Economics Assignment 1: Comparing Marx and Classical Economists

This economics assignment explores the evolution of economic thought, focusing on the theories of economic growth and development. The essay delves into Karl Marx's theory of "Falling Profit" and contrasts it with the "Stationary State" concept proposed by classical economists such as Adam Smith and David Ricardo. It examines the key differences in their explanations of economic stagnation, including factors like competition, diminishing marginal productivity of land, and the organic composition of capital. The assignment highlights how Marx attributed the decline in profit to the increasing ratio of constant to variable capital and the exploitation rate, offering a different perspective from Smith and Ricardo. The essay also explores the implications of these theories on economic development, capital accumulation, and the role of labor. The essay concludes by summarizing the contrasting views on the causes of declining profit and the implications for the economy's growth trajectory.

Running head: ECONOMICS ASSIGNMENT
Economics Assignment
Name of the Student
Name of the University
Author Note

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Economics as a subject has evolved considerably, experiencing substantial dynamics with
time and changes in the global economic, social and political frameworks. However, there have
been several key issues and questions of concerns which remained as primary topics for
investigations, speculation and exploration for the economists over centuries and in all the
corners of the world (Barr 2012). One of such issues of immense concern, among the
economists, has been the issue of economic growth and development of different geographical
regions.
Every country or economy is different from another in terms of their unique
characteristics, inclusive of the demographics, resource patterns, and income generating
activities, social and political contexts and also in terms of the governing or the regulatory
framework under which the economic agents of these regions operate. However, regardless of
these inherent differences, the growth pattern of the economies tends to have several common
features and steps. Over the years, the economists have tries to identify, define and discuss such
steps of development of the economies across the globe (Negishi 2014).
Keeping the above discussion into consideration, the concerned essay tries to discuss the
concept of “Falling Profit”, one of the iconic theory of economic development, proposed by Karl
Marx and compare the same with the concept of stationary state in , as has been proposed by
different classical economists over the years, in the aspects of the different stages of
development of an economy and the traits observed in the economic domains of the countries in
the process of development (Clarke 2016).
One of the foremost schools of thought, in economics, has been the Classical school of
economists, with Adam Smith being considered as the father of this school of thought and also of

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economics as a discipline itself. The other eminent economists believing in this school of thought
are David Ricardo, Mill, Malthus and Say. Each of these classical economists has contributed
significantly in the arena of designating the characteristics of the economies in general, at
different stages of growth or progress with time (North 2016). One of the primary characteristics
of any economy in its growth path, which have been put forward by different classical
economists from different perspectives, is the concept of the “Stationary State”. Though having
different dimensions in the theories of different classical political economists, the concept of
stationary state is viewed, in general, as the final state of economic growth in which all the
economies are expected to devolve into (Van den Berg 2016). The stationary state is generally
consisting of stability in all the growth variables, specifically the ones like the stock of physical
capital and the growth trends in the population of the countries.
The concept of stationary state, in its elementary form, was first proposed by the classical
economist, Adam Smith. Under the belief that individual freedom in economic actions
maximizes the profit of all the individuals in the economy, Adam Smith recognized three main
factors of production- labor, land and capital, with the production function of the economy being:
Y= f(K,N,L), here, K is the stock of capital in the economy, L is the total labor force in the same
and N is the land resources present in the economy (Blauwhof 2012). Adam Smith also
incorporated the idea of increasing returns to scale in the production function, arguing that the
real cost of production tend to diminish with time. The growth of an economy, as proposed by
Adam Smith, is also characterized by division of labor, which leads to specialization and also by
the process of capital accumulation. Smith sees these attributes in an economy as the drivers of
economic growth and progress of the countries in general.

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According to the assertions of Smith, the growth process of any economy is cumulative,
with the reinvestment of profits in the production process being one of the most natural
behaviors of the economic agents. The continuous progress of agricultural sector leads to the
development of the manufacturing industries and commerce in the economy. The prosperity of
these sectors leads to higher capital accumulations, population increase and rise in the profits in
the economy (Waterman 2012).
However, this leads to immense competition for more profit accumulation among the
businessmen and over time, owing to the scarcity of the natural resources as well as the increased
competition, the growth of the economy starts stagnating. The profits also start falling after a
certain point of time, owing to the high competition and scarcity of natural resources, which in
turn decreases the level of investments in the economy (Brown 2013). The stagnation of capital
accumulation and decline of profits also makes the population stationary. The wages come down
to a subsistence level and there no longer occurs any change in the per capita income or
production in the country. This state of stagnation of the growth of all the growth variables in the
economy leads to the creation of a state of stability in the economy, which Adam Smith refers to
as the stationary state in the economy.
However, the propositions of Adam Smith, regarding the stationary state as an end state
of the capitalist economy, has been criticized in the aspect that he defines stationary state as a
steady situation with uniform and regular development. However this assumption is unrealistic
as development in the real scenario cannot occur uniformly always (O'donnell 2016).
Like Smith, David Ricardo also defines stationary state, but from a different perspective.
According to his theory, there remains a natural tendency of the profit of an economy, over its

