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K ARL H EINRICH M ARX May 5, 1818 March 14, 1883 BIOGRAPHY dmolina/econ4510.htm.

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1 K ARL H EINRICH M ARX May 5, 1818 March 14, 1883 BIOGRAPHY dmolina/econ4510.htm

2  Karl Marx born in Trier, Bruckergasse 664  son of Jewish lawyer Heinrich Marx and his wife Henriett  Appears to have had a normal childhood  Father baptizes Karl and his 5 sisters and a brother into the Protestant church  m m

3  The reason he converted to Christianity was in order to reduce the limitations in his profession Jews normally encountered  Not surprisingly, at a very early age Marx begins to wonder about the devotion aspect of religion and places its importance more as a social phenomenon 

4  Not surprisingly later in his life he is quoted as stating that:  “Religious suffering is, at one and the same time, the expression of real suffering and a protest against real suffering. Religion is the sigh of the oppressed creature, the heart of a heartless world, and the soul of soulless conditions. It is the opium of the people.”  In his Critique of Hegel's Philosophy of Right. Introduction]  m m

5  On October 15th, 1835 at the age of 17 he enrolls at the University of Bonn  He last there less than a year since he flunks out due to excessive partying… 

6  Marx spends his summer vacations in Trier. In Summer of 1836 becomes secretly engaged to Jenny von Westphalen, daughter of Government Counselor Ludwig von Westphalen.  na/econ4510.htm na/econ4510.htm

7  On October 22 1836, Marx is enrolled in the Faculty of Law of Berlin University.  After completing his studies in Berlin he attends the University of Jena.  Writes a dissertation entitled: “he Difference Between Democritean and Epicurean Natural Philosophy” Obtain Ph.D. in April of 1841 

8  Wife dies on December 2, 1881  1882 his health deteriorates  He dies on March 14, 1883  Marx passed away peacefully in his armchair  He lies buried next to his wife at Highgate Cemetery in London.  econ4510.htm econ4510.htm

9  Here is a brief list of works by Karl Marx  1844:  A Contribution to the Critique of Hegel's Philosophy of Right. Introduction  Outlines of a Critique of Political Economy  Critical Notes on "The King of Prussia"  Economic and Philosophic Manuscript  1845: Theses on Feuerbach 

10  He also wrote many articles with F. Engels  Communist League (1847)  The Communist Manifesto (1848)  England's 17th c. Revolution (1850)  The Alleged Splits in the International (1872)  Reformists in Germany's Social-Democratic party (1879) 

11  The most important work by Karl Marx is clearly Das Kapital which appeared in three volumes. Only volume I appeared while he was alive (in 1867).  Volumes II (1885) and III (1894) were edited by Engels and appeared after Karl Marx’s death in 1883 

12 Marx Overview What Das Kapital is About Karl Marx (1867). Das KapitalDas Kapital Das Kapital is a study of capitalism Not much of an effort is made to explain socialism and communism.

13 Stage of Development Adam Smith:Society progresses from hunter- gathers, to agriculture, to industry and trading stages. The latter stage is capitalism. From there society progresses towards a stationary state of falling profits. David Ricardo:Society progresses towards a stationary state of falling profits, subsistence wages, and high rents. Karl Marx: Society progresses from feudalism, to capitalism, to socialism, to communism.

14 Marx Overview Feudalism to Capitalism from the Communist Manifesto… The bourgeoisie, wherever it has got the upper hand, has put an end to all feudal, patriarchal, idyllic relations. It has pitilessly torn asunder the motley feudal ties that bound man to his "natural superiors," and has left remaining no other nexus between man and man than naked self-interest, than callous "cash payment." It has drowned the most heavenly ecstasies of religious fervour, of chivalrous enthusiasm, of philistine sentimentalism, in the icy water of egotistical calculation. It has resolved personal worth into exchange value, and in place of the numberless and feasible chartered freedoms, has set up that single, unconscionable freedom--Free Trade. In one word, for exploitation, veiled by religious and political illusions, naked, shameless, direct, brutal exploitation. The bourgeoisie has stripped of its halo every occupation hitherto honoured and looked up to with reverent awe. It has converted the physician, the lawyer, the priest, the poet, the man of science, into its paid wage labourers. The bourgeoisie has torn away from the family its sentimental veil, and has reduced the family relation to a mere money relation.

