KARL MARXS MODEL OF CAPITALISM

1
KARL MARXS MODEL OF CAPITALISM
2
Preview

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

3
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

4
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

5
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

6
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

7

• 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

8
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

9
Setting up the Internal Contradiction

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

10

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

11

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

12

• 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

13
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

14

• 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

15
Overproduction

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

16
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