‘What’s wrong with Marx, by the way?’

Chad Satterlee discusses Marxist theory.

If I was given a dollar for each of my utterings of the above response in the last couple of years, by my best approximation I would have at least $200 by the time this piece goes to print. This handsome return is not cause for celebration. It arises through a combination of arrogant self-righteousness, ideological blindness and profound ignorance. Herein I attempt to overcome this malaise by providing a brief introduction to Marxian political economy. I will then diagnose some of the sources of the misconceptions surrounding Marx’s work and refute their common mistakes.

Neo-classical v Marxian

Let me begin by asking some epistemological questions. Have you ever actually seen an economy? Have you ever seen a market? What is a market? What is a society?

At the risk of interrupting your Wittgensteinian deliberation allow me to make the following proposition. The only means we have to make sense of the complex world in which we live are the models we have in our heads.

There are only two equally valid and systematic theories social scientists can employ to understand political-economic phenomena: neo-classical and Marxian. If you successfully develop a third you will be awarded a Nobel prize. Keynesians might interject here, but theirs is not so much a coherent framework as a complete mess (Keynes’ contribution is essentially psychological; it says speculators speculate more when they speculate more).

The dominant kind of economics taught today is called, for various historical reasons, neo-classical. This is typically taught in a haphazard fashion by drawing marginal cost curves and all that nonsense without the rigorous mathematical foundation which underpins the entire framework. That foundation is known as Walrasian general equilibrium theory. For our purposes I need only outline its general properties.

In the neo-classical model there are two sectors in the economy: firms and households. Firms produce commodities and sell them to households. Households consume the commodities and sell their endowments of labour, land and capital to the firms. It is assumed that firms maximise profits subject to their production functions and households maximise utility functions subject to their budget constraints.

Most of us are familiar with the story that follows: when these guys trade on a free market we end up with the best outcome for society as a whole.

It turns out that such a state of affairs is possible to achieve; the mathematical proof is incredibly elegant and on par with the great breakthroughs of theoretical physics. It is important to note, however, that a set of seemingly bizarre conditions that hardly ever hold in reality must be satisfied for this theory to work perfectly. These include that there be an infinite number of optimising buyers and sellers, who possess perfect information, trading on perfectly competitive markets that exist for all possible goods and services, in all periods, in all states of nature (for all risks), at all locations.

Under these strict circumstances it is possible for the system to reach an equilibrium such that supply equals demand on every market and everybody finds the best possible price for what they sell and buy. In this case all markets clear.

An important feature of this world is that profits do not exist. This is because all firms sell at cost. Furthermore, everybody would have made enough trades with each other such that no one can be made better off without reducing the welfare of another. This equilibrium scenario is the  fundamental focus of neo-classical economics.

What of the Marxian model? In this theory of the (capitalist) economy the main actors are capitalists and workers; the equivalent of firms and households in neo-classical terms. And, just like in the neo-classical story, everything trades on a perfectly free market.

However, capitalists own the means of production. Workers own their own labour but do not own the means of production which would enable them to cover their needs. In the real world this turns out to be pretty accurate: US Federal Reserve figures show the top five percent hold about as much wealth as the bottom ninety five percent and the same sort of figures are apparent in Australia and many EU countries.

As in the neo-classical model, capitalists move their resources in the capital market to maximise profits and workers sell their labour on the labour market for a wage that enables them to reproduce themselves. As we can see, our theories are fundamentally similar. The story in both is one of the production of commodities by means of commodities.

A key difference between our models is that while the neo-classical is static and concerned with equilibrium, the Marxian is dynamic. To see the latter consider the following process. Workers turn up to the local shoe factory and offer to sell their labour. After bidding down their wages with each other to the subsistence level they are hired and provided with machines, lace and leather with which they are instructed to make shoes. At the end of the week the shoes are appropriated by the capitalist. Workers are paid wages and consume them in entirety. The capitalist realises the value of the shoes by selling them on the market and then reinvests all the profits in replenishing the tools and materials.

At the end of this process workers return to square one. They must go back to the shoe factory, bid down  wages, make shoes, consume, and return to the labour market. The capitalist, in turn, appropriates the shoes, realises their value on the market, reinvests all the profits and hires workers.

This process ensures the automatic reproduction of capitalism.

Notice the Marxian model derives its assumptions that capitalists maximise profits and workers consume from the objective structure of the system. A viable capitalist must maximise and reinvest profits by definition because failure to do so will result in her being driven out of the market by more profitable capitalists. It is not, for instance, due to morally corrupt motives. Likewise, rational workers who own no means of production have no alternative but to sell their labour for a wage in order to survive. If they do not they will experience absolute and relative deprivation.

