Evolution of Economic Thought
The Revolt Against Classical Economics: The Socialists and Marx
By the middle of the nineteenth century the collective contributions of the “classical” economists had become an orthodox and accepted body of doctrine.
But it was not without its critics.
England and the continent – Great Britain had a long tradition of individualism since John Locke (1632-1704) – and this was certainly seen in Classical economics.
As British economics passed across Europe, it was influenced by different cultural and philosophical views.
The emphasis was placed on the group rather than the individual.
Basically, between 1776 and 1848 many writers began criticizing the increase in industrialization that was taking place. Economic development struck many as uneven.
It was often taken for granted that the “working class” generally received low wages, worked long hours, and worked under adverse factory conditions.
Thus there were attempts to “socialize” economics by “champions of the working class.”
Socialism Defined
“A socialist can be defined as anyone who asserts that capitalism has very serious problems, and who also believes that a substantial degree of common ownership is necessary if those problems are to be solved.” Samuels, Biddle and Davis, A Companion to the History of Economic Thought
As we see in Mill’s writings – socialism was defined as the state owning the means of production (not the output). This is how economists define it today.
The ideas of the people involved covers a wide range. From revolutionary anarchists to moderate “progressives.”
Socialism before Marx (1800-50)
Limits of nature not the problem:
Pretty much all the writers preached a socialism of affluence, denying the Malthusian claim that nature placed severe limits on material progress. For them, capitalism was condemned for perpetuating poverty in the midst of potential plenty. The rise of modern industry, they asserted, demonstrated that human ingenuity was boundless; social, political, and (above all) economic institutions were to blame for the continuing misery of the mass of the population, not the limits of nature.
This attack on Malthus and his followers, including Ricardo and other classical economists thought the “existing order” under capitalism could be greatly improved.
What was wrong with capitalism?
1) 1. An indefensible degree of inequality (sound familiar?)
a. The labor theory of value of often used here – but interpreted (as it had been by John Locke) as a theory of natural rights. Since each productive individual was entitled to the full fruits of his own labor, the working man was clearly receiving much less than his due.
b. Why? Most said it was due to the inequality in economic relations – particularly the prevalence of unequal exchange. So here we see a theory of exploitation, derived from a theory of surplus labor. Since there is so much labor available, the employers have more "power" in the labor contracts.
This is still a popular argument today for those who support the minimum wage, for example.
2) 2. Capitalism was also criticized on efficiency grounds.
a. The periodic "stationary states" that we have discussed (basically the down in a business cycle) threw millions of working people into utter destitution and forced the economy to operate well below its potential capacity. Socialists often linked this with inequality of income, which they
believed to be responsible for a chronic tendency for under-consumption to take place. Emphasis was on consumption, not production. If working people weren't making enough money - they didn't consume enough and that caused the problem.
So lack of demand, not productivity, was the problem.
Most famous here is the French socialist Simonde de Sismonde - great rival of Jean-Baptiste Say and the French Liberal School.
He viewed capitalism as being detrimental to the interests of the poor and particularly prone to crisis brought about by an insufficient general demand for goods. His under-consumption thesis (as we know - was shared by Malthus) and sparked the General Glut Controversy of the 1820s where their
theories were pitted against those of Say, Ricardo and the Classical economists in general.
So the Say/Keynes debate is not new!!
b. Another reason for the waste under capitalism was that it failed to develop the skills and make use of the intelligence of the workforce. Human potential was being squandered through constant overwork, malnutrition, and cultural and educational deprivation. (Robert Owen)
c. Yet another reason (French socialist Saint-Simon) said that the excessive influence of the aristocracy and the military lead to the problems of inefficiency. All of this came at the expense of the productive classes (which included workers but also capitalist employers,
intellectuals, scientists, and artists). So therefore, economic efficiency required the concentration of decision-making in the hands of an enlightened (and well-paid) elite. We needed well-chosen government planners to decide where resources should go to make sure they were
used in the right places.
Note the combining of the state (or the system of government) with the concept of capitalism. We see that today as well!
d. Capitalism does not allow for cooperation among workers. Without it, work would be performed for its own sake and production organized by voluntary associations of free producers. (Charles Fourier)
Here we have the workers cooperating freely to operate businesses.
3) The bottom line: unrestrained economic individualism was innately self-destructive (see esp. Saint-Simon, de Sismondi and Owen). The “natural harmony of interests” was not correct. This is what Bastiat was responding to.
So what should be done? There were quite a lot of differences in opinion among the socialists so this is a short summary!
