COLLEGE NAME: KINNAIRD COLLEGE

DEPARTMENT NAME: INTERNATIONAL RELATIONS

COURSE NAME: INTERNATIONAL POLITICAL

ECONOMY

STUDENT’S NAME: AIMEN ZEB WAHLAH

TEACHER’S NAME: DR. ASIA MUKHTAR
ROLL # F19BAIR030
PRE MID ASSIGNMENT # 2
SEMESTER: 5
DATE: 29TH-SEPTEMBER-2021
Theory of Marxism: Analysis of US Financial Crisis in 2008

Abstract
This document gives detailed explanation regarding Marxism theory. Marxism is an
international relations philosophy developed by Karl Marx in the mid-nineteenth century. It
studies the effect of capitalism on the economic conditions of a State. According to Marxism,
workers should come together and revolutionize against capitalism in favour of communism.
The different class divisions within a society will lead to revolutionary communism. Its main
concept and its link with politics and economy discussed thoroughly. Moreover, the theory of
structuralism is also discussed under Marxism and detailed analysis is also given. From
below, we can see the aspects of the oppressed class, the poor, and developing third world
countries within the scope of the international political economy. The focus of structuralism
is on what is dynamic in the global political economy. The main concepts, ideas, and policies
related to Marxism and Lenin will describe and also discuss some structuralist arguments
about the financial crisis. In addition to this, the case study of US financial crisis is also
discussed with reference to structuralist Marxism theory.
What is Marxism?
The Marxist perspective is one of the most important and a lively approach to the study of
International Politics which is different from traditional theories of international relations
such as realism and neo-realism in manner; that it does not support to maintain status-quo in
the international system. Rather, it attempts to bring the radical change in the prevailing
social and political order. It was the first theory that was named after a theorist Karl Marx.
The political and economic ideas were introduced by Karl Marx and Engels. These ideas
influenced many countries. This is a political theory that has influenced world politics for
over 150 years. In this theory the main idea is that the world is distributed into different
classes which includes workers and the richer capitalists. These capitalists exploits the labour
class thus due to this class difference or conflict eventually this will lead to socialism, and
then communism and eventually to class less society. Basically Marxism highlighted the idea
that during Industrial revolution workers were being exploited. It led to unjust treatment of
workers.

Basically Elite class were in dominant position they keeps profit with themselves and treat
workers in miserable way and pay them less wages. Capitalist were not sharing their profits
with workers and other then this they were increasing work load on them. This all scenario
was against human kind thus it leads to alienation and other then this environment was also
being exploited as coals and petrol was extracted the damaged the natural environment.
Workers were not satisfied their hard work was not appreciated by the owners (Industrialist)
thus those workers were neglected.

Marxism also effect political views which includes social democracy and socialism. Marxist
ideas were different from capitalism views. Marxism believes that capitalism can only
prosper on the exploitation of the labour class. However according to Marxism there was a
real denial between the human nature and the way they work in a capitalist society.

Historical Materialism
Marxists argue that history is the result of materialistic conditions rather than ideal. Historical
materialism is a scientific approach to the study of history. It studies the interaction between
society, history and economics. The life of an individual is influenced by material conditions
prevailing around him. According to Marx, it is how humans ensure their living and who
owns the means to living dictates the social relations within society.

The mode of production is of great significance in understanding historical materialism.

Mode of production includes labor, raw materials and resources needed to produce goods.
Moreover, it also includes work relations between people as in who are the owners and who
works under them. Any sort of social relations occurring at any stage are greatly determined
by economic conditions prevailing at the time. Survival of man depends on his efficiency in
the production of goods. Production is therefore the most important human activity. A perfect
society brings in satisfaction for all by creating necessities of all. But according to dialectic
concept, perfection comes after long process of conflict between opposing forces. Society has
always been subjected to internal stress and strains and man has always imagined of a world
where all his needs are met. As the process of material conditions holds the key to man’s
social life, changes in the process are responsible for all historical development. Marx’s
description of historical development is based on the concept of historical materialism.

