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 ID: 919520
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Slide1
Karl Marx
Slide2Introduction
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.
Slide3Marxian 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.
Slide4Contd.
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.
Slide5Contd.
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.
Slide6Contd.
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
Slide7Contd.
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.
Slide8Labour
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
.
Slide9Measure 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.
Slide10Components 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
.
Slide11Contd.
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).
Slide12Organic 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
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.
Slide14Contd.
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.
Slide15Contd.
Slide16Contd.
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)
Slide17Contd.
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.
Slide18Theory 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.
Slide19Contd.
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.
Slide20Contd.
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.
Slide21Contd.
Slide22Contd.
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.
Slide23Contd.
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.
Slide24Contd.
Centralization of capital also generated in the process of capital accumulation. Large firms take over the small firms or merge with them.
Slide25Marxian 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
Slide26Contd.
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
Slide27Contd.
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
Slide28Contd.
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.
Slide29Contd.
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
Slide30Contd.
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
Slide31Contd.
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