Karl Marx Introduction Karl Marx is one of the greatest economic thinkers. - PowerPoint Presentation

Slide1

Karl Marx

Slide2

Introduction

Karl Marx is one of the greatest economic thinkers.

Marxian Economics introduces a new era in economic thought.

Marx considered capitalism a passing phase.

He considered economic life in terms of conflicts of

intrest

between the owners of capital and of

labour

.

His famous works are the Communist Manifesto and Das Kapital.

Slide3

Marxian Theory of Value

Theory of surplus value :-

The concept of surplus value given by Marx is based on his theory of value.

The wage of

labour

must be equal to the productivity of

labour

but this does not happen under capitalism.

In such a system the exchange value of

labour

is less than its product.

For example in a system of simple commodity production we find that the producers sell out their products in the market in order to purchase some other necessary product.

Thus the producers start with commodities convert them into money and the same money is converted into some other commodities.

Slide4

Contd.

This can be written as C-M-C .

Under capitalism the process is changed. The capitalists start with money for the purchase of commodities then these commodities are again sold out for money this can be written as M-C-M.

Here money acquires the character of capital.

The money that is obtained at the end is greater that the money at beginning.

This difference between the two monies is the surplus value which is the income of the capitalists.

In a capitalist economy

labour

power is a commodity. Therefore it must have a value.

Slide5

Contd.

The value of

labour

power is determined by the

labour

necessary for the production of an article.

The value of

labour

power is the subsistence necessary for the maintenance of the

labour

.

Marx observes that

labour

is paid only a subsistence wage under capitalism.

Suppose a

labour

requires 4 hours of

labour

to earn his subsistence, however he works for 12 hours (Required Duty hours), the value of the product created by the

labour

for the remaining 8 hours can be regarded as surplus value,

i.e

,

labour

over and above the subsistence requirement.

Slide6

Contd.

Marx says that

labour

power is the source of surplus value which is cornered by the capitalist.

The working day of a

labour

can be divided into two parts

i

) Necessary

Labour

and ii) Surplus

labour

Under capitalism value of a commodity consists of ;

Constant Capital which includes value of Machinery, Equipment and raw materials. ( C )

Expenditure on

labour

power, known as variable capital denoted by V.

Surplus value denoted by S.

Thus, total value = C+V+S.

The rate of surplus (S’) value can be regarded as Ratio of Surplus value to Capital. S’ = S/V

Slide7

Contd.

The rate of surplus value is nothing but the rate of exploitation by the capitalists.

It is determined by three factors;

The productivity of

labour

.

The quantity of commodities entering into the real wage.

The length of the working day.

It is possible to increase the surplus value by applying either of the three in isolation or together.

Slide8

Labour

Theory of Value

Marxian

labour

theory of value explains social relation in a capitalistic society. The basic form of this relation is commodity.

A commodity contains use value as well as exchange value.

Exchange value is the quantitative proportion in which the use values of two commodities exchange.

According to Marx the only common property that every commodity has with every other commodity is that they are all produced by

labour

.

The homogeneous

labour

which produces commodities is called Abstract

labour

(Muscles, Nerves and Brain powers).

Value is then defined as the materialization of abstract

labour

.

Slide9

Measure of Value

Value is measured by measuring the abstract

labour

in units of time which is on an average necessary to produce the commodity in question.

When

labour

time is shortened (less

labour

is required) the value of commodity falls.

In Marxian analysis exchange value is the necessary form of value.

As commodities, the products of

labour

have simultaneously a value form and a natural form.

The social relation (Nature) of value is expressed through exchange.

Value is not something intrinsic to a single commodity.

It is the process of exchange which reduces all the different kinds of

labour

embodied in different kinds of commodities to their common quality of being

labour

in general.

Slide10

Components and Creations of Value

What about plant, machinery and raw materials which are used along with

labour

for the creation of commodities?

The value of the machinery and plant is transferred to the product in stages , Equal to their wear and tare at every stage.

Do not create values they are created by

labour

. They merely transfer the value already created by the

labour

.