Marx admired this unprecedented dynamism. Under feudalism, for example, the serf only pays rent to the lord because of non-economic factors such as the threat of force or religious motivations. When these are not available the system collapses. Marx also accurately predicted that capitalism’s dynamic forces would sweep the world.

Unlike in the neo-classical system of equilibrium, profits exist in the Marxian model. Once again we can say this seems to happen in the real world. Marx, like the classical economists Adam Smith and David Ricardo, adhered to a labour theory of value: the price of a commodity is set to the labour embodied in it. In a simple potato producing economy with no capital, for example, when a worker produces n potatoes the cost of labour simply equals the number of potatoes. So labour is also a produced commodity. The question is where do profits come from?

Imagine for a moment a slave economy in which slave owners blatantly expropriate unpaid labour from slaves. Suppose the slaves work 14 hour days, 7 days a week. And suppose the cost to reproduce the slaves in terms of clothing, shelter and food equals 14 hours a day of labour. From the viewpoint of the slave owner what would be the point of this arrangement?

Our first step in explaining profits in Marxian theory, then, is that the capitalist gets an extra reward by extracting a surplus from labour for no effort. This process, in a strictly technical economic sense, Marx calls exploitation.

Suppose back at our local shoe factory the working day is 10 hours and our capitalist pays workers for only 5 hours of labour. This yields a surplus for the capitalist equal to the working day (10) minus what Marx calls the necessary labour time, or the amount of labour necessary for the worker to basically reproduce herself (5). In this case the surplus equals 5. We can now calculate the rate of exploitation. This is equal to the surplus (5) divided by the working day (10), which equals 50%. Marx argues this process produces externalities over space which results in increasing societal decline.

Now consider the equation T = K + V + S, where T is the total value of a produced good, K is capital (the tools and materials used up in production, also expressed in labour units), V is what gets paid out to the worker, and S is the surplus. Then profit must equal T – K – V  = S.

Bringing everything together, let us finally imagine a society of two technologies: a factory and a farm. The    factory is owned by a capitalist who owns 10 machines (in units of capital K). On the farm there are 50 peasants (in units of labour L). Suppose in the factory 1K + 1L = 3 units of potatoes, and on the farm 1L = 1 unit of potatoes. Then it costs 1 to reproduce 1L. Our peasants want to work in the factory for 1/3 of the day at a wage 1L = 3, and the demand is for 10 units of labour. Our peasants then compete with each other and bid down V to 1 unit. Then T = V + S. We can modify this to get S = T – V. Then S = 30 – 10 = 20. Thus the rate of exploitation = 20 / 10 = 200%.

This example is important because it explains how exploitation arises on the free market. It occurs as a result of the product of capital being short relative to labour. Marx refers to this excess labour as the ‘industrial reserve army’.

This brings us to another key difference between neo-classical and Marxian theory. In the Marxian model it is assumed the supply of labour is more or less fixed. That is, at a given price capital has access to an arbitrarily large amount of labour. In the real world this again seems to be accurate. For example, since the late 1970s real wages in the US have remained flat or declined. This is a consequence of capital bringing in lots of cheap    foreign labour, the women’s liberation movement flooding the labour market with women, the now fashionable trend of bringing the elderly back to work and, of course, capital looking to relocate  offshore if lower tax rates or energy costs etc. are available.

Now when labour is scarce the price obviously goes up. So what determines the wage rate? One factor is the available technology in the economy. Another is conflicts between labour and capital. Since workers get to vote in liberal democracies they may be able to achieve reforms to working hours, child labour laws and so on. Likewise, union bargaining can improve the condition of workers. Such conflict is a natural feature of Marxian political economy. Marx was using the tools of game theory long before it was formally discovered when he argued capitalist relations of production generates antagonism between workers and capitalists as well as between competing     capitalists. Indeed he was already aware of collective goods problems in realising capitalists require an executive     committee for managing the ‘common affairs of the whole bourgeois’.

In contrast there is no politics in the neo-classical model because interdependence does not exist: since prices are taken as given, no one influences the payoffs of anyone else.

There are three main objections to everything I have just said. First, a neo-classical economist might say the Marxian assumption of a fixed labour supply (or that there are owners and non-owners, or pick any other assumption you like) is an implausible description of reality. While it would be easy to contest such arguments on some of the empirical grounds I have already outlined, my counter would simply be as follows. And how does your theory, for instance, explain crises? Our neo-classicist needn’t answer because by his own mathematics there is only one way he can respond: the Great Depression was in fact the Great Vacation, for there is no such thing as involuntary unemployment. The only possible neo-classical explanation is that workers were asking too much for their labour. The

Marxian system, of course, has crises inbuilt into the natural reproduction of capitalism.

If what I just said sounded ridiculous I have proven my point. The Marxian and neo-classical models are just as systematic and consistent as each other. Any bizarre assumptions of one (remember the neo-classical world has zero profits, everybody possesses perfect information, there are no transaction costs etc.) are no less bizarre than any of the bizarre assumptions of the other.

