Marxian economics

Marx used dialectics, a method that he adapted from the works of Georg Wilhelm Friedrich Hegel. Dialectics focuses on relation and change, and tries to avoid seeing the universe as composed of separate objects, each with essentially stable unchanging characteristics. One component of dialectics is abstraction; out of an undifferentiated mass of data or system conceived of as an organic whole, one abstracts portions to think about or to refer to. One may abstract objects, but also—and more typically—relations, and processes of change. An abstraction may be extensive or narrow, may focus on generalities or specifics, and may be made from various points of view. For example, a sale may be abstracted from a buyer's or a seller's point of view, and one may abstract a particular sale or sales in general. Another component is the dialectical deduction of categories. Marx uses Hegel's notion of categories, which are forms, for economics: The commodity form, the money form, the capital form etc. have to be systematically deduced instead of being grasped in an outward way as done by the bourgeois economists. This corresponds to Hegel's critique of Kant's transcendental philosophy.[11]

Marx regarded history as having passed through several stages. The details of his periodisation vary somewhat through his works, but it essentially is: Primitive Communism – Slave societies – Feudalism – Capitalism – Socialism – Communism (capitalism being the present stage and communism the future). Marx occupied himself primarily with describing capitalism. Historians place the beginning of capitalism some time between about 1450 (Sombart) and some time in the 17th century (Hobsbawm).[12]

Marx defines a commodity as a product of human labour that is produced for sale in a market, and many products of human labour are commodities. Marx began his major work on economics, Capital, with a discussion of commodities; Chapter One is called "Commodities".

The worth of a commodity can be conceived of in two different ways, which Marx calls use-value and value. A commodity's use-value is its usefulness for fulfilling some practical purpose; for example, the use-value of a piece of food is that it provides nourishment and pleasurable taste; the use value of a hammer, that it can drive nails.

Value is, on the other hand, a measure of a commodity's worth in comparison to other commodities. It is closely related to exchange-value, the ratio at which commodities should be traded for one another, but not identical: value is at a more general level of abstraction; exchange-value is a realisation or form of it.

Marx argued that if value is a property common to all commodities, then whatever it is derived from, whatever determines it, must be common to all commodities. The only relevant thing that is, in Marx's view, common to all commodities is human labour: they are all produced by human labour.

Marx concluded that the value of a commodity is simply the amount of human labour required to produce it. Thus Marx adopted a labour theory of value, as had his predecessors Ricardo and MacCulloch; Marx himself traced the existence of the theory at least as far back as an anonymous work, Some Thoughts on the Interest of Money in General, and Particularly the Publick Funds, &c., published in London around 1739 or 1740.[13]

Marx placed some restrictions on the validity of his value theory: he said that in order for it to hold, the commodity must not be a useless item; and it is not the actual amount of labour that went into producing a particular individual commodity that determines its value, but the amount of labour that a worker of average energy and ability, working with average intensity, using the prevailing techniques of the day, would need to produce it. A formal statement of the law is: the value of a commodity is equal to the average socially necessary labour time required for its production. (Capital, I, Chap I – p. 39 in Progress Publishers, Moscow, ed'n.)

Marx's contention was that commodities tend, at a fairly general level of abstraction, to exchange at value; that is, if Commodity A, whose value is "V", is traded for Commodity B, it will tend to fetch an amount of Commodity B whose value is the same, "V". Particular circumstances will cause divergence from this rule, however.

Marx held that metallic money, such as gold, is a commodity, and its value is the labour time necessary to produce it (mine it, smelt it, etc.). Marx argued that gold and silver are conventionally used as money because they embody a large amount of labour in a small, durable, form, which is convenient. Paper money is, in this model, a representation of gold or silver, almost without value of its own but held in circulation by state decree.

Marx lists the elementary factors of production as:

1. labour, "the personal activity of man." (Capital, I, VII, 1.)
2. the subject of labour: the thing worked on.
3. the instruments of labour: tools, labouring domestic animals like horses, chemicals used in modifying the subject, etc.

Some subjects of labour are available directly from Nature: uncaught fish, unmined coal, etc. Others are results of a previous stage of production; these are known as raw materials, such as flour or yarn. Workshops, canals, and roads are considered instruments of labour. (Capital, I, VII, 1.) Coal for boilers, oil for wheels, and hay for draft horses are considered raw materials, not instruments of labour.

The subjects of labour and instruments of labour together are called the means of production.  Relations of production are the relations human beings adopt toward each other as part of the production process. In capitalism, wage labour and private property are part of the system of relations of production.

Calculation of value of a product (price not to be confused with value):

If labour is performed directly on Nature and with instruments of negligible value, the value of the product is simply the labour time. If labour is performed on something that is itself the product of previous labour (that is, on a raw material), using instruments that have some value, the value of the product is the value of the raw material, plus depreciation on the instruments, plus the labour time. Depreciation may be figured simply by dividing the value of the instruments by their working life; e.g. if a lathe worth £1,000 lasts in use 10 years it imparts value to the product at a rate of £100 per year.

