Karl Marx (Part 2)

The theory of economics throughout the ages

Yes, there's still plenty more to say about Marx's economic ideas. If we go much further with the proletarian struggle, we'll be moving more in the political direction, so let's get back on the economic track. We've seen Marx's description of how the economy got to be the way it is: the bourgeois took over from the feudal aristocracy. Marx thought (so far, wrongly) that the proletariat would take over from the bourgeois. Thus he saw history as a continuing class struggle. Marx's idea of the proletariat ruling is called communism; since economics deals with capitalism, a market society in which we can freely trade goods for other goods, we'll not discuss communism.
So, what did Marx have to say about capitalism? Unlike Adam Smith, who saw it as self-regulating (the invisible hand guides the market in the right direction), Marx saw capitalism as full of possible crises.
Marx began by looking at how a businessman gets more money (makes a profit). Let's say the businessman has $X, an arbitrary amount of money. He wants to have a bigger amount of money. How does he do this? In order to produce goods that he can sell, he needs to by materials and labor, and his first problem is getting this capital (resources used for production) at an affordable price. If he can't afford it, he can't make more money because he can't produce goods. If he can afford it, his next step is to profit from his factory. To make a profit, he has to gain more money than he pays his employees. He has to take in a surplus value, to put it in economic terms.

This means that the emplyees aren't paid as much as they could be, so they're unhappy. If they strike, the businessman won't make a profit. This is yet another risk inherent in capitalism. If no problems occur in production, the businessman still has yet another task to accomplish. He has to sell his product. If people don't like it, or there's too much supply and not enough demand, or the economy as a whole is having problems, he won't make a profit. If the businessman avoids all the possible problems, he will make a profit and have a new amount of money, $Y. He wants to turn this into a bigger amount of money. So the whole cycle starts again... and again...
In short, capitalism, in Marx's view, is unstable; it is fraught with perils for anyone who tries to make more money. Adam Smith had said the economy would keep growing; Marx said that it would grow, but with lots of problems, until eventually the proletarians got tired of the amount of power the big businesses had and revolted. Is Marx right? Will capitalism bring about its own downfall?
People disagree on this. Marx's critics say that working-class people are happier now than ever, not miserable as Marx suggested. Also, we haven't seen any collapse yet!
Marx's supporters say that the economy cam close to collapsing in the 1930s, with the Great Depression, and that more and more people work for large firms, not for themselves.
Whether Marx was right or wrong, we must note that he perceived things no economist before him saw; still, many of his predictions have turned out to be untrue. What he has left to economists is the idea that capitalism is full of problems. The challenge now is to decide what to do about those problems: should we hope that the invisible hand will smooth things over, or is government intervention the answer to recessions, inflation, and other economic problems? The answer, traditionally was no. Adam Smith believed in a laissez-faire ("hands off") policy. That has largely changed in the twentieth-century, especially in the wake of the Great Depression.