 Marxists believe that market is very imperfect coordinating mechanism. Although initially it plays positive role in stimulating fast economic progress, it is incapable to achieve smooth economic coordination in mature capitalism. Business cycle with periods of fast growth followed by deeper and deeper
depressions, growing army of unemployed, excess production on one hand and poverty and misery on the other, these all are symptoms of market anarchy. |
| These symptoms are also manifestations of the 'basic contradiction' of the market economy: the contradiction between value and use value. Commodity is being produced for the use by somebody else, but when the producer makes his decisions he does not yet know whether consumers will find his commodity useful. This can be found only after it was delivered to the market, but at that point the labor was already expended and means of production used. If the consumer does not find the commodity useful the producer cannot realize its value, which means that his labor and other inputs were wasted. In other words the imperfection of market results - according to Marx - from the fact that decisions about what and how much to produce are not ex ante coordinated with consumption decisions. Market gives its signals too late, only after the goods were already produced and labor and other resources may have been wasted on something that could not be sold. All that is in a great extent due to the fact that in capitalism the essence of the relations of production is obscured by their commodity form of appearance (commodity fetishism). |
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The quality of market coordination has not remained unchanged. In early capitalism it was all right but as the economy grew and technology progressed the quality of market coordination worsened. That has aggravated contradictions which must eventually trigger the revolutionary destruction of capitalism and lead to the creation of a new economic system in which decisions on production and consumption are ex ante rationally coordinated by central plan. The basic idea is that the achievements of the capitalist market economy undermine its coordinative ability. Market prepares its own demise and transition to central planning.
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| Under capitalism market leads to rapid technological change which brings concentration of production into larger and larger economic units and elimination of small units. As a result competition weakens, becomes imperfect and eventually monopolistic. Under monopoly conditions, however, market does not work well. Big monopolies start planning themselves and government intervenes into the economy. Finally market must be completely replaced by central planning. |
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Why does capitalist market lead to rapid technological progress? This follows from profit maximization. Because according to Marx profit is only 'transformed' surplus value, i.e. workers surplus labor, increase of profit requires to produce more surplus value. There are three ways how capitalists can achieve that:
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In early capitalism the first two ways were pursued resulting in
inhumanly long working hours, miserable wages, employment of young children and generally terrible working conditions. It could not continue further. Workers began to revolt. Soon capitalists discovered that they can attain higher profits by implementing new technologies, i.e. by increasing labor productivity. When labor productivity increases in the production of subsistence goods that enter into the determination of the value of labor power the general wage level falls and all the capitalists gain. But more importantly capitalists learned that they can gain enormously if they succeed to increase the productivity in their own firm above the average of their competitors. Note that labor value is determined by the socially necessary - i.e. average - conditions and therefore labor which is more productive produces more value and surplus value during the same period of time. This brings an increase of profits above the average. But such an extraordinary profit is only temporary. When the competitors see higher profits they also adopt the more progressive technology and as a result the average productivity increases and with it the labor value of the commodity declines. The original leader looses his edge and his extra profit vanishes. The only way to reap higher profits permanently is to innovate again and again, to be always one step ahead of the others. This is why the capitalist 'relations of production' result in a fast and incessant technical progress. But innovations and technical progress need capital investment. Larger the capital, more easy it is to sponsor research and development and more easy it is to keep the productivity ahead of competitors.
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| If the capitalist wants his profit to grow he must save and reinvest part of it. This is called accumulation of capital. Suppose that the initial capital of some capitalist is $100 and his rate of profit is 10% bringing him $10 of profit. If he/she consumes all of $10 then the next period's capital remains to be $100 bringing again only $10 of profit. If, however, half of the profit is saved and reinvested the next period's capital will be $105 bringing $10.5 of profit. If the capitalist continues to accumulate the same way for 10 periods his capital will grow steadily. |
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Everything
growths by 5% rate of growth gA = rA sA = (.1)(.5) = .05 |
Everything growths by 10.5% rate of growth. gB = rB sB = (.15)(.7) = .105 |
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From accumulation of capital Marx proceeded to deduce that over the time larger and larger share of the total capital would become concentrated in the hands of a smaller and smaller group of richest capitalists. He called this process concentration of capital. His conclusion is based on two assumptions:
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Now suppose that in the whole economy there is one big capital B growing at the rate 10.5% and 10 identical small capitals A all growing at the rate 5%. Clearly the share of the big capital in the total capital will increase as shown in the following table |
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This process of concentration of capital would be further accelerated by the fact that many small capitalists would not withstand competition with the big capitalist and would bankrupt. In addition to that, the new forms of the 'centralization' of capital are emerging to help implementation of new technologies requiring very large scale production. By centralization of capital Marx meant amalgamation of existing smaller capitals through the banking system and joint stock companies. |
| The modern mass-production technology substitutes labor with capital and causes large scale and permanent unemployment. This in turn pushes wages down bellow the subsistence level causing immiseration of the proletariat. Increasing capital/labor ratio (organic composition of capital) causes declining tendency of the profit rate which undermines incentives for investment and slows down the overall rate of economic growth. The economy becomes more and more unstable. As the time passes depressions become longer and deeper. Concentration of capital and production in a few huge production units causes monopolization and consequently a failure in market coordination. It also slows down technological progress, because monopolies are not under the pressure to innovate. Society is polarized with most of the wealth concentrated in the hands of few super rich and with masses of poor living in misery on the other end. Class struggle is intensified to the point of violent revolution. This is the mechanism which according to Marx leads necessarily to a social revolution which would destroy capitalism and create a new socio-economic system socialism. |
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