KARL MARX

Economic Thought

Karl Heinrich Marx was born on the 5th of May 1818 in Trier.1 He was a German philosopher, sociologist,
historian, political economist, political, theorist and revolutionary socialist who developed the socio-political
theory of Marxism. His ideas have since played a significant role in both the development of social science
and also in the socialist political movement. He published various books during his lifetime the most notable
being The Communist Manifesto (1848) and Capital (1867–1894), many of which were co-written with his
friend, the fellow German revolutionary socialist Friedrich Engels.

Born into a wealthy middle-class family in Trier, Prussia, Marx went on to study at both the University of
Bonn and the University of Berlin, where he became interested in the philosophical ideas of the Young
Hegelians. Following the completion of his studies, he became a journalist in Cologne, writing for a radical
newspaper, the Rheinische Zeitung, where he began to use Hegelian concepts of dialectical materialism to
influence his ideas on socialism. Moving to Paris in 1843, he began writing for other radical newspapers, the
Deutsch-Französische Jahrbücher and Vorwärts! as well as writing a series of books, several of which were
co-written with Engels. Exiled to Brussels in Belgium in 1845, he became a leading figure of the Communist
League, before moving back to Cologne, where he founded his own newspaper, the Neue Rheinische
Zeitung.
Exiled once more, in 1849 he travelled to London where, living in poverty, he proceeded to continue
writing and formulating his theories about the nature of society and how he believed it could be improved, as
well as campaigning for socialism and becoming a significant figure in the International Workingmen’s
Association.
Marx’s theories about society, economics and politics, which are collectively known as Marxism, hold
that all society progresses through class struggle. He was heavily critical of the current form of society,
capitalism, which he called the ‘dictatorship of the bourgeoisie’, believing it to be run by the wealthy middle
and upper classes purely for their own benefit, and predicted that, like previous socioeconomic systems, it
would inevitably produce internal tensions which would lead to its self-destruction and replacement by a new
system, socialism. Under socialism, he argued that society would be governed by the working class in what
he called the ‘dictatorship of the proletariat’, the ‘workers state’ or ‘workers’ democracy’. He believed that
socialism would, in its turn, eventually be replaced by a stateless, classless society called pure communism.
Along with believing in the inevitability of socialism and communism, Marx actively fought for the former’s
implementation, arguing that both social theorists and underprivileged people should carry out organised
revolutionary action to topple capitalism and bring about socioeconomic change.
While Marx remained a relatively obscure figure in his own lifetime, his ideas and the ideology of Marxism
began to exert a major influence on socialist movements shortly after his death. Revolutionary socialist
governments following Marxist concepts took power in a variety of countries in the 20th century, leading to
the formation of such socialist states as the Soviet Union in 1922 and the People’s Republic of China in
1949, whilst various theoretical variants, such as Leninism, Trotskyism and Maoism, were developed. Marx
is typically cited, with Émile Durkheim and Max Weber, as one of the three principal architects of modern
social.

