Sunday, 4 September 2011


There have been several people pushing the ideas of Karl Marx recently, from the FT's Alphaville, UBS economist George Magnus to the "neutral" BBC article that appears to have no author.

Marx was a terrible economist.

At the heart of Marxist economic theory, in fact I would say its central pillar is the Labour Theory of Value. LTV asserts incorrectly that the value of a good is the amount of man hours required to create it. So a portion of hot chilli con carne taking an hour to make is worth the same amount as a few litres of freshly squeezed ice cold orange juice. The most common objection is that Marx's theory is demonstrably wrong because it does not include input costs, ie. a gold ring is worth more than a silver ring. Marx took that simple incorrect theory and then proceeded to the conclusion that the difference between the selling price and the labour value of the product is the profit, which the bourgeois capitalists extract.

Marx doesn't really care if its by ripping off the consumer (I think because he believes they will act in self interest in a free market), but cares about the extraction coming at the expense of those providing the labour. He believes that the value that capitalist create is purely their ability to own the means of production enabling them to purchase labour at an unfair price.

In short, capital, capitalists, inventors and entrepreneurs only generate returns because they are in a privileged position to manipulate workers.

This is utter nonsense. If anything in a democracy it is labour that is able to manipulate the system rather than capital, witness the UAW or public sector unions destroying the fiscal position of their employers.

In our earlier example, the reason on a very hot day that cold orange juice will make a profit and the hot chilli con carne will not, is not because the owner of the means of production is able to bully his workforce, but because the decision to allocate capital correctly provided a popular and valuable choice to the market.

Additionally Marx makes some rather bold predictions that are neglected in the article above. According to Marx, what should be happening in the West is that profit margins should be falling, leading to companies cutting the pay of their staff, there should be mass over production of goods and chronic under consumption as workers purchasing power declines.

Instead we are now seeing very high profit margins, higher worker productivity and pay but weak cyclical demand. That really has almost nothing to do with Marx, other than the enormous sense of entitlement in large parts of Europe and a dollop of leftwing hunger to return to the rhetoric of class war.

What I personally find particularly jarring is the juxtaposition of the West, with a massive social benefits system, free education, health care, and living standards the highest they have ever been in the history of mankind, that is nominally a free market system, that consumes the enormous production of a supposedly communist country, with a much lower standard of living, poor working conditions, low/no employee rights, no benefit system, no state healthcare and pensions. Yet it is those in the rich west complaining that they don't have a big enough slice of the income and resources pie??

It is as absurd to claim the "system" isn't fair because your neighbour has a bigger mansion than you in Chelsea.

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