1) 1. Return to a pre-capitalist and largely pre-industrial economy. No capitalist-labor relationships – this was the key. (Sismondi)
2) Some British socialists favored an egalitarian society of independent artisans who could exchange their products among themselves in proportion to the labor time expended in producing them, with a monetary system (of “labor notes”) designed to facilitate the process of “equal” exchange.
Again, no capitalist-labor relationships.
3) 2. Others (like Saint-Simon), thought a collective solution was needed – one that preserved the advantages of large-scale production and the social division of labor while eliminating the worst of the costs.
Saint-Simon envisaged the reorganization of society with an elite of philosophers, engineers and scientists leading a peaceful process of industrialization tamed by their "rational" Christian-Humanism.
So basically, central planning by an elite group of know-it-alls.
4) 3. Cooperatives – as per Robert Owen. He is considered the father of the "cooperative movement" - founded the famous New Lanark Mills in Scotland as an example of the viability of co-operative factory communities. Many industrialists actually visited these "model factories" and some even adopted parts of
Owen's system. Owen attempted to extend these into agriculture - advocating collective farming (was tried in the U.S.). Although most of these efforts failed, he became the head of one of the largest trade union federations in Britain in 1843.
So the Socialist movement was not uniform by any means. We can see how it became divided.
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The Classical Critics:
The classical economists of the time, of course, criticized these theories.
· They claimed that socialism would destroy the incentive to produce, to save, and to exercise moral restraint in the matter of procreation (remember what Malthus discussed).
· It would therefore have a very bad effect on the level and rate of growth of output.
Bastiat and others also criticized the whole idea of the "artificial" identity of interests -- especially between workers and capitalists (as we have discussed). Everyone is better off under capitalism (accumulation of capital).
John S. Mill was the only one somewhat sympathetic to socialist arguments – he accepted the possibility that public-spiritedness might well replace traditional economic incentives.
This is why he often favored self-managed workers’ cooperatives rather than state ownership of enterprises (in this way he was not a socialist per se). But later in his life (according to most history of thought experts), J.S. Mill’s doubts about the desirability of any form of socialism was solidified. He was, in the end, a capitalist!
So this is the environment in which Marx (and Engels) entered the picture. It was a very favorable environment for what Marx would espouse.
Karl Marx (1818-1883)
Born in Germany.
Although Marx did not invent socialism, he soon dominated the movement, and his theories came to be known as Marxism. Studied law and earned a doctorate -- basically a journalist
While Marx was supported financially by his close friend and co-author Friedrich Engels, he nevertheless lived in poverty with his wife Jenny von Westphalen, their children and maid, Helene Demuth.
His association with Engels concluded with the three-volume Das Kapital, the last two volumes of which Engels wrote from Marx's rough notes and manuscripts. Other works by Marx were not published until the twentieth century.
Very influential – wrote on history, philosophy, sociology, psychology and political theory – as well as economics. He, in fact, wrote mostly on economics but is not considered an economist by mainstream economics today.
He (along with Engels) was very prolific:
Economic and Philosophic Manuscripts of 1844
Theses on Feuerbach (1845)
The German Ideology with Engels (1846)
The Poverty of Philosophy (1847)
Wage Labour and Capital (1849)
The Communist Manifesto (1848)
Das Kapital with Engels (1867 --)
Philosophic Background
Influenced by Georg Hegel and Ludwig Feuerbach:
Hegel: Theory of progress. History is not a sequence of accidental occurrences or a collection of disconnected stories; rather an organic process guided by the human spirit.
It is the outcome of opposing forces. One force is confronted with the opposite – often taught as “thesis” vs. “antithesis” leading to a “synthesis.” In the battle of ideas, neither one remains in tact, but both are synthesized into a third; this is how all general knowledge, as well as history, advances.
Marx adopted Hegel's dialectic.
Feuerbach: He added “materialism” – holds that the only thing that can truly be said to exist is matter; that fundamentally, all things are composed of material and all phenomena are the result of material interactions.
Hence we get from Marx – Dialectical Materialism (putting Hegel and Feuerbach together):
The way to understand the world was not to see it as a collection of things but as an evolving process. Matter is in continuous evolution toward more complexity -- more complex atoms, plants, men, society, etc. Evolution is linear - and each stage is always the most complex - and better than the last. This evolution will take place through struggle -- this is the thesis-antithesis-synthesis paradigm. Conflict, therefore, exemplifies the driving force of evolution which proceeds by leaps -- "dialectic evolution."
The evolution of the economic formation of society – a process of natural history – conflicts or “contradictions” are the sources of “development” – change or transformation.