However in this theory it tells us that super structure is based on the base. Base includes
workers they are the one who work hard and work for industries to produce goods. If these
workers will not work then nothing will work neither economy nor politics. Economy will
eventually collapse. However according to workers their efforts should be recognised their
hard work should be encouraged because they are the base and super structure is dependent
on base. The input workers produce should also be returned to them. However if this cycle
will break this structure will not work. The key of Marxist thinking is known as Materialism.
This is a view that tells us that communities establish from the ground up. It highlight the
facts and say that higher qualities of culture which include manners, art and customs are
basically founded on the “lower” or simpler qualities of life. These qualities add having
enough of what people need to survive which includes food and shelter, who has money and
what they have to do to get it, the person who is allowed to work, and the person who is
forced to work. Henceforth changes in the higher qualities of culture which is known as super
structure are often linked to changes in the lower qualities of life known as base.

Class Theory
Karl Marx based his class theory on the idea that modern society has only two classes of
people: the bourgeoisie and the proletariat. The Bourgeoisie are the owners of the means of
production: the factories, businesses, and equipment needed to produce wealth. The
Proletariat are the workers.

The bourgeoisie in industrialist societies exploit workers. The owners pay them enough to
afford basic necessities, and the workers do not realize they are being exploited as they think
that they are well off. They think they can counter their capitalist owners to do what was best
for them.

Marx predicted the workers’ revolution. As the rich grew richer, Marx contemplated that
workers would develop a true class awareness, or a sense of shared identity based on their
frequent experience of exploitation by the bourgeoisie. Then they would unite and rise up in a
global revolution. After the revolution, the workers would then own the means of production,
and the world would become communist. No one class would control the upsurge to wealth.
Everything would be owned equally by everyone.

Later, Marx vision was not true. As societies developed and become larger, the working
classes became more educated, gaining specific job skills and achieving the financial
resources which Marx never had thought would be possible. Instead of rising exploitation, the
workers came under the protection of unions and labor laws. Skilled factory workers and
tradespeople began to earn salaries that were greater than, their middle-class counterparts.
Theory of Structuralism By Karl Marx Under Marxism
Structuralism is rooted in the thought of Karl Marx, which is very influential in his
predictions about the collapse of capitalism. It is inevitable and humanist ethics that believe
that humans are mostly good, and in certain favorable circumstances, will be able to free
themselves from the institutions that oppress, insult, and mislead.

Most structuralists do not believe that falling profit rates for capitalists will cause the collapse
of the capitalist mode of production. Structuralism places the relationship between economics
and politics as the most crucial element in seeing things concerning influencing social,
cultural, and political life itself with the hope of creating justice for the whole class.
Structuralists emphasize the class-based nature of the international political economy in terms
of content orders where one cannot understand the domestic economic policy or global
political economy without recognizing conflicts over income derived from the distribution of
economic output into profits and wages. Structuralism is considered as a critique of realism
and liberalism to create a fairer world because the birth of capitalism has created an unfair
gaze. The current global economic relations designed to benefit certain social classes to
develop social courses from the perspective of structuralism this must eliminate. Anti-
globalization structuralists call for greater unity among workers from all countries and
international trade and investment arrangements that no longer expose developing countries
that are vulnerable to conditions that support the core.

Case Study of US Financial Crisis 2008

The issue of recession lately has become much of the international discourse community
since the news of the economic slowdown in the United States. The downturn in the United
States economy at the end of 2007 prompted speculation that the United States is on the verge
of recession, especially the impact of the credit crisis that has spread from the housing sector
(currently in a recession) to the manufacturing industry and towards the labor sector. Besides,
the financial crisis that was initially only experienced by America in the process has spread to
other countries and turned not only into a global-scale financial crisis but has led to a global
economic slowdown. Besides having a weakening in the financial sector, this also has
implications for the real industry. The industry, which is related to the local business sector,
as well as the actual industry and international finance through export-import and financing
activities, can already feel the impact of the financial crisis and the global economic
slowdown.

