Karl Marx Economic Theories Overview

Marxian Economics

Karl Marx was one of the most popular and prominent economists the society has ever produced. Born in 1818 in Prussia, Marx would come to activate in fields such as sociology, economy, history or journalism. In his economic activity, he uncovered a series of economic principles regarding the functioning of the society and the economy in the context of capitalism, commonly integrated under the generic umbrella of Marxism. The Marxian theories draw from the Marxist ideology, yet they are considered ideologically independent (Roemer, 2002).

The Marxian economic theories oppose the previous theories of Adam Smith, who relied of productivity and wages; Marx, on the other hand, promoted the role of labor to attaining economic gains. Marx contends that the specialization of the labor force leads to a decrease in the wages and that ultimate value of the goods and services is not able to reflect the value of the work employed. This principle was issued in the social and demographic context of an increasing population (Roemer, 1989).

"Marxian economics focuses on the role of labor in the development of an economy, and is critical of the classical approach to wages and productivity developed by Adam Smith. Marxian economics argues that the specialization of the labor force, coupled with a growing population, pushes wages down, and that the value placed on goods and services does not accurately account for the true cost of labor" (Investopedia, 2012).

The basic principles of Marxian economic can generally be classified into six categories, as follows:

(1) The fundamental principles

(2) The labor theory of value

(3) The concept of capital

(4) The concept of surplus value

(5) Capital accumulation and the falling profit rate, and last

(6) The concepts of monopoly, impoverishment and crisis.

(1)

The fundamental principles of Marxian economics refer to (a) the theory of economic development, from slavery to feudalism, to capitalism, to socialism and to communism; (b) the dialect materialism, with emphasis on the evolution of economy occurring as a result of a clash of the opposites, and last, (c) the labor theory of value, according to which labor is the only source in the creation of value.

(2)

According to the labor theory of value, the value of an item within a society is given by the amount of work employed in the creation of the respective item (Prychitko). At this level, Marx also recognizes the importance of technology in the enhancement of the levels of productivity. The labor represents the commodity possessed and offered by the laborer and its value is established based on social and economic principles.

(3)

At the level of the Marxian concept of capital, the German economist identified two types of capitals, namely the constant capital and the variable capital. According to Marx, the constant capital is the capital that cannot be reproduced, such as technology or raw materials, which do not suffer a quantitative modification in value; the costs and consumptions incurred at this level are faithfully reflected in the final value of the produced item. The variable capital reflects the labor force, which produces value through its own input, as well creates excess; its value varies across time and space.

(4)

The concept of the surplus value reveals the generation of profits, as what is resulted from the difference between the resources invested and the final results of the process. According to Karl Marx, who also assesses the surplus value through the lenses of labor:

"The consumption of labor power is at one and the same time the production of commodities and of surplus value. […] The surplus of the total value of the product, over the sum of values of its constituent factors, is surplus of the expanded capital over the capital originally advanced" (Munro).

In the most simplistic formulation then, the surplus value represents the profit of the business agent. According to Marx, the profit is then composed of three important elements, namely the interest on capital, the rent on land and the physical capital, and last, the normal profit of the entrepreneur, or the wages of entrepreneurship.

(5)

While the entrepreneurs often seek to increase their profits, the actual profitability rate tends to decrease within the long-term. This conclusion was reached by all economists from Adam Smith, to David Ricardo and even Karl Marx, yet each had their on explanation for the phenomenon. Marx as such contended that the economic agents come to focus more on development and advancement, and that they come to invest more and more in this direction. In other words, they spend larger portions of their capitals on new investments and this decision negatively impacts the ultimate profitability rate.

(6)

Last, the final focus of the Marxian economics falls on the definition of the concepts of monopoly capitalism, impoverishment and crisis. The concept of the monopoly is explained through the accumulation of wealth, through repetitive actions and advantages, in the hands of a few. In the monopolistic market place, the smaller companies will either be driven out of business as uncompetitive, or will be absorbed into the monopoly.