Amity Business School

Amity Business School

MBA 2013, 3rd Semester

INTERNATIONAL ECONOMICS AND POLICY

Amanpreet Kang

Amity Business School

Conceptualization of Economic Systems

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
2

Amity Business School

Conceptualization of Economic Systems

Basis of social order is production of economic goods What is produced, how is it produced and how is it exchanged is the basis of differences in peoples:
Wealth Power Social status

The quest to meeting basic needs is central to understanding social life. After meeting basic needs, there is creation of new needs.
3

Amity Business School

Conceptualization of Economic Systems

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.
4

Amity Business School

Conceptualization of Economic Systems

With time, these classes develop different material interests and they become antagonistic. Analysis of society will reveal its underlying economic arrangements. 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.

Amity Business School

Conceptualization of Economic Systems

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

Amity Business School

Conceptualization of Economic Systems

Property relations - Give rise to social classes "The ideas of the ruling class are, in every age, the ruling ideas Ruling class, Oppressed, Revolution

Amity Business School

Conceptualization of Economic Systems

Perfect capitalism no monopolies, no unions, no special 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 labor it has within itself.
Machines, overhead labor - everything is eventually reducible to labor and it is the true source of value, determines the price of goods.

The commodities will be priced according to the amount of labor, direct or indirect, that they contain.

Amity Business School

Conceptualization of Economic Systems

Labor power the worker enters the market to dispose of the one commodity he commands -- labor power. The capitalist is an owner-entrepreneur
engaged in an endless race against his fellow ownerentrepreneurs; strives for accumulation, competitive environment, one accumulates or one gets accumulated.

If everyone gets the exact value, what is the source of profits

How do profits accumulate Price cannot be higher than the competitor How can there be profit in the whole system if everything exchanges for its honest worth?

Amity Business School

Conceptualization of Economic Systems

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 in commodities
10

Amity Business School

Conceptualization of Economic Systems

Profits excess hours worked for the capitalists for which the 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 he paid the worker. The capitalists monopolize access to the means of production themselves. They own the machines and equipment without which men and women cannot work.

11

Amity Business School

Conceptualization of Economic Systems

Profits Competition Accumulation Expand the scale of output Expansion, need more labor, wage rate, surplus value Improve technology Labor saving machinery
12

Amity Business School

Conceptualization of Economic Systems

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 time for which the workers worked By reducing workers, reduces the chance of earning profit
13

Amity Business School

Conceptualization of Economic Systems

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.

14

Amity Business School

Conceptualization of Economic Systems

Crisis is not end of the game. Workers accept sub-value wages. Machinery is dumped, the stronger capitalists can acquire machines for less than their true value. After a time, surplus value reappears. Thus each crisis serves to renew the capacity of the system to expand. Crisis -- or recession, in modern terminology -- is therefore the way the system works, not the way it fails.
15

Amity Business School

Conceptualization of Economic Systems

But the working of capitalist system is very peculiar. Each renewal leads to the same ending:
competition for workers; higher wages; labor-displacing machinery; a smaller base for surplus value; still more frenzied competition; another crisis -- worse than the preceding one.

For during each period of crisis, the bigger firms absorb the smaller ones, and when the big organization eventually go down, the damage is far greater than when the small enterprises fall.

16

Amity Business School

Conceptualization of Economic Systems

Feudalism Capitalism

Imperialism/socialism at its highest

Transition Socialism Transition
17

Amity Business School

Conceptualization of Economic Systems

Imperialism highest stage of capitalism Identified by Lenin, not much discussed by Marx 5 features are: 1) There should be development of monopolies and concentration 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 to create finance capital 3) The export of capital becomes more important than the export of commodities.
18

Amity Business School

Conceptualization of Economic Systems

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 Multilateral relationships

19

Amity Business School

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 different economies. Changes in means of production/ features of production. Proletariat revolution/ vanguard of the working class Capture of power by working class under leadership of the proletariat. Bourgeois Deliberate
20

Amity Business School

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)

21

Amity Business School

Economic Systems 4 main types of economic systems Market Capitalism Centrally planned socialism Centrally planned capitalism Market socialism

22

Economic Systems

Amity Business School

This classification is based on the dominant method of resource allocation (market versus command) and the dominant form of resource ownership (private versus state). Resource Allocation Market Command Private Resource Ownership Market Capitalism Centrally Planned Capitalism Centrally Planned Socialism
23

State

Market Socialism

Amity Business School

Market Capitalism
Individuals and firms allocate resources Production resources are privately owned Driven by consumers Government should promote competition among firms and ensure consumer protection

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

24

Amity Business School

Centrally-Planned Capitalism Economic system in which command resource allocation is used extensively in an environment of private resource ownership
Examples: Sweden, Japan

25

Amity Business School

Market Socialism Economic system in which market allocation policies are permitted within an overall environment of state ownership

Examples:
China India

26

Amity Business School

Centrally Planned Socialism

Opposite of market capitalism State holds broad powers to serve the public interest; decides what goods 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 economic system.
27

Amity Business School

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

28

Amity Business School

References
1. International Economics, Francis Cherunilam (4th Edition), Mc Graw Hill 2. International Economics, BO Sodersten and Geoffrey Reed (3rd Edition), Macmillan 3. International Economics, Paul Krugman and Maurice Obstfeld (6th Edition), Pearson Education 4. Economics, Samuelson & Nordhaus (18th Edition), Tata Mc Graw Hill

29