${\displaystyle value=mp+lt}$,	Where:	${\displaystyle value}$	is the value of the product;
		${\displaystyle mp}$	is the value of the means of production;
		${\displaystyle lt}$	is the labour time.

The labour theory of value was initially introduced by the classical economists Adam Smith and David Ricardo, but was further developed in Marx’s work Capital. According to the labour theory of value, the value of a commodity equals the socially necessary labour time required to produce it.

The value of commodities is divided into two categories: use-value and exchange-value. Use-value is the usefulness of a commodity. Exchange-value is the proportion by which use-values of one kind are exchanged for use-values of other kinds. However, since the exchange-values are not arbitrary, there must be a common unit by which the goods can be equated. When the unique use-values of the goods are removed, the only value left is the labour time necessary to produce the commodity.[14]

Marx's theory of value differs from the classical view in his definition of labor. Marx separates it into two different types: concrete and abstract labor.[15] Concrete labor can be thought of as the unique characteristics of labor such as the work of a farmer versus a tailor. Abstract labor, on the other hand, is the general conceptualization of human labor.[16] It represents the expenditure of simple human labor power.[15] Concrete labor produces qualitatively different commodities; however, in order to equalize and compare the values of qualitatively different commodities quantitatively, their value must be measured in terms of abstract labor.[16] Abstract labor is the basic unit of value and is basis for Marx's labor theory of value.[15]

According to Marx, in capitalism, workers own their labor-power, but do not own the means of production through which they can actualize their labor power and generate use-values.[16] As a result, the workers must sell their labor and are alienated from it. The capitalist takes the use-values created by the workers.[16] However, the capitalist does not want these goods for their use-values, rather, he or she wants them for their exchange-values.[16] According to Marx, capitalists desire profit or surplus-value.[16] However, no surplus value can be created naturally. The labor process simply transforms value from one form into another. Thus, according to Marx, the only way for the capitalist to gain surplus-value is by paying the workers' exchange-value, not their use-value. The difference between these two values is the surplus-value generated.

According to Marx, the amount of actual product (i.e. use-value) that a typical worker produces in a given amount of time is the productivity of labour. It has tended to increase under capitalism. This is due to increase in the scale of enterprise, to specialisation of labour, and to the introduction of machinery. The immediate result of this is that the value of a given item tends to decrease, because the labour time necessary to produce it becomes less.

In a given amount of time, labour produces more items, but each unit has less value; the total value created per time remains the same. This means that the means of subsistence become cheaper; therefore the value of labour power or necessary labour time becomes less. If the length of the working day remains the same, this results in an increase in the surplus labour time and the rate of surplus value.

Technological advancement tends to increase the amount of capital needed to start a business, and it tends to result in an increasing preponderance of capital being spent on means of production (constant capital) as opposed to labour (variable capital). Marx called the ratio of these two kinds of capital the composition of capital.

Big business can maintain selling prices at high levels while still competing to cut costs, advertise and market their products. However, competition is generally limited with a few large capital formations sharing various markets, with the exception of a few actual monopolies (such as the Bell System at the time). The economic surpluses that result cannot be absorbed through consumers spending more. The concentration of the surplus in the hands of the business elite must therefore be geared towards imperialistic and militaristic government tendencies, which is the easiest and surest way to utilise surplus productive capacity.

Exploitation focuses on low wage workers and groups at home, especially minorities. Average earners see the pressures in drive for production destroy their human relationships, leading to wider alienation and hostility. The whole system is largely irrational since though individuals may make rational decisions, the ultimate systemic goals are not. The system continues to function so long as Keynesian full employment policies are pursued, but there is the continued threat to stability from less-developed countries throwing off the restraints of neo-colonial domination.

Paul A. Baran introduced the concept of potential economic surplus to deal with novel complexities raised by the dominance of monopoly capital, in particular the theoretical prediction that monopoly capitalism would be associated with low capacity utilization, and hence potential surplus would typically be much larger than the realized surplus. With Paul Sweezy, Baran elaborated the importance of this innovation, its consistency with Marx's labor concept of value and supplementary relation to Marx's category of surplus value.[46]

According to Baran's categories:

• Actual economic surplus: "the difference between what society's actual current output and its actual current consumption." Hence, it is equal to current savings or accumulation.
• Potential economic surplus: "the difference between that output that could be produced in a given natural and technical environment with the help of employable productive resources, and what might be regarded as essential consumption."

Baran also introduced the concept of planned surplus—a category that could only be operationalized in a rationally planned socialist society. This was defined as "the difference between society's 'optimum' output available in a historically given natural and technological environment under conditions of planned 'optimal' utilization of all available productive resources, and some chosen 'optimal' volume of consumption."[47]

Baran used the surplus concept to analyze underdeveloped economies (or what are now more optimistically called "developing economies") in his Political Economy of Growth.[47]