Karl Marx

Lecture 12
Topics
2.11Karl Marx I
2.11.1 Marx's Theory of History
2.11.2 Marx's Theory of Alienation
2.11 Karl Marx I
Overview of Marx : Both the Smith-Ricardo tradition of the classical political economy and socialist
tradition led by Marx were the result of industrial revolution even though they took two opposite
positions. The industrial revolution in the eighteenth century brought in radical changes through
mechanized factory production which replaced the existing petty production system. Consequently,
production increased rapidly but this also created a new economic class: the proletariat who were
the workers in these factories. While the Smith-Ricardo emphasized the economic growth generated
out of it, the socialist school emphasized the class conflict emerging out of the new production
system.

Karl Marx was the first philosopher who felt that his job was not merely to interpret the world, but to
change it. His writing influences politics till date. Marx is popularly associated of socialism and
communism. However, in the literature written by Marx and Engels there is little reference to how a
socialist /communism should be organized i.e. the incentive structure needed to run an economy.

2.11.1 Marx's Theory of History

 Marx was influenced by Hegelian philosophy, French utopian thought and classical political
economy.
 Hegel said that history does not proceed cyclically through a series of recurring situation.
According to Hegel a thesis (an accepted idea) is challenged by an antithesis (a new idea).
 This conflict of ideas soon leads to synthesis.
 There is a never ending chain of ideas in history which evolves through an endless process
in which all things/system become more perfect. This process is called dialectic. Marx also
uses the concept of dialectic but with a difference. Hegel being an idealist talked about
conflict of ideas while for materialist Marx conflict of materialist (economic) forces is what
changes the world.
 The grand questions of Marx:
1. Can one develop a theory that explains the different ways in which societies have been organized
over time?
2. And can this theory be used to predict the possible future organization of society?
3. Are the societal structure we call feudalism and capitalism part of an evolutionary process? Or,
are they just accidents?
 He criticized bourgeois economists for taking a position as though capitalist system is the
end of history it was somehow an ideal societal structure.
 Marx believed that all societies except classless societies can be divided analytically into two
parts:
1.Forces of Production --Technological know-how which is dynamic
2. Relations of productions --Rules of the game >institution
 Relations of production are more persistent and depend on the society.
 The static nature of production relation are maintained by social superstructure such as art,
literature, music, philosophy, jurisprudence, religion and other cultural forms. At a given
period there is a harmony between relation and forces of production.
 The relations of production act as fetters on the development of the forces of production -the
former allows the development of the latter up to a level and then constrain them. At this
 point nascent classes that are the bearers of more progressive relations dislodge the existing
ruling classes.
 Forces of production often change> contradiction between relation and forces gets reflected
in class struggle > contradictions are so intense that it leads to revolution
 According to dialectic materialism Old thesis (relation of production = institutions) + Anti
thesis (Forces= technology) = New thesis new equilibrium,
 Marx said: The history of all existing society is the history of class struggles. (Bottomore, p. 75).
-Capitalism was a replacement (for Western) feudalism
-Marx believed that capitalism had an inherent tendency towards crisis. He believed that these crises
would get worse, and would impose unemployment and other problems on the working class. And thus
he believed the working class would be motivated to get rid of it
-Marx thought that he had showed that the capitalist system is inherently unstable and would lead to
greater and greater crises, ultimately to collapse.

2.12.1 Socialism and Communism

2.12 Karl Marx II

Capitalism vs Socialism:
Capitalism Socialism
Ownership Assets owned by private firms Government/ co-operatives
Equality Income determined by market forces Redistribution of income
Prices Prices determined by supply and Price controls
demand
Efficiency Market incentives encourages firms to Government owned firms have
cut costs fewer incentives to be efficient
Taxes Limited taxes/ limited govt spending High progressive taxes/ higher
spending on public services
Healthcare Health care left to free-market Healthcare provided by
government
Problems Inequality, market failure, monopoly Inefficiency of state industry, less
incentives
Incentives Incentives for creation Less incentives
Discrimination The discrimination is occurs The people are considered equal
Goal Create wealth through private ownership of Economic and social equality
property and businesses. through redistribution of wealth
GovtIntervention Less Intervention Fully Intervention
Examples The modern world economy operates Union of Soviet Socialist Republics
largely according to the principles of (USSR): although the actual
capitalism. The UK, US, and Hong Kong are categorization of the USSR's
mostly capitalist. Singapore is an example of economic system is in dispute, it is
state capitalism often considered to be a form of
centrally-planned socialism