15 Marx Overview One Capitalistic World from the Communist Manifesto… The bourgeoisie, by the rapid improvement of all instruments of production, by the immensely facilitated means of communication, draws all, even the most barbarian, nations into civilisation. The cheap prices of its commodities are the heavy artillery with which it batters down all Chinese walls, with which it forces the barbarians' intensely obstinate hatred of foreigners to capitulate. It compels all nations, on pain of extinction, to adopt the bourgeois mode of production; it compels them to introduce what it calls civilisation into their midst, i.e., to become bourgeois themselves. In one word, it creates a world after its own image.

16 Marx Overview Conflict in Capitalism Karl Marx saw the basic conflict in capitalism to be between labor and the owners of capital. Remember that Marx was writing in the middle of the 19th century. At this point in the history of England, workers generally worked six to seven days a week, with the work day extending beyond 10 hours a day. Workers were not allowed to unionize, and wages were at or near subsistence.

17 Marx Overview How Socialism Arises As capitalism developed, the ability of small firms to survive the competition of the system was bleak. As these small firms were driven out of business, the owners of the smaller firms went to work for the larger firms that survived. Consequently, the population of labor was continually expanding while the population of owners was declining. Marx believed that under capitalism the workers were producing the profit that the owners of capital were able to keep. Given the changes in the population of workers and owners, Marx believed that eventually the workers would rise up and seize the means of production. In this way, the economic system of socialism would be born.

18 Marx Overview Just Employee Owned? One could argue that “workers owning the means of production” is essentially the same as the employee-owned companies we see today (or the practice of giving stock-options to workers). So did Marx just want everyone to follow the example of these firms? ownership-100 ownership-100

19 The Communist Manifesto It appears Marx wanted more than just Employee Ownership. 10 points from the Communist Manifesto (scroll to the end)10 points from the Communist Manifesto

20 – Hegelian Philosophy Thesis Anti-thesis Synthesis

21 + Building on the work of Hegel + Thesis, antithesis, and synthesis – The History of Thought can be represented as a conflict between a thesis and antithesis, with the conflict resolved via the synthesis, which becomes the new thesis – Society evolves by this process in a drive towards perfection. The driving force is conflict between the existing thesis and the antithesis. – The process and the means of investigation is called the dialectic + Hegel focused upon ideas whereas Marx focused on the material world. Hence Marx’s philosophy is called dialectical materialism.

22 + Society can be segmented into two parts: 1.The forces of production: Technology, labor skills, scientific knowledge, and capital goods. These forces are inherently dynamic. 2.The relations of production: Rules of the game, inherently static. + The thesis is the relations of production. + The anti-thesis is the forces of production. + Initially there is harmony. However, as technology develops the relations of production are no longer consistent with the forces of production. This conflict leads to social revolution until the new relations of production are established.

23 Forces of Production Land, Labor, Capital, and Technology Relations of Production Private Property, Wage System Social Superstructure Religion, Law, Government Dynamic Static

24 + Feudalism and the Dialectic + The relations of production: Tradition dictates the allocation of goods. + Society is characterized as follows: – Self-sufficient manors that must fend off the forces of nature and other lords. Work is hard but necessary for the people to survive. There is little or no trade, if you need a good or service you must produce the good yourself. – Hence, the relations of production are established in light of the forces of production.

25 + Capitalism and the Dialectic + Increasing technology and trade alters the forces of production. To maximize economic growth, the fetters of feudalism must be removed. + Hence a new synthesis is developed where the profit motive is nurtured and economic growth results. + How does capitalism end? Workers are exploited by capital. Once people’s material needs are met, the alienation of the market will lead people to establish a new economic system, socialism. + Note: This is not the only story Marx tells about the end of capitalism!

26 + Socialism: Means of production is transferred from capital to labor. However the incentive system of capitalism remains. + Communism: A classless society where people are not motivated by monetary or material incentives. + “From each according to his ability, to each according to his needs.” + Marxian thought regards human beings as perfectible and human goodness is suppressed by a market economy.


28 Food and Economic Growth  As the economy grows – and technology improves– the amount people spend on food declines.  What if technology improves to a point where the necessities of life are available to everyone at little or no cost?

