Theory of labor value by Karl Marx

1. Karl Marx
Chapter 7

2. Karl Marx
 German philosopher, political economist and
revolutionary
 Believed that capitalism would be replaced by
communism
 While in college, president of the Trier Tavern
Drinking Club
 Member of (influenced by) Young Hegelians –
dialectic
 His interest in economics was fueled by Friedrich
Engels – friend, collaborator and benefactor
 Only 12 people attended his funeral

3. Karl Marx
 It is difficult to talk only about the economic theory of
Marx, since his ideas formulate a complete,
integrated intellectual system involving the nature of
the process of social history – i.e., he was more than
an “economist.”
 Many economic historians argue that it is impossible
to understand any one part of Marx’s thoughts
without putting it into its proper context within the
entire system.
 Keeping this in mind, we will focus on some of the
more important aspects of Marx’s “economic theory.”
 Das Kapital and The Communist Manifesto

4. Essence of Marx’s Economics
 Heavily influenced by the theories of
value and profit of Smith and Ricardo –
it could be said that his ideas are an
extension and refinement of their ideas.
 Contemptuous of the ideas of Malthus,
Say, Senior and Bentham
 Rejected Malthus’ population theory

5. Essence of Marx’s Economics
 In general, he believed that the ideas of most
of the Classicals lacked historical perspective
 If they would have had this historical
perspective, they would have discovered that
production is a social activity that depends
upon the prevailing form of social
organization and techniques of production
 For example, Europe had passed through
several distinct historical epochs, or modes of
production, including feudalism and
capitalism.

6. Essence of Marx’s Economics
 In order to understand any one mode of production it
is necessary to discover the essential and particular
features of the mode
 The failure to make this discovery, according to Marx,
led the Classicals to two “confusions”
 The first confusion was the belief that capital was a
universal element in all production processes
 The second was that all economic activity could be
reduced to a series of exchanges

7. Essence of Marx’s Economics
– first confusion
 To Marx, capitalism had one feature that was
common to all modes and one feature that
was specific to capitalism
 The common feature was the existence of
capital as an instrument of production; capital
is stored up labor necessary for production
 The particular feature of capitalism is that this
capital is the source of income and power of
the dominant social class

8. Essence of Marx’s Economics
– first confusion
 “Capital is, among other things, also an
instrument of production, also objectified, past
labour. Therefore, capital is a general,
eternal relation of nature; that is, if I leave out
just the specific quality which alone makes
‘instrument of production’ and ‘stored-up
labor’ into capital.” (Das Kapital)
 The specific quality he was referring to was
the power of capital to yield profits to a
special social class

9. Essence of Marx’s Economics
– second confusion
 The second confusion is that all economic activity can
be reduced to a series of exchanges
 Marx believed that since the Classicals accepted all
capitalist modes of production (e.g., private property)
the only thing left to study was exchange. Workers
simply became sellers of labor – labor was a
commodity.
 Anyone who had money was a buyer, all buyers were
the same
 This makes a system of exchange look like a system
of equality, of harmony, etc. BUT, Marx said, that is
because the Classicals ignored the features that
differentiated capitalism from other systems.

10. Essence of Marx’s Economics
 Capitalism was destined to fail – it contained
the seeds of its own destruction
 “The development of Modern Industry,
therefore, cuts from under its feet the very
foundation on which the bourgeoisie
produces and appropriates products. What
the bourgeoisie therefore produces, above
all, are its own grave-diggers. Its fall and the
victory of the proletariat are equally
inevitable.” (Manifesto)

11. Essence of Marx’s Economics
 AND/OR
 The proletariat (workers) would seize control from the
bourgeoisie (capitalists)
 Socialist revolution
 The proletariat would seize control from the bourgeosie –
revolution
 “The Communists disdain to conceal their views and aims. They
openly declare that their ends can be attained only by the
forcible overthrow of all existing social conditions. Let the ruling
classes tremble at a Communistic revolution. The proletarians
have nothing to lose but their chains. They have a world to win.”
(Manifesto)
 “From each according to his ability, to each according to his
needs” (Manifesto)

12. The Question
 The Question is, WHY does this
happen?

13. Hegelian Dialectic
 Process of history is linear, not
recurring
 Interaction of thesis, antithesis and
synthesis
 An abstract force is seeking perfection
 A form of idealism