2.12.1 Socialism and Communism

 Unlike some popular references where socialism and communism are used interchangeably,
socialism and communism have specific meaning in the Marxian system.
  They are the two phases of history which would follow capitalism.
 One of the chief characteristics of capitalism is that the means of production is not owned by
the proletariat class who produces surplus.
 In socialism proletariat now owns means of production. However, under socialism production
will be organized following the same incentive system followed in the capitalist regime i.e.
payment according to ability. Socialism in a way is very similar to the capitalist system in
terms of production organization, the only difference being the ownership of means of
production.
 The communist society that will emerge from the socialist system will be characteristically
different from socialism and capitalism in terms of production organization.
 Classes that existed in capitalism and to a lesser extent in socialism will disappear under
communism.
 Under communism each contributes according to his/her ability but consumes according to
his/her needs.
 It becomes quite clear from this formulation that Marx believed that human beings are
corrupted by the existing societal structure and can be made perfect by an ideal society.
However, he did not outline the contradiction between forces of production and production
relation that would the trigger the transition from socialism to communism. This would initiate
a methodological critique of the Marxian theory that we will discuss later.
 We can analyze the Marxian theory of post capitalist socio-economic transition from different
angles. Let us first concentrate on the philosophical ones:
1. Is it a correct reading of human nature to see the market as inherently alienating?
2. Will a communistic society reveal that humans are basically good?
 A second level of analysis focuses on the practical issues
Can we think of a practical alternative to market?
 Related to this there is a criticism of Marx's dialectic that point out that the entire system is
not truly an ongoing dialectic but is teleological. Because in this system the contradiction
between forces of production and production relation ceases to exist whenever communism
emerges.
 Some contemporary Marxist like Resnik-Wolff interpreted Marx's dialectic as over-
determinism where there can be many possible paths.
 Such issues become especially important with the fall of socialist countries
 Two possible views explaining the fall of socialism in East Europe emerged :
(i) Marxism is wrong at its core (ii) Those countries did not really try socialism
 These developments suggest that socialism or communism is too not a fated outcome (in the
way capitalism developed from feudalism). There are different paths of development
experienced in less developed countries which show different hybrid social formation
(between feudalism and capitalism) emerging.
 Another important question regarding the treatment of class in the Marxian theory comes up
with this criticism.
 Marx viewed a capitalist society divided in two classes: labor and capital.
 Some contemporary Marxists believe that this division is too narrow to fit in reality. For
example, even in Marx's time there were farmers and middle class who could be classified
neither as capitalists nor as laborers.
 Some scholars also raise the point of impossibility of class: class is one dimension of one's
identity. There are many identity parameters individual posses: gender, race, religion etc.
 Hence it is not obvious that the class identity will be the fundamental parameter that will drive
class struggle instead of any other form of conflict: racial or otherwise.
 Experience shows that classes did not disappear with the establishment of socialism in
Russia. After the revolution, a new class nomenclature emerged which mainly consisted of
the bureaucracy.
  Balkan war and deadly ethnic clashes in post-socialist regime East Europe shows that ethnic
identities are difficult to erase even after a reasonably long socialist regime.
 One more example that runs contrary to the Marxian theory was World War I. Marx argued
that this was a war with the imperialist agenda of capturing raw material and market for final
goods. He appealed to the working class of Britain, France, Germany and other countries
that they should not take weapons against workers of other countries and call a general
strike to stop the conflict.
 This appeal did not have any effect resulting in a death toll of 10 million people in World War
I.
 The fact that nationalistic sentiment was championed over the proletariat identity during WWI
(and many other wars before and after that) does not directly disprove Marxian doctrine. But
it shows that class is not the most obvious dimension of struggle in a society.
 The traditional interpretation of Marxian theory of transition also faces some serious
challenge when that is applied in the context on Asia and other less developed part of the
world.
 Unlike Western Europe, the transition of feudalism to capitalism was never complete in Asia.
Hence, the traditional interpretation of Marxism, which is also described as Eurocentric for its
overt emphasis on western European history, cannot account for this incomplete transition.
 Several contemporary Marxist scholars however, tried to explain the cases of less developed
countries using Gramscian exposition of Marx.