1. Theory of Economic Development

Marxian theory of development is based on the premise of the nature of production function, technological
progress and the way the process of capital accumulation takes place. All these together influence the wage
rate determination and accumulation of profit in the economy thereby consequent upon the dynamic
behaviour of the economy.
In his Das Kapital (1867), Marx maintains that the production of goods takes place under the control of a
capitalist and on his behalf, does not alter the general character of that production. According to him,
labour is a process in which both man and nature participate. He argues that the labour power gives value
 to a commodity produced. However, the unearned income of the labour is retained by the capitalist as
profit. Karl Marx terms this as the exploitation of labour. This injustice caused to the labour class can be
eliminated only when the factors of production are transferred from the capitalist to the working class.
According to Marx, technology inevitably replaces labour and machines help the capitalist to earn greater
profits. Thus, technological advancement results in increase in unemployment and furthering accumulation
of capital. But this will also result in the reduction of investment opportunities and rate of profit. Therefore,
the ruling capitalist class becomes an imperialist class. Under capitalism, income inequalities will grow.
Growth would be unbalanced and business cycles would be more violent due to increase in unemployment,
poverty and under consumption among the masses. The working class will revolt against the capitalist class
thereby resulting into an end of capitalism and rise of communism.
The theory of development is based on certain assumptions such as the capital accumulation, technological
progress and the production function.
2. Materialistic interpretation of history
According to Karl Marx, the foundation and evolutionary cause of all social life is materialism. Historical
development is determined and influenced by the economic condition and non-economic forces have very
little influence on these events. The mode of production determines the general character of the social and
political process of life and the class structure is related to the relations of production which are
characterized by the following
• Division of labour in a society, skills possessed by the labour in the social content with respect to
the degree of freedom
• Knowledge about the availability of resources in the economy
• Technological progress
According to Marx the entire history of humankind is divided into four different social
systems.
• Primitive communism
• Slave age
• Feudalism
• Capitalism
During the age of primitive communism, the factors of production belong to the community which
also enjoys control over the resources. Individuals utilize the resources as per their needs. But in the other
stages, the control of resources is restricted to a smaller class. This class also controls the society. The
society gets divided into two classes, viz., the dominant class and the depressed class. Such a kind of
division of society also creates tensions and conflicts. Hence, the control of resources results into a change
in the structure of the society. But the basic structure relates to production, exchange and distribution. This
also influences the shape of life. Friedrich Engels mentions that the ultimate cause of social change and
political revolution is sought in the mode of production and exchange.
3. Surplus value
According to Karl Marx, labour is the only source of value of a community. The factors of demand and
supply determine the value of a commodity only in the short run but in the long run, the amount of labour
used in the production of a commodity determines this value.
Karl Marx divides society into two classes, viz., the working class and the capitalist class. The capitalist
class owns the resources and purchases labour services from the working class and the working class sells
its labour to the capitalists. The commodity produced by the labour is sold at a price in the commodity
market and the labour is paid some wages for producing the commodity. The difference between the price
of the commodity and the wages paid to the labour is the surplus value which is retained by the capitalist.
According to Marx, capitalists are interested in producing those goods and services that generate more
surplus value for them rather than socially useful commodities. Thus, capitalism believes in the exploitation
of labour which is nothing but the surplus value generated by the workers. The surplus value generated by
the labour during the process of production is used by the capitalist class for reinvestment which furthers
the process of production under capitalism.
The capitalist tries to increase the surplus value which leads to the capitalist development. Hence, it is the
surplus values generated by the labour class which has a great role to play in the development of a society.
4. Organic Composition of Capital, and Surplus Value
Like the classical economists, Marx believed there was a declining rate of profit over the long-term. The
long-run tendency for the rate of profit to decline is brought about not by competition increasing wages (as
in Smith), nor by the diminishing marginal productivity of land (as in Ricardo), but rather by the "rising
organic composition of capital".

Marx defined the "organic composition of capital" as the ratio of what he called constant capital to variable
capital. It is important to realise that constant capital is not what we today call fixed capital, but rather
circulating capital such as raw materials. Marx's "variable capital" is defined as advances to labour, i.e. total
wage payments, or heuristically, v = wL (where w is wages and L is labour employed). Thus, according to
Marx, total value of output is y = c + v + s where y is output, ‘c’ constant capital, ‘v’ variable capital and
‘s’ surplus value.
The rate of profits, Marx claimed, is defined as:
r = s/(v +c)
where r is the rate of profit, s is surplus, and (v+c) are total advances (constant and variable). Surplus, s, is
the amount of total output produced above total advances, or
s = y - (v+c), where y is total output. It is important to note that for Marx only labour produces surplus value.
This was to become a sore point of debate between the Neo-Ricardians like Sraffa, Pasinetti and Garegnani
and the Neo-Marxians like Baran, Sweezy, Mandel, Amin, Frank, Levine, Prebisch, and Furtado, in later
years. Marx called the ratio of surplus to variable capital, s/v, the "exploitation rate" (surplus produced for
every dollar spent on labour).
Marx referred to the ratio of constant to variable capital, c/v, as the organic composition of capital
(which can be viewed as a sort of capital-labour ratio). Notice that by dividing numerator and denominator
of r by v we obtain:
r = (s/v) (v/(v+c))
so, the rate of profit can be expressed as a positive function of the exploitation rate (s/v) and a negative
function of the organic composition of capital (c/v)).
5. Declining Rate of Profit
Marx then argued that the exploitation rate (s/v) tended to be fixed, while the organic composition of capital
(c/v) tended to rise over time, thus the rate of profit has a tendency to decline. Why?
The basic logic can be as follows. For simplicity, assume a static economy (no labour supply growth). As the
surplus accrues to capitalists and, necessarily, capitalists invest that surplus into expanding production, then
output will rise over time while the labour supply remains constant. Thus, the labour market gets gradually
"tighter" and so wages will rise. Thus, v (= wL) or variable capital rises and r or profits fall.
But this decline in r is temporary. There are forces at work which will restore profit rate what are these
forces? Marx argued, capitalists can boost their profit rate back up by introducing labour-saving machinery
into production -- thereby leading to unemployment.
There are two effects of this. a) notice that v declines because of increasing labour (L). But,
concurrently, the employment of machinery implies that constant capital, c, rises. Thus, the
introduction of labour-saving machinery does not seem to change anything: the fall in v from less
labour is counteracted by the rise in c, so it seems that c/v stays constant. b) the concurrent expansion in
the unemployed -- the "reserve army of labour" -- will, by itself, influence the labour bargaining process and
reduce wages down to subsistence. Thus, v declines further. So, on the whole, the net effect of a labour-
saving technology is to raise c/v, i.e. to reduce the rate of profit.
But notice that v declines further because labour is released. So, both the w and the L part of v = wL
declines. But, concurrently, the employment of machinery implies that constant capital rises, c rises. Thus,
the fall in L is counteracted by the rise in c, so that, on the whole, v declines. So, in sum, the organic
composition of capital, c/v, falls. Profits, consequently, are increased.
Thus, the L part of v = wL declines and so r = s/(v+c) comes back up. There is a double effect in that, of
course, the release of labour is not automatically absorbed by higher investment so that a "reserve army of
labour" is created. In this manner, at the bargaining table, firms will be at an advantage relative to their
employees, so that wages decline (or at least are prevented from rising further).