14. Marx’s Dialectic
 The dialectical process is NOT driven by abstract
forces, but rather by material conditions, and
particularly by economic factors
 Hegel's historical process rests on the idea that new
ideas cause us to change the way we live (our
thoughts change, and the world changes in response)
 Marx's historical process states that when new
economic relationships change the way we live, we
develop new ideas (the world changes, and our
thoughts change in response)

15. Marx’s Dialectic (cont’d)
 Forces of production and the relations of production
 The forces of production are ever changing, they are the
technology embodied in labor and capital.
 The relations of production are the “rules of the game” – the
social relations that support production
 Relations of production involve all kinds of human interactions
involved in economic life.
 Relations of production tend to be static or very slow to change,
and are supported by the “social superstructure”
 The dialectic occurs when the forces of production (antithesis)
come into conflict with the relations of production (thesis).

16. Social superstructure
 The social superstructure are the
institutions that support the relations of
production. They include religion, the
legal system, music, art, etc.

17. Framework of Analysis
 What are the questions that Marx is
asking?
 Why do societies change?
 What is the future of capitalism?
 Why are all men born free, but
everywhere they are in chains? (my
apologies to Rousseau)

18. Framework of Analysis
 What are the assumptions that Marx is
making?
 The world is real and exists apart from us - materialist
 The mode of production plays a determining role in
the life of society
 Conflict (class struggle) is inherent in any society
 "The history of all hitherto existing society is the
history of class struggles. Oppressor and oppressed
st[an]d in constant opposition to one another. . . "
(Manifesto)
 Every society contains within it the conditions for the
emergence of a new society

19. Framework of Analysis
 What are the assumptions that
Marx is making? (cont’d)
 Labor Theory of Value
 The working class would inevitably
develop a revolutionary consciousness
 Scarcity can be abolished

20. Framework of Analysis
 What is the economic/ political/
cultural/social environment of
Marx?
 Criticism of Ricardo, modifications of
Classical Theory
 Criticism of capitalism from humanists
and socialists

21. Framework of Analysis
 What is the role of the market?
 Essential feature of capitalism
 Everything is treated as a commodity
with a price, including labor
 Communism is a classless economy
without markets

22. Framework of Analysis
 What is the role of the government?
 The state is a product of class struggle
 It is an instrument by which one class rules
another
 The state arises where, when and insofar as
class antagonism cannot be reconciled.
 It can be used by workers or capitalists

23. Framework of Analysis
 What is the role of the government?
(cont’d)
 The state may be used to suppress the
proletariat but eventually
 “The proletariat seizes from state power and
turns the means of production into state
property to begin with” (Engels)
 Credit, transport and the means of production
should be centralized under the State.

24. Framework of Analysis
 What is the role of the government?
(cont’d)
 Eventually the state “withers away”
 “But thereby it abolishes itself as the
proletariat abolishes all class distinctions
and class antagonisms, and abolishes also
the state as state.” (Engels)

25. Socialism v. Communism
 Socialism is the stage after capitalism,
and contains some vestiges of
capitalism, including differential
compensation to get people to work
 Communism is an advanced stage of
socialism.

26. Socialism v. Communism
 Socialism - A society run by the working class (i.e.,
proletariat) rather than the bourgeoisie (i.e., capitalists). The
state machine is used to defend working class interests against
those who still have wealth or power and who will attempt to
return society to the capitalist system and bourgeois rule.
Socialism is the period of transition between the overthrow
of bourgeois rule and the development of a classless,
communist society.
 Communism - A classless society with no exploitation. No
state machine used by one section of the population to oppress
another section. No need for professional armies or police
forces. No use of production for profit or exchange. Society runs
in accord with the principle: From each according to his
ability, to each according to his need.
 www.communism.com

27. Alienation and Markets
 Private property and markets alienate
people from their true selves, for
example, to sell one’s labor to another
is demeaning. Private property keeps
people from fulfilling themselves.

28. Marx’s Value Theory
 Commodities have a use value and an
exchange value
 Exchange value of a good is equal to the
amount of socially necessary labor necessary
to produce it
 Socially necessary labor is the labor exerted
at the average level of intensity and
productivity for the industry
 Basically the same as Ricardo’s labor theory
of value

29. Marx’s Value Theory (cont’d)
 Two-stage argument for labor theory of value
 If two objects can be compared (relative
prices) then there must be a “third thing of
identical magnitude in both of them” to which
they are both reducible
 That “third thing” is the quantity of labor
embodied

30. Marx’s Value Theory (cont’d)
 Profit is not a cost of production, not
price determining, it is a surplus which
would make it price determined
 What is the argument here?