The world economy recovered from the recession due to the collapse of housing in the United
States in 2007. When viewed from a Structuralist Perspective, which considers the problem
as part of the structure. They argue that the financial crisis and economic stagnation result
from economic laissez-faire policies. In the last 35 years, the income of the wealthy
American has increased through the industrial sector. Lower and middle-class people are
easier to get credit cards, which are debt instruments without any collateral. People become
spending their income just to pay debts. Thus causes the production of goods to decrease and
the reduction in employees, which creates a lot of unemployment. The US economy has run
based on unstable debt and inequality. In this case, the US economy also impacts the world
economy.

Besides, the financial crisis mainly caused by deregulation in the financial industry, which
allowed banks to engage in trading hedge funds with derivatives. The bank then demands
more mortgages to support the profitable sale of this derivative. They create loans that are
only affordable for subprime borrowers. The 2007-2008 financial crisis, also called the
subprime mortgage crisis, was a severe contraction in liquidity on global financial markets
originating in the United States as a result of the US collapse. Mortgage lenders, insurance
companies, savings and loan associations; and triggered a Great Recession (2007-2009), the
worst economic downturn since the Great Depression (1929-1939). Although Subprime
Mortage is the beginning of a crisis, it is a small part of the amount of loss experienced where
this comes from the practice of packaging subprime mortgages into other securities traded on
the global market. In 2004, the Federal Reserve raised Fed interest rates right when new
mortgage rates reset. House prices began to fall in 2007 because supply exceeds demand.
Thus traps homeowners who cannot afford to pay but cannot sell their homes. When
derivative values destroyed, banks stop lending to each other, creating a financial crisis that
causes a Great Recession. Deregulation in the financial industry was the leading cause of the
2008 economic collapse. They thus allowed speculation about derivatives supported by cheap
mortgages that were issued, available even to those who had creditworthiness. Rising
property values and mortgages easily attract many people to take advantage of home loans. In
the end, this created a housing market bubble.

When the Fed raised interest rates in 2004, the end of the year, the Fed's interest rates were
2.25%. At the end of 2005, it was 4.25%. In June 2006, the figure was 5.25%. Homeowners
hit payments they were unable to make. This rate rises much faster than the previous fed
funds rate. As a result, the percentage of subprime mortgages more than doubled, from 6% to
14%, of all mortgages between 2001 and 2007. The consequences of an increase in mortgage
payments depress the borrower's ability to pay. Because home loans are strictly related to
hedge funds, derivatives, and bad loans, the collapse of the housing industry makes the US
financial industry kneel as well.

According to some world economic experts, it can conclude that the United States is a
country affected by the financial crisis caused by prolonged budgetary deviations and the
result of the development of the property industry. It thus started in mid-2007 due to the
subprime mortgage or the low-quality housing credit crisis, which had an impact on the more
profound economic crisis. Where marked by many of his international financial institutions
that closed down in 2008, this crisis is also felt by the whole world and is increasingly
prolonged. One impact is the decline in share prices in most countries and the bankruptcy of
financial institutions in developed and developing countries.

In this case, the structuralists reject the optimistic application of liberalism in free trade and
market mechanisms; these people see that in practice, there is only inequality in power, which
results in exploitation, unemployment, and poverty. Structuralist thinking-antiglobalization
emphasizes that there must be a union between workers of all countries, international trade,
and investment arrangements to no longer expose developing countries, where developing
countries felt most of the effects of this economic imbalance. In the financial crisis, US
President Barack Obama has illustrated that increasing inequality and mobility. From this,
several concerns arise, such as the gap between the rich and the poor. Every time there is a
financial crisis, a glaring difference is in the economic field. Rich people will use what they
have to enrich themselves and do not care about people whose economies are middle-low. In
contrast, those whose economies are declining are greatly affected by the financial crisis.

During the financial crisis in the US, many companies reduce their employees, then people
from the bottom up losing their jobs. And when they lose their jobs, they can't afford to pay
rent and mortgages, even to the point where they can't afford to buy their food. Equality like
this will slow down economic growth and reduce social mobility. Then, it can cause divisions
that threaten the stability of society and can hamper development.

