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Classical Economics, Lecture 5 with David Gordon - Mises Academy

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The Ludwig von Mises Institute
The Ludwig von Mises Institute

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Classical Economics, Lecture 5 Marxism
Marxs Theory of History Marx says that history is determined by the growth of the forces of production. Its isnt entirely clear what Marx meant by this. A plausible view is that it means the technology that exists at a particular time. Rothbard here follows Mises, who in turn took this view from the Russian Marxist G.V. Plekhanov, The Development of the Monist View of History (1895)
Relations of Production As the forces of production develop, they determine the relations of production. Relations of production is also not clearly defined. It basically means the way production is organized, especially the division into classes. This includes legal relations.
The Superstructure Every society has a system of beliefs, based on the interests of the ruling class, that support the way production is organized. This system of beliefs doesnt aim at truth. It is ideological. This view raises a problem about the status of Marxs own theory. Is it ideological too?
Progress in History The forces of production have a tendency to grow continually. The relations of production are those best suited to develop the forces of production at that time. As the forces of production grow, the system that formerly best developed the forces of production stops being the best system. The old system becomes fetters on the development of the forces of production.
Progress Continued The systems just mentioned are Slavery---The Ancient World Feudalism-The Middle Ages Capitalism-The Modern World Each of these systems is characterized by class conflict. There is also an initial stage of primitive communism.
Oriental Despotism Marx also recognized another system, the Asiatic mode of production. This involved slavery, but it was highly centralized under a monarch. Particular economic features of society, especially centralized control of water and irrigation, made this system possible. Karl Wittfogel, in Oriental Despotism, used the Asiatic mode to analyze Communist rule.
More Progress A future system, socialism, will be established through a revolution. Class conflict will no longer exist, after the dictatorship of the proletariat stamps out opposition.
Whats Wrong With the Theory? Mises and Rothbard both point out that the forces of production dont grow by themselves. Only individuals act. The growth in the forces of production depends on ideas that people have. Institutional and legal relations will also be important. Marx has the direction of causation wrong: changes in the relations of production cause changes in the forces of production.
Whats Wrong Continued Also, Marx never explained how the forces of production are supposed to determine the relations of production. Why should a particular invention, e.g., the hand-mill, cause an entire social system? If the issue is, what system would best develop the forces of production, isnt the answer always capitalism? The answer doesnt vary at different times.
Classes For Marx, what is important for capitalism is the division of two classes, bourgeoisie and proletariat. Why should be the only two classes that matter? There are all sorts of ways people can be classified. Why would someone follow his class interest over his individual interest, the interest of his family, or other interests?
Classes Continued Rothbard makes a deeper criticism of Marx on class. In the free market, the relations between capitalists and workers arent antagonistic. People engage in exchange for mutual benefit. Antagonistic class relations arise only when the State enables one group to prey on another. This is a system of castes rather than economic classes.
Classes The French classical liberals Charles Comte, Charles Dunoyer, and Augustin Thierry developed this libertarian theory of class. Marx was familiar with it and sometimes used it, e.g., in The Eighteenth Brumaire. Franz Oppenheimer and Albert Jay Nock extended the libertarian theory in the 20th century.
Raw Communism Rothbard follows Robert Tucker in saying that Marx realized that when capitalism was overthrown, the initial situation would be worse than it was under capitalism. Workers would be dominated by envy for the possessions of others and by hostile feelings. This has been suppressed in Marxs later writings.
The Labor Theory of Value Marxs analysis of capitalism rests on the labor theory of value. Marx argues that exchange between two commodities implies that the two commodities are equal. The equality cant be in the use values of the commodities; these are all different.
Labor Theory Continued The commodities, if they are equal, must be equal to a third thing. This third thing can only be labor. If so, the value of a commodity depends on the number of labor hours required to produce it.
Problems with the Labor Theory An exchange does not require an equality between the commodities that are traded. To the contrary, a double inequality is required. If an equality were required, it wouldnt follow that the equality would have to be one of labor.
