Karl Marx

1
Karl Marx

• Chapter 7

2
Karl Marx

• German philosopher, political economist and
  revolutionary
• Believed that capitalism would be replaced by
  communism
• While in college, president of the Trier Tavern
  Drinking Club
• Member of (influenced by) Young Hegelians
  dialectic
• His interest in economics was fueled by Friedrich
  Engels friend, collaborator and benefactor
• Only 12 people attended his funeral

3
Karl Marx

• It is difficult to talk only about the economic
  theory of Marx, since his ideas formulate a
  complete, integrated intellectual system
  involving the nature of the process of social
  history i.e., he was more than an economist.
   
• Many economic historians argue that it is
  impossible to understand any one part of Marxs
  thoughts without putting it into its proper
  context within the entire system.
• Keeping this in mind, we will focus on some of
  the more important aspects of Marxs economic
  theory.
• Das Kapital and The Communist Manifesto 

4
Essence of Marxs Economics

• Heavily influenced by the theories of value and
  profit of Smith and Ricardo it could be said
  that his ideas are an extension and refinement of
  their ideas.
• Contemptuous of the ideas of Malthus, Say, Senior
  and Bentham
• Rejected Malthus population theory

5
Essence of Marxs Economics

• In general, he believed that the ideas of most of
  the Classicals lacked historical perspective
• If they would have had this historical
  perspective, they would have discovered that
  production is a social activity that depends upon
  the prevailing form of social organization and
  techniques of production
•  For example, Europe had passed through several
  distinct historical epochs, or modes of
  production, including feudalism and capitalism.  
  

6
Essence of Marxs Economics

• In order to understand any one mode of production
  it is necessary to discover the essential and
  particular features of the mode 
• The failure to make this discovery, according to
  Marx, led the Classicals to two confusions 
• The first confusion was the belief that capital
  was a universal element in all production
  processes
• The second was that all economic activity could
  be reduced to a series of exchanges

7
Essence of Marxs Economics first confusion

• To Marx, capitalism had one feature that was
  common to all modes and one feature that was
  specific to capitalism 
• The common feature was the existence of capital
  as an instrument of production capital is stored
  up labor necessary for production 
• The particular feature of capitalism is that this
  capital is the source of income and power of the
  dominant social class

8
Essence of Marxs Economics first confusion

• Capital is, among other things, also an
  instrument of production, also objectified, past
  labour.  Therefore, capital is a general, eternal
  relation of nature that is, if I leave out just
  the specific quality which alone makes
  instrument of production and stored-up labor
  into capital.  (Das Kapital)
• The specific quality he was referring to was the
  power of capital to yield profits to a special
  social class

9
Essence of Marxs Economics second confusion

• The second confusion is that all economic
  activity can be reduced to a series of exchanges
• Marx believed that since the Classicals accepted
  all capitalist modes of production (e.g., private
  property) the only thing left to study was
  exchange.  Workers simply became sellers of labor
  labor was a commodity. 
• Anyone who had money was a buyer, all buyers were
  the same
• This makes a system of exchange look like a
  system of equality, of harmony, etc.  BUT, Marx
  said, that is because the Classicals ignored the
  features that differentiated capitalism from
  other systems.

10
Essence of Marxs Economics

• Capitalism was destined to fail it contained
  the seeds of its own destruction
• The development of Modern Industry, therefore,
  cuts from under its feet the very foundation on
  which the bourgeoisie produces and appropriates
  products. What the bourgeoisie therefore
  produces, above all, are its own grave-diggers.
  Its fall and the victory of the proletariat are
  equally inevitable. (Manifesto)

11
Essence of Marxs Economics

• AND/OR
• The proletariat (workers) would seize control
  from the bourgeoisie (capitalists)
• Socialist revolution
• The proletariat would seize control from the
  bourgeosie revolution
• The Communists disdain to conceal their views
  and aims. They openly declare that their ends can
  be attained only by the forcible overthrow of all
  existing social conditions. Let the ruling
  classes tremble at a Communistic revolution. The
  proletarians have nothing to lose but their
  chains. They have a world to win. (Manifesto)
• From each according to his ability, to each
  according to his needs (Manifesto)

12
The Question

• The Question is, WHY does this happen?