The second objection attacks Walrasian general  equilibrium theory. You might say: ‘Well a whole heap of markets obviously do not clear, pollution and other       externalities exist, plus monopolies and oligopolies and asymmetric information are all rife. What is the point in adhering to the rigours of this model if it constantly fails to describe reality?’ I would respond by going in to bat for Walrasian general equilibrium.

It is certainly the case that the conditions of the neo-classical world seldom, if ever, exist. In particular, any    interaction where an actor’s payoff depends on what she does and also on what others do (which encompasses   pretty much everything) is necessarily beyond the mathematical scope of neo-classical theory. But this does not totally vitiate its application. It must be acknowledged that it explains some phenomena reasonably well.

When economic commentators talk about the consequences of introducing carbon taxes or adjusting interest rates, for example, they are, albeit unconsciously and in an unsophisticated way, using the Walrasian model (although one can demonstrate these sorts of things just as well in a Marxian vein with input-output matrixes). Moreover, bad assumptions can often help illuminate our understanding when thinking about problems and point us in the right direction.

There is a third objection. It says I am being too dogmatic and that we should look to incorporate unique events into our theories. This moves us into the territory of the well known inadequacies of partial equilibrium modelling and the ad hoc endeavours of econometricians. What these guys essentially do is try to explain a state of the world x by showing x is a function of the arbitrarily picked variables a, b and c. When asked how they chose those variables the response is: ‘Because those are the most important!’ But to know this our econometricians would have had to compare a, b and c to all the other variables in the world. In technical terms this is known as infinity. You will die long before such a process is ever completed.

It is true that sometimes events are unique. So what? Although this might be interesting for those with a descriptive and historical disposition, a set of unique events does not make for a coherent discipline.

On the charge of dogmatism a comparison with  religion is in order. Even if some or all aspects of your religion seem silly, if you are truly religious you really have no choice but to be a fundamentalist. There is a tendency for some followers to cherry pick elements from their holy doctrines that seem sufficiently civilised while conveniently sweeping the ugly elements under the carpet. In this case they cease to be loyal followers by definition. In economics a similar sort of ‘buffet neo-classicism’ occurs. Free marketeers raucously proclaim their philosophy demands less taxes and regulation but refuse to accept the fact it also mandates zero profits, for example. Either you have the set menu or you don’t; you’re a neo-classicist or you’re not. You can’t have it both ways.

Diagnosing ignorance

So why is the ignorance of Marx’s work so widespread? The first culprit is popular culture. Marx seems to be portrayed in two distinct ways. The first is a strain of romanticism. In this portrayal Marx is swept up in the general mishmash of left wing utopianism and youthful rebellion. The story here is one of Che Guevara T-shirts, rallies by student unions and notions of tolerance, democracy, saving refugees and whales, the elimination of poverty in Africa and Middle East peace slogans. On the other hand there is a temptation for many people, perpetuated by the Glenn Beck wing and other conservative groups in the US, to make a connection that goes:

Marx → Russian revolution → Communism →  Stalin → Gulags.

These conflations are more likely symptoms of    psychological disorders than the basis of any objective  analysis. I can only restate the facts: Marx’s project is a  theory of capitalism (a term he invents). Capital is a systematic analysis of how it works. The association of Marx with communism by radicals and their detractors is simply wrong. Marx never wrote seriously about communism. The Manifesto is largely the work of Engels and was written on commission as a rhetorical pamphlet. Marx saw himself as an economic analyst and critic, and frequently enjoyed ridiculing utopians who dreamt of    hypothetical paradises. Moreover, the idea of communal organisation of production is centuries older than Marx.

Another explanation of the widespread ignorance of Marxian theory is that it requires heavy investments in time and understanding; capacity typically not available to most people in purely practical terms. The three volumes of  Capital are together over 2500 pages long and pretty much entirely mathematical. Furthermore, to properly make sense of  Marx’s analyses requires repeated readings as well as a fluent command of a wide range of economic, philosophical and historical texts. On top of this there is an enormous academic literature that built up around the 1980s in which every contentious aspect of Marxian theory was forensically fleshed out, analysed and debated by economists, political scientists and philosophers.

It would be plausible to deduce that most people will have never encountered either of these literatures and    never will. My only response to this is that those who   haven’t bothered to sufficiently familiarise themselves with Marx’s work should stop offering their ill-informed opinions.

In conclusion I will return to my epistemological introduction. All we have to understand the world are the models in our heads. So far the vast majority of the citizenry seem only to possess a half-baked conception of neo-classical theory. This does not mean the Marxian  model is not a perfectly systematic alternative. What it does mean is that an awful lot of people are inconsistent, ignorant or both.


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