The Theory and Practice of Socialism
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
Socialism has a very long history. The earliest recorded socialist society is described in the
Book of Acts in the Bible. Following the crucifixion of Jesus, Christians in Jerusalem established
a system in which all property was owned in common.
There have been other socialist experiments in which all property was held in common,
effectively creating socialist societies. Early in the nineteenth century, such reformers as
Robert Owen, Count Claude-Henri de Rouvroy de Saint-Simon, and Charles Fourier established
almost 200 communities in which workers shared in the proceeds of their labor. These men,
while operating independently, shared a common ideal—that in the appropriate economic
environment, people will strive for the good of the community rather than for their own self-
interest. Although some of these communities enjoyed a degree of early success, none
survived.
Socialism as the organizing principle for a national economy is in large part the product of the
revolutionary ideas of one man, Karl Marx. His analysis of what he saw as the inevitable
collapse of market capitalist economies provided a rallying spark for the national socialist
movements of the twentieth century. Another important contributor to socialist thought was
Vladimir Ilyich Lenin, who modified many of Marx’s theories for application to the Soviet
Union. Lenin put his ideas into practice as dictator of that country from 1917 until his death
in 1924. It fell to Joseph Stalin to actually implement the Soviet system. We shall examine the
ideas of Marx, Lenin, and Stalin and investigate the operation of the economic systems based
upon them.
The Economics of Karl Marx
Marx is perhaps best known for the revolutionary ideas expressed in the ringing phrases of
the Communist Manifesto, such as those shown in the Case in Point. Written with Friedrich
Engels in 1848, the Manifesto was a call to arms. But it was Marx’s exhaustive, detailed
theoretical analysis of market capitalism, Das Kapital (Capital), that was his most important
effort. This four-volume work, most of which was published after Marx’s death, examines a
theoretical economy that we would now describe as perfect competition. In this context, Marx
outlined a dynamic process that would, he argued, inevitably result in the collapse of
capitalism.
Marx stressed a historical approach to the analysis of economics. Indeed, he was sharply
critical of his contemporaries, complaining that their work was wholly lacking in historical
perspective. To Marx, capitalism was merely a stage in the development of economic systems.
He explained how feudalism would tend to give way to capitalism and how capitalism would
give way to socialism. Marx’s conclusions stemmed from his labor theory of value and from
his perception of the role of profit in a capitalist economy.
The Labor Theory of Value and Surplus Value
In The Wealth of Nations, Adam Smith proposed the idea of the labor theory of value, which
states that the relative values of different goods are ultimately determined by the relative
amounts of labor used in their production. This idea was widely accepted at the time Marx
was writing. Economists recognized the roles of demand and supply but argued that these
would affect prices only in the short run. In the long run, it was labor that determined value.
Marx attached normative implications to the ideas of the labor theory of value. Not only was
labor the ultimate determinant of value, it was the only legitimate determinant of value. The
price of a good in Marx’s system equaled the sum of the labor and capital costs of its
production, plus profit to the capitalist. Marx argued that capital costs were determined by
the amount of labor used to produce the capital, so the price of a good equaled a return to
labor plus profit. Marx defined profit as surplus value, the difference between the price of a
good or service and the labor cost of producing it. Marx insisted that surplus value was
unjustified and represented exploitation of workers.
Marx accepted another piece of conventional economic wisdom of the nineteenth century,
the concept of subsistence wages. This idea held that wages would, in the long run, tend
toward their subsistence level, a level just sufficient to keep workers alive. Any increase in
wages above their subsistence level would simply attract more workers—or induce an
increase in population, forcing wages back down. Marx suggested that unemployed workers
were important in this process; they represented a surplus of labor that acted to push wages
down.
Capital Accumulation and Capitalist Crises
The concepts of surplus value and subsistence wages provide the essential dynamics of Marx’s
system. He said that capitalists, in an effort to increase surplus value, would seek to acquire
more capital. But as they expanded capital, their profit rates, expressed as a percentage of the
capital they held, would fall. In a desperate effort to push profit rates up, capitalists would
acquire still more capital, which would only push their rate of return down further.
A further implication of Marx’s scheme was that as capitalists increased their use of capital,
the wages received by workers would become a smaller share of the total value of goods.