Theory of Marxism and Structuralism in context to the Financial Crisis

Marxism has the purpose of marrying the real market, becoming a place where capitalism
practices to form a social class between the bourgeoisie and the proletariat. According to him,
capitalism has two historical roles, namely the first to change the world by destroying
feudalism. Second, create a social and economic foundation to move to a higher level of
social development.

When viewed from a Structural Perspective, which sees the problem as part of the structure,
they argue that the financial crisis and economic stagnation result from economic laisses are
policies. The Federal Reserve (Fed), the United States central bank, reduced the level of
federal3 funds (the interest rates that banks charge each other for overnight loans of federal
funds - that is, balances deposited with Federal Reserve banks) 11 times between May 2000
and December 2001, from 6.5 percent to 1.75 percent. Changes in banking laws that began in
the 1980s, banks can offer customers subprime mortgage loans that arranged with balloon
payments or adjustable interest rates. Contribution to the growth of subprime loans, a
widespread practice of securitization, in which banks combine hundreds or even thousands of
subprime mortgages and other forms of consumer debt and sell them on the capital market as
securities (bonds) to banks and other investors, including hedge funds and pension funds.

Banks, securities firms, and insurance companies could enter each other's markets and join
each other, eventually resulting in the formation of banks “too big to fail” if they failed., the
failure rate can damage the entire financial system. And finally the long period of global
economic stability and growth that immediately preceded the crisis, beginning in the mid to
late 1980s and since becoming known as the “Great Moderation,” has convinced many US
banking executives, government officials, and economists that extreme economic volatility is
a thing of the past. To overcome this global crisis, the administration of US President Barack
Obama has tried to handle it. Thus is done by bailout investment banks and companies so that
the company will survive. Barrack Obama then founded the G20, which is a country with a
large economy plus the European Union. This forum enables collaborative collaboration with
international humanitarians.

Criticism of Marxism
Democratic socialists reject the proposal that societies can achieve communism only through
class dispute and a proletarian revolt. Many revolutionaries reject the need for a volatile state
phase. Some theorists have rejected the basics of Marxist theory such as historical
materialism and the labor theory of value and have gone on to criticize capitalism and
endrose socialism using other arguments.

Some contemporary supporters of Marxism see many aspects of Marxist thought as logical,
but they contend that the compilation is incomplete or somewhat outdated in regard to certain
features of economic, political or social theory.

However Marx theories concentred on the advanced industrial capitalism which is not perfect
but sell functioning democratic institution and he never believed that socialism could ever get
its full promise in poor politically underdeveloped nations. The critics was also that their was
no equal pay given to workers during industrial revolution and thus their economic incentive
was also affects but Marx don’t covers all aspects other things should also be included.

Analysis
Karl Marx states that we are a product of the environment we live in. Material conditions and
technological advancements that have taken place greatly dictate how people think and act.
Individual is concerned with ensuring his own survival and having as many materialistic
things as possible. With scarce resources, individuals start acting greedy whereas when there
is an ample amount of resources for everyone, humans do not act greedy. Marx said that
capitalism is not a means to an end, but it lead to something new which was communism.

The focus of economic power and class conflict is seen from a structuralist perspective to
find out the basis of its logic. The current global capitalist system is unjust and exploitative.
More reasonably, most structuralists believe it can change in distributing economic output,
which does not share a commitment to the socialist system. The driving force in a society
based on a global capitalist economy that acts as a system. Marx was considered dead with
capitalism marked by the sudden death of the socialist economy in the Soviet Union and
Eastern Europe and Chinese communism, which had a gradual transformation. Their belief is
to stop using structuralist analysis and embrace the free market will create the best
politicaleconomic system. Highlights of the failure of free-market capitalism resulted in the
global financial crisis and the failure of political influence from the economic elite where
ordinary taxpayers struggled, and some received bailouts so that they aroused protests by
millions of citizens in free trade and the United States imperialism. The structuralist
perspective is a reason to criticize inequality and exploitation by capitalism.
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