New on FinoLib · Volume III: Finance Encyclopedia
I have just published a new article on FinoLib, my free finance education library: Marx’s Critique of Capitalism and the Marginalist Revolution. It is part of Volume III: Finance Encyclopedia. Below is a summary of the topic in plain, expert language, so you can follow the idea even before you open the full article.
9.3 Marx’s Critique of Capitalism
The idea in plain words
Karl Marx argued that profit comes from surplus value, the value workers produce beyond their wages. He predicted that competition and mechanization would push the profit rate down and drive capitalism into crisis. The marginalists displaced his labor theory of value within a decade, but his questions about who gets what, and why crises happen, remain.
Key points
■In Marx’s own example the rate of surplus value is s ÷ v = 100% while the rate of profit is s ÷ (c + v) = 18%.
■Raising machinery from $410 to $610 with wages and surplus unchanged cuts the profit rate to 12.9%; that was his engine of crises.
■The weak link: mechanization also raises productivity, which raises surplus value and can offset the fall.
A closer look
Karl Marx offered the most influential critique of the classical framework Smith and Ricardo had built. The primary texts. The Communist Manifesto, written with Friedrich Engels and first published in February 1848, opens its first chapter: “The history of all hitherto existing society is the history of class struggles.” Capital, Volume One (1867), supplies the economics. Marx took the classical labor theory of value (that the value of a good reflects the labor needed to make it) and turned it on the wage bargain. A worker sells the capacity to work for a wage that covers the cost of living, but works longer than it takes to produce that value. The difference is surplus value, kept by the owners of capital rather than by the workers who produced it.
Decision rule
This is a reading rule. When you meet Marx’s vocabulary, separate three layers before agreeing or disagreeing. If the claim is an accounting identity (output is divided between wages and profits), test it against national accounts. If it rests on the labor theory of value (only labor creates value, so profit is unpaid labor), know that mainstream economics abandoned that theory in the 1870s, so the conclusion needs another support.
The costliest mistake
Confusing the rate of surplus value with the rate of profit. In Marx’s own example the first is s ÷ v = 100% and the second is s ÷ (c + v) = 18%, a ratio of 100 ÷ 18 = 5.6 times. Marx noted that the two were “generally confounded”; readers still confound them, quoting the 100% as if it were a return on capital. The same error appears in modern form whenever a margin on labor cost is presented as a return on all capital employed.
9.4 The Marginalist Revolution
The idea in plain words
In the 1870s, a group called the marginalists explained value by how useful the next unit is, not by the labor that went into it. Jevons and Menger did this in 1871, and Walras in 1874. That solved the water-diamond paradox: water is essential but cheap because there is plenty, while a diamond is less useful but rare. Marshall later joined it to production costs, Mises and Hayek treated prices as a way of sharing knowledge, and Schumpeter made innovation the engine of growth.
Key points
■Price reflects the marginal unit: a household paying $2 a gallon buys five gallons worth $163 to it, a surplus of $153.
■Marshall’s scissors: demand (utility) and supply (cost) set price together.
■Hayek (1945): the price system communicates knowledge that no planner can gather.
Decision rule
Decide on the margin, not the average. If the value of the next unit (the next project, the next hire, the next dollar of advertising) exceeds its full cost, including the cost of capital, do it; if not, stop, however profitable the business is on average. Ignore sunk costs entirely: money already spent is the same whichever way you decide. Ignore the rule when the choice is all-or-nothing (a factory that cannot be built in halves); then compare total value with total cost.
The costliest mistake
Approving projects by average return. A company has $100 million invested earning 15%, or $15 million a year, and a cost of capital of 8%. A new $20 million project earns 6%, or $1.2 million. The average return after the project is (15 + 1.2) ÷ 120 = 13.5%, still well above 8%, so it looks fine. At the margin it destroys value: $20 million × (6% − 8%) = −$0.4 million a year, worth −$0.4 million ÷ 8% = −$5 million if it runs indefinitely.
What the full article covers
In the full article I take you through these sections:
■9.3 Marx’s Critique of Capitalism
■9.4 The Marginalist Revolution
It includes a look under the hood at the mechanics, a clear decision rule, the one mistake that costs people the most, a recap, a reveal-on-click quiz and the official sources behind every figure.
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