Karl Marx

Published: Oct 2013

These are the closing lines to ‘The Communist Manifesto’ (1848), one of the better-known works of Karl Marx and close collaborator, Fredrick Engels. Although renowned as a revolutionary communist, Marx was also an eminent philosopher and economist, and is without a doubt the most influential socialist thinker to emerge in the 19th century. Marx’s work in economics laid the basis for the current understanding of labour and its relation to capital, and has influenced much of subsequent economic thought.

As a result of the 2007/8 global financial crisis, many economists have revisited Marx’s economic theory, in particular his theory of crisis. Marx believed that capitalism was a system of inherent and cyclic instability, driven by the tendency of the rate of profit to fall. In Volume III of ‘Das Kapital’, published posthumously in 1894, he wrote: “This mode of production produces a progressive relative decrease of the variable capital as compared to the constant capital, and consequently a continuously rising organic composition of the total capital. The immediate result of this is that the rate of surplus-value, at the same, or even a rising, degree of labour exploitation, is represented by a continually falling general rate of profit.”

The falling profit rate hits the mass of profit, which causes a crisis of over-accumulation. The mass of profit at this point is insufficient to fund the next stage of capital investment, as the rate of return is insufficient to attract finance. As a result, capital seeks alternative outlets, and crisis and devaluation ensues.

“This is in every respect the most important law of modern political economy, and the most essential for understanding the most difficult relations. It is the most important law from the historical standpoint. It is a law which, despite its simplicity, has never before been grasped and, even less, consciously articulated,” Marx wrote in ‘Grundrisse’ (1857).

In ‘Das Kapital’, Marx also wrote that companies’ pursuit of profits and productivity would naturally lead them to need fewer and fewer workers, creating an “industrial reserve army” of the poor and unemployed: “Accumulation of wealth at one pole is, therefore, at the same time accumulation of misery.” This has been used by a number of economists to explain the paradox of over-production and under-consumption.

“The more people are relegated to poverty, the less they will be able to consume all the goods and services companies produce,” wrote George Magnus, Senior Economic Adviser at UBS, in a Sydney Morning Herald column in late August 2011. “When one company cuts costs to boost earnings, it’s smart; but when they all do, they undermine the income formation and effective demand on which they rely for revenues and profits.”

Nouriel Roubini, the New York University economics professor known on Wall Street as “Dr. Doom” because of his accurate prediction of the crisis, agrees that Marx wasn’t “always wrong” about capitalism. In a blog entitled ‘Is Capitalism Doomed?’, which first appeared on Project Syndicate on 15th August 2011, Roubini wrote: “Karl Marx, it seems, was partly right in arguing that globalisation, financial intermediation run amok, and redistribution of income and wealth from labour to capital could lead capitalism to self-destruct (though his view that socialism would be better has proven wrong). Firms are cutting jobs because there is not enough final demand. But cutting jobs reduces labour income, increases inequality and reduces final demand.”

Roubini’s answer to the crisis is akin to Keynesianism, with government intervention through fiscal stimulus and stricter regulation of the financial system, as well as progressive taxation and investment in “human capital, skills, and social safety nets to increase productivity and enable workers to compete, be flexible and thrive in a globalised economy.” However, Marx’s answer was completely different. He argued for the complete overthrow of the capitalist system.

“Karl Marx, it seems, was partly right in arguing that globalisation, financial intermediation run amok, and redistribution of income and wealth from labour to capital could lead capitalism to self-destruct.”

Nouriel Roubini

As Engels said, in his eulogy at Marx’s funeral: “For Marx was before all else a revolutionist. His real mission in life was to contribute, in one way or another, to the overthrow of capitalist society and of the state institutions which it had brought into being, and to contribute to the liberation of the modern proletariat, which he was the first to make conscious of its own position and its needs, conscious of the conditions of its emancipation. Fighting was his element. And he fought with a passion, a tenacity and a success such as few could rival.”

Early life

Karl Marx was born on 5th May 1818 in Trier in Western Germany, the son of a successful Jewish lawyer. He studied law in Bonn and Berlin, where he became interested in the philosophical ideas of Hegel and joined the Young Hegelians. In 1841, he received a Doctorate in Philosophy from the University of Jena, based on his doctoral thesis ‘The Difference between the Democritean and Epicurean Philosophy of Nature’.

