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The Economics of Karl Marx

By Dr. Hassan Shirvani —Karl Marx (1818-1883) was one of the most influential economists of the 19th century. His economics provided a bridge between the classical economics (1776-1850) and the neoclassical economics (1870-1936), with the latter being a precursor to the modern conservative economics. Indeed, much of the neoclassical economics was a reaction against and an attempt to repudiate the Marxian critique of the classical economics. At the same time, while many liberal economists of the Keynesian persuasion (1936-present) are somewhat reluctant to admit it, they also have been greatly influenced by the Marxian analysis of the capitalist system.


Trained originally as a philosopher, Marx was a self-taught economist who managed to make fundamental contributions to the economics of business cycles and to the field of economic history. In addition, the Marxian ideas served to revolutionize the fields of political philosophy and sociology. Asserting that history is nothing more than economics in action, Marx argued that all cultural, political, and social institutions are largely shaped by their underlying economic realities. As technological progress results in new modes of production, the social super-structure also changes to adjust to the new economic relationships among the productive social classes. Regardless of the modes of production, however, Marx insisted that the basic struggle between the poor and the rich will persist, resulting in the privileged classes exploiting those endowed with nothing but their labor power. Thus, according to Marx, the Roman slaves were as surely exploited by their masters as the medieval serfs by their feudal landlords and the modern workers by their capitalist bosses. Under all these economic systems, by exercising monopolistic control over the means of production, the owners of land and capital have been able to impose their economic wills on their corresponding societies.


Marx was particularly concerned with the nature of the capitalist exploitation of workers, not only as a deplorable process by itself, but also as a cause of the eventual downfall of the capitalist system. His reasoning, based partly on the teachings of the classical economists, included the use of the labor theory of value, according to which only labor is the true source of all value. Clearly, the production of most items involves the costs of land (raw materials) and capital (equipment) in addition to labor costs. While allowing for both of these costs, Marx nevertheless argued that natural resources are free gifts of nature and should therefore be shared by all. In addition, since all capital goods are also produced by workers, they represent congealed labor, rather than a separate factor of production. Thus, while the products with greater uses of raw materials or more capital-intensive methods of production should command higher prices for efficiency reasons, the profits from such higher prices should ultimately go to the workers as well. To counter the Marxian assertion that only labor creates value and is thus worthy of financial compensation, the neoclassical economists pointed to saving as an additional input in the production process. According to this view, capitalists provide savings which are used to fund investments in the means of production that will allow workers to work more productively. As owners of the means of production, the capitalists therefore deserve a compensation for taking the trouble to abstain from current consumption. Marx, however, rejected this assertion by denying that ownership by itself constitutes a productive activity. Thus, he famously called for the nationalization of both saving and all the means of production.

In practice, of course, as Marx pointed out, the capitalist system rewards the workers only with their wages, with all the other forms of income, such as rents and profits, largely ending up in the pockets of the private owners of the means of production. Marx referred to these non-wage incomes as the surplus value, representing the expropriation by capitalists of what Marx believed should rightfully belong to the workers. In addition, for Marx, the process of capitalist development requires the continuous extraction and investment of the surplus value from the workers. Such investment is needed to meet the ever-present competition from rival capitalists. Based on this assertion, Marx was able to develop his theory of the recurring economic crises in the capitalist economies. Specifically, during economic booms, when the pace of capital investment intensifies, the resulting labor shortages will raise wages and, thus, will reduce the amount of the surplus value available to businesses. That is, capital deepening in the economy will eventually put downward pressure on the rate of return to capital. To deal with this problem, capitalists will try to replace workers with less expensive machines and robots, but machines and robots provide no perpetual demand for the consumer goods and services produced by the capitalists. Indeed, the more the workers are replaced by automation, the less the aggregate demand in the economy and, therefore, the greater the scope for production gluts and economic crises. Alternatively, some capitalists may try to deal with the falling rate of profit through such means as gobbling up their capitalist competitors, selling their products on credit, and reaching out to foreign markets in search of cheaper labor, more abundant natural resources, and greater consumer demand. In addition, capitalist classes will try to enlist the supports of their governments in both weakening labor unions and as a source of defense spending to boost the aggregate demand in their economies. In the long run, however, Marx asserted that none of these temporary palliatives will be able to address the main capitalist contradiction that workers are both a cost to be minimized and an indispensable source of demand for goods and services. Without the workers to serve as consumers, there will be no realization of surplus value and, therefore, no business profits. Thus, capitalism by its very nature is bound to create a growing army of the unemployed and, as a byproduct, a gradual deepening of capitalist economic crises.


There is no question that the collapse of the Soviet Union in the 1990s provided a strong impetus to reject Marxian economics and the case for centrally planned economies. However, the successive financial and economic crises of the past few decades in the West have served to also raise questions about the efficacy and equity of the capitalist system. In this light, the Marxian economic analysis of capitalism seems to be still relevant. As Marx correctly foresaw, the capitalist economies have been continuously plagued by the growing concentration of capital and economic power in the hands of the privileged few, the spread of globalization to provide access to foreign resources and markets, the rising tide of automation and the disappearance of the high-paying manufacturing jobs, the chronic insufficiency of aggregate demand which has resulted in the greater frequency of credit bubbles, and the widespread international political and social instability. In the process, many prominent reformers of capitalism both on the left (Keynes) and on the right (Hayek) have all been echoing Marx’s concerns and ideas without acknowledging their debts to him.

Hassan Shirvani, Ph.D.
Professor Cullen Foundation Chair in Economics

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