The prime mover of history to Marx – the way in which individuals make a living, that is, the way in which they satisfy their material needs. This is important because unless their material needs are satisfied, human beings would cease to exist.
“Men must be able to live in order to ‘make history,’” therefore, “The first historical act is . . . the production of the means to satisfy these needs, the production of material life itself.” (The German Ideology).
Economics, to Marx, was the science of production: the relationship between economics or production and history.
The Methods of Production help to Shape Human Nature itself
“As individuals express their life, so they are. What they are, therefore, coincides with their production, both with what they produce and with how they produce. The nature of individuals thus depends on the material conditions determining their production. (The German Ideology).
In the course of production of their social life, however, humans enter into certain “definite relations that are indispensable and independent of their will, relations of production which correspond to a definite state of development of their material productive forces.”
These “rules of the capitalist game” are essentially static and consist of two types:
Property relations: between people and things.
Human relations: between people.
Every aspect of the socioeconomic structure owes its origin to the relations of production simply because institutions exist in order to make humans conform to the relations of production – ECONOMICS DETERMINES SOCIETY!
Marx’s “social pyramid” – the structure of society owes its origin to the basic facts of economic production:
“The mode of production of material life determines the character of the social, political, and spiritual processes of life. It is not the consciousness of men that determines their existence, but on the contrary, their social existence that determines their consciousness.” (Critique of Political Economy).
** The individual cannot be held “responsible for relations (institutions) whose creature he remains.”
The individual is a result of the process – and therefore cannot be held responsible for his actions – or his place within society.
Everything is historically justified – history had to happen the way it did because it’s all part of this natural progression.
So in Marx humanity appears as a collective subject, whose inherent striving towards full realization shapes the course of history. The individual - making decisions about his/her life - is not part of his analysis. Indeed, it is as if individuals don't really exist in terms of their conscious decisions -- they are like puppets in the system.
Capitalism and Man (and Woman)
Capitalism will repress the development of men and women. On the other hand:
Communism – “a society in which the full and free development of every individual forms the ruling principle.” “. . . a society that seeks for its members “the completely unrestricted development and exercise of their physical and mental faculties.”
So it was not their material poverty that Marx saw as the basic tragedy of the workers under capitalism, but their stunted development.
*the assembly line man – life long repetition, cannot reach his true potential.
Social Change - To correct the problems with capitalism – we must create social conditions in which these unfulfilled human desires can be more directly achieved in the real world. This meant getting rid of alienation.
Alienation
Alienation happens when a manmade product becomes dominant over man. They are no longer developing their true selves.
The inner potentialities of man then appear in strange forms under capitalism (all of these are things that create alienation):
God (religious self-alienation)
Money
Capital
The State
Before capitalism, men were not objectively alienated, since even with a reorganization of the production it would not have been possible to satisfy needs much wider than those actually satisfied.
Rather they had “adaptive preferences” – adaptation of wants to what is possible. Capitalism creates wants that are not possible to satisfy -- therefore we are unhappy and alienated from our true spirits. We see what is "possible" under capitalism - yet we don't achieve it. That makes us unhappy. If we never saw greater possibilities, we would be happy.
Two main concepts of alienation in Marx:
1) Lack of self-actualization or spiritual alienation: lack of a sense of meaning in life.
Commentary Question: Is there an objective “good life” for all human beings? Is Marx assuming there is?
2) Power that the products of man may acquire over their creators or social alienation: under capitalism the products of men gain an independent existence and come into opposition to their makers – religion, the state, money, capital – the main examples of this process.
The alienation from the means of production is the central problem of the economic writings of Marx.
“The social power, i.e. the multiplied productive force, which arises through the cooperation of different individuals as it is caused by the division of labour, appears to these individuals, since their cooperation is not voluntary but has come about naturally, not of their own united power, but as an alien power existing outside them, of the origin and goal of which they are ignorant, which they are no longer able to control, which on the contrary passes through a peculiar series of phases and stages independent of the will and the action of man, nay even being the prime governor of these.” (The German Ideology).
So Smith's "invisible hand" - which was a positive thing to him, becomes a very bad thing to Marx!
Men are alienated from the aggregate result of their activities when:
a) they do not realize that these aggregates are the result of their own activities and
b) they are unable to control or to change the outcome.
Human beings are shaped – utterly determined – by their environment.
The evils of the world are not due to the nature of man, but were the product of institutions, education was needed to change these institutions.
The Capitalist Economy
Marx’s Analysis of Capitalism as an Economic System
(Exploitation and Class Struggle)
Two Main Points
1. The labor theory of value.
2. Competition and the theory of the falling rate of profit.
Private property did not define capitalism for Marx. We had private property before (what Marx considered) capitalism.