In 1843, after a short spell as journalist/editor on a radical newspaper in Cologne, Marx moved to Paris and joined another leftist newspaper as co-editor. It was there he became a revolutionary communist and met Engels, his lifelong friend. He began refining his views on socialism based upon Hegelian and Feuerbachian ideas of dialectical materialism. According to Engels: “Proceeding from the Hegelian philosophy of law, Marx came to the conclusion that it was not the state, which Hegel had described as the “top of the edifice”, but “civil society”, which Hegel had regarded with disdain, that was the sphere in which a key to the understanding of the process of the historical development of mankind should be looked for.”

“For Marx was before all else a revolutionist. His real mission in life was to contribute, in one way or another, to the overthrow of capitalist society and of the state institutions which it had brought into being.”

Frederick Engels

By the spring of 1845, Marx’s continued study of political economy, capital and capitalism had led him to the belief that the new political economic theory that he was espousing – scientific socialism – needed to be built on the base of a thoroughly developed materialistic view of the world. In 1848, on the eve of the French Revolution, Marx and Engels co-authored the pamphlet ‘The Communist Manifesto’, which asserted that all human history had been based on class struggles, but that these would ultimately disappear with the overthrow of capitalism by the working class to create a classless society.

In 1849, Marx moved to London, where he produced his magnum opus, ‘Das Kapital’. The first volume, ‘A Critique of Political Economy’, was published in his lifetime, while the remaining two volumes were edited by Engels after his friend’s death. Marx was a steadfast campaigner for socialism and was one of the founders of the International Workingmen’s Association, also known as the First International, in 1864.

He died on 14th March 1883 and was buried at Highgate Cemetery in London. His tombstone bears two messages: “Workers of all lands unite”, the final line of ‘The Communist Manifesto’, and “The philosophers have only interpreted the world in various ways – the point however is to change it”, which is from the ‘11th Thesis on Feuerbach’. In his speech at the funeral, Engels referred to Marx as “the greatest living thinker, who has ceased to think”.

‘Das Kapital’

The first volume of ‘Das Kapital’, ‘A Critique of Political Economy’, was published in 1867 and analysed the capitalist process of production. According to Engels: “It is the first work in which the actual relations existing between capital and labour, in their classical form such as they have reached in England, are described in their entirety and in a clear and graphic fashion.”

Volume I begins with an analysis of the idea of commodity production. A commodity is defined as a useful external object, produced for exchange on a market. Thus two necessary conditions for commodity production are the existence of a market, in which exchange can take place, and a social division of labour, in which different people produce different products, without which there would be no motivation for exchange.

“Marx suggests that commodities have both use-value and an exchange-value, initially to be understood as their price,” writes Jonathan Wolff in ‘The Stanford Encyclopaedia of Philosophy’ (2011). “The exchange value can be seen in terms of the labour input required to produce the commodity, or rather, the socially necessary labour, which is labour exerted at the average level of intensity and productivity for that branch of activity within the economy. Thus the labour theory of value asserts that the value of a commodity is determined by the quantity of socially necessary labour time required to produce it.”

Capitalism is distinctive, Marx argues, in that it involves not merely the exchange of commodities, but the advancement of capital, in the form of money, with the purpose of generating profit through the purchase of commodities and their transformation into other commodities which can command a higher price, and thus yield a profit.

According to Marx, profit is derived from the exploitation of the worker. In setting up conditions of production the capitalist purchases the worker’s labour power – the ability to labour – for the day. The cost of labour power is determined in the same way as the cost of every other. “In this case the value of a day’s labour power is the value of the commodities necessary to keep the worker alive for a day,” explains Wolff. “If such commodities take four hours to produce, then the first four hours of the working day is spent on producing value equivalent to the value of the wages the worker will be paid. This is known as necessary labour. Any work the worker does above this is known as surplus labour, producing surplus value for the capitalist. Surplus value, according to Marx, is the source of all profit.”

In Marx’s analysis labour power is the only commodity which can produce more value than it is worth, and for this reason it is known as variable capital. As industry becomes more mechanised, using more constant capital and less variable capital, the rate of profit ought to fall. For as a proportion less capital will be advanced on labour, and only labour can create value.

In Volume II, he shifts his focus from the sphere of production of commodities to the sphere of circulation. Circulation is crucial to the expansion of capital, for it is only through sale of commodities that produced surplus-value is realised in the form of profit. By raising the issue of economic crisis at a number of points in the text, Marx underscores the problematic nature at the point of interface between capitalist production and exchange. In Volume III Marx makes the prediction that the rate of profit will fall over time, and this is one of the factors which leads to the downfall of capitalism.

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