But this is merely a temporary respite. Profits will be reinvested, output will grow again, labour markets will
tighten once more and the whole process will repeat itself. The problem is that the second time around, there
is less labour to lay off. Recall, L was already reduced in the first round. Introducing more machinery
reduces L further -- and, via several rounds, further and further -- until there is hardly any more L that can be
released. When the system gets to the point that there are no more labourers to be fired, then there is nothing
to bring s/v back up. The profit rate declines and firms will begin going bankrupt.

The bankruptcy of firms means a sudden release of even more labour and capital into the market, depressing
prices tremendously. Firms that remain active will thus be able to buy the bankrupt smaller firms and thus
acquire more labour and capital at very cheap rates -- indeed, cheaper than their proper "value". The
unemployed, thus, act as a "reserve army of labour" and bring wages back down to a manageable level.

However, the introduction of labour-saving capital and laying off of workers means that c rises while v falls,
i.e. the organic composition of capital rises. It is easy to notice that a constant s/v and a rising c/v will
necessarily reduce the profit rate (to see this, just notice that r can be rewritten as:
r = (s/v)(v/(v+c))).
6. Increasing Rate of Exploitation
Thus, there is a natural tendency for the rate of profit to fall. One way to prevent this decline in r would
be to increase the exploitation rate in proportion to which variable capital declines relative to constant
capital. The manner of increasing the exploitation rate, Marx claimed, was up to the devilish imagination of
the capitalist.
Technological progress in the form of machinery or division of labour was not wholly beneficial way of
improving growth either.
Marx took on Ricardo's idea that machinery is labour-saving and leads to a disproportional adjustment: the
rate of release of labour does not accompany the rate of re-absorption of that labour, so that there tends to be
permanent "technological" unemployment which can be used to bring down the wage. One does not even
need to undertake it: technological improvement is also a way capitalist can increase their leverage over
labour merely by threatening it with mechanisation. Whereas Marx contended that division of labour was a
way of generating the "alienation" of the working classes and thus tie them more dependently to the
production process - thereby, again, reducing the bargaining position of labour.
The issue of trade, another possible check to the decline in profit rate, was seen by Marx as an inducement to
produce on an even greater scale - thereby increasing the organic composition of capital further (and
reducing profit quicker).
The connection between trade with non-capitalist economies to prevent of the decline in profit rate was for
later Marxians like Rosa Luxemburg (1913) to propose in their theories of imperialism.
However, despite all their efforts, Marx claimed that there were social limits to the extent to which
capitalists could increase the exploitation rate, while no such thing limited the growing organic composition
 of capital. Consequently, Marx envisioned that greater and greater cut-throat competition among capitalists
for that declining profit. Then a crisis occurs: large firms buy up the small firms at cheaper rates (i.e. below,
and thus the total number of firms declines. This will boost the surplus value as firms can now purchase
capital As capital becomes more concentrated in fewer hands, the increasing tendency for capital to be
concentrated in fewer and fewer hands, combined with the greater misery of labour would culminate in ever
greater "crises" which would destroy capitalism as a whole.

