Term Paper on "Karl Marx John Maynard Keynes"

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Karl Marx and John Maynard Keynes

Karl Marx (1818-1883) and John Maynard Keynes (1883-1946) are two of the most important economists of modern times. While Marx's political philosophy and economic theories triggered some of the most significant revolutions in human history, Keynes was responsible for introducing a whole new concept of economic theory that came to be known as Keynesian Economics and influenced the economies of several non-communist countries after the Second World War. This paper presents the main economic theories and concepts of Karl Marx and his contribution to Communism. It also outlines the economic theories of Keynes and compares and contrasts his economic theories with those of Marx.

Economic Theories of Karl Marx

Materialist Concept of History: Karl Marx's philosophy is based on a "materialist" concept of history, which declares that human beings, throughout their history, have been motivated by material concerns such as the need to eat and survive rather than being motivated by grand ideas. Marx, thus, places economics at the center of human life and human history.

Marx first introduced the concept of historical materialism in the "Communist Manifesto," which he co-authored with Friedrich Engels in 1848 and elaborated the theory in his "Critique of Political Economy" in 1859. According to this theory, until the people worked as hunter-gatherers, they worked in unity and there was no concept of different "classes" among them. It was only when people developed agriculture that the concept of private property and thus classes arose. From then onwards, according to Marx, class conflict has driven human society and it has the driving force of human history. All of Karl Marx's subsequent economic theories are based on this materialist concept of history. (Cline)

Stages of History: Elaborating his materialistic concept of history, Marx explained that history progressed through a series of stages, each characterized by its mode of production or economic system. It had progressed from slavery to feudalism and, in the nineteenth century -- during Marx's lifetime, it was in the stage of Capitalism. Marx saw 'Capitalism' as a transitory stage of social development and described it as a sub-stage of Adam Smith's 'commercial age' in which the production of commodities is done by 'paid employees' of a small group of people (the capitalists) who owned all the tools, means of production, the raw material, as well as the finished product. Karl Marx analyzed this particular stage of social development in his book, "Das Kapital," (published in 3 Volumes from 1867 to 1895) and described how Capitalism would ultimately develop into the next stage of development called "Socialism" -- which Marx believed was a higher stage of human development. ((Kroessin, para on "Marxist Analysis of Economics.")

Theory of Surplus Value: Marx explains in Das Kapital that value can be added to a commodity only through the input of "labor" and the "profit" made by the capitalists is the difference between the value added by labor to a commodity and the wages paid to the worker. Marx was of the opinion that the Capitalist always pays the workers at a lower rate than the actual "worth" of their labor and hence accumulates wealth by exploiting them. The difference between the actual worth of labor and the rate at which the workers are paid is termed the "surplus value" by Marx. (Marx 24-25)

It could be argued that money (or profit) can be made without any value addition though labor by buying a commodity at a cheaper rate and selling it at a higher rate when the commodity becomes dear. But such a situation, according to Marx, is a zero-sum game whereby when someone makes a profit, someone else is losing money. Hence in such transactions the capitalists (as a class) would not be able to get richer over a long period of time. It is, therefore, necessary for value to be added to the commodity through labor.

Monopoly: The Marxist explanation of Capitalism is based on the surplus value provided by the laborer to the capitalist that lets him to accumulate capital and make his profit. The question, therefore, arises as to why the workers work for the capitalist instead of working for themselves and keeping the surplus value? The answer lies in the monopolistic control of the Capitalists over the means of production. In capitalist societies, the laborers' own equipment and other resources simply cannot compete with those of the capitalist. This is an example of the monopolistic tendency of the capitalistic system and it is not just restricted to the elimination of the "working class" from competing with the Capitalists but also extends to competition between the small and the big capitalists. The Marxist theory of capitalism maintains that some portion of the 'surplus' value of labor extracted from the production and distribution of goods and services is used to eliminate competition and/or to expand market share. In the modern context, the rich corporate firms tend to accumulate this wealth into ever fewer firms. In other words, big companies buy up or drive out small companies and the trend is evident in most Capitalist countries including the United States. (Marx 288)

Unemployment (Reserve Army): Another feature of Marx's economic theory is that capitalism tends to deliberately keep a large section of the population unemployed. This, in his opinion, is done to keep wages low and to have a "reserve army" of the unemployed ready for induction as laborers in his industries when the need arose. In this, Marxist theory is at variance with the view of other economists that increased rates of fertility among the poor results in excess population that keeps the wages low. Marx argues that the population becomes redundant to the needs of the economy because the capitalist uses less and less capital for the employment of labor, i.e., the ratio of variable capital (used to buy labor power) to constant capital (used to buy machines and other non-human means of production) keeps falling. (Marx 161)

Immiseration Theory: Marx theorizes that Capitalism results in concentration of wealth in fewer and fewer hands while the poor get poorer and poorer because the Capitalists tend to reinvest their profits in improving the means of production rather than in labor. This also gives rise to related problems such as concentration of power in the hands of the Capitalists to the extent that they wield enormous economic as well as political power and the progressive alienation of the working class.

Economic Theories of John Maynard Keynes

Critique of Classical Economics: One of the most important contributions of Keynes in the field of economics is his investigation of the business cycles and the analysis of the Great Economic Depression of the late 20s and early 30s. As a result of his study, Keynes emphasized that the laws of Classical Economics did not work in modern economies. One of the assumptions in Classical Economics is that the economic system spontaneously tends to produce full employment of given resources. Keynes rejected this assumption by arguing that full employment exists provided all the savings generated in an economy are invested, but this does not happen in a modern economy. The reason for this, according to Keynes was, that in the early days of industrial capitalism only wealthy landlords and capitalists were investing into their businesses. In a modern economy, with a wider distribution of wealth, the businesses depend on capital provided by the savings of people apart from the owners of the business; hence savings and investment have been separated. As a result, Keynes rightly dismissed the theory that the existing economic system tends to produce full employment. (Kroessin, para on "The Keynesian Revolution.")

Another accepted economic theory of the time was that during recessions savings would accumulate, causing interest rates to fall, and would thereby encourage business to invest and the economy to expand. Keynes rejected this assumption; he also rejected the dogmatic Say's law that production under free market competition will always generate an equivalent demand for goods produced, i.e., supply simply creates its own demand.

Government Spending and the Welfare State: The key economic theory of Keynes was his 'expansionist' theory expressed in "A Treatise on Money" (1930; 2 volumes) and "The General Theory of Employment, Interest, and Money" (1936). After 'proving' that no self-correcting mechanism existed to lift an economy out of a prolonged depression and that private business could not be depended on to maintain a high level of employment and a steady flow of income through the economy, Keynes proposed that government spending must compensate for insufficient business investment in times of recession even if it results in deficit financing. He was thus a great supporter of the 'New Deal' policies of President Roosevelt as well the establishment of welfare states in which the governments played a key role in regulating and guiding the economies. (Ibid.)

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