1. KARL MARX’S MODEL OF CAPITALISM

2. Preview Karl Marx (1818-1883) Marx’s dialectical materialism –economic evolution Rise and fall of capitalism –labor theory of value –surplus –crisis and socialist revolution

3. Karl Marx (1818-1883) Born in Prussia of Jewish family converted to Christianity Influenced by the philosopher Hegel Much of his work in London in collaboration with Friedrich Engels –concept of dialectical materialism –The Communist Manifesto

4. Marx’s Theory of Dialectical Materialism Social and economic change through conflict Emerging classes associated with economic innovations come into conflict with the old Replacement of an old economic order with a superior one Capitalism is a qualitative leap over feudalism Socialism is a qualitative leap over capitalism

5. Capitalism Inefficient feudalism replaced by far more efficient capitalism As capitalism emerges, there is an accumulation of capital (wealth) by the bourgeoisie (the capitalists) and the creation of a free (i.e., not serf) labor force, the proletariat Extreme dichotomy between capital and labor Sets up two classes which must eventually conflict

6. The Model Marx models an internal contradiction which sets up the conflict between classes Proposes a “labor theory of value” –Long run value determined by three things amount of labor used to produce the good indirect embodiment of labor through capital and intermediate inputs the capitalist’s surplus

7. C = c + v + s where –C is value –c is indirect labor through capital (fixed capital) –v is direct labor cost (variable capital) –s is surplus value or profit

8. Surplus Value Where does this surplus value come from? –Workers are paid a subsistence wage –Employers compel workers to produce a value above that needed to generate subsistence wage –The workers get the subsistence wage, the capitalist gets the surplus the “Reserve Army of the Unemployed” keeps wages at subsistence level exploitation of labor

9. Setting up the Internal Contradiction Let the “Rate of Labor Exploitation” (s') be s' = s/v profits divided by wages

10. Let the “Organic Composition of Capital” (q) be q = c/(c+v) the ratio of fixed to total costs

11. Let the “Rate of Profit” (p) be p = s/(c+v) the ratio of surplus to total costs

12. Using the expressions for s', q, and p, we can show that p = s'(1 - q) That is, the rate of profit is –directly related to the exploitation of labor –inversely related to the organic composition of capital As the organic composition of capital rises, the rate of profit falls

13. Cut-Throat Capitalism and the Internal Contradiction Each firm in cut-throat competition for each other’s business Driven to gain temporary competitive advantage over others The way to do this is to introduce labor saving innovations –that is, replace labor with capital But innovation diffuses quickly through economy, dissipating innovator’s advantage

14. Thus, throughout the economy, capitalists are driven to accumulate capital in order to replace labor with capital But as labor is replaced with capital, the organic composition of capital rises As the organic composition of capital rises, the rate of profit falls Capitalists try to keep up rate of profit by exploiting labor more and more More and more firms fall behind and fail –bankrupt capitalists lose their capital and join the swelling ranks of the proletariat

15. Overproduction Tendency toward overproduction –workers too poor to buy much –capitalists too busy saving (accumulating capital) –economic depressions become more and more severe

16. Revolution The stage is set for revolution –proletariat swelling and becoming increasingly exploited –bourgeoisie shrinking and becoming increasingly cut-throat –the proletariat rises up in revolt, replacing the bourgeoisie as the dominant class and creating the new socialist order

17. Implication of the Model Revolution will occur in most advanced (i.e., ripest) capitalist economy –Germany –UK Did it? NO Revolution occurs in Russia –hardly a mature capitalist economy

18. The Socialist Countries in 1987 Year Socialist Period Begins Change Via Internal or External Forces 1.Soviet Union1917Internal 2.Mongolia1921External 3.Albania1944Internal 4.Yugoslavia1945Internal 5.Bulgaria1947External 6.Czechoslovakia1948External 7.Hungary1948External 8.Poland1948External 9.Romania1948External 10.North Korea1948External 11.China1949Internal 12.East Germany1949External 13.Vietnam1954Internal

19. 14.Cuba1959Internal 15.Congo1963Internal 16.Somalia1969Internal 17.South Yemen1969Internal 18.Benin1972Internal 19.Ethiopia1974Internal 20.Angola1975External 21.Kampuchea1975External 22.Laos1975External 23.Mozambique1975Internal 24.Afghanistan1978External 25.Nicaragua1979Internal 26.Zimbabwe1980Internal The Socialist Countries (cont.)

20. Lenin later extended the model to explain this inconsistency