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September 2012 Policy Study, Number 12-9


A Short History of Economic Theory


Karl Marx: The Rise of Collectivism



Following the collapse of the Soviet Union in 1991, Marxism and its ideological offspring, communism, seemed a thing of the past. Today, Marxism has reentered the public arena with a vengeance, and discussions about socialism hover over public-policy debates. Now more than ever, it is critical to understand the economic policies shaped by Marx for his “classless society.”[31] In Das Capital, Karl Marx explained his theory of commodities and money, surplus value, the exploitative model of capitalism, and dialectic materialism, but had no grasp of the fundamental realities of a free-market economy.


Marx held that commodities and money were interchangeable and that the production of value within an economic system was a zero-sum game.[32] All items, claimed Marx, had a certain amount of “use-value,” an early precursor to the theory of utility.[33] Putting forth the equation “C-M-C,” Das Capital argued that commodities (C) could be exchanged for other commodities through the medium of money (M).[34] He continued that capitalists lose sight of this, and instead seek “M-C-M,” treating money as the final goal, rather than goods and services. Marx then proposed his infamous “labor theory of value,” holding that absolute value could be measured by the amount of labor that goes into making a product.[35] The labor theory of value gave Marxist economic thought a solid framework on which to base the rest of his attacks on capitalism. His labor theory of value made Marx’s transition to the idea of surplus value quite natural.


Since he held that a product is only worth the amount of labor put into it, Marx concluded that profits and interest came from the laborers being deprived of their rightful wage. Marx constructed an equation to represent exploitation, “p = s/r,” with “p,” “s,” and “r” representing profit, surplus value, and the value of the finished product, respectively.[36] Extrapolating, Marx wrote that two types of capital existed, constant and variable. Hence, “p = s/[v + c]” represented the rate of exploitation of workers by capitalists.[37] As evidence, Marx railed against the “working day,” citing numerous examples of laborers pushed to the limit of their endurance by their employers.[38] Marx loathed the system of division of labor, contending that it represented brutal exploitation of laborers.[39] Finally, Marx voluminously described the industrial machinery in use during the Industrial Revolution, alluding to it as another “weapon” of capitalists to keep the poor enslaved.[40] It was easy for Marx to move from the labor theory of value and surplus value to an exploitative model of capitalism.


Marx was convinced that the capitalist class was forcing laborers to work for less than their rightful wages, since firms made a profit beyond the wages paid to workers. Surplus value, in his opinion, was the same thing as slavery, since it denied laborers their “fair share” of the product.[41] The capitalists, Marx claimed, robbed workers of their labor power, unfairly accumulating wealth that rightfully belonged to “the masses.”[42] Surplus value “squeezed” profits from the wages of the workers, since in Marx’s view wages were the only place that excess profit could be made.[43] Having thoroughly explained the perceived injustices suffered by workers at the hands of capitalists, Marx put forth a theory on the ultimate demise of capitalism and the rise of communism.


Dialectic materialism, a theory Marx borrowed from Hegel, predicted that capitalism would eventually be merged with socialism and produce pure communism. Marx described a “crisis of capitalism,” with boom and bust cycles, unemployment, falling profits, and overproduction all contributing to a disillusioned mass of proletariats.[44] Believing that history was a continuous process of an idea arising (thesis), followed by its opposite (antithesis), Marx saw socialism as the antithesis of capitalism. Dialectic materialism holds that when the thesis combines with the antithesis, a synthesis is formed which becomes the new thesis, starting the process again.[45] In the case of capitalism and socialism, Marx held that they would merge into the final phase of history, communism. Revolutionary socialism, claimed Marx, would unite with capitalism and, probably through violence, lead to a utopia of communism in a classless world.[46] However, Marxism had numerous flaws that its creator did not recognize, leading to the breakdown of the theory.


Marx’s central hypothesis was that absolute value is measured by the amount of labor it takes to create a product. The Austrian school of economics, led by Carl Menger, challenged the assumption on which the entire Marxist theory rests. Rather than accept the labor theory of value, they put forth the “consumer origin of value,” claiming that true value was only decided by the consumer, who could choose whether or not to buy a product. The Austrians also introduced the concepts of marginal utility and cost, further weakening the arguments of Das Capital. However, their greatest achievement was introducing subjective value, the concept that there is no absolute value for a product, only what consumers are willing to pay for it.[47] If surplus value is wrong, then the entire Marxist framework of exploitative capitalism falls apart under its own weight. In addition to his labor theory of value being completely erroneous, Marx’s economic theory was damaged by his misunderstanding of the “boom and bust” cycle of capitalism.


Marx predicted the demise of capitalism and rise of communism as the predominant economic force in the world, but his prognostication was severely flawed. Over the last two hundred years, profit has not continuously declined, as Marx thought, despite the massive accumulation of capital in the world. Real wages are rising, not falling, and workers today enjoy more affluence than their 19th century counterparts. There has been no increased concentration of industries, as Marx believed inevitable; rather, industries have become extremely diverse. Socialist societies and revolutions have not overtaken capitalism, becoming the exception, rather than the rule. Capitalism today is even stronger than when Marx wrote Das Capital, and his projected utopias have failed to materialize.[48] Another of Marx’s underlying assumptions, that capitalism would inevitably fall to his dialectic materialism, has been incontrovertibly invalidated by history.


Despite its obvious failings, Marxism has taken root in several countries, primarily agrarian, over the past century, with even fewer surviving at the dawn of the 21st century. Cuba, under the rule of Fidel and Raul Castro, remains one of the most pernicious communist states in the world. Under the leadership of Mao Zedong, China, following millions of deaths during the Great Lead Forward, remains nominally communist, with a hybridized model of capitalism making inroads into their economy. North Korea, under Kim Il-Sung and his son Kim Jong-Il, has remained communist since the cessation of hostilities in 1953, maintaining a close relationship with China. Marxism today is nothing that Marx would have envisioned―instead of violent revolution followed by a peaceful utopia, communism has been one of the most viciously oppressive forms of government in the world.


Despite his lack of comprehension concerning the free market, Marx’s Das Capital clearly communicated the theories of dialectic materialism, the exploitative model of capitalism, surplus value, and the circulation of commodities and money. Few have had the influence that Marx possessed, albeit after his death. There can be no doubt that through his work, Marx gave rise to a new school of economic thought, and was indirectly responsible for the rise and fall of entire nations.




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