Karl Marx on Capitalism, Marxism Capitalism
Marx Critique Of Capitalism

Marx applied his theory of history to the society and economy of his time in order to discover the laws of motion of capitalism and to identify contradictions between the forces and relations of production. He was concerned with long-run trends in the economy; when he examined the present, it was always in the context of the present as history. In his analysis of capitalism, he formulated certain principles that have become known as Marxian laws and are treated with much the same reverence by some Marxists as the laws of supply and demand are by some orthodox economists. The Marxian laws of capitalism include the following: a reserve army of the unemployed, a falling rate of profit, business crises, increasing concentration of industry into fewer firms, and increasing misery within the proletariat.

In his analysis of the economics of capitalism, Marx used, with a few exceptions, the basic tools of classical economics, particularly Ricardian theory. Thus, he assumed (1) a labor cost theory explaining relative prices, (2) neutral money, (3) constant returns in manufacturing, (4) diminishing returns in agricul­ture, (5) perfect competition, (6) a rational, calculating economic man, and (7) a modified version of the wages fund doctrine. In most of his analysis he rejected the Ricardian assumptions of fixed coefficients of production, full employment, and the Malthusian population doctrine.

It is important to realize that part of the difference between Marx and Ricardo in their analysis of the economics of capitalism does not proceed from any difference in their basic analytical framework; rather, it comes from a difference in their respective ideologies. Because Marx was critical of capitalism, he examined it with a view to finding faults or contradictions in the system; Ricardo basically accepted it and saw it as a harmonious working-out of the economic process. The chief actor in the Marxian model, as in the Ricardian model, is the capitalist. The capitalist's search for profits and reaction to changing rates of profits explain, in large part, the dynamics of the capitalist system. But whereas capitalists in the Marxian system rationally and calculatingly pursue their economic advantage and sow the seeds of their own destruction, in the Ricardian system these same rational and calculating capitalists, in following their own self-interest, promote the social good. Although the classical economists' long-run prediction of a stationary state is certainly pessimistic, such a state is not the fault of the capitalistic system; rather, in their view, it follows from Malthusian population doctrine and historically diminishing returns in agriculture. For Marx, however, the capitalistic system produces undesirable social conse­quences; as the contradictions in capitalism become more manifest over time he said, capitalism .as a phase of history will pass away.

The Reserve Army of the Unemployed

Marx rejected Malthusian population theory. In classical analysis this theory had been essential to explain the existence of profits. The classical economists maintained that capital accumulation leads to an increased demand for labor and a rise in the real wage of labor. If wages continued to rise with capital accumu­lation, the level of profits would fall. The Malthusian population doctrine, however, explained why wages do not rise to a level at which profits cease to exist: any increase in wages will lead to a larger population and labor force, and wages will then be pushed back to a subsistence level. The Malthusian population theory, therefore, not only accounts for the existence of profits in the classical system but also partly explains the forces determining wage rates.

Rejecting the Malthusian theory meant that Marx had to find some other vehicle to explain the existence of surplus value and profits. In the Marxian model, increased capital accumulation will increase the demand for labor. As wage rates rise, what keeps surplus value and profits from decreasing to zero? Marx's answer to this question lies in his concept'of the reserve army of the unemployed, which plays the same theoretical role in his system as does the Malthusian population theory in the classical model. According to Marx, there is always an excess supply of labor in the market, which has the effect of depressing wages and keeping surplus value and profits positive. He saw the reserve army of the unemployed as being recruited from several sources. Direct recruitment occurs when machines replace humans in production processes. The capitalists' search for profits leads them to introduce new machines, thereby increasing the capital intensity in the economy. The workers displaced by the new technology are not absorbed into other areas of the economy. Indirect recruitment results from the entry of new members into the labor force. Children finishing school and housewives who desire to enter the labor market as their family responsibilities change find that jobs are not available and enter the ranks of the unemployed. This reserve army of the unemployed keeps down wages in the competitive labor market.

The size of the reserve army and the level of profits and wages vary, in Marx's system, with the business cycle. During periods of expanding business activity and capital accumulation, wages increase and the size of the reserve army diminishes. This increase in wages ultimately leads to a reduction in profits, to which the capitalist reacts by substituting machinery for labor. The unemploy­ment created by this substitution of capital for labor pushes down wages and restores profits.

The concept of the reserve army of the unemployed is counter to several aspects of orthodox analysis. Ricardo had suggested the possibility of short-run technological unemployment in a new chapter, "On Machinery," in the third edition of his Principles. In the classical system, technological unemployment, or any unemployment other than frictional unemployment, is not possible in the long run. Marx's assumption of long-run, persistent technological unemploy­ment amounts to a rejection of Say's Law, which predicted full employment of resources. Most orthodox economic theorists have never been willing to accept Marx's reserve army of the unemployed for the following reasons. The notion of the reserve army implies the existence of an excess supply of labor—a labor market that is not cleared. But if quantity supplied exceeds quantity demanded and competitive markets exist, economic forces will push down wages until quantity supplied equals quantity demanded and the market clears. Because Marx assumed perfectly competitive markets, an orthodox theorist would argue that the logic of Marx's own system invalidates his concept of persistent technological unemployment.

A Marxist would counter this argument by pointing out that the orthodox framework is one of comparative statics—that is, it assumes that as the forces of supply and demand work to lower wages and reduce unemployment, other things remaining equal and that, in particular, no replacement of people by machines takes place as the labor market clears. The Marxists would admit that the orthodox analysis is theoretically correct, given the static framework of orthodox theory, but they would argue that a more dynamic analysis of the labor market would allow for permanent disequilibrium. Modern orthodox macroeconomists who focus on dynamic search theory would agree that something that might look like long-run disequilibrium in a comparative static framework might exist, although they would argue that excess labor supply suggests that an average above-competitive equilibrium wage exists in an economy.

One possible means of exploring the validity of Marx's concept of a reserve army of the unemployed is to examine the level of unemployment over time. This procedure will not, however, give an unequivocal answer, as the definition of unemployment used for statistical measurement contains some anomalies. In most countries, unemployed persons are considered to be the part of the labor force that is seeking jobs but cannot find them. Some members of the population are not seeking jobs precisely because they have been unable to find work in the past and have therefore dropped out of the labor force. For example, a worker who preferred to be employed might spend several months actively seeking work and then decide to drop out of the labor force. If employment opportunities should improve, that worker might reenter the labor force. The ratio of those actively in the labor force to the total population, often called the participation ratio, varies directly with the level of business activity. A person who is working part-time but who would prefer full-time employment is usually considered to be employed. A Marxist would claim that both the dropout and the part-timer help to push down wage rates and should be included in the reserve army of the unemployed.

Even if a satisfactory statistical measure of the size of the reserve army of the unemployed were available, it is not clear that this would validate or invalidate the Marxian notion that such a reserve army prevents wages from rising so that surplus value and profits are eliminated. How much unemployment is required to produce a positive rate of surplus value and profits? The issue is further clouded, perhaps hopelessly, by the fact that the Marxian model assumes competitive markets, not the oligopolistic firms and labor unions of the modern economy. Thus, empirical work may never resolve the issue of whether or not there exists a reserve army of the unemployed.