7. Process of Production
According to Karl Marx, it is the process of production in an economy that determines the evolution of
society. Under capitalism, the value of a commodity consists of three elements. These are the constant capital,
variable capital and surplus value. The constant capital represents machinery and material and remains
constant during the process of production. Labour power represents the variable capital and changes with
production. Finally, the surplus value is the value added to the production which according to Marx is equal to
the profit. This occurs because the worker is not paid wages equal to the amount of value added during the
process of production, but only subsistence wages.
If we suppose that the following is the production function:
Q = f (K, N, L, T, Z) where Q is the amount of output
K is the capital stock
N is the amount of land
L is the amount of labour
T is the technical knowledge and technical interaction representing relations of production Z is the entire
socio-cultural and institutional set-up of the society
Accordingly,
The supply of labour is exogenous and increases with an increase in population. Because technology
displaces labour, change in technology, unemployment will increase and create a ‘reserve army of labour’.
This reserved army of labour facilitates the movement of capital between new and traditional production
activities. It also influences the bargaining power of labour and thereby the amount of money wages. This
results in the exploitation of labour. Hence, with the growth of capitalism, there is a progressive deterioration
in the conditions of the labour class. According to Marx, ‘with the progress of industry, the modern labour
sinks deeper and deeper below the conditions of existence of his own class, becomes a pauper and pauperism
develops more rapidly than population and wealth.’
8. Capital Accumulation
The rate of capital accumulation is an important determining factor of economic growth in Marxian theory.
Marx argues that the quantity of accumulated capital is determined by the surplus value generated during the
process of production. This is due to the fact that the wages received by the workers are spent for
consumption. There is reinvestment in society so as to maintain the stock of capital. Thus, ‘all the
circumstances that determine the mass of surplus value operate to determine the magnitude of accumulation.’
Another factor contributing to the accumulation of capital is the productivity of labour. As the productivity of
labour rises, the surplus value generated by labour increases and therefore results in the accumulation of
capital. The capitalist forms the elite class in society as he is the owner of the capital. The higher the amount
of capital owned by capital, the higher the position power and prestige in the society. As Marx puts it, ‘to
accumulate is to conquer the world of social wealth, to increase the mass of human being exploited by him,
and thus to extent both the direct and indirect sway of the capitalist.’ The capitalist who has more advanced
and efficient technology is also the one who is able to generate larger amounts of surplus and therefore is able
to accumulate a larger amount of capital.
After accumulating large amounts of capital, the capitalist spends on luxury and conspicuous consumption,
may be due to the necessities of a business show-off that may add to the prestige. This kind of expenditure
grows with the growth of accumulated capital. The motive behind this kind of lavish and wasteful expenditure
is also to accumulate more capital.
The tendency to accumulate capital is normal and an important feature of the working of capitalism. This
results in the emergence and expansion of huge enterprises that gain importance in the economy. This
stimulates the concentration of capital in a capitalist society and gradually results in the emergence of
monopoly power. Gradually, this results in monopoly capitalism and imperialism. But at the same time, the
process of socialization of production is promoted, i.e., a large group of workers begin to work together. This
provides the material condition for the transition to socialism.
One important aspect of capital accumulation under capitalism that Marx mentions is the cyclical nature of
accumulation. There are cyclical crises from one period to another resulting into another kind of crisis. At
times, there is a situation of overproduction or underconsumption or there may be an underutilization of the
capacity resulting in underproduction. There are phases of depression, recession, recovery and boom through
which the economy passes. When capitalism exhausts its progress there is a collapse of the system and is
replaced by a superior form, i.e., socialism as a result of high levels of unemployment, poverty and growing
inequalities.
Critical Evaluation
The Marxian theory of economic development has been criticized on several grounds. Some of these have
been discussed as under:
• Marx argues that there is a tendency for the profit to fall as the organic composition of capital rises. But Paul
Sweezy argues that as the organic composition of capital rises, labour productivity increases. But this should
have the effect of creating an industrial reserve army of labour which results in lowering wages which in turn
raises the rate of surplus value. Since both the composition of capital and the rate of surplus value is variable,
the rate of profit would be indeterminate, though a falling rate of profit is a basic feature of capitalism.
• The Marxian theory has also been criticized on the ground that at best it can be a synthesis of the historical
evolution of the society during the process of economic growth but cannot be a theory of economic growth.
• Marxian theory has been criticized with respect to the wages and poverty among the working class. He
argues that under industrial capitalism wages tend towards subsistence level. However, the evidences are that
in industrial societies, wages have had a tendency of upward movement.
• Another important criticism of the Marxian theory pertains to his assumption about the collapse of the
capitalist system being replaced by socialism. Though revolutions have taken place in some countries such as
Russia and China it is not simple to carry through a socialist transformation in the industrially advanced
countries as the employment and wage levels are high. Ernest Mandel has also argued that there has been a
straight-line progressive evolution in the world starting from the first stages of fruit gathering and ending with
the most advanced capitalist or socialist industry.
• The recent experiences with the former USSR, China and the East Europe countries have shown that the
social ownership of the factors of production and production decisions have resulted in growing inefficiencies
in the economy and the collapse of the system. There have been government failures resulting in the collapse
of economies.