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course of growth, which leads the economy to the stationary state. According to him, with the
increase in capital accumulation and profit, the production as well as the wages of an economy
increases. This in turn increases population, which leads to a rise in the aggregate demand in the
economy. This demand increase tends to the cultivation of comparatively inferior land resources
too and the rents on the superior ones are subjected to increase, thereby reducing the wages of
the labors as well as the profits of the capitalists (Ekelund Jr and Hébert 2013). This in turn
reduces the profit and the wages also fall to the subsistence level and the same continues till the
marginal output from the land covers only the subsistence wage of the labor, thereby making the
profit level equal to zero. This initiates the stationary state in the economy, where the
accumulation of capital stops, along with the stagnation of population and wages, which clubbed
with excessive high rent, leads to an overall stagnation of the economy.
The views of both Smith and Ricardo talk about stationary state and the concept of
primarily increasing and then declining rates of profits in the economy which leads to stagnation
in the economic growth variables. In this context, the theory of falling profit in the growth path
of an economy has also proposed by Karl Marx. Marx also proposed that with time and progress
of an economy, the profit increases till a certain point of time, after which it declines. However
the decline in the profit is explained by Marx from a perspective different from that of Smith or
(Ricardo Lin and Rosenblatt 2012).
Unlike the assertions of Adam Smith or Ricardo, Marx does not attribute the long term
falling rate of profit with time, to the wage increasing competition (Smith) or to the diminishing
marginal productivity of the scarce land resources. According to the “Falling Profit” theory of
Karl Marx, the profit of the economy declines with time and the same can be attributed to what is
known to be the increase in the “organic composition of the capital”.

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In the Marxian theory, the term “Organic composition of capital” is defined as the ratio of
the constant capital to that of the variable capital in the economy. Marx defines constant capital
as the capital circulating in the economy, like that of raw materials and variable capital as that of
the compensations of labor, like that of wages given to the labor (Howard and King 2014).
Thus, according to Marx, y= c+v+s, where y is the output, v is variable capital, c is constant
capital and s is the surplus values.
Thus, the rate of profit r= s/ (v+c).
Marx assumes that the surplus value is only produced by the labors in the economy and
he also defines the ratio of the surplus value to that of variable capital as the exploitation rate,
showing the production of surplus for each unit of money spent on the labor resources. Keeping
this into consideration, Marx asserts that with time, the organic composition of capital increases
with time, while the exploitation rate remains fixed, thereby showing a decline in the rate of
profit with time (Ruccio and Amariglio 2016).
This is because, with increasing surplus accruing to the capitalists, the surplus is
reinvested to increase production, with output rising but labor supply remaining fixed, which
leads to an increase in the wages, declining the rate of profit. To restore the same, labor saving
technologies will be implanted, which in turn leads to unemployment (Fleetwood 2012).
However, the temporary respite of increase in profit, is again expected to reinvestment of profit
again, thereby leading to the occurrence of the cycle again, ultimately leading to a net decline in
the rates of profit, because with each cycle, the probability of layoff will decrease even more and
after a time no more labor can be released and the s/v cannot be backed up even more.

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From the above discussion, it can be concluded that both classical economists as well as
Marx have proposed the idea of stationary state and the incidence of decline in the profit of the
economy with time. However, their perceptions and ways of interpreting the process by which an
economy reaches to a state of declining profit vary considerably. While Smith and Ricardo
explain the same with the help of increasing competitions among the capitalists or diminishing
marginal productivity of land, Marx gives an entirely different explanation of the declining
profit, from the perspectives of organic capital composition, surplus value production and
exploitation rate.

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References
Barr, N., 2012. Economics of the welfare state. Oxford University Press.
Blauwhof, F.B., 2012. Overcoming accumulation: Is a capitalist steady-state economy
possible?. Ecological Economics, 84, pp.254-261.
Brown, M., 2013. Adam Smith's Economics: Its Place in the Development of Economic Thought.
Routledge.
Clarke, S., 2016. Marx's theory of crisis. Springer.
Ekelund Jr, R.B. and Hébert, R.F., 2013. A history of economic theory and method. Waveland
Press.
Fleetwood, S., 2012. Laws and tendencies in Marxist political economy. Capital & Class, 36(2),
pp.235-262.
Howard, M.C. and King, J.E., 2014. A History of Marxian Economics, Volume II: 1929-
1990 (Vol. 2). Princeton University Press.
Lin, J.Y. and Rosenblatt, D., 2012. Shifting patterns of economic growth and rethinking
development. Journal of Economic Policy Reform, 15(3), pp.171-194.
Negishi, T., 2014. History of economic theory (Vol. 26). Elsevier.
North, D.C., 2016. Institutions and economic theory. The american economist, 61(1), pp.72-76.
O'donnell, R., 2016. Adam Smith’s theory of value and distribution: A reappraisal. Springer.

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Ruccio, D.F. and Amariglio, J., 2016. Postmodern moments in modern economics. Princeton
University Press.
Van den Berg, H., 2016. Economic growth and development. World Scientific Publishing
Company.
Waterman, A.M.C., 2012. Adam Smith and Malthus on high wages. The European Journal of
the History of Economic Thought, 19(3), pp.409-429.