KARL MARXS MODEL OF CAPITALISM

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KARL MARXS MODEL OF CAPITALISM
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Preview

• Karl Marx (1818-1883)
• Marxs dialectical materialism
• economic evolution
• Rise and fall of capitalism
• labor theory of value
• surplus
• crisis and socialist revolution

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Karl Marx (1818-1883)

• Born in Prussia of Jewish family converted to
  Christianity
• Influenced by the philosopher Hegel
• Much of his work in London in collaboration with
  Friedrich Engels
• concept of dialectical materialism
• The Communist Manifesto

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Marxs Theory of Dialectical Materialism

• Social and economic change through conflict
• Emerging classes associated with economic
  innovations come into conflict with the old
• Replacement of an old economic order with a
  superior one
• Capitalism is a qualitative leap over feudalism
• Socialism is a qualitative leap over capitalism

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Capitalism

• Inefficient feudalism replaced by far more
  efficient capitalism
• As capitalism emerges, there is an accumulation
  of capital (wealth) by the bourgeoisie (the
  capitalists) and the creation of a free (i.e.,
  not serf) labor force, the proletariat
• Extreme dichotomy between capital and labor
• Sets up two classes which must eventually conflict

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The Model

• Marx models an internal contradiction which sets
  up the conflict between classes
• Proposes a labor theory of value
• Long run value determined by three things
• amount of labor used to produce the good
• indirect embodiment of labor through capital and
  intermediate inputs
• the capitalists surplus

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• C c v s
• where
• C is value
• c is indirect labor through capital (fixed
  capital)
• v is direct labor cost (variable capital)
• s is surplus value or profit

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Surplus Value

• Where does this surplus value come from?
• Workers are paid a subsistence wage
• Employers compel workers to produce a value above
  that needed to generate subsistence wage
• The workers get the subsistence wage, the
  capitalist gets the surplus
• the Reserve Army of the Unemployed keeps wages
  at subsistence level
• exploitation of labor

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Setting up the Internal Contradiction

• Let the Rate of Labor Exploitation (s') be
• s' s/v
• profits divided by wages

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• Let the Organic Composition of Capital (q) be
• q c/(cv)
• the ratio of fixed to total costs

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• Let the Rate of Profit (p) be
• p s/(cv)
• the ratio of surplus to total costs

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• Using the expressions for s', q, and p, we can
  show that
• p s'(1 - q)
• That is, the rate of profit is
• directly related to the exploitation of labor
• inversely related to the organic composition of
  capital
• As the organic composition of capital rises, the
  rate of profit falls

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Cut-Throat Capitalism and the Internal
Contradiction

• Each firm in cut-throat competition for each
  others business
• Driven to gain temporary competitive advantage
  over others
• The way to do this is to introduce labor saving
  innovations
• that is, replace labor with capital
• But innovation diffuses quickly through economy,
  dissipating innovators advantage

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• Thus, throughout the economy, capitalists are
  driven to accumulate capital in order to replace
  labor with capital
• But as labor is replaced with capital, the
  organic composition of capital rises
• As the organic composition of capital rises, the
  rate of profit falls
• Capitalists try to keep up rate of profit by
  exploiting labor more and more
• More and more firms fall behind and fail
• bankrupt capitalists lose their capital and join
  the swelling ranks of the proletariat

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Overproduction

• Tendency toward overproduction
• workers too poor to buy much
• capitalists too busy saving (accumulating
  capital)
• economic depressions become more and more severe

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Revolution

• The stage is set for revolution
• proletariat swelling and becoming increasingly
  exploited
• bourgeoisie shrinking and becoming increasingly
  cut-throat
• the proletariat rises up in revolt, replacing the
  bourgeoisie as the dominant class and creating
  the new socialist order

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Implication of the Model

• Revolution will occur in most advanced (i.e.,
  ripest) capitalist economy
• Germany
• UK
• Did it? NO
• Revolution occurs in Russia
• hardly a mature capitalist economy

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The Socialist Countries in 1987Year Socialist
Period BeginsChange Via Internal or External
Forces

• 1. Soviet Union 1917 Internal
• 2. Mongolia 1921 External
• 3. Albania 1944 Internal
• 4. Yugoslavia 1945 Internal
• 5. Bulgaria 1947 External
• 6. Czechoslovakia 1948 External
• 7. Hungary 1948 External
• 8. Poland 1948 External
• 9. Romania 1948 External
• 10. North Korea 1948 External
• 11. China 1949 Internal
• 12. East Germany 1949 External
• 13. Vietnam 1954 Internal

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The Socialist Countries (cont.)

• 14. Cuba 1959 Internal
• 15. Congo 1963 Internal
• 16. Somalia 1969 Internal
• 17. South Yemen 1969 Internal
• 18. Benin 1972 Internal
• 19. Ethiopia 1974 Internal
• 20. Angola 1975 External
• 21. Kampuchea 1975 External
• 22. Laos 1975 External
• 23. Mozambique 1975 Internal
• 24. Afghanistan 1978 External
• 25. Nicaragua 1979 Internal
• 26. Zimbabwe 1980 Internal

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• Lenin later extended the model to explain this
  inconsistency