Marx, Karl: Impact on Economics
Marx, Karl: Impact on Economics
Karl Marx’s economic analysis is mainly contained in three books: the three-volume Capital, the Theories of Surplus Value, also in three volumes, and the Grundrisse. In his economic works Marx tries “to lay bare the law of motion of modern society,” that is to say, to discover social regularities described mainly as long-run tendencies. Marx’s method of analysis begins with the observation of empirical reality in all its complexity and concreteness. From this reality he derives abstract concepts (determinative relations and interpretive categories), and then through these concepts he ends up once again with the concrete, whose reproduction now is structured according to the internal connections established by the theory. The adequacy of the theory and concepts that have been created is judged by the degree of correspondence between the most concrete categories and data derived from empirical reality. A characteristic example of this methodological approach is the determination of market prices (the most concrete category) by another set of more abstract prices known as prices of production, that is, prices that incorporate the economy’s general rate of profit. Prices of production are in turn determined by an even more abstract type of prices called labor values. All these prices can be subjected to empirical testing.
Marx observes that capitalism is a historically specific system characterized by generalized commodity exchange and so, naturally, the starting point of his inquiry is the analysis of the commodity whose exchange value aspect (and not its use value aspect) is the dominant one. Exchange value is the external measure of the intrinsic property of commodities, which he calls value, defined as the total amount of socially necessary abstract (i.e., undifferentiated) labor time embodied in a commodity. In the process of exchange, one commodity, due to its possession of a set of useful properties, is chosen to function as the universal commodity against which all other commodities are compared and exchanged. The commodity that historically has performed the function of universal commodity more successfully than any other is gold. The ratio of the value of a commodity to the value of gold gives the direct price of the commodity. If the value of gold decreases (e.g., because of discoveries of new gold mines and technological change) the general price level, other things being constant, increases—and vice versa. This rudimentary theory of money, which is derived from a straightforward generalization of the theory of value, can be expanded to include both monetary systems that are convertible to gold and those that are not, and thus becomes relevant for new developments after 1970. At the same time, Marx’s theory of value (together with the use of mathematical analysis and input-output data) has been shown to rather accurately predict market prices, and thus could become a viable alternative to neoclassical price theory (Shaikh 1984).
The analysis of the universal commodity and money leads to an investigation of the capitalist process of production. This process is described by the circuit M – C (LP, MP ) … P … C' –M', according to which capitalists invest an amount of money (M ) in order to buy a set of commodities (C ) consisting of commodity labor power (LP )—that is, the worker’s capacity to work—and other means of production (MP ), for the purpose of production (P ) of a new set of commodities (C' ), which when sold they expect to realize a sum of money greater than that of the initial investment, M' > M. This extra money is what really motivates the whole circuit of capitalist production as it is repeated on an expanded scale. The difference M' –M > 0, which Marx calls surplus value, stems from labor power, a special commodity characterized by its property of producing more value than the value of commodities that the worker buys with his money wage and consumes in order to reproduce his capacity to work. In contrast, the value of the means of production is either transferred to the final product all at once (as in the case of raw materials) or gradually through depreciation (as is the case with the plant and equipment) (Capital I ). The distinction between labor and labor power is Marx’s greatest discovery and contribution to political economy, because through this distinction the source of surplus value can be explained on the basis of equivalent exchanges. Marx argued that surplus value is created in the sphere of production by labor. The production sphere has primacy over the circulation sphere because the latter is supported by the surplus value produced in the former. Furthermore, the circulation sphere modifies and changes, within strictly specified limits, some of the results of the sphere of production. For example, surplus value in the sphere of circulation is redistributed to the various sectors of the economy in the form of profit according to its degree of capital intensity; however, the sum of the profits cannot exceed the amount of surplus value produced.
It is important to stress that there is no guarantee that the circuit of capital will necessarily be completed, as it can be interrupted at any stage by a number of unexpected factors. Thus, uncertainty and expectations are immanent in Marx’s analysis of capitalism. Furthermore, the whole circuit begins and ends with money, a characteristic that allows the introduction of credit and also the hypothesis that savings may differ from investment, a difference that sets the stage for the development of an alternative to Keynes’s theory of effective demand rooted in the process of capital accumulation.
