Chaos
Penultimate Amazing
- Joined
- Sep 15, 2003
- Messages
- 10,611
As I promised in the Nationalism thread, here is the analysis of the economic “foundation” of communism.
But first, let me state that I am not familiar with the English terminology of Economics, so the economists among you will probably find quite a few terms they are unfamiliar with, as I will have to translate the German terms in the way they sound best to me.
Why Marx was wrong
To understand why Marx was convinced that the economic model of capitalism – as it presented itself in the middle of the 19th century – was doomed to fail, we will first have to take a look at the economic theory of the time, which is today called the “classic” economic theory.
According to classic theories as put forth by David Ricardo, among others, three factors are needed to produce goods: land, capital, and work. The yield of production goes mainly to the landowners – this is called the “rent” – and the capitalists – this is called “profit” – while the workers receive subsistence wages – in theory, the exact amount that enables them to stay alive and productive; the model assumes that there are more than enough worker eager to work at subsistence level, so capitalists would not have to offer more than that to any worker. The exact mechanism that determines the distribution of rent and profit is shown in Ricardo´s “grain model”; however, explaining that would go too far off-topic here.
According to Marx, there is only one factor involved in production: work. He assumed that, since products (the result of work) and land could be freely traded for capital, and vice versa, capital and land were really just “accumulated work”. He also said that since the land is not used up in any way by production (just temporarily occupied) there is no way that a landowner deserves any profit or rent out of providing the land.
For example, to produce a wooden table, a man would have to spend four hours cutting a tree, another four hours to process the tree into the proper boards and other pieces of wood, and yet another four hours to make a table from the processed wood. Thus, the value of a table, expressed in terms of work, is 12 hours.
However, workers produce more than they need to restore their own productivity – more than the subsistence wage of Ricardo´s model. If we assume that a capitalist runs a table factory, he would have to buy the processed wood for each table for 8 hours´ worth of money and hire workers to do 4 hours of further work on each table. Assuming, for example, a 8 hour workday, each worker can build two table each day; his subsistence wage for that workday, however, is less than 8 hours´ worth of money. This difference, the profit, goes to the capitalist. The same is, of course, true for the woodcutter´s camp and the sawmill, where the tree is cut down and processed. At each step, workers do their work for less than what they produce.
Since, according to Marx´s theory, the value of the table is made up completely of work, he proposed that the workers ultimately deserve all of the profit that is derived from that table, while in reality, they received none of it. This is what he called the “exploitation of the working class”.
Marx´s economic model says that the value of each profits is made up of three part – “dead work”, “living work” and “unpaid work”.
Dead work is the sum of all the raw materials, tool wear & tear and other “dead” factors that go into a product. For the table factory example, that is 8 hours. (I´ll abbreviate it with I for “investment”)
Living work is the wages that the workers are paid. Let us assume that this is 2 hours´ worth per table. (I´ll abbreviate it with W for “wages”)
Unpaid work is the profit that the capitalist – here, the table factory´s owner – derives from a product. Assuming that the table´s value is 12 hours, that would be 2 hours. (P for “profits”)
The “profit ratio” R of a production is the profit per unit of costs – how much money can be made with a production process per unit of capital put into it: P/(I+W)= R – in our example 2/(2+8)= .2
The “organic composition” O shows how much of the costs consists of dead work – investments that have to be made up front to be able to produce (it is assumed that wages are not paid up front): I/(I+W)= O – in our example 8/(2+8)= .8
(In comparison, for the woodcutters´ camp investment would have been zero, wage would have been 2 hours, and profit another 2 hours. So profit ratio would be 2/(2+2)= .5 and organic composition 0/(2+0)= 0.
That shows that woodcutting provides more profits and needs less investments than carpentry. But that´s another part of economic theory.)
In Marx´ days, mechanization – replacing workers with machines, a process greatly accelerated by the invention of the steam engine – was trend in industrial production. Machines would enable workers to produce much more in the same time, at the cost of requiring big investments in machinery and, during production, wood or coal to power the machines.
Since there were to carpentry machines that I know of in that era, let us abandon the table factory example and talk about a cloth factory. For manual work, the same numbers as for carpentry still apply – 8 hours for wool bought from spinners, 2 hours for wages, and 2 hours for profit.
Now the capitalists buys a mechanical loom powered by a steam engine. With that, his workers can double their production. The factors change as follows: investment is 18 per worker (8 for the wool and 10 for coal and machinery wear & tear), wages remain at 2 per workers; since each worker now produces 24 hours´ worth of cloth instead of 12, profits rise to 4 hours per worker.