Capitalism Defined by Marx
Capital and capitalism were defined by Marx in terms of the relationships they created among people. Capitalism was defined by the capitalist-worker wage relationship.
"Self-earned private property, that is based, so to say, on the fusing together of the isolated, independent labouring-individual with the conditions of his labour, is supplanted by capitalistic private property, which rests on exploitation of the nominally free labour of others, i.e., on wages-labour." (Das Kapital)
So owning property, per se, was not wrong - if you obtained property by being a wage-laborer. But if you obtained property by being a capitalist -- then it was bad!
Capitalism emerged when production facilities were widely consolidated into collective means of production, whose surplus was appropriated by private owners who did not work in them.
Socialism was the next logical stage – where ownership would also become collective.
Remember Hegel and his dialectics:
Marx saw capitalism emerge because it offered wider potentialities for mankind!
It emerged by the revolutionary political and economic activities of the capitalist class, conceiving of themselves as acting for the benefit of all mankind (via Adam Smith).
This individual injustice (freeing a privileged few to look beyond the urgent needs of keeping alive) – did serve a useful purpose.
Allowed mankind to advance intellectually, economically, politically.
BUT – the great economic productivity created by capitalism also offered the means of ending this injustice – making leisure general and making human development available to the masses.
But there was a problem:
Those wedded to the capitalist “ethos” were certain to resist collectivization of ownership and all the other legal, political and social changes implied by it. The capitalist class had the political power - and didn't want to give it up.
Another revolutionary confrontation, immediately of ideologies but ultimately of classes was thus in the works.
Class Conflict
Marx thought that capitalism created even more painful social dislocations than earlier social systems –
Especially recurrent economic crises of mass unemployment with production and commerce brought to a standstill.
(Ignored here are all outside forces – government policy, disease, war, droughts, etc.).
All of this would lead to a large working class and small, elite capitalist class -- and the two would eventually clash!!
The Nature of Capitalism
Marx understood capitalism to be an economic system in which people make a living by buying and selling things (commodities). The relationships that followed from this were what were important to Marx.
Marx’s objectives: To show
1. how the commodity form of market exchange (capitalism) leads to class conflict and exploitation of the labor force,
2. how the commodity system (capitalism) will eventually fail to operate because of its own inherent contradictions,
3. why the class conflict under capitalism, unlike class conflicts under earlier economic systems, should ultimately result in rule by the formerly exploited class rather than by a new ruling class.
His Labor Theory of Value and his Theory of Wages
In Das Kapital, Marx set out to analyze the production and distribution of commodities. The explanation had to include a theory of value – here he turned to Smith and Ricardo.
Labor is the essence of all value to Marx. Being a materialist, he didn’t accept utility explanations – material relations alone determine value.
These relations determine value prior to the determination of price, so that price reflects merely a value caused by the purely objective element common to all commodities – labor.
"We know that the value of each commodity is determined by the quantity of labour expended on and materialised it it, by the working-time necessary, under given social conditions, for its production. This rule also holds good in the case of the product that accrued to our capitalist, as the result of the labour-process carried on for him."
Value represented the units in which social labor was measured.
Socially necessary value: under normal conditions of production, the value necessary for the subsistence of labor. " . . . determined by the working time required for the reproduction of the labour-power of the labourer himself."
The value of an object is proportional to the number of simple undifferentiated socially necessary labor hours that went into it.
The value of labor power can be divided into an amount necessary for the subsistence of labor and an amount over and above that.
The socially necessary labor determines the exchange value of labor itself – wage. "We started with the supposition that labour-power is bought and sold at its value. Its value, like that of all other commodities, is determined by the working time necessary to its production."
"Let us assume that the line A B represents the length of the necessary working time, say 6 hours. If the labour be prolonged 1, 3, or 6 hours beyond A B, we have 3 other lines:
Working day I Working day II Working day III
A---------B --- C A---------B ------ C A---------B -------- C
representing 3 different working days of 7, 8, and 12 hours. The extension B C of the line A B represents the length of the surplus value."
Surplus value: It is that proportion of society’s labor that exceeds what is required to produce the livelihood of the workers themselves. Basically, it is use value (what the output will exchange for) MINUS necessary value paid to the laborers.
Out of this comes all the income of the non-working classes – the profit, interest, rent, etc.
As you saw in the reading:
The Minimum Working Day:
The Maximum Working Day:
But the capitalist wants to extend the working day because that is what creates more surplus value for him.
