Karl Marx Theory of Development

The thought about economic growth of Karl Marx is published in his famous book “Das Kapital”.

According to Karl Marx there are five stages through which an economic development takes place.


It is the uncivilised portion/part of the economy in the process of development. In this stage people live in  forest and survive  on hunting and product of forest.


In this stage people are under the control of land and they serve the owner as servant.


In this stage the labour are appointed on the basis of wage. They serve the land owner against the payment. The small scale and cotton industry are found in this stage.


There are some persons who are called capitalist and they provide the capital for agriculture and industrial sector. The labour are given fixed wage and surplus amount is taken by the capitalist as profit. The capitalists exploit the labour class.


After the collapse of capitalism the socialism comes. In this stage all controls of the economy is in the hand of government. Social welfare is more important then the personal benefits.

In Karl Marx economic model the production function is

\(O = f(L,K,N,T)\)


O = output

K = Capital

N = Land

T = Technological Progress

Here we find that the production function of Karl Marx is similar to the production function given by the classical economists.

Marxian theory is based on two thoughts :

  1. The value theory of Labour.
  2. Thought of value of labour about subsistence level

According to Karl Marx the labours are exploited they are given minimum wage and the surplus income is given to the capitalist as profit.

i.e., Surplus Value = Total Value of production – Wage of labour

The surplus value is considered as unearned income of capitalist and it is equal to the exploitation of labour.

In Karl Marx theory there are three components of price of a commodity

  1. FIXED CAPITAL ( C ) : This cp does not produce the surplus value.
  2. VARIABLE CAPITAL ( V ) : This capital produces the surplus value.
  3. SURPLUS VALUE ( S ) : This is the unearned income or profit of the capitalist.

So, Price of the Commodity = [C + V] + [S]

Here, [C + V] is the Production Cost and [S] is profit.

Karl Marx considered the rate of surplus value as the rate of exploitation. According to him the rate of exploitation means the ration between the surplus value and among the variable capital.

Rate of Exploitation = S / V

There is another important factor in Karl Marx growth model i.e., Organic Composition of Capital.

It is the ratio between Fixed Capital and Variable Capital.

Organic Composition of Capital = C / V

According to Marx, as capitalism increases/ develops the value of “C” increases and labours are substituted by machines.

The rate of profit is determined by organic composition of capital and rate of exploitation. He defined the rate of profit as the ratio between surplus value and total capital.

\(r=\; \frac{S}{C\; +\; V}\),

\(or,\;r=\; \frac{\frac{S}{V}}{\frac{C}{V}\; +\; \frac{V}{V}}\),

\(or,\;r=\; \frac{\frac{S}{V}}{\frac{C}{V}\; +\; \frac{V}{V}}\),

\(or,\; r=\; \frac{Value\; of\;Exploitation}{Organic\; Composition\; +\; 1}\),

Thus according to Marx model the rate of profit is determined by rate of exploitation and organic composition of capital. From this model we also find that the profit increases by increasing the rate of exploitation.

According to Marx in capitalist economy the  capitalist increase the profit by exploitation of labour.

The main points of marxian theory is the technological progress depends on the quantity of investment.

\(T\; =\; T\left( I \right)\),

Investment depends on the rate of profit,

\(I\; =\; I\left( r \right)\),

The wage depends on Investment,

\(W\; =\; W\left( I \right)\),

Employment depends on rate of Investment,

\(L=\; L\; \left( \frac{I}{Q} \right)\),  Q = Capital

Consumption depends on wage bill,

\(C\; =\; C\left( W \right)\),

Profit depends on Rate of exploitation and organic composition of capital,

\(P\; =\; P\; \left( \frac{S}{V},\frac{C}{V} \right)\),

Karl Marx concluded his theory by collapse of capitalism and rise of socialism. According to him due to competition in capitalism the rate of profit decreases which causes the end of capitalism, socialism is raised.


  1. This theory is applicable in static economy not in the dynamic economy.
  2. According to Marx, the machines increases the underemployment in the economy. This is true for sort run only. In the long run due to modernisation and technological progress employment increases.
  3. Marx was against the control of population but over population is harmful for any economy.
  4. In underdeveloped countries there is an important role of government but in marxian theory the role of government is totally neglected.
  5. The prediction of quick fall of capitalism is wrong forecasting by Marx.
  6. According to Marx labour movement is found in capitalism but we find many evidences of labour movements in socialist countries.

Inspite of there criticisms the Marxian theory impressed many modern economist and at present also there is a good effect of marxian thought.

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