As we examine the profit rate – P/(I+W) = 4/(18+2) – remains at 0.2, although total profit has doubled. The organic composition – I/(I+W) = 18/(18+2) – rises from .8 to .9; this means that the capitalist now has to pay 90% of his costs up front. Assuming that he pays the wages after the cloth is sold, the capitalist now has to pay 4.5 hours´ worth of investment for each hour´s worth of profit, or, using money to keep things simple, $4.50 for each $1.00 of profit – up from $4.00 before the mechanization.
Capitalists would still implement mechanization, since, as the basic model had shown, they would accumulate more and more capital, and had to find ways to invest said capital to prevent exhausting the supply of willing, cheap workers – which would have driven up wages since they could no longer just have hired someone else if a worker demanded more than subsistence wages.
That way, capitalists are in a fix, since they would either eventually make less profit because of rising wages, or because of rising investment costs. According to Marx´s theory, this problem would get progressively worse, to the point where it just didn´t pay off any more to invest money – since capitalists would have to invest more and more money for the same amount of profits – and all that before seeing even a single cent of these profits. That, according to Marx, would be the time when the working class would rise up and seize the production factors (and the profit) for themselves.
Are you still with me? Good. Don´t give up, we´re almost there.
(To tell the truth, at this point in the lecture I wondered “So why the **** is capitalism still around?”)
On the other hand, if we assume that the capitalists will try to mechanize their production and/or hire more workers, balancing both problems in an effect to minimize their total effect, total production – and thus, supply of goods – will necessarily increase according to the formula (productivity per worker)*(total number of employed workers), while demand rises in proportion with the number of hired workers – or more exactly, with the amount of wages paid, which, in this model, is about the same. Supply rising faster than demand will inevitably lead to falling prices. That, in turn, will cause the investments costs, which are nothing else than the prices of raw materials and machines, to fall as well, since the production of said raw materials and machines is governed by exactly the same mechanisms.
As you can easily see – just insert smaller numbers for I into the formulas and see what happens – this counteracts the problems that Marx foresaw. Marx was aware of said effects, but he was convinced that the effects were too small to change the eventual fate of capitalism according to his model.
That is what was wrong in his economic theories.
But first, let me state that I am not familiar with the English terminology of Economics, so the economists among you will probably find quite a few terms they are unfamiliar with, as I will have to translate the German terms in the way they sound best to me.
Why Marx was wrong
To understand why Marx was convinced that the economic model of capitalism – as it presented itself in the middle of the 19th century – was doomed to fail, we will first have to take a look at the economic theory of the time, which is today called the “classic” economic theory.
According to classic theories as put forth by David Ricardo, among others, three factors are needed to produce goods: land, capital, and work. The yield of production goes mainly to the landowners – this is called the “rent” – and the capitalists – this is called “profit” – while the workers receive subsistence wages – in theory, the exact amount that enables them to stay alive and productive; the model assumes that there are more than enough worker eager to work at subsistence level, so capitalists would not have to offer more than that to any worker. The exact mechanism that determines the distribution of rent and profit is shown in Ricardo´s “grain model”; however, explaining that would go too far off-topic here.
According to Marx, there is only one factor involved in production: work. He assumed that, since products (the result of work) and land could be freely traded for capital, and vice versa, capital and land were really just “accumulated work”. He also said that since the land is not used up in any way by production (just temporarily occupied) there is no way that a landowner deserves any profit or rent out of providing the land.
For example, to produce a wooden table, a man would have to spend four hours cutting a tree, another four hours to process the tree into the proper boards and other pieces of wood, and yet another four hours to make a table from the processed wood. Thus, the value of a table, expressed in terms of work, is 12 hours.
However, workers produce more than they need to restore their own productivity – more than the subsistence wage of Ricardo´s model. If we assume that a capitalist runs a table factory, he would have to buy the processed wood for each table for 8 hours´ worth of money and hire workers to do 4 hours of further work on each table. Assuming, for example, a 8 hour workday, each worker can build two table each day; his subsistence wage for that workday, however, is less than 8 hours´ worth of money. This difference, the profit, goes to the capitalist. The same is, of course, true for the woodcutter´s camp and the sawmill, where the tree is cut down and processed. At each step, workers do their work for less than what they produce.