The natural means of production (land, air and Water

etc

) do not impart any value to the product.

The value of the raw materials is immediately transferred to the product produced by using them.

The can not create any new value.

Value is created by

labour

.

Slide11

Contd.

commodity is produced by

labour

power.

The value of

labour

power is determined by the

labour

time necessary for the production.

Under capitalism due to weak bargaining power of the

labour

wage is reduced to subsistence.

However a worker produces for the capitalist much more than the wage paid to him.

Thus the working hour is divided into two parts

Necessary

labour

and Surplus

labour

.

in the Marxian theory, price which is equivalent to cost of production (C+V) + profit may not always be equal to value.

They are equal only under an ideal situation.

They vary just as Natural price and Market price vary from each other.

The extent of such variations basically depends on the organic composition of capital(C/V).

Slide12

Organic composition of capital

According to Marx surplus value or profit should be higher (lower) in an industry having a larger (lower) Variable capital (labor) proportion and a lower (higher) constant capital proportion.

Thus, in this case the profit rate would differ from industry to industry

Slide13

Contd.

The above chart shows that the profit rate varies depending on the capital composition.

However, Marx observed later that in a capitalistic economy, competition tends to equalize the rate of profit.

Marx says that whereas the rate of surplus value is equal (constant) everywhere, the organic composition of capital (C/V) differs.

Thus, the rate of profit must be different in different industries. This can be written as

r = a/q+1

Where r is the rate of profit, q is organic composition of capital, a is rate of surplus value.

Slide14

Contd.

It is impossible to maintain the simultaneous equalities of (a and r) except under a very special situation.

When capital composition differs, values of commodities differ and labor theory of value fails as an analytical tool.

Marx tried to solve the above problem of inconsistency by transforming values into prices. This is known as Marxian transformation problem.

Slide15

Contd.

Slide16

Contd.

The transformation was made possible by setting up total surplus value is equal to total profit.

Marx solution consist of redistribution of surplus value such that we get an equalize rate of profit.

There are five industries having different capital compositions but the stock of capital (100) remains the same in every case.

Price of production is the cost of production plus profit.

Value of product is the sum of constant capital, variable capital and surplus value.

The average rate of profit (22%) is the total profit of industries divided by no. of industries. (110/5=22)

Slide17

Contd.

The organic composition of capital of the industries (1,4,5) is greater than the average organic composition of capital (390/110) will sell their products at prices higher than their values.

Prices would be lower than their values for the industries (2&3) whose organic composition of capital is lower than the average organic composition of capital.

Value and price will be exactly equal in the industries whose organic composition of capital would be equal to average organic composition of capital.

This way there may be possibility an equality between value and price at micro level, but at the macro level the price and value would be equal.

Slide18

Theory of capital accumulation

Accumulation is the necessary evil in the capitalist economy.

Without accumulation, a capitalist can’t stay in business.

It is one of the laws of motion of capitalism which Marx has discovered

In the long run, accumulation is determined by many forces including social

Accumulation of capital is actually the capitalization of surplus value.

The total profit of the capitalist is allocated between consumption and accumulation.

Accumulation can also be for the purpose of expansion of constant capital or of variable capital.

Slide19

Contd.

By accumulation, Marx meant spending on constant and variable capital.

It is done to maximize the profit.

However, it is a contradiction that as accumulation progresses, profit declines in the long run.

Marx says that accumulation of capital is limited by the realized profit of capitalist.

The capitalist is confronted with a difficult choice of accumulation and of consumption.

The conflict is between the passion for accumulation and the desire for enjoyment.

Slide20

Contd.

Marx observes that the marginal propensity to consume remains constant among capitalist.

The main purpose of accumulation is to conquer the world of social wealth and to extend the area of exploitation.

In the short run, the capitalist does not automatically invest the entire amount of surplus which is left after his consumption. However, in the long run he often does so.

Capitalist accumulate in order to compensate for the assume downward trend in the rate of profit.

