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 Marx’s 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 Marx’s “economic theory.”
Das Kapital and The Communist Manifesto 

4. Essence of Marx’s 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 Marx’s 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 Marx’s 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 Marx’s 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 Marx’s 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 Marx’s 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 Marx’s 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 Marx’s 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. Marx’s 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. Marx’s Dialectic (cont’d)
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 st[an]d 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? (cont’d)
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? (cont’d)
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? (cont’d)
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.

27. Alienation and Markets
Private property and markets alienate people from their true selves, for example, to sell one’s labor to another is demeaning.  Private property keeps people from fulfilling themselves.

28. Marx’s 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 Ricardo’s labor theory of value

29. Marx’s Value Theory (cont’d)
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. Marx’s Value Theory (cont’d)
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. Marx’s Value Theory (cont’d)
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. Marx’s Value Theory (cont’d)
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 (cont’d)
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!"