Tutorial Notes Chapter 6
Marx Madness Plunges Economics into a New Dark Age
• If the Scottish philosopher (Adam Smith) is the great creator of a system of
natural liberty, the German Revolutionary (Karl Marx) is its great destroyer.
• Karl Marx separated the bonds of capitalism and set apart the foundations of
Adam Smith’s system of natural liberty. As a strong critic of capitalism his
argument was that it was no longer a commercial system to be viewed as
innocent, mutually beneficial or naturally harmonious.
• Karl Marx painted Adam Smith system of natural liberty as alien, exploitative and
self-destructive. He opposed all the characteristics of free market economy and
was in favor of a state-owned economy.
Marx’s Contributions to Economics
He established his own school of thought, with its own methodology and
specialized language.
He created his own vocabulary: surplus value, reproduction, and monopoly
capitalism.
He invented the term capitalism and since Karl Marx
Economics has never been the same because of his theories.
There is no homogenous or one size fits all acceptable model and/or solution of
the economy as there in physics or in mathematics.
There are various schools of thought that contradict each other, as they have
their own interpretations or solutions for our socio-economic issues.
• The Labour Theory of Value
If we recap to chapter 4, David Ricardo contribution focused on production and
how it is distributed between class system (landlords, workers, and capitalists).
Marx followed Ricardo by focusing on the production of a single homogeneous
commodity and the distribution of income from the commodity production into
classes.
Under David Ricardo system, labour played very important part in setting value.
What this meant is that the value or the price of a commodity must be
determined by the average amount of time needed to produce the
commodity.
• Example:
1. Let us say to produce a bicycle and a skateboard each require 10hrs to
manufacture, both should have the same price.
2. If it takes 1 hour to produce a dishwashing liquid and 5 hours for a bar of
chocolate, then 1 bar should trade for 5 dishwashing liquids. Remember it is
about the relative prices which is calculated by 5hours divided by 1hour
which equals to 5.
For Marx, the Labour theory was more than just a theory of relative prices, to
him it draws attention to the grievances of labour and the exploitation which
they suffer at the hands of the capitalist system.
• Theory of Surplus Value
Marx labelled profits and interest as ‘surplus value’. This was to argue that
capitalists and landlords were exploiters of labour.
His introduction of the labour theory was to prove the point that the value of a
product must equal the labour hours it took to manufacture. This then means all
profit obtained by capitalists and interest by landlords must be a surplus (extra)
value unjustly benefited from the true earnings of the working class.
• Marx mathematical formula for his theory of surplus value.
P=S/R
P=The rate of profit
S=Surplus value
R=Value of the final product
• Example
Shoes sells for R160
Labour costs R80 a dress
p = R80/R160 = 0.5 or 50%
• Marx further dividend the value of a final product into 2 forms of capital: constant
capital(C) and Variable capital (V)
Constant capital = represents factories and equipment.
Variable capital = represents the cost of labour.
• The new rate of profit equation becomes.
P=S/ [V + C]
Marx explanation was that profits and exploitation are increased by extending
workday for employees and by hiring women and children at lower wages than
men. Moreover, capital goods such as machinery and technologies
improvements benefited the capitalists, not the worker.
All Karl Marx was trying to do is demonstrate the crisis of capitalism. A
system he viewed as crisis-prone and unstable, and therefore recommended
communism .
Difference between capitalism and communism
CAPITALISM COMMUNISM
Economic and political ideology where a country’s trade and Economic and political ideology in which all property is
industry are controlled by private owners for profit, rather owned by the community, and each person contributes and
than by the state. receives according to their ability and needs.
Goods are privately owned and not distributed evenly, also Goods are state-owned and distributed among the people.
creating class distinctions.
Has a democratic form of government. Has a totalitarian form of government.
Has an elitist society. Has a egalitarian society.
Profit of trade and products belong to specific private Profit of trade and products are shared by the people or the
entities. whole community.
Market is privately owned; thus, free and competitive. Market is state-owned and state controlled.
Since the market is privately owned, everyone should work Since the market is state-owned, wealth is distributed
on his own to acquire wealth. according to community needs and abilities.
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