Chapter 7: Karl Marx and his Critique of Classical Economics Questions for Review, Discussions and Research 2, 5, 7

Overview Marx was a philosopher who advocated a fundamental revolution in society Expelled from Germany, France and Belgium Later years in London and the British Museum

Theory of History His economic theory focuses on the dynamic processes of change and is an application of his theory of history based on 1.Hegelian Philosophy A never-ending chain of ideas of thesis, antithesis and synthesis with the latter representing a higher form of truth

Basis of Marx’s dialectical materialism that revolutionized the social sciences 2. French Utopian Thought 3. Classical Political Economy

Forces of Production “Technology” manifested in I.Labour Skills II.Scientific Knowledge III.Tools IV.(Real) capital Inherently dynamic

Relations of Production -“Rules of the game” that are historically determined and provide the institutional framework Static

Social Superstructure Cultural forms such as Art Literature Music Philosophy Jurisprudence Religion Purpose is to maintain static relations of production Contradictions within capitalism result in class struggle and a new set of relations eventually emerge

Closer Look at the Dialectic Read pp on your own

Foundations of Marx’s Economic Theories The fundamental determinant of the relations of production are the forces of production established in the early years of capitalism

Methodology “Top down approach” where causation runs from the whole to the parts of a system Modern economics is the reverse

Marx’s Theory of Value Primary interest was not the development of a theory of relative prices His interest rests in the distribution of income Overhead pp. 198

Marx’s Labour Theory of Value Overhead pp. 198 Used the concept of socially necessary labour, ie. the time taken by an average worker The costs of production were determined by socially necessary labour time

Problems 1.Little attention to the allocation of resources and formulation of prices 2.Influence of capital goods on relative prices 3.Influence of profits on prices

Concept of Surplus Value Modern economies produce more goods and services needed to pay for the real social costs of production I.Labour costs II.Capital costs (depreciation of CCA in labour time equivalents)

Difference between a goods price and its (total) labour costs is surplus value Similar to the Physiocrats of net product

Marx’s Analysis of 19th Century Capitalism Primary purpose was to 1.Discover the laws of motion of capitalism 2.Identify contradictions between the forces and relations of production Overhead pp. 202 The chief economic actor in Classical and Marxist model is the capital class

Other Topics 1.Reserve army of the unemployed in the labour force 2.Falling rate of profit 3.Origins of Business cycle 4.Cyclically recurring fluctuations

5 Disproportionality of Crisis  Difficulty in coordinating the output of interdependent sectors 6 Overhead pp Concentration and centralization of Capital 8 Increasing misery of proletariat