29 The Replicator (from Star Trek)

30 The Economics of Star Trek  In a world where one can get anything without any cost, would you  need to work?  need money?  participate in a market economy?  The story of Star Trek is really…  In the long run, we will all be Marxists!

31  Marx’s purpose: Demonstrate that even if capitalism works as Ricardian suggests, the system is still doomed to failure.  Hence Marx assumes both perfect competition and the labor theory of value.  However, Marx does introduce the idea of the reserved army of the unemployed.  We will discuss these three issues as well as Marx’s predictions.

32  An Answer from David Ricardo and Karl Marx…  The Labor Theory of Value - The price of a good is determined by the cost of production, and the cost of production is dictated by the quantity and quality of labor utilized.  What of the other factors of production?  Capital: Capital is simply stored up labor.  Land: Ricardo argued that the price of corn determined the price of land, rather than the price of land determining the price of corn. In other words, the price of land is price determined, not price determining.  What about demand? In the long-run, assuming competition, price will equal the cost of production. This comes directly from the work of Adam Smith

33  Marx assumes all markets are perfectly competitive. Capitalists acquire inputs at their long-run competitive price and sell the final product at its long-run equilibrium price.  Why is this important?  Surplus value does not arise from labor being paid less than it long run competitive price or from commodities being sold at above long-run competitive prices.

34  Where does surplus value originate? According to Marx, labor creates more value than it is paid. 1. The long-run competitive price of labor is equivalent to the socially necessary labor time required to produce the real wage of labor (long-run subsistence wage). 2. If in eight hours labor has produced enough to earn the subsistence wage, and the work day is eight hours long, then no surplus value exists. However, if the work day is twelve hours long, labor produces four hours of surplus. 3. Capital owns the means of production. Labor either works the hours capital commands, or not at all. Given this, capital can require labor to work more than what is necessary to maintain the worker and thus realize a surplus value. 4. Surplus value can be increased by increasing the work day or increasing labor’s productivity. Capital cannot change the subsistence wage, but through better technology one can reduce the amount of time labor works for the equilibrium wage and increase the surplus value.

35  Marx reject the Malthusian population theory (WHY?), hence he needs an alternative model to explain wages.  The reserved army of the unemployed is his theory for why wages are kept low.  Recruitment for the army comes from labor- saving machines.

36  The reserve army of the unemployed gives firms an advantage in the negotiation with firms. In other words, Marx is arguing firms have monopsony power Monopsony – a single buyer in a market. A firm in a competitive labor market is forced to pay a worker a wage equal to the worker’s marginal revenue product. A monopsony, though, is the sole buyer in the market. Consequently the monopsonist can require workers to accept wages below the worker’s marginal revenue product.

37  Implication: Monopsonistic firms exploit their workers.  Joan Robinson (1933): “What is actually meant by exploitation is usually that the wage is less than the marginal revenue product.”

38  The writings of Karl Marx argued that capitalism leads to the exploitation of workers. In other words, Marx argued that workers in a capitalist society tended to produce more value than they were paid by their employers.  In 1899, J.B. Clark published The Distribution of Wealth. This work argued that workers under capitalism are paid according to their marginal productivity. Therefore there is no exploitation in the capitalist system.  J.M. Clark – the son of J.B. Clark – argued that his father’s statements about the ethical implications of marginal productivity “are oriented at Marx, and are best construed as an earnest, and not meticulously qualified, rebuttal of the Marxian exploitation theory.”  Neither Marx or Clark provided empirical evidence supporting their ideas. And this is not surprising. Outside of sports, how can one measure marginal productivity?  In other words… outside of sports, how can we know whether or not a worker is being paid according to their economic contribution?

39  Research in sports indicates that when firms have monopsony power – as they did in baseball prior to the establishment of free agency in 1976 – players were “exploited”.  In contrast, when players are confronted with a free market, wages tend to equal a player’s marginal revenue product.  In sum, Marx and Clark can both be right. The answer depends on the nature of the labor market.

40  Expansion lead to a greater demand for labor and wages rise as the reserve army falls.  Business responds by substituting capital for labor in the production process  Reserve army rises, thus wages fall, and profit increases.  This causes again a greater demand for workers, which starts the process over again.

