KARL MARXS MODEL OF CAPITALISM

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Karl Marx (1818-1883) Marxs dialectical materialism
economic evolution

Rise and fall of capitalism

labor theory of value surplus crisis and socialist revolution

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

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

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

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

 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

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

Setting up the Internal Contradiction

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

 Let the Organic Composition of Capital (q) be

q = c/(c+v)
the ratio of fixed to total costs

 Let the Rate of Profit (p) be

p = s/(c+v) the ratio of surplus to total costs

 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

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

 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

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

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

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

The Socialist Countries in 1987

Year Socialist Period Begins Change Via Internal or External Forces

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.

Soviet Union Mongolia Albania Yugoslavia Bulgaria Czechoslovakia Hungary Poland Romania North Korea China East Germany Vietnam

1917 1921 1944 1945 1947 1948 1948 1948 1948 1948 1949 1949 1954

Internal External Internal Internal External External External External External External Internal External Internal

The Socialist Countries (cont.)

14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26.

Cuba Congo Somalia South Yemen Benin Ethiopia Angola Kampuchea Laos Mozambique Afghanistan Nicaragua Zimbabwe

1959 1963 1969 1969 1972 1974 1975 1975 1975 1975 1978 1979 1980

Internal Internal Internal Internal Internal Internal External External External Internal External Internal Internal

 Lenin later extended the model to explain this inconsistency