According to Marx, the hallmark of the individual behavior of capitalists is the pursuit of profit as a purpose in itself, which forces them into two kinds of competition: the first with workers in the labor markets over wages and conditions of work, and the second with other capitalists in the commodity markets over the expansion of market share at the expense of their competitors. Capitalists cope with these two types of competition through the introduction of more fixed capital. As a consequence, mechanization of the labor process is used to raise the productivity of labor. The introduction of fixed capital both increases the scale of operation needed for minimum efficiency and reduces the unit cost of production. The latter implies that by reducing their prices innovating firms are able to expand their market share at the expense of less efficient firms. Thus, the process of capital accumulation leads to a small number of top firms controlling an increasing share of the total market. This is the reason why concentration of capital is the expected outcome implied by the nature of capital and by the operation of competition, which by no means diminishes over time. On the contrary, the very cause of mechanization—the pursuit of profit—continues to exist even with fewer firms, as competition among them intensifies. Meanwhile, the ever-increasing minimum-efficiency scale of operation requires higher investment that firms, especially the small ones, cannot undertake on their own, and thus there is pressure to merge, in order to avoid becoming the target of a hostile takeover. The resulting growth in the scale of production through the amalgamation of capitals is called centralization of capital and is another aspect of the operation of competition (Capital I, III ). If there is a grand prediction that has been historically validated it is Marx’s law of increasing concentration and centralization of capital.
Another grand prediction by Marx, which is also consistent with the available historical evidence, concerns the law of the falling rate of profit. This law is derived from the very purpose of capitalist production, which is the extraction of profits as an end in itself. As mentioned above, the realization of this goal entails mechanization of the production process through the introduction of fixed capital. On the one hand, this raises both the productivity of labor and profits for the firms that remain following concentration; on the other hand, however, the increase of fixed capital relative to labor leads to a falling profit rate. Marx noted that the fall in the rate of profit exerts a negative effect on the mass of real profits and, at the same time, a positive effect through the accumulation of capital. So long as the positive effect exceeds the negative, the mass of real profits expands at an increasing rate in a long wavelike pattern. Because new investment is a function of the rate of profit, it follows that a falling rate of profit at some point will necessarily slow down the rate of growth of new investment, thereby slowing down the rate of increase in the mass of real profits. As this tendency continues there will be a point at which the two (positive and negative) effects will cancel each other out and the change in the mass of profits will become zero. This means that the investment of the previous period will not contribute at all to an increase in profits and thus capitalists will have no interest in new investment. This is the point of “absolute overaccumula-tion of capital” that marks the onset of economic crisis. Its consequence is a slowdown in investment and rising unemployment. As more and more firms are led into bankruptcies and real wages fall, one can also observe the creation of new institutions, the emergence of new methods of management, and the diffusion of technological change. The combination of these processes results in a rising mass of profit (and a temporarily rising rate of profit) and sets the course for the reestablishment of the necessary conditions for another wave of expansion and contraction. Thus capitalism is both a growth-and crisis-prone system, as has also been documented in the literature on long economic cycles (see Shaikh 1992).
Marx’s impact on economic thought has not received the recognition it deserves due to his view of the historical character of capitalist society and his vision of socialism. Thus, unfortunately, when orthodox economists discuss aspects of Marx’s work, they generally do so to point out its alleged weaknesses rather than its strengths.
SEE ALSO Communism; Competition, Marxist; Labor Theory of Value; Marxism
Marx, Karl. 1867–1894. Capital. 3 vols. Ed. Friedrich Engels. Moscow: International Publishers.
Shaikh, Anwar. 1984. The Transformation from Marx to Sraffa. In Ricardo, Marx, Sraffa, ed. Ernest Mandel and Alan Freeman, 43–84. London: Verso.
Shaikh, Anwar. 1992. The Falling Rate of Profit and Long Waves in Accumulation: Theory and Evidence. In New Findings in Long-Wave Research, ed. Alfred Kleinknecht, Ernest Mandel, and Immanuel Wallerstein, 175–202. London: Macmillan.