Lecture 13
Topics
2.13 Karl Marx III
2.13.1 Marx's Economic Theories
2.13.1.1 Marx's methodologies
2.13.1.2 Commodities and classes
2.13.2 Marx's Labor Theory of Value
2.13.3 Surplus and Exploitation
2.13 Karl Marx III
2.13 .1 Marx's Economic Theories
2.13.1.1 Marx's methodologies
 The basic difference between the Marxian and main stream economics lies in the treatment
of individual, society and their interaction.
 In mainstream economics a representative individual takes decision to maximize his/her well
being. The societal outcome is nothing but an aggregation of individual decisions.
 In Marxian economics, economic class (as opposed to individual) is the key to understanding
the society.
 These two strands of economics took two different positions because of the different
questions they try to answer -- mainstream economics is mostly concerned with the decision
making problem within the current economic and social set up while Marxian economics
looks to understand the changes in social and economic organizations.

2.13.1.2 Commodities and classes

 Marx argued that the capitalist production is characterized by the separation between means
of production and the proletariat. This is a marked difference from the earlier artisan based
production where workers would own means of production
  The surplus produced in excess of the subsistence is always produced by laboring people. In
a slave society surplus was produced by the slaves, in a feudal society by serfs and in a
capitalist society by factory workers or proletariat.
 A society is characterized by who owns surplus and the basis of their entitlement--in slave
society it was the social elites, in a feudal society it was the landlord class and in capitalist
society it is owned by the capitalist class.
 For understanding the capitalist society (and transition thereof) Marx reasoned that it is
critical to understand the forces that determine prices of commodities and labor power.This
was because in a capitalist economy all that is produced and all the means of production are
bought and sold in the market.
 Marx argued that prices in a capitalist system represent both the quantitative relation
between commodities and qualitative relationship between individuals who own them
.
 Marx was primarily interested in the analysis of prices as it reveals the social relationships
between labor and capitalist classes and secondarily because of the quantitative relation
between commodities.

2.13.2 Marx's Labor Theory of Value

 Commodities with different physical characteristics can be compared using prices. This
means there must be something common in them that makes them comparable. Marx
argued this sameness cannot come from the consumption side as a coat and a pen have
different types of use values.
 Marx argued that labor is the common factor which makes different goods comparable. This
was in line with classical political economy tradition which was built on the labor theory of
value.
 Marxian labor theory of value was an extension of the Ricardian value theory and it
stumbles upon the problems that were inhere nt in the classical labor theory of value.
 One big stumbling block was the problem of comparing different skill levels of labor.
 Marx theoretically solved this problem by assuming a homogeneous measure of labor known
as the abstract labor.
 On a more practical level (and less theoretical) he proposed that this problem can be solved
by measuring the socially necessary level of skill required to produce a good. This is
precisely the time taken by a worker with average skill measured in clock hours.
 If a worker with higher skill is engaged necessary adjustment is made. If a worker is twice as
productive as an average worker then 1 hour of this more productive laborer shall be
counted as 2 hours of the average worker.
 Another crucial problem is how to measure capital's contribution to relative prices.
 Again Marx used Ricardo's solution of treating capital as the stored up capital which means
that labor required to produce a unit of a commodity is the direct labor + indirect labor
embedded in capital.
 However, this theory is not consistent with the interest theory. We will discuss the
inconsistencies when we discuss neo-classical distribution theory.
 A bigger problem is the contribution of land with different fertility power. Unlike capital, land
cannot be seen as stored labor and hence, land's contribution cannot be measured in terms
of abstract labor.
 In the third volume of capital Marx adopted Ricardo's theory of rent to show that competition
on the superior grade of land will raise rent until rates of profit on all grades of land are equal.
Rent according to Marx also is price determined and not price determining. This however
does not solve the original problem of accounting for value created by land.
 The final difficulty of the labor theory of value comes from the analysis of the influence of
profits on prices. We will come to this issue after we famiarize ourselves with a few more
Marxian concepts.
2.13.3 Surplus and Exploitation