Since, according to Marx´s theory, the value of the table is made up completely of work, he proposed that the workers ultimately deserve all of the profit that is derived from that table, while in reality, they received none of it. This is what he called the “exploitation of the working class”.
Marx´s economic model says that the value of each profits is made up of three part – “dead work”, “living work” and “unpaid work”.
Dead work is the sum of all the raw materials, tool wear & tear and other “dead” factors that go into a product. For the table factory example, that is 8 hours. (I´ll abbreviate it with I for “investment”)
Living work is the wages that the workers are paid. Let us assume that this is 2 hours´ worth per table. (I´ll abbreviate it with W for “wages”)
Unpaid work is the profit that the capitalist – here, the table factory´s owner – derives from a product. Assuming that the table´s value is 12 hours, that would be 2 hours. (P for “profits”)
The “profit ratio” R of a production is the profit per unit of costs – how much money can be made with a production process per unit of capital put into it: P/(I+W)= R – in our example 2/(2+8)= .2
The “organic composition” O shows how much of the costs consists of dead work – investments that have to be made up front to be able to produce (it is assumed that wages are not paid up front): I/(I+W)= O – in our example 8/(2+8)= .8
(In comparison, for the woodcutters´ camp investment would have been zero, wage would have been 2 hours, and profit another 2 hours. So profit ratio would be 2/(2+2)= .5 and organic composition 0/(2+0)= 0.
That shows that woodcutting provides more profits and needs less investments than carpentry. But that´s another part of economic theory.)
In Marx´ days, mechanization – replacing workers with machines, a process greatly accelerated by the invention of the steam engine – was trend in industrial production. Machines would enable workers to produce much more in the same time, at the cost of requiring big investments in machinery and, during production, wood or coal to power the machines.
Since there were to carpentry machines that I know of in that era, let us abandon the table factory example and talk about a cloth factory. For manual work, the same numbers as for carpentry still apply – 8 hours for wool bought from spinners, 2 hours for wages, and 2 hours for profit.
Now the capitalists buys a mechanical loom powered by a steam engine. With that, his workers can double their production. The factors change as follows: investment is 18 per worker (8 for the wool and 10 for coal and machinery wear & tear), wages remain at 2 per workers; since each worker now produces 24 hours´ worth of cloth instead of 12, profits rise to 4 hours per worker.
As we examine the profit rate – P/(I+W) = 4/(18+2) – remains at 0.2, although total profit has doubled. The organic composition – I/(I+W) = 18/(18+2) – rises from .8 to .9; this means that the capitalist now has to pay 90% of his costs up front. Assuming that he pays the wages after the cloth is sold, the capitalist now has to pay 4.5 hours´ worth of investment for each hour´s worth of profit, or, using money to keep things simple, $4.50 for each $1.00 of profit – up from $4.00 before the mechanization.
Capitalists would still implement mechanization, since, as the basic model had shown, they would accumulate more and more capital, and had to find ways to invest said capital to prevent exhausting the supply of willing, cheap workers – which would have driven up wages since they could no longer just have hired someone else if a worker demanded more than subsistence wages.
That way, capitalists are in a fix, since they would either eventually make less profit because of rising wages, or because of rising investment costs. According to Marx´s theory, this problem would get progressively worse, to the point where it just didn´t pay off any more to invest money – since capitalists would have to invest more and more money for the same amount of profits – and all that before seeing even a single cent of these profits. That, according to Marx, would be the time when the working class would rise up and seize the production factors (and the profit) for themselves.
Are you still with me? Good. Don´t give up, we´re almost there.
(To tell the truth, at this point in the lecture I wondered “So why the **** is capitalism still around?”)
On the other hand, if we assume that the capitalists will try to mechanize their production and/or hire more workers, balancing both problems in an effect to minimize their total effect, total production – and thus, supply of goods – will necessarily increase according to the formula (productivity per worker)*(total number of employed workers), while demand rises in proportion with the number of hired workers – or more exactly, with the amount of wages paid, which, in this model, is about the same. Supply rising faster than demand will inevitably lead to falling prices. That, in turn, will cause the investments costs, which are nothing else than the prices of raw materials and machines, to fall as well, since the production of said raw materials and machines is governed by exactly the same mechanisms.
As you can easily see – just insert smaller numbers for I into the formulas and see what happens – this counteracts the problems that Marx foresaw. Marx was aware of said effects, but he was convinced that the effects were too small to change the eventual fate of capitalism according to his model.
That is what was wrong in his economic theories.
