Excerpts from 
Oskar Lange: 
Marxian economics and
Modern Economic Theory.


The Review of Economic Studies,
June 1935

 

The Marxist’s claim to superiority for his economics is that ‘bourgeois’ economics has utterly failed to explain the fundamental tendencies of the development of the Capitalist system. 
These tendencies are:
(1)  the constant increase of the scale of production which by substituting large-scale for small-scale production has led to the transition from the free-competitive Capitalism of the nineteenth century to the present monopolistic (or rather oligopolistic) Capitalism;
(ii)  the substitution of interventionism and ‘planning’ for laisser-faire; 
(iii)  the transition from free trade to high protectionism and economic nationalism in international relations;
(iv)  the constant expansion of the capitalist method of production in non-capitalist countries, which as long as competition was free led to a relatively peaceful permeation of capitalist economy and Western civilization through the whole world, but which with oligopolistic and interventionist Capitalism leads to imperialist rivalry among the principal capitalist powers; 
(v)  the increase of economic instability in the capitalist system, which by destroying the economic and social security of the population of capitalist countries, causes them to rebel against the existing economic system, whatever the ideology and program underlying this rebellion (Socialism or Fascism ).
The claim that ‘bourgeois’ economists have failed to explain these tendencies in the development of Capitalism, and to formulate them into a theory of economic evolution seems to be justified indeed. How utterly they failed to do so is conspicuous from the fact that many of them denied this development until the phenomena apparently became so overwhelming as to be familiar to anybody but the professional economist who was always the last to recognize their existence.
     On the other hand, Marxian economics must be admitted to have anticipated these tendencies correctly, and to have developed a theory which investigates the causal mechanism of this evolution and thus shows its inevitability.      

 

But this superiority of Marxian economics is only a partial one. There are some problems before which Marxian economics is quite powerless, while ‘bourgeois’ economics solves them easily.   
       What can Marxian economics say about monopoly prices?
  What has it to say on the fundamental problems of monetary and credit theory?
  What apparatus has it to offer for analyzing the incidence of a tax, or the effect of a certain technical innovation on wages?
  And (irony of Fate!) what can Marxian economics contribute to the problem of the optimum distribution of productive resources in a socialist economy?
Clearly the relative merits of Marxian economics and of modern ‘bourgeois’ economic theory belong to different ‘ranges’. Marxian economics can work the economic evolution of capitalist society into a consistent theory from which its necessity is deduced, while ‘bourgeois’ economists get no further than mere historical description. On the other hand, ‘bourgeois’ economics is able to grasp the phenomena of the everyday life of a capitalist economy in a manner that is far superior to anything the Marxists can produce.

 

 Economic theory as developed by the Austrian, Marshallian and Lausanne schools is essentially a static theory of economic equilibrium analyzing the economic process under a system of constant data and the mechanism by which prices and quantities produced adjust themselves to changes in these data..
All that is assumed is the existence of the institutions necessary for the functioning of an exchange economy. But the consequences of the additional institutional’ datum which distinguishes Capitalism from other forms of exchange economy, i.e. the existence of a class of people who do not possess any means of production, is scarcely examined. Now, Marxian economics is distinguished by making the specification of this additional institutional datum the very cornerstone of its analysis, thus discovering the clue to the peculiarity of the Capitalist system by which it differs from other forms of exchange-economy.
The Marxian theory of economic evolution is based on the contention that it is possible, in certain circumstances, to deduce the necessity for, and also the direction of a certain change of economic data, and that such a change follows, in a particular sense, from the very mechanism of the economic process in capitalist society.
Thus a ‘law of development’ of the Capitalist system is established. Hence the anticipation of the future course of events deduced from the Marxian theory is not a mechanical extrapolation of a purely empirical trend, but an anticipation based on the recognition of a law of development and is, with certain reservations, not less stringent than an anticipation based on the static theory of economic equilibrium such as, for instance, the anticipation that a rise in price leads, under certain circumstances, to a decline of the amount of commodity demanded.

 

It is not the specific economic concepts used by Marx, but the definite specification of the institutional framework in which the economic process goes on in capitalist society that makes it possible to establish a theory of economic evolution different from mere historical description.
Most orthodox Marxists, however, believe that their superiority in understanding the evolution of Capitalism is due to the economic concepts with which Marx worked, i.e. to his using the labor theory of value.
 That they are wrong can be easily shown by considering the economic meaning of the labor theory of value. It is nothing but a static theory of general economic equilibrium. In an individualistic exchange economy, based on division of labor, in which there is no central authority to direct which commodities, and in what quantities, are to be produced, the problem is solved automatically by the fact that competition enforces such a distribution of productive resources between the various industries that prices are proportional to the amount of labor necessary for producing the respective commodities (these being the ‘natural prices’ of classical economics). In essence this is as static as the modern theory of economic equilibrium,
Thus the labor theory of value has no qualities which would make it, from the Marxist point of view, superior to the modern more elaborate theory of economic equilibrium. It is only a more primitive form of the latter, restricted to the narrow field of pure competition and even not without its limitations in this field.
Thus the labor theory of value cannot possibly be the source of the superiority of Marxian over ‘bourgeois’ economics in explaining the phenomena of economic evolution. In fact, the adherence to an antiquated form of the theory of economic equilibrium is the cause of the inferiority of Marxian economics in many fields.

 

In the Marxian system the labor theory of value serves also to demonstrate the exploitation of the working class under Capitalism, ...... It is this deduction from the labor theory of value which makes the orthodox Marxist stick to it. But the same fact of exploitation can also be deduced without the help of the labor theory of value.
.....the crucial point in the Marxian theory is the application of the labor theory of value to the determination of wages. If the market price of cotton cloth exceeds its ‘natural price’ capital and labor flow into the cotton cloth industry until, through increase of the supply of cotton cloth, its market price conforms to the ‘natural price’. But this equilibrating mechanism, which is the foundation of labor theory of value, cannot be applied to the labor market. If wages rise above the ‘natural price’ of labor power so as to threaten to annihilate the employers’ profits, there is no possibility of transferring capital and labor from other industries to the production of a larger supply of labor power. In this respect labor power differs fundamentally from other commodities.
Therefore, in order to show that wages cannot exceed a certain maximum and thus annihilate profits a principle different from the ordinary mechanism making market prices tend towards ‘natural prices’ must be introduced. The classical economists found such a principle in the theory of population.
... Marx rejected the Malthusian theory of population, contending that even without such reproductive facilities wages could not rise so as to annihilate profits. For Capitalism creates, according to Marx, its own surplus population (industrial reserve army) through technical progress, replacing workers by machines. The existence of the surplus population created by technical progress prevents wages from rising so as to swallow profits.
 Thus technical progress is necessary to maintain the capitalist system ,.... That the labor theory of value is not necessary for this argument is easily seen, for its application to the labor market is a purely formal one, since the equilibrating mechanism which is at the basis of this theory does not work on the labor market.

 

 

 

 

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