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• Karl Marx (1818-1883)
• Marx’s dialectical materialism
– economic evolution
• Rise and fall of capitalism
– labor theory of value
– surplus
– crisis and socialist revolution
Karl Marx (1818-1883)
• Born in Prussia of Jewish family converted
to Christianity
• Influenced by the philosopher Hegel
• Much of his work in London in
collaboration with Friedrich Engels
– concept of dialectical materialism
– The Communist Manifesto
Marx’s Theory of Dialectical
• Social and economic change through
• Emerging classes associated with economic
innovations come into conflict with the old
• Replacement of an old economic order with
a superior one
• Capitalism is a qualitative leap over
• Socialism is a qualitative leap over
• Inefficient feudalism replaced by far more
efficient capitalism
• As capitalism emerges, there is an
accumulation of capital (wealth) by the
bourgeoisie (the capitalists) and the creation
of a free (i.e., not serf) labor force, the
• Extreme dichotomy between capital and
• Sets up two classes which must eventually
The Model
• Marx models an internal contradiction
which sets up the conflict between
• Proposes a “labor theory of value”
– Long run value determined by three
• amount of labor used to produce the good
• indirect embodiment of labor through capital
and intermediate inputs
• the capitalist’s surplus
• C=c+v+s
• where
– C is value
– c is indirect labor through capital (fixed
– v is direct labor cost (variable capital)
– s is surplus value or profit
Surplus Value
• Where does this surplus value come from?
– Workers are paid a subsistence wage
– Employers compel workers to produce a value
above that needed to generate subsistence wage
– The workers get the subsistence wage, the
capitalist gets the surplus
• the “Reserve Army of the Unemployed” keeps
wages at subsistence level
• exploitation of labor
Setting up the Internal
• Let the “Rate of Labor Exploitation” (s') be

• s' = s/v

• profits divided by wages

• Let the “Organic Composition of Capital”
(q) be

• q = c/(c+v)

• the ratio of fixed to total costs

• Let the “Rate of Profit” (p) be

• p = s/(c+v)

• the ratio of surplus to total costs

• Using the expressions for s', q, and p, we
can show that

• p = s'(1 - q)

• That is, the rate of profit is

– directly related to the exploitation of labor
– inversely related to the organic composition of
• As the organic composition of capital rises,
the rate of profit falls
Cut-Throat Capitalism and the
Internal Contradiction
• Each firm in cut-throat competition for each
other’s business
• Driven to gain temporary competitive
advantage over others
• The way to do this is to introduce labor
saving innovations
– that is, replace labor with capital
• But innovation diffuses quickly through
economy, dissipating innovator’s advantage
• Thus, throughout the economy, capitalists
are driven to accumulate capital in order to
replace labor with capital
• But as labor is replaced with capital, the
organic composition of capital rises
• As the organic composition of capital rises,
the rate of profit falls
• Capitalists try to keep up rate of profit by
exploiting labor more and more
• More and more firms fall behind and fail
– bankrupt capitalists lose their capital and join
the swelling ranks of the proletariat
• Tendency toward overproduction
– workers too poor to buy much
– capitalists too busy saving (accumulating
– economic depressions become more and
more severe
• The stage is set for revolution
– proletariat swelling and becoming
increasingly exploited
– bourgeoisie shrinking and becoming
increasingly cut-throat
– the proletariat rises up in revolt, replacing
the bourgeoisie as the dominant class and
creating the new socialist order
Implication of the Model
• Revolution will occur in most advanced
(i.e., ripest) capitalist economy
– Germany
– UK
• Did it? NO
• Revolution occurs in Russia
– hardly a mature capitalist economy
The Socialist Countries in 1987
Year Socialist Period Begins
Change Via Internal or External Forces

• 1. Soviet Union 1917 Internal

• 2. Mongolia 1921 External
• 3. Albania 1944 Internal
• 4. Yugoslavia 1945 Internal
• 5. Bulgaria 1947 External
• 6. Czechoslovakia 1948 External
• 7. Hungary 1948 External
• 8. Poland 1948 External
• 9. Romania 1948 External
• 10. North Korea 1948 External
• 11. China 1949 Internal
• 12. East Germany 1949 External
• 13. Vietnam 1954 Internal
The Socialist Countries (cont.)

• 14. Cuba 1959 Internal

• 15. Congo 1963 Internal
• 16. Somalia 1969 Internal
• 17. South Yemen 1969 Internal
• 18. Benin 1972 Internal
• 19. Ethiopia 1974 Internal
• 20. Angola 1975 External
• 21. Kampuchea 1975 External
• 22. Laos 1975 External
• 23. Mozambique 1975 Internal
• 24. Afghanistan 1978 External
• 25. Nicaragua 1979 Internal
• 26. Zimbabwe 1980 Internal
• Lenin later extended the model to explain
this inconsistency