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There are two distinct ways for a capitalist to increase surplus value, as shown in the following
diagrams:

Method #1 entails an increase in the working day. If the capitalist can get away with this without
increasing pay, surplus value will clearly increase. Marx called this ABSOLUTE SURPLUS VALUE.
Method #2 entails a decrease in necessary value, with the working day remaining constant. This
means the worker is paid less, and more surplus value is left for the capitalist. Marx called this
RELATIVE SURPLUS VALUE.
Another concept that will prove useful below is the RATE OF SURPLUS VALUE. This is simply the
ratio of surplus value (s) to necessary value (n)

Lecture 14
Topics
2.14
Karl Marx IV
2.14.1 Marx's Analysis of capitalism
2.14.2 The reserve army of the unemployed
2.14.3 Falling rate of profit
 2.14.4 Business crises
2.14.5 The concentration of capital
2.14.6 Increasing misery of the proletariat

2.14 Karl Marx IV

2.14.1 Marx's Analysis of capitalism
 Marx's analysis of capitalism is based on a the following assumptions:
1. Labor cost theory explaining relative prices
2. Neutral money
3. Constant returns in manufacturing
4. diminishing return in agriculture
5. perfect competition
6. a modified version of wage fund doctrine

 Marx and classical political economists especially Ricardo had a lot of elements
common in their economic models. It is important to understand the difference
between them. Marx was critical of the capitalist system and his objective was to
analyze the transition from capitalism to socialism.
 Ricardo on the other hand was concerned about the distribution of income within
the capitalist system. Below we are discussing some of the basic features of
Marxian economics.

2.14.2 The reserve army of the unemployed

 In classical analysis population growth plays an important role in determining
level of profit.
 With rising capital accumulation, the demand for labor rises which leads to rising
wages.
 Malthus argued that population would rise with rising real income of the labor
class creating extra labour supply that would prevent real wage from rising and profit from falling.
Hence, Malthusian theory explained why profit does not vanish in the long run in the capitalist
system.
 Marx rejected Malthusian theory of population. Instead he proposed the existence of reserve
army of labor to explain why capitalist profit does not go down to zero.
 According to Marx, excess supply in labor market always exists which depresses
the wages and makes profit positive.
 Young people finishing school, women looking for job and people losing jobs
because of labor saving technology add to the reserve army of labor.
 In the Marxian system, wages, profits and employment varies with phases of the
business cycle. During boom period, capital accumulation and wage increase,
and reserve army shrinks. This ultimately depresses profit and capitalists
responds by replacing workers with machine by restoring profits again.
 The concept of reserve army of labor is a radical idea which runs contrary to the
orthodox theory. Ricardo admitted that there could be unemployment but it would
be of temporary in nature. If the labor market is competitive then wage should go
down to clear market.
 Marx also claimed that labor market is perfectly competitive. Then how could he
defend unemployment in equilibrium in the long run?
 There are various ways the Marxian position can be defended. We will discuss
this in detail in the chapter on the critique of general equilibrium theory how market can stay in
disequilibrium in the long run. For now, we provide brief outline of the arguments.
  The simplest way to explain the Marxian position is that workers are paid just
enough money to buy their subsistence consumption bundle. Hence, wages
cannot go lower than that level even if there is excess supply in the long run.
 Another way of reconciliation is to look at the labor market in dynamic framework
rather than the static framework that classical-neo classical tradition usually uses
for analysis. In a dynamic set up unemployment exists in the market due to search cost
--it is costly to match job seekers with the appropriate employers. However, search theorists would
argue that excess supply of labor indicates that more than competitive equilibrium
wage exists in the labor market.
 Tracking down` reserve army of labor empirically is quite tricky. Usually, unemployed people
are defined as people who are looking for jobs but cannot find it. But how do such people
survive? In developed countries, unemployed people are easy to identify from unemployment
doll records. In less developed countries, people often work in family farms or businesses but
not employed meaningfully which means that the farms' output won't fall if these people are
removed. This concept is known as disguised unemployment. These people should be part
of the reserve army but it is difficult to measure the number of such people.
 Also, people working part time to search for better jobs are also part of the reserve army.
 Besides the problems involved in measuring the size of reserve army, it is a difficult task to
statistically show that reserve army depresses wages or for that matter, finding the size of
the reserve army that will depress wage.