When the rate of profit goes down below the normal level then the capitalist accumulates and introduce innovation through new technology.

This relationship can be seen in the following diagram.

Slide21

Contd.

Slide22

Contd.

The above diagram shows that capital accumulation has a long run trend to increase and profit has a long run trend to go down.

Accumulation, is also determined by the prospect of sales of commodity being produced.

The expected future prospect of sales must go at a constant rate for accumulation to continue.

In Marxian economics, accumulation of capital is linked with technological change. Accumulation and innovation go hand in hand.

The technological change will be either

labour

saving or capital saving.

Marx gave a list of reasons for the introduction of capital saving technology.

Slide23

Contd.

However, Marx postulated that technological change will be of labor saving.

During the process of accumulation division of labor increases in the production process.

Large firms can accumulate faster than the smaller one.

the large firms can also take advantage of the economies of scale.

Large firms produce with superior machines.

As a result small firms driven in to bankruptcy.

Increasing accumulation of capital ultimately leads to more and more concentration of capital and monopoly.

Slide24

Contd.

Centralization of capital also generated in the process of capital accumulation. Large firms take over the small firms or merge with them.

Slide25

Marxian Theory of Crisis (Business Cycle)

Marx has never presented a systematic theory of business cycle

According to him crisis is inherent in capitalist economies

The forces of production come into conflict with the relations of production , resulting into crisis , which ultimately causes end of capitalism

Reasons for Crisis:

1- Crisis due to underconsumption

This is regarded as one of the most important factors for the generation of crisis in a capitalist economy

Slide26

Contd.

Marx believed that in a capitalist economy consumption can not cope with production

As the capitalist economy grows , there is tremendous growth in its productive power. However, the consumption power of the workers does not grow in the same proportion

Because of limited consumption, it is difficult for the capitalist to sell out the goods and services produced

The capitalist is unable to

realise

the surplus value already created in the form of commodities

When the capitalist finds that his profit level is going down , he reduces the wage level of the workers

This causes reduction in effective demand

Low wages narrow down the market and render crisis inevitable

Slide27

Contd.

In a capitalist society , the consumption of workers and capitalists is limited by many factors

The consumption of the capitalist remains limited because of his desire to accumulate capital, and the consumption of the workers remains limited because of low wages and poverty

The above factors create gap between demand and supply which ultimately results into crisis

2-Crisis due to Disproportionality:

Another cause of crisis is related accumulation due to the disproportional growth of different departments

According to Marx, the capital goods department expands more rapidly than other departments

This leads to a crisis because ultimately physical limits are reached and the capital goods sector is unable to buy inputs to satisfy its own needs

Slide28

Contd.

As soon as it is forced to slow down accumulation, fluctuations in business get started

Production under capitalism is unplanned and anarchic

Production is based on market information which is imperfect

Therefore, there is always the possibility of either overproduction or

Underproduction

3-Crisis due to falling rate of profit

Marx devoted most attention to the falling rate of profit as a cause of

Capitalist crisis.

Slide29

Contd.

The endogenous fall in the rate of profit may be due to an increase in wage rate, in the short run.

There is an inherent tendency of the rate of profit to fall in the long run in a capitalist economy.

This can be shown from the following formulae.

Total value =

c+v+s

, [c-constant capital, v-variable capital and s-surplus value]

The rate of surplus value [s’] can be indicated by :

S’=s/v

The rate of profit [ p] can be indicated by :

P=s/

c+v

Slide30

Contd.

As industry grows larger, constant capital expands more rapidly than variable capital

Since surplus value is the product of labor power , the rate of profit necessarily declines

Criticism:

1-According to

sweezy

, there are some factors which may cancel out the effects of underconsumption

2-Due to population growth, variable capital can grow without raising wages and the rate of profit may not be affected

3-After criticizing others theories of underconsumption, Marx himself made this as the basis of his theory of crisis

Slide31

Contd.

4-Marx observed that capitalist economy has tremendous productive capacity. How can this happen if there is underconsumption

5-The underconsumption theory is

empirically incorrect