New Ideas from Dead Economists – Pt. 5 (Karl Marx)

This is part 5 of my review of New Ideas from Dead Economists by Todd Buchholz. Here are parts 1, 2, 3, and 4 if you’d like to look back. Any of the entries can stand alone, of course.

I had a college professor in undergrad that taught a class on Southern American literature. Very smart guy. Ivy league graduate school and all that. He was a Faulkner scholar. He had a tremendous amount of knowledge about literature. He cared a lot about people. Injustice really bothered him. Overall, I’d say he was a cool guy. One day in class he started telling us about how Coca Cola was exploiting Indonesian (I think it was Indonesian) workers for pennies an hour (this made him furious). He finally went so far as to say that Coca Cola was an evil company and that Coca Cola should give the Indonesian workers the factory. I was puzzled, so I raised my hand and asked whether it was the wages that he found to be unfair. Wages were part of the problem. I stated that if the Indonesian workers could make more money elsewhere, they would, and that the Coca Cola job was actually helping them, their families and their economy. He disagreed for a number of reasons, and proceeded to assault my logic on moral grounds. I concluded that he didn’t know much about economics. In any case, he didn’t subscribe to the same brand of economic theory that I did. It’s possible that he had, at some point, studied our next economist, Karl Marx.

Buchholz spends a pretty decent amount of time talking about Marx’s life. It’s obvious why he did, too. Marx is fascinating. The amount of money he spent (he was not a frugal person), the life he led, the things he did. He was an academic above all things. He poured through money and raged against the burgeoise. He wrote books while living in vast poverty. He was rarely able to hold any job for much time at all. Both he and his wife were from wealthy families – and they lived off help most of the time. He spent his time writing and studying. He was a man of ideas and ideals. Some of his best known works include Contribution to the Critique of Political Economy, The Communist Manifesto, and, of course, Capital.

Like all the economists we’ve examined, Marx had so many ideas that it’s hard to give you even a brief overview of his major ones. I’m going to take a shot at it anyway. Many people think of Marx as an enemy of capitalism. This may be true to an extent. I think he did view capitalism as possessing sort of an evil quality. That being said, he actually believed that capitalism was a necessary precondition to socialism. He believed that the extra production capitalism produced would help lead to socialism, and that socialism was inevitable, but I’m getting ahead of myself here.

Marx’s basic theory was that capitalism requires the exploitation of the worker. He believed that the value of a product is determined by the amount of labor used to produce it. Machines are just labor stored up in metallic form. An item that takes 10 hours of labor to produce is twice as valuable as one that takes 5. Assuming this is true, no profits can be made unless labor is exploited. Instead of paying the workers for the exact amount of value they add to the process, the business owner only pays them a small amount and takes the surplus value for himself. The worker, according to Marx, is unable to demand the full value he/she is owed because the business owners own the means of production (materials, place to work, etc.) and because the worker is easily replaceable by someone in the unemployment pool that capitalism inevitably creates. Marx explains why this exploitation can’t go on, citing the inability to exploit machines, increasing economic power of a few, depressions, and possible revolution of the poor.

Obviously, Marx has been widely criticized, though his ideas still command a cult following. Any modern thinker can see problems with his labor theory of value. For one, it ignores incentives for innovation and entrepreneurship and the value they can add. They ignore the value of human capital in running a business – knowledge and management skill in running a business. Buchholz uses the example of the man who invented Velcro after getting several burrs caught on a wool sock. Surely he added value above the amount of labor used to create the Velcro, didn’t he? Capitalism also keeps prices low for consumers and demands quality. Alfred Marshall, who we’ll look at next time, also points out that Marx focuses solely on the supply of goods. Marshall points out that value comes from demand, and sometimes risks must be taken to unlock that demand. Such risks have value as well.

I do agree with some of Marx’s ideas. Without some form of social welfare, I do think the poor would eventually revolt. People will go to great extremes to survive. That I truly believe. I also believe that Marx’s writings have some value. I don’t believe he represents the utopia that he’s commonly associated with, because I just don’t believe that his writings reflect that that’s what he felt Marxism would lead to. As economist Frank Hahn once said,

“Most Marxists have never even read Marx. Of course, you really can’t blame them.”

What I do believe has value, is that Marx represents the other side of the coin. His reasoning flies in the face of current economic theory. He looked at the world and had an idea of how it could be different. Of course, I don’t think any attempts at realizing Marx’s ideal have been very successful. His ideas are still challenging. They still make you think. I don’t agree with most of them, but some of his ideas actually make a lot of sense, if you read them for what they are. I am a hearty advocate of the free market on this site and in my personal life, but I still recognize that there are other view points out there. He had a sense of humor, too – Marx once famously declared that he was no longer a Marxist. I hope, wherever he is, that my Southern American literature professor isn’t either. Thanks for reading.