1. Socialist Economies in Transition Chapter 20 – Read pages 415-430 I The Theory and Practice of Socialism A)The Economics of Karl Marx 1) The Labor Theory of Value states that the relative values of different goods are ultimately determined by the relative amounts of labor used in their production. 2) The surplus value (profits) is the difference between the price of a good or service and labor cost of producing it.

2. B) Capital Accumulation and Capital Crises according to Marx. 1) Capitalists acquire more capital in an effort to increase surplus value. 2) However, this forces profit rates down since ultimately the labor value is all that is important for product value. 3) This eventually leads to crises where capitalists loose their wealth and only workers demand output. 4) Since workers have limited means they can’t buy everything making the crises deeper.

3. 5) Simultaneously workers organize and convince themselves they are victims of the capitalists. 6) Marx was not specific about what would happen next, but somehow there would be a downfall of capitalism.

4. C) Marx’s Theory: An Assessment 1) Marx’s Theory in several regards was consistent with other contemporary economists. 2) The primary difference was that other economists only saw stagnation not revolution. 3) Predictions have been dramatically wrong a) Wages have not tended to subsistence levels: they have risen. b) Labor’s share of income has not fallen. c) Capitalism has not collapsed.

5. II Socialist Systems in Action A) Command Socialism in the Soviet Union. 1) Marx did not describe how a socialism system should operate, only that capitalism would fall. Thus, leaders of socialist or communist states had to create that on their own. 2) The Soviet Union began by seizing private assets and setting up an incentive system for managers to operate firms.

6. 3) The primary problem was that the incentive system was not designed to respond to the market, i.e. what people wanted, but to produce whatever the government dictated. 4) In addition there was no incentive to use new technologies. 5) Soviet economies ended up with large factories that produced using inefficient capital stocks and thus too many resources were dedicated to capital maintenance.

7. B) Yugoslavia: Another Socialist Experiment. 1) Yugoslavia allowed greater freedom for market factors to influence production by allowing individual firms to determine what and how much to produce. However, profits were shared within the firm. 2) Yugoslavia had a better experience in terms of standards of living. C) Overall no socialist economies succeeded in out producing western capitalist economies.

8. III Economies in Transition: China and Russia A) Problems in Transition 1) Property Rights, 2) Banking 3) Inflation 4) Ideology B) China: A Gradual Transition. Since the late 1970’s China has allowed some market elements which has led to good growth.