41  The decline in profit represents a crisis in capitalism, where the smaller firms are driven out of business.  Business crisis is not the exception to the rule of capitalism, it follows from the rules of capitalism.  Each successive crisis leads to bigger and bigger enterprises. Each successive crisis lead to bigger and bigger firms failing.  In this lies the seeds of capitalism’s destruction (note: that is not the same story from before)

42 PREDICTIONS FROM MARX The falling rate of profit both during the business cycle and from business cycle to business cycle. Competition in the labor market and the commodity market will lead the capitalist to increase the use of capital and thus reduce profits. Why does this reduce profits? Because labor produces profits, not capital. As more and more capital is used in production, profit will fall because profit cannot be realized from capital. If we have perfectly competitive capital markets then the price of capital equals its long-run normal rate of return. Marx is correct that profits do fall, although the idea that labor is the sole source of profit is incorrect. He is also not alone in this perspective. Smith and Ricardo share this perspective. Do profits fall from business cycle to business cycle? This is not as clear.

43 PREDICTIONS FROM MARX The ceaseless quest for new technology How do firm’s overcome falling rates of profit? With new technology. Growth in capitalism is caused by improved technology, again in this lies the seeds of capitalism’s decline. NOTE: Marx sees improved technology as a negative, not a positive!

44 PREDICTIONS FROM MARX A propensity to business crisis In Marx’s day, such a prediction was not exactly consistent with observed phenomenon. Today, however, the business cycle is taken as given. As the work of Schumpeter reveals, one can argue the business cycles does occur because profit opportunities are destroyed via competition, and new technology is required to revive the system.

45 PREDICTIONS FROM MARX The Concentration and Centralization of Capital Again, with each successive crisis, the larger firms survive, the small firms fail. Again, in 1850 this was hardly an obvious statement.

46 PREDICTIONS FROM MARX Increasing Misery of the Proletariat The self-employed will be increasingly forced to sell their labor-power in the market. At the beginning of the 19th century, 75% of Americans were self- employed. Today, less than 10%. Why? The power of larger firms overwhelms the smaller enterprises.

47 PREDICTIONS FROM MARX Capitalism will collapse The advent of mixed capitalism suggests that pure capitalism is untenable. Marx did not see the countervailing power of government and organized labor. Had capitalism not been tempered by the power of government would it have collapsed?

48 WHAT HAPPENED?  Marx died in 1883  In 1917 – 34 years after Marx died -- the communists took over Russia  The system implemented was supposedly based on Marx, but actually was simply another version of a system based on extractive institutions.  Centrally planned socialism, or what is commonly referred to as communism, is the version of this economic system that was implemented.  In this system, the government creates a central plan which answers all of the basic questions facing society.  The plan determines what will be produced, how the goods will be produced, and who is given the goods after production

49 IS CENTRAL PLANNING A NEW IDEA?  from:  The idea that the central planning of the economy in the Soviet Union was driven by ideology seems compelling and obviously true. But it isn’t that simple actually.  For one thing, it turns out that centrally planning the economy was not something rare or anomalous in history. Actually, it was quite common. So central planning in itself has nothing whatsoever to do with Marxism.  To see what might have driven central planning as a way to organize the economy, let’s consider some famous historical examples of central planning. One of the best documented and agreed on occurs during the Greek Bronze Age.  Around 3200 BCE there was the start of the Bronze Age in the Eastern Mediterranean. Though this terminology refers to the use of bronze (an alloy of copper and tin) which replaced stone for tools and weapons, there was a whole series of correlated technological, social and political changes. In particular the Bronze Age was associated with increased political centralization and the formation of states throughout the Mediterranean basin.

50 IS CENTRAL PLANNING A NEW IDEA?  from: in-history-the-greek-bronze-age.html  How did the economy of the Greek Bronze Age states work?  Since there was no money, the state basically moved around all of the goods itself by fiat. It supplied food and inputs to weavers and then took their output. It stored large amounts of food and goods in the palace complex.  As T.J. Killen puts it:  the key role in the movement of goods and the employment of labour was played, not by a market or money, but by a central redistributive agency… in the Mycenaean world, by a central palace.  Killen concludes:  this was a redistributive (or command) economy.

