MARXIST ECONOMICS - Karl Marx ( ) - Marx believed that the economic organization of society forms the basis for its social and political organization; economics, therefore, drives social change. Marx saw history not in terms of war or colonialism, but as a progression of different economic systems. What were these systems?*1. Primitive communism or primitive communal society 2. Asiatic mode of production 3. Antique or Ancient mode of production 4. Feodalism 5. Capitalism 5.1 Early Capitalism 5.2 Late Capitalism 6. Socialism 6.1 Socialism (Lower-stage communism) 6.2 communism (Upper-stage communism) - Feodalism was replaced by capitalism which in turn will be supplanted by communism. In his 1848 Communist Manifesto**, Marx said that this would be brought about by revolution. To explain this he analysed the capitalist system and its inherent weaknesses in his magnum opus (great work), Das Kapital. *** - Capitalism is a form of economic organization in which the means of production are privately owned by bourgeoisie**** (the wealthy stratum of the middle class that originated during the latter part of the Middle Ages). The bourgeoisie is the ruling class, which exploits the proletariat. The primary form of exploitation is wage labour. According to Marx, capitalism is a passing stage, it will be supplanted by socialism. - Proletariat, (the class of workers, especially industrial wage earners, who do not possess capital or property and must sell their labor to survive) must produce more value than they receive in wages. In this way capitalists extract a surplus value from the workers – this is profit. It is the result of the exploitation of the workers. To maximize profit, it is clearly in the interest of the capitalist to keep wages at a minimum, but also to introduce technology to improve efficiency. The workers will be alienated and this will inevitably lead to social unrest. - Another essential element of capitalism is competition among producers. Competition among capitalists will lead to monopolies. They, in turn, will exploit not only workers but also consumers. - The strive for profit will lead to overproduction (waste and stagnation) and inevitably to crises.

MARXIST ECONOMICS - A revolution is inevitable - Marx uses Georg Hegel’s ( , German philosopher) process of dialectic: every idea or state of affairs (the original thesis), contains within it a contradiction (the antithesis), and from this conflict, a new, richer notion (the synthesis) arises. Thus the thesis (capitalism) contains its own antithesis (the exploited workers) which will lead to communism (the synthesis). - Through a revolution by the proletariat private property will be abolished in favor of common or collective property. First, dictatorship of proletariat, a form of socialism where economic power is in the hands of majority. And later on, common ownership - A communist economy is based on common property and central planning (central planning in favor of free markets) - Met with criticism/hostilitygrowth and prosperity come from capitalism - Revolution in Russia and China not Europe - Today: Cuba, China, Laos, Vietnam and North Korea - Mixed economies a “third way” between communism and capitalism: - Increasing inequality, concentration of wealth in a few large companies, frequent economic crises, credit crunch of 2008 …. All have been blamed on the free market economy (capitalism). So Marx’s critique of capitalism is being taken more seriously than ever.

THE LABOUR THEORY OF VALUE - English economist William Petty argues that land is a free gift of nature, and so all capital is “past labor”. - US economist Paul Sweezy publishes The Theory of Capitalist Development, defending Marx’s labor theory of value. - The classical economists Adam Smith and David Ricardo had each developed a theory of value connected to labor, but it was Karl Marx who set out the most famous description of the labor theory of value in his magnum opus Capital. - Marx’s idea was that the amount of labor used to produce a good is proportional to its value. - It is the amount of (normal) labour used to produce a good that is proportional to its value. All commodities (goods), as values, are realized human labour. -Marx did not deny that supply and demand in the marketplace would influence the value or price of goods in the short run, but said that in the long run the basic structure and dynamics of the value system must come from labor

SUPPLY AND DEMAND - Alfred Marshall ( ) - Ibn Taymiyyah ( , Islamic scholar) publishes a study of the effects of supply and demand on prices.* - English philosopher John Locke argues that commodity prices are directly influenced by the ratio of buyers to sellers - British economist David Ricardo argues that prices are influenced mainly by the cost of production. - British economist John Maynard Keynes identifies economy-wide total demand and supply. - Supply and demand work in tandem to generate the market price. - The law of supply and the law of demand work in all markets: goods market (price), labour market (wage), money markets (rate of interest), etc. - Factors that shift demand: income, income distribution, wealth, prices of other goods, tastes and preferences, expectations, population - Factors that shift supply: prices of factors of production, technology, prices of other goods, expectations, number of firms - Economists call Marshall’s work “partial equilibrium” analysis because it shows how a single market reaches equilibrium or balance through the forces of supply and demand. However, an economy is made up of many different interacting markets. The question of how all these can come together in a state of “general equilibrium” is a complex problem that was analyzed by Léon Walras in the 19th century.

SUPPLY, DEMAND AND EQUILIBRIUM

EXCESS SUPPLY AND EXCESS DEMAND

CHANGES IN EQUILIBRIUM

ELASTICITY OF DEMAND General definition of elasticity: Responsiveness of a variable to changes in another variable 1.Price ↔price elasticity of demand: Percentage change in quantity divided by percentage change in price 2.Income ↔ income elasticity of demand: Percentage change in quantity divided by percentage change in income ↔a) normal goods b) inferior goods 3.Prices of other goods ↔ cross-price elasticity of demand: Percentage change in quantity divided by percentage change in the price of some other good Marshall 1.Necessities – price elasticity is low 2.Luxuries - price elasticity is high a) Low income groups: elasticity for luxuries high b) Super-rich groups: elasticity for luxuries not very high Engel’s law: as people grow richer, they increase spending on food by less than their increase in income (The poorer the household, the larger the proportion of its budget dedicated to nourishment)

ELASTICITY OF DEMAND Price elasticity of demand is percentage change in quantity divided by percentage change in price Income elasticity of demand is percentage change in quantity divided by percentage change in income Cross-price elasticity of demand is percentage change in quantity divided by percentage change in the price of some other good