13
Hegelian Dialectic

• Process of history is linear, not recurring
• Interaction of thesis, antithesis and synthesis
• An abstract force is seeking perfection
• A form of idealism

14
Marxs Dialectic

• The dialectical process is NOT driven by abstract
  forces, but rather by material conditions, and
  particularly by economic factors
• Hegel's historical process rests on the idea that
  new ideas cause us to change the way we live (our
  thoughts change, and the world changes in
  response)
• Marx's historical process states that when new
  economic relationships change the way we live, we
  develop new ideas (the world changes, and our
  thoughts change in response)

15
Marxs Dialectic (contd)

• Forces of production and the relations of
  production
• The forces of production are ever changing, they
  are the technology embodied in labor and
  capital. 
• The relations of production are the rules of the
  game the social relations that support
  production 
• Relations of production involve all kinds of
  human interactions involved in economic life.
• Relations of production tend to be static or very
  slow to change, and are supported by the social
  superstructure
• The dialectic occurs when the forces of
  production (antithesis) come into conflict with
  the relations of production (thesis).

16
Social superstructure

• The social superstructure are the institutions
  that support the relations of production.  They
  include religion, the legal system, music, art,
  etc. 

17
Framework of Analysis

• What are the questions that Marx is asking?
• Why do societies change?
• What is the future of capitalism?
• Why are all men born free, but everywhere they
  are in chains? (my apologies to Rousseau)

18
Framework of Analysis

• What are the assumptions that Marx is making?
• The world is real and exists apart from us -
  materialist
• The mode of production plays a determining role
  in the life of society
• Conflict (class struggle) is inherent in any
  society
• "The history of all hitherto existing society is
  the history of class struggles. Oppressor and
  oppressed stand in constant opposition to one
  another. . . " (Manifesto)
• Every society contains within it the conditions
  for the emergence of a new society

19
Framework of Analysis

• What are the assumptions that Marx is making?
  (contd)
• Labor Theory of Value
• The working class would inevitably develop a
  revolutionary consciousness
• Scarcity can be abolished

20
Framework of Analysis

• What is the economic/ political/ cultural/social
  environment of Marx?
• Criticism of Ricardo, modifications of Classical
  Theory
• Criticism of capitalism from humanists and
  socialists

21
Framework of Analysis

• What is the role of the market?
• Essential feature of capitalism
• Everything is treated as a commodity with a
  price, including labor
• Communism is a classless economy without markets

22
Framework of Analysis

• What is the role of the government?
• The state is a product of class struggle
• It is an instrument by which one class rules
  another
• The state arises where, when and insofar as class
  antagonism cannot be reconciled.
• It can be used by workers or capitalists

23
Framework of Analysis

• What is the role of the government? (contd)
• The state may be used to suppress the proletariat
  but eventually
• The proletariat seizes from state power and
  turns the means of production into state property
  to begin with (Engels)
• Credit, transport and the means of production
  should be centralized under the State.

24
Framework of Analysis

• What is the role of the government? (contd)
• Eventually the state withers away
• But thereby it abolishes itself as the
  proletariat abolishes all class distinctions and
  class antagonisms, and abolishes also the state
  as state. (Engels)

25
Socialism v. Communism

• Socialism is the stage after capitalism, and
  contains some vestiges of capitalism, including
  differential compensation to get people to work
• Communism is an advanced stage of socialism.

26
Socialism v. Communism

• Socialism - A society run by the working class
  (i.e., proletariat) rather than the bourgeoisie
  (i.e., capitalists). The state machine is used to
  defend working class interests against those who
  still have wealth or power and who will attempt
  to return society to the capitalist system and
  bourgeois rule. Socialism is the period of
  transition between the overthrow of bourgeois
  rule and the development of a classless,
  communist society.
• Communism - A classless society with no
  exploitation. No state machine used by one
  section of the population to oppress another
  section. No need for professional armies or
  police forces. No use of production for profit or
  exchange. Society runs in accord with the
  principle From each according to his ability, to
  each according to his need.
• www.communism.com

27
Alienation and Markets

• Private property and markets alienate people from
  their true selves, for example, to sell ones
  labor to another is demeaning.  Private property
  keeps people from fulfilling themselves.

28
Marxs Value Theory

• Commodities have a use value and an exchange
  value
• Exchange value of a good is equal to the amount
  of socially necessary labor necessary to produce
  it
• Socially necessary labor is the labor exerted at
  the average level of intensity and productivity
  for the industry
• Basically the same as Ricardos labor theory of
  value

29
Marxs Value Theory (contd)

• Two-stage argument for labor theory of value
• If two objects can be compared (relative prices)
  then there must be a third thing of identical
  magnitude in both of them to which they are both
  reducible
• That third thing is the quantity of labor
  embodied

30
Marxs Value Theory (contd)

• Profit is not a cost of production, not price
  determining, it is a surplus which would make it
  price determined
• What is the argument here?