51 DID CENTRAL PLANNING WORK?  from Why Nations Fail, p. 128  Before 1928 most Russians lived in the countryside. The technology used by peasants was primitive, and there were few incentives to be productive. Indeed, the last vestiges of Russian feudalism were eradicated only shortly before the First World War. There was thus huge unrealized economic potential from reallocating this labor from agriculture to industry. Stalinist industrialization was one brutal way of unlocking this potential. By fiat, Stalin moved these very poorly used resources into industry, where they could be employed more productively, even if industry itself was very inefficiently organized relative to what could have been achieved. In fact, between 1928 and 1960 national income grew at 6 percent a year, probably the most rapid spurt of economic growth in history up until then. This quick economic growth was not created by technological change, but by reallocating labor and by capital accumulation through the creation of new tools and factories.

52 DID PEOPLE THINK CENTRAL PLANNING WOULD WORK?  from Why Nations Fail, p. 128  Growth was so rapid that it took in generations of Westerners. …It took in the Central Intelligence Agency of the United States.  It even took in the Soviet Union’s own leaders, such as Nikita Khrushchev, who famously boasted in a speech to Western diplomats in 1956 that “we will bury you [the West].”  As late as 1977, a leading academic textbook by an English economist argued that Soviet-style economies were superior to capitalist ones in terms of economic growth, providing full employment and price stability and even in producing people with altruistic motivation.

53 WHAT HAPPENED TO CENTRAL PLANNING?  from Why Nations Fail, p. 128  Though the policies of Stalin and subsequent Soviet leaders could produce rapid economic growth, they could not do so in a sustained way. By the 1970s, economic growth had all but stopped. The most important lesson is that extractive institutions cannot generate sustained technological change for two reasons: the lack of economic incentives and resistance by the elites. In addition, once all the very inefficiently used resources had been reallocated to industry, there were few economic gains to be had by fiat. Then the Soviet system hit a roadblock, with lack of innovation and poor economic incentives preventing any further progress.

54 THE PROBLEM OF INCENTIVES  from Why Nations Fail, p. 131  Focusing on the different rules and bonus schemes tends to mask the inherent problems of the system. As long as political authority and power rested with the Communist Party, it was impossible to fundamentally change the basic incentives that people faced, bonuses or no bonuses.  Since its inception, the Communist Party had used not just carrots but also sticks, big sticks, to get its way. Productivity in the economy was no different. A whole set of laws created criminal offenses for workers who were perceived to be shirking. In June 1940, for example, a law made absenteeism, defined as any twenty minutes unauthorized absence or even idling on the job, a criminal offense that could be punished by six months’ hard labor and a 25 percent cut in pay. All sorts of similar punishments were introduced, and were implemented with astonishing frequency. Between 1940 and 1955, 36 million people, about one-third of the adult population, were found guilty of such offenses. Of these, 15 million were sent to prison and 250,000 were shot. In any year, there would be 1 million adults in prison for labor violations; this is not to mention the 2.5 million people Stalin exiled to the gulags of Siberia.  Still, it didn’t work. Though you can move someone to a factory, you cannot force people to think and have good ideas by threatening to shoot them.

55 WHY NOT IN ENGLAND OR THE UNITED STATES?  The revolution predicted and encouraged by Marx did not occur in England or any other industrialized nation.  Rather, via democracy (i.e. inclusive institutions), the inequity of capitalism was addressed.  Workers were allowed to unionize, which raised wages and redistributed the gains of the firm from the owners to workers.  Furthermore, the government frequently stepped into the marketplace to resolve the problems people saw with capitalism.  And finally, and perhaps most importantly, inclusive institutions and economic growth allowed more and more people to improve their standard of living in industrialized nations.

56 1. A communist nation will be a democratic nation 2. The government of a democratic nation represents the people 3. The people are workers 4. So the government represents workers 5. And if the government owns everything, that is the same thing as the workers owning everything

57 Summarizing Marx  A number of his predictions appear to come true  His big prediction – capitalism will fail – does not come true… yet! (back to Star Trek)  In the end, Marx the economic theorist is undermined by Marx the political theorist  He seems to get much of the economics right. But the politics doesn’t work out like he thinks.  Or perhaps…Marx wants to live in a world that simply doesn’t exist in the 19 th century

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