31. Marx’s Value Theory (cont’d)
 The capitalist purchases the power of labor
for a day
 What does he pay the laborer? The same as
he would pay for any other commodity
 That is, he pays the laborer the amount of
socially necessary labor required to produce
the labor
 That is equal to the amount of commodities
necessary to keep the worker alive

32. Marx’s Value Theory (cont’d)
 So, assume that it takes four hours of
labor to produce enough commodities
to keep the worker alive
 That is the cost of the worker
 Any work that the workers does above
this four hours provides a surplus for
the capitalist
 Surplus value is the source of all profit

33. Surplus Value and Labor
Exploitation
 The surplus goes to the capitalists
 Labor was exploited because they did not
own the means of production (capital).
 Capitalists do not earn the income that they
receive – they get income just by virtue of
owning the capital.
 Marx was concerned with the distribution of
income, and believed that the distribution
prevailing during his time was “unfair.”

34. Surplus Value and Profits
 If the demand for labor increases over
time due to capital accumulation, what
keeps wages from rising and profits
falling to zero
 It is NOT an increase in population as
Malthus would have it
 It is the Reserve Army of the
Unemployed

35. Reserve Army of the
Unemployed
 The existence of the reserve army keeps wages low.
It exists because of technological progress that
replaces labor with machines
 Also, new entrants into the labor force expand the
reserve army
 During periods of expansion, the reserve army
declines, but during recessions, it expands
 Marx predicted long term unemployment
(disequilibrium in the labor market), unlike Classicals
who believed that labor markets will “clear” when
wages fall
 He rejected Says Law

36. What does current economic theory say
about long term unemployment?
 Do flexible wages clear the labor market? Or
is there a long term disequilibrium?
 Structural Unemployment
 Search Theory
 Workers can choose from many job offers.
Different companies make different wage offers to
the same worker. These wage differentials cause
the worker to “shop around” for the best job offer,
and he or she will remain unemployed longer and
he or she searches for the best job. This will
increase the duration of unemployment.

37. Reserve Army of the
Unemployed
 Does it exist?
 Hard to say – statistics do not give a clear
picture
 At times, the official unemployment rate
understates the true amount of
unemployment because of discouraged
workers.
 Also people who are working part time but
would like to work full time are counted as
employed; this also understates the true
amount of unemployment.

38. Falling Rate of Profit
 Like Ricardo and other Classicals, Marx predicted the
rate of profit would fall.
 Profits will fall as capitalists invest in more capital in
order to substitute machines for workers. As the
quantity of capital increases, the return to capital will
fall. (diminishing returns to capital)
 Output prices will also fall as businesses compete to
offer lower prices. In order to increase efficiency,
capitalists will invest in more machines (capital
goods), thus driving down the rate of return to
capital. (again, diminishing returns to capital)

39. Falling Rate of Profit
 Will this really happen?
 It is important to note that increases in the
quantity of capital is likely to bring with it an
increase in the quality of capital
(technological improvements) which will
increase the return to capital.
 WHICH FORCE WILL WIN? It is diminishing
returns vs. technological improvements
 There is really no empirical evidence to
decide which factor is victorious

40. Business Cycles
 Marx distinguished between a barter
economy and a capitalist economy.
 In a barter economy there is no excess
production thus no business cycles. Goods
are produced only when someone wants to
consume them.
 But in a capitalist economy, production is
separated from demand. Overproduction can
occur.
 When it does, prices and profits fall

41. Business Cycles (cont’d)
 Eventually, the overproduction will
cause wages to fall and profits to rise
 The cycle continues

42. Disproportionality Crisis
 Disequilibrium in one market may
spread to others, according to Marx
 Resource allocation from one market to
another may not be a smooth process -
resources may not be mobile
 This can exacerbate business cycles

43. Competition
 Marx believed that the level of competition will
decline over time and businesses become
bigger and more monopolistic
 Economies of scale favor large enterprises
over small businesses
 Large corporations separate ownership from
control - this is a problem according to Marx

44. Increasing misery of the
proletariat
 Real and/or relative share of income going to
workers fall
 Alternatively, the quality of life decreases -
worker alienation, long hours
 This results in revolution of the proletariat
(workers)
 "The proletarians have nothing to lose but
their chains. They have a world to win.
Proletarians of all countries, unite!"