplus value reappears.

Thus each crisis serves to renew the capacity of thesystem to expand.

Crisis -- or recession, in modern terminology -- is thereforethe way the system works, not the way it fails.



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But the working of capitalist system is very peculiar.

Each renewal leads to the same ending:

competition for workers; higher wages; labor-displacingmachinery; a smaller base for surplus value; still morefrenzied competition; another crisis -- worse than thepreceding one.

For during each period of crisis, the bigger firms absorb thesmaller ones, and when the big organization eventually godown, the damage is far greater than when the smallenterprises fall.



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Feudalism

Capitalism

Imperialism/socialism at its highest

Transition

Socialism

Transition



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Imperialism highest stage of capitalism

Identified by Lenin, not much discussed by Marx

5 features are:

1) There should be development of monopolies andconcentration of capital to such a high stage that

monopolies are created and they start playing a decisive

role in economic life.

2) Merging of bank capital with the industrial capital tocreate finance capital

3) The export of capital becomes more important than the

export of commodities.



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4) International monopoly combines of capitalists are

formed that divide the world.

5) Territorial division of the world by greatest capitalist

powers is complete based on bilateral and Multilateralrelationships



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Transition

Transition State period in which there is a shift from one

economic system to the other.

Reorganization may be painful, noticeable and may take

time.

The nature of reorganization is different for differenteconomies.

Changes in means of production/ features of production.

Proletariat revolution/ vanguard of the working class

Capture of power by working class under leadership of theproletariat.

Bourgeois

Deliberate


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Transition

Nature of the socialist state

Case of China and USSR

Dictatorship of the proletariat

Rule by majority on minority

Nobody can live on the labour of the other

State provides employment

Representatives of the people

They can be called or recalled

Communist Party of China (Mao)

Bourgeois democracy

Class dominating and controlling the state

Under this system only heads are counted and not the quality

of heads (Bernard Shaw)


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Economic Systems

4 main types of economic systems

Market Capitalism

Centrally planned socialism

Centrally planned capitalism

Market socialism


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Economic Systems

Market Command

Market

Capitalism

Centrally

Planned

Capitalism

Market

Socialism

Centrally

Planned

Socialism

Private

Resource

Ownership

State

Resource Allocation

This classification is based on the dominant method of

resource allocation (market versus command) and the

dominant form of resource ownership (private versus

state).


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Market Capitalism

Individuals and firms allocate resources

Production resources are privately owned

Driven by consumers

Government should promote competition among firmsand ensure consumer protection

Market capitalism is practiced most around the world,most notably in Western Europe and North America.


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Centrally-Planned Capitalism

Economic system in which command resource

allocation is used extensively in an environment

of private resource ownership

Examples:

Sweden,

Japan


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Market Socialism

Economic system in which market allocation

policies are permitted within an overall

environment of state ownership

Examples:

China

India


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Centrally Planned Socialism

Opposite of market capitalism

State holds broad powers to serve the public interest; decides whatgoods and services are produced and in what quantities

Consumers can spend on what is available

Government owns entire industries

Demand typically exceeds supply

Little reliance on product differentiation, advertising, pricing strategy

For decades China, the Former Soviet Union used this economicsystem.


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Political and Legal Environment

System of government in a nation

Democracy - representative

Totalitarian - Communist, theocratic, tribal, right-wing

Home country

Host country

Embargoes

Sanctions

Government structure

Terrorism

Legal systems common law, civil law and theocratic


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1. International Economics, Francis Cherunilam (4thEdition), Mc Graw Hill

2. International Economics, BO Sodersten and GeoffreyReed (3rd Edition), Macmillan

3. International Economics, Paul Krugman and MauriceObstfeld (6th Edition), Pearson Education

4. Economics, Samuelson & Nordhaus (18th Edition), TataMc Graw Hill

References

iep~session 3

Documents