2.14.3 Falling rate of profit

 The idea that the rate of profit would fall over time is an important element of the
classical writing. Marx's contribution was to explicitly linking it with the demise of capitalism.
 Marx maintained that the drive for profit would induce the capitalists to
accumulate more capital which would bid up the wage and reduce profit.
 Capitalists would responds to it by employing more machinery that would
displace labor. Marx argued more employment of machines would reduce rate of
profit. In order to understand the argument it is imperative that we take a look at
the value-profit calculus of Marxian economics.
 Marx divided capital in two components: constant capital (c) and variable capital (v).
Constant capital consists of expenditure on physical capital such as machines and factory
building. This is referred to as the constant because the labor embodied in these is fixed.
Variable capital on the other hand is wage bill. This is called variable because this is amenable to
negotiation between the trade unions and the management.
 Rate of profit in the Marxian scheme is defined as ρ=s/(c+v), where s is the surplus value.
 The rate of surplus value (alternatively called the rate of exploitation) is defined as
e=s/v. The organic composition of capital is given by y=c / v
 Hence, ρ can be rewritten as
ρ = e/(1+y) (1)
 With capitalists replacing workers with machines will go up reducing the rate of profit given
that all other parameters are constant.
 Things are not so straight forward if technological change takes place which changes the
rate of exploitation. The rate of exploitation is partly determined by technology and partly by
the comparative political strength of workers union and capitalists. So higher productivity
may need not necessarily result in higher rate of exploitation. If technological change
induces higher rate of exploitation (i.e. more surplus per unit of labor employed) then there are two
opposing forces at work there, and the resultant change in rate of profit is theoretically ambiguous
--it becomes an empirical question.
 Given that we don't have a very satisfactory theory of technological development
it's impossible to come up with a theoretically unambiguous answer.
 However, Marx maintained the position that rate of profit will decline in the long
run and that will bring
down the capitalism. Some of the twentieth century Marxist
economists such as Paul Sweezy and Joan Robinson contested the idea of
falling rate of profit.

2.14.5 The concentration of capital

 Although the Marxian model assumes perfectly competitive market, Marx was
aware of rising concentration of wealth and monopolization of
industries. Large firms would out compete smaller firms by exploiting scale of operation.
 Marx predicted that with more and more concentration of wealth and emergence
of big corporations.
 This will be followed by a separation of ownership and control along with a
number of undesirable social consequences such as corporate fraud and stock
price manipulation.
 For Marx this was another expression of the contradiction between forces and
relations of production.

2.14.6 Increasing misery of the proletariat

 Another contradiction of capitalism that would lead to its destruction was increasing misery of
the proletariat.
 There are three possible interpretation of this doctrine of Marx:
1.Absolute misery of the proletariat will increase as real income for the majority of people will decline
with capitalism.
2. Relative misery will increase as share of labor income in national income would fall.
3. With the advance of capitalism, the quality of life of the laborers would deteriorate.
 Marx subscribed to each of these views at some point or the other.
 The doctrine of absolute misery can be found in his early writing which was abandoned
between the publication of communist manifesto in 1847 and the publication of capital in
1867.
 Marx however maintained the third point of degrading life quality under capitalism throughout
his writing