Marx assumed that capitalists used all their funds to acquire more capital. Only workers, then,
could be counted on for consumption. But their wages equaled only a fraction of the value of
the output they produced—they could not possibly buy all of it. The result, Marx said, would
be a series of crises in which capitalists throughout the economy, unable to sell their output,
would cut back production. This would cause still more reductions in demand, exacerbating
the downturn in economic activity. Crises would drive the weakest capitalists out of business;
they would become unemployed and thus push wages down further. The economy could
recover from such crises, but each one would weaken the capitalist system.
Faced with declining surplus values and reeling from occasional crises, capitalists would seek
out markets in other countries. As they extended their reach throughout the world, Marx said,
the scope of their exploitation of workers would expand. Although capitalists could make
temporary gains by opening up international markets, their continuing acquisition of capital
meant that profit rates would resume their downward trend. Capitalist crises would now
become global affairs.
According to Marx, another result of capitalists’ doomed efforts to boost surplus value would
be increased solidarity among the working class. At home, capitalist acquisition of capital
meant workers would be crowded into factories, building their sense of class identity. As
capitalists extended their exploitation worldwide, workers would gain a sense of solidarity
with fellow workers all over the planet. Marx argued that workers would recognize that they
were the victims of exploitation by capitalists.
Marx was not clear about precisely what forces would combine to bring about the downfall
of capitalism. He suggested other theories of crisis in addition to the one based on insufficient
demand for the goods and services produced by capitalists. Indeed, modern theories of the
business cycle owe much to Marx’s discussion of the possible sources of economic downturns.
Although Marx spoke sometimes of bloody revolution, it is not clear that this was the
mechanism he thought would bring on the demise of capitalism. Whatever the precise
mechanism, Marx was confident that capitalism would fall, that its collapse would be
worldwide, and that socialism would replace it.
Marx’s Theory: An Assessment
To a large degree, Marx’s analysis of a capitalist economy was a logical outgrowth of widely
accepted economic doctrines of his time. As we have seen, the labor theory of value was
conventional wisdom, as was the notion that workers would receive only a subsistence wage.
The notion that profit rates would fall over time was widely accepted. Doctrines similar to
Marx’s notion of recurring crises had been developed by several economists of the period.
What was different about Marx was his tracing of the dynamics of a system in which values
would be determined by the quantity of labor, wages would tend toward the subsistence level,
profit rates would fall, and crises would occur from time to time. Marx saw these forces as
leading inevitably to the fall of capitalism and its replacement with a socialist economic
system. Other economists of the period generally argued that economies would stagnate; they
did not anticipate the collapse predicted by Marx.
Marx’s predictions have turned out to be wildly off the mark. Profit rates have not declined;
they have remained relatively stable over the long run. Wages have not tended downward
toward their subsistence level; they have risen. Labor’s share of total income in market
economies has not fallen; it has increased. Most important, the predicted collapse of capitalist
economies has not occurred.
Revolutions aimed at establishing socialism have been rare. Perhaps most important, none
has occurred in a market capitalist economy. The Cuban economy, for example, had some
elements of market capitalism before Castro but also had features of command systems as
well.While resources in Cuba were generally privately owned, the government had broad
powers to dictate their use. In other cases where socialism has been established through
revolution it has replaced systems that could best be described as feudal. The Russian
Revolution of 1917 that established the Soviet Union and the revolution that established the
People’s Republic of China in 1949 are the most important examples of this form of revolution.
In the countries of Eastern Europe, socialism was imposed by the former Soviet Union in the
wake of World War II. In the early 2000s, a number of Latin American countries, such as
Venezuela and Bolivia, seemed to be moving towards nationalizing, rather than privatizing
assets, but it is too early to know the long-term direction of these economies.
Whatever the shortcomings of Marx’s economic prognostications, his ideas have had
enormous influence. Politically, his concept of the inevitable emergence of socialism
promoted the proliferation of socialist-leaning governments during the middle third of the
twentieth century. Before socialist systems began collapsing in 1989, fully one-third of the
earth’s population lived in countries that had adopted Marx’s ideas. Ideologically, his vision of
a market capitalist system in which one class exploits another has had enormous influence