Use Value: This is his version of what the commodity will be sold for. It basically comes from both the necessary labor and the labor that went into the capital and other instruments used to produce the commodity. So - given that this is above the wage paid (value of the necessary labor), the capitalist will gain.
"In the labour-power, therefore, man's activity, with the help of the instruments of labour, effects an alteration, designed from the commencement, in the material worked upon. The process disappears in the product; the latter is a use value."
"Though a use-value, in the form of a product, issues from the labour-process, yet other use-values, products of previous labour, enter into it as means of production. The same use-value is both the product of a previous process, and a means of production in a later process. Products are therefore not only results, but also essential conditions of labour."
"Therefore, the value of labour-power, and the value which that labour-power creates in the labour process, are two entirely different magnitudes; and this difference of the two values was what the capitalist had in view, when he was purchasing the labour-power."
"The seller of labour-power, like the seller of any other commodity, realises its exchange-value, and parts with its use-value."
In other words -- the use value is what the capitalist will obtain for the output. The laborers only get paid for their necessary labor (their exchange value) -- the use value they create goes to the capitalist.
"Capital is dead labour, that vampire-like, only lives by sucking living labour, and lives the more, the more labour it sucks."
Surplus value was his attempt to quantify the exploitation of man by man.
Exploitation: This surplus value does not arise in exchange, but in production. The aim of the capitalist is to get surplus value out of each worker. This is exploitation, according to Marx. It exists because the extra value contributed by labor is expropriated by the capitalist.
Surplus value arises not because the worker is paid less than he is worth but because he produces more value (use value) than he is worth (his exchange value).
This may be regarded as the sum of the non-labor shares of income (rent, interest, profit).
Capital and Value: He did not deny that machinery and other invested resources contributed to production. But remember, machines were contributions of past labor.
The Law of Accumulation and the Falling Rate of Profit
Two Reasons profit will fall:
1. All business people try to acquire more surplus value in order to increase their profit. Surplus value is, be definition, derived from labor. Thus we might expect capitalists to seek out labor-intensive methods in order to maximize their profits. But instead they strive to substitute capital for labor:
“Like every other increase in the productiveness of labour, machinery is to cheapen commodities, and, by shortening the portion of the working day, in which the labourer works for himself, to lengthen the other portion that he gives, without equivalent, to the capitalist. In short, it is a means for producing surplus value”
By introducing capital the laborer can become more productive per hour (these are the "conditions" Marx talks about), but gets paid the same (necessary value) -- so more of the working day can go to creating surplus value - hence increasing profit for the capitalist.
However, once the capital or technology is introduced everywhere, the price falls and so does the surplus value.
Hence we get the first explanation for competition leading to a falling rate of profit.
2. A second reason is that workers might push for higher wages. If wages are increased, this will reduce the surplus value as well.
(Note: Marx did not believe in Malthus – that the increase in wages would increase population and therefore bring them back down. He thought population was determined by cultural and social factors).
So the tendency for the profit rate to fall provides the incentive for exploitation.
THE CLASS CONFLICT AND EXPLOITATION
“At a certain stage of their development, the material forces of production in society come in conflict with the existing relations of production, or – what is but a legal expression for the same thing – with the property relations within which they have been at work before. From forms of development of the forces of production these relations turn into their fetters. Then comes the period of social revolution. With the change of the economic foundation the entire immense superstructure is more or less rapidly transformed. . . . The bourgeois relations of production are the last antagonistic form of the social process of production – antagonistic not in the sense of individual antagonism, but of one arising from conditions surrounding the life of individuals in society; at the same time the productive forces developing in the womb of bourgeois society create the material conditions for the solution of that antagonism” (Critique of Political Economy).
Continued a pattern of dialectical thinking.
Competition would decrease the rate of profit. So capitalists would react by lengthening the workday, speed up the work place, etc., which would increase the rate of surplus value . . .
And the rate of exploitation of labor – Which in turn hastens the revolution.
Concentration and the Centralization of Industry:
The competition would lead to only the most efficient surviving –
This all leads to greater substitution of capital (and technology) for labor and transforms small-scale industry into large-scale enterprises with a more marked division of labor and far greater capacity for output.
Industry would become more and more centralized, and economic power would be increasingly concentrated in the hands of the few. WORKER'S OF THE WORLD REVOLT!!
In Sum:
Labor Theory of Value
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Exploitation
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Competition and More Capital for Labor and Increase in Wages
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Falling Rate of Profits
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More Exploitation AND Concentration/Centralization of Industry
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Expanding working class
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Shrinking Capitalist class
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Revolution and History Progresses
The next stage: Socialism -- then as the state withers away - utopian communism!