Further Problems Some labor is more efficient than other labor. If it takes me longer to make a bookcase than it would take a trained carpenter, it doesnt follow that my bookcase would be worth more. Also, how can you compare different types of labor?
Marxs Answer Marx answered the first point by saying that it was the socially necessary labor time required to produce a commodity that determined its value. My bookcase wouldnt be worth more than a bookcase that was more efficiently produced. Different kinds of labor can be compared with each other by the use of the market. The solution to both of these problems is circular. The labor theory is supposed to explain market prices but it presupposes them.
The Point of the Labor Theory Marx thought that the labor theory was the means for understanding the laws of motion of capitalism. Note the Newtonian reference here. The capitalist starts with money. He buys and rents land, labor, machinery, etc. and engages in production. He then sells what he has produced. Unless he has made a mistake, he earns a profit. In symbols, we have MCM卒. How is this increase possible?
Profit The worker is selling the capitalist his labor power. That is, the capitalist gets a certain number of hours of labor time, during which the worker can produce goods of economic value for the employer. He doesnt pay the worker the full labor value of what the laborer produces. What does he pay him? This is determined by the labor theory of value.
Profit Continued He pays him the labor cost required to produce the workers labor power. More simply, he pays what is required for the laborer to live. In other words, labor earns a subsistence wage. Rothbard thinks that this should be interpreted strictly. If taken this way, the theory is obviously false.
B旦hm-Bawerks Problem If this is how profit arises, then the rate of profit depends only on how much labor is employed. Additions to capital dont add to profit. If this is true, then those in industries with a lot of labor and little capital should earn a higher rate of profit. In fact, the average profit for each industry tends to be the same.
Problems Continued B旦hm-Bawerk pointed out that Marx was unable to explain this contradiction. As capital increases, the rate of profit will fall. This has not been borne out by the facts. Marx also thought that the workers position would keep getting worse. If they earn subsistence wages, how can it get worse?

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Classical Economics, Lecture 5 with David Gordon - Mises Academy

  • 2. Marxs Theory of History Marx says that history is determined by the growth of the forces of production. Its isnt entirely clear what Marx meant by this. A plausible view is that it means the technology that exists at a particular time. Rothbard here follows Mises, who in turn took this view from the Russian Marxist G.V. Plekhanov, The Development of the Monist View of History (1895)
  • 3. Relations of Production As the forces of production develop, they determine the relations of production. Relations of production is also not clearly defined. It basically means the way production is organized, especially the division into classes. This includes legal relations.
  • 4. The Superstructure Every society has a system of beliefs, based on the interests of the ruling class, that support the way production is organized. This system of beliefs doesnt aim at truth. It is ideological. This view raises a problem about the status of Marxs own theory. Is it ideological too?
  • 5. Progress in History The forces of production have a tendency to grow continually. The relations of production are those best suited to develop the forces of production at that time. As the forces of production grow, the system that formerly best developed the forces of production stops being the best system. The old system becomes fetters on the development of the forces of production.
  • 6. Progress Continued The systems just mentioned are Slavery---The Ancient World Feudalism-The Middle Ages Capitalism-The Modern World Each of these systems is characterized by class conflict. There is also an initial stage of primitive communism.
  • 7. Oriental Despotism Marx also recognized another system, the Asiatic mode of production. This involved slavery, but it was highly centralized under a monarch. Particular economic features of society, especially centralized control of water and irrigation, made this system possible. Karl Wittfogel, in Oriental Despotism, used the Asiatic mode to analyze Communist rule.
  • 8. More Progress A future system, socialism, will be established through a revolution. Class conflict will no longer exist, after the dictatorship of the proletariat stamps out opposition.
  • 9. Whats Wrong With the Theory? Mises and Rothbard both point out that the forces of production dont grow by themselves. Only individuals act. The growth in the forces of production depends on ideas that people have. Institutional and legal relations will also be important. Marx has the direction of causation wrong: changes in the relations of production cause changes in the forces of production.