31
Marxs Value Theory (contd)

• The capitalist purchases the power of labor for a
  day
• What does he pay the laborer? The same as he
  would pay for any other commodity
• That is, he pays the laborer the amount of
  socially necessary labor required to produce the
  labor
• That is equal to the amount of commodities
  necessary to keep the worker alive

32
Marxs Value Theory (contd)

• So, assume that it takes four hours of labor to
  produce enough commodities to keep the worker
  alive
• That is the cost of the worker
• Any work that the workers does above this four
  hours provides a surplus for the capitalist
• Surplus value is the source of all profit

33
Surplus Value and Labor Exploitation

• The surplus goes to the capitalists
• Labor was exploited because they did not own the
  means of production (capital). 
• Capitalists do not earn the income that they
  receive they get income just by virtue of
  owning the capital. 
• Marx was concerned with the distribution of
  income, and believed that the distribution
  prevailing during his time was unfair. 

34
Surplus Value and Profits

• If the demand for labor increases over time due
  to capital accumulation, what keeps wages from
  rising and profits falling to zero
• It is NOT an increase in population as Malthus
  would have it
• It is the Reserve Army of the Unemployed

35
Reserve Army of the Unemployed

• The existence of the reserve army keeps wages
  low.  It exists because of technological progress
  that replaces labor with machines 
• Also, new entrants into the labor force expand
  the reserve army 
• During periods of expansion, the reserve army
  declines, but during recessions, it expands 
• Marx predicted long term unemployment
  (disequilibrium in the labor market), unlike
  Classicals who believed that labor markets will
  clear when wages fall 
• He rejected Says Law

36
What does current economic theory say about long
term unemployment?

• Do flexible wages clear the labor market? Or is
  there a long term disequilibrium?
• Structural Unemployment
• Search Theory
• Workers can choose from many job offers. 
  Different companies make different wage offers to
  the same worker.  These wage differentials cause
  the worker to shop around for the best job
  offer, and he or she will remain unemployed
  longer and he or she searches for the best job. 
  This will increase the duration of unemployment.

37
Reserve Army of the Unemployed

• Does it exist?
• Hard to say statistics do not give a clear
  picture
• At times, the official unemployment rate
  understates the true amount of unemployment
  because of discouraged workers. 
• Also people who are working part time but would
  like to work full time are counted as employed
  this also understates the true amount of
  unemployment.

38
Falling Rate of Profit

• Like Ricardo and other Classicals, Marx predicted
  the rate of profit would fall.
• Profits will fall as capitalists invest in more
  capital in order to substitute machines for
  workers.  As the quantity of capital increases,
  the return to capital will fall.  (diminishing
  returns to capital)
• Output prices will also fall as businesses
  compete to offer lower prices.  In order to
  increase efficiency, capitalists will invest in
  more machines (capital goods), thus driving down
  the rate of return to capital.  (again,
  diminishing returns to capital)

39
Falling Rate of Profit

• Will this really happen?
• It is important to note that increases in the
  quantity of capital is likely to bring with it an
  increase in the quality of capital (technological
  improvements) which will increase the return to
  capital.
• WHICH FORCE WILL WIN?  It is diminishing returns
  vs. technological improvements
• There is really no empirical evidence to decide
  which factor is victorious

40
Business Cycles

• Marx distinguished between a barter economy and a
  capitalist economy. 
• In a barter economy there is no excess production
  thus no business cycles.  Goods are produced only
  when someone wants to consume them. 
• But in a capitalist economy, production is
  separated from demand.  Overproduction can occur.
  
• When it does, prices and profits fall

41
Business Cycles (contd)

• Eventually, the overproduction will cause wages
  to fall and profits to rise
• The cycle continues

42
Disproportionality Crisis

• Disequilibrium in one market may spread to
  others, according to Marx 
• Resource allocation from one market to another
  may not be a smooth process - resources may not
  be mobile
• This can exacerbate business cycles

43
Competition

• Marx believed that the level of competition will
  decline over time and businesses become bigger
  and more monopolistic
• Economies of scale favor large enterprises over
  small businesses
• Large corporations separate ownership from
  control - this is a problem according to Marx

44
Increasing misery of the proletariat

• Real and/or relative share of income going to
  workers fall
• Alternatively, the quality of life decreases -
  worker alienation, long hours
• This results in revolution of the proletariat
  (workers) 
• "The proletarians have nothing to lose but their
  chains. They have a world to win. Proletarians of
  all countries, unite!"