  • 10. Whats Wrong Continued Also, Marx never explained how the forces of production are supposed to determine the relations of production. Why should a particular invention, e.g., the hand-mill, cause an entire social system? If the issue is, what system would best develop the forces of production, isnt the answer always capitalism? The answer doesnt vary at different times.
  • 11. Classes For Marx, what is important for capitalism is the division of two classes, bourgeoisie and proletariat. Why should be the only two classes that matter? There are all sorts of ways people can be classified. Why would someone follow his class interest over his individual interest, the interest of his family, or other interests?
  • 12. Classes Continued Rothbard makes a deeper criticism of Marx on class. In the free market, the relations between capitalists and workers arent antagonistic. People engage in exchange for mutual benefit. Antagonistic class relations arise only when the State enables one group to prey on another. This is a system of castes rather than economic classes.
  • 13. Classes The French classical liberals Charles Comte, Charles Dunoyer, and Augustin Thierry developed this libertarian theory of class. Marx was familiar with it and sometimes used it, e.g., in The Eighteenth Brumaire. Franz Oppenheimer and Albert Jay Nock extended the libertarian theory in the 20th century.
  • 14. Raw Communism Rothbard follows Robert Tucker in saying that Marx realized that when capitalism was overthrown, the initial situation would be worse than it was under capitalism. Workers would be dominated by envy for the possessions of others and by hostile feelings. This has been suppressed in Marxs later writings.
  • 15. The Labor Theory of Value Marxs analysis of capitalism rests on the labor theory of value. Marx argues that exchange between two commodities implies that the two commodities are equal. The equality cant be in the use values of the commodities; these are all different.
  • 16. Labor Theory Continued The commodities, if they are equal, must be equal to a third thing. This third thing can only be labor. If so, the value of a commodity depends on the number of labor hours required to produce it.
  • 17. Problems with the Labor Theory An exchange does not require an equality between the commodities that are traded. To the contrary, a double inequality is required. If an equality were required, it wouldnt follow that the equality would have to be one of labor.
  • 18. Further Problems Some labor is more efficient than other labor. If it takes me longer to make a bookcase than it would take a trained carpenter, it doesnt follow that my bookcase would be worth more. Also, how can you compare different types of labor?
  • 19. Marxs Answer Marx answered the first point by saying that it was the socially necessary labor time required to produce a commodity that determined its value. My bookcase wouldnt be worth more than a bookcase that was more efficiently produced. Different kinds of labor can be compared with each other by the use of the market. The solution to both of these problems is circular. The labor theory is supposed to explain market prices but it presupposes them.
  • 20. The Point of the Labor Theory Marx thought that the labor theory was the means for understanding the laws of motion of capitalism. Note the Newtonian reference here. The capitalist starts with money. He buys and rents land, labor, machinery, etc. and engages in production. He then sells what he has produced. Unless he has made a mistake, he earns a profit. In symbols, we have MCM卒. How is this increase possible?
  • 21. Profit The worker is selling the capitalist his labor power. That is, the capitalist gets a certain number of hours of labor time, during which the worker can produce goods of economic value for the employer. He doesnt pay the worker the full labor value of what the laborer produces. What does he pay him? This is determined by the labor theory of value.
  • 22. Profit Continued He pays him the labor cost required to produce the workers labor power. More simply, he pays what is required for the laborer to live. In other words, labor earns a subsistence wage. Rothbard thinks that this should be interpreted strictly. If taken this way, the theory is obviously false.
  • 23. B旦hm-Bawerks Problem If this is how profit arises, then the rate of profit depends only on how much labor is employed. Additions to capital dont add to profit. If this is true, then those in industries with a lot of labor and little capital should earn a higher rate of profit. In fact, the average profit for each industry tends to be the same.
  • 24. Problems Continued B旦hm-Bawerk pointed out that Marx was unable to explain this contradiction. As capital increases, the rate of profit will fall. This has not been borne out by the facts. Marx also thought that the workers position would keep getting worse. If they earn subsistence wages, how can it get worse?