During this time of global economic crisis, the venerable Karl Marx is enjoying newfound popularity. He is undoubtedly the most influential social thinker of the last three hundred years if not the last thousand, but while his influence permeates the Great Conversation, his system has been crushed under the weight of contradictory theory and evidence. In light of global economic conditions, should we come to praise Marx, or to bury him? He is an important figure in the history of ideas, but we wont gain much insight into current economic conditions by reading Marx.
It is important not to mistake Marxs significance in the history of ideas for the veracity of Marxs economics. Paul Samuelson described Marx-the-economist as a minor post-Ricardian, and the current global economy does nothing to suggest that we should revise Samuelsons assessment. Marxs theoretical system was destroyed by nineteenth century marginalism (as discovered and explained by noted economists William Stanley Jevons, Carl Menger, and Leon Walras), and the broader Marxian system has been thoroughly demolished in detailed critiques by the likes of Eugen von Bohm-Bawerk, Joseph Schumpeter, Ludwig von Mises, and Thomas Sowell.
Even when setting his critics aside, history gives us plenty of reason to doubt Marx. He predicted growing misery for the working class and the creation of a large and growing reserve army of unemployed. Neither predication came to pass; indeed, precisely the opposite happened. Industrialization did not result in the increasing misery of the poor. Industrialization poured out blessings on unskilled laborers in the form of higher wages. Indeed, as Gregory Clark shows in A Farewell to Alms, real wages increased, interest rates stayed nearly constant, and rents on land also stayed almost unchanged. Contra Marx, the poor got richer in countries that adopted capitalist institutions.
Marx also claimed that capitalism alienates us from our essential nature and saps us of our creative juices. Deirdre McCloskey notes in The Bourgeois Virtues: Ethics for an Age of Commerce that the alleged social ills wrought by advancing capitalism were in fact mitigated rather than exacerbated by the spread of bourgeois society and bourgeois values. And, ironically, the intellectual and cultural freedom that Marx foresaw in his socialist paradise has flourished under capitalism. Commerce and culture are not substitutes. Commercial success is an input into flourishing culture.
In his monumental History of Economic Analysis, Joseph Schumpeter argues that one cannot fully understand and comprehend Marx if one has not read all three volumes of Capital and all of his Theories of Surplus Value. Further, he argues that one cannot have a full appreciation of Marx without an intimate familiarity with the continental intellectual tradition in which he wrote. Given the ways in which his qualifications trump mine, I defer to Schumpeter for an assessment. While acknowledging the importance and originality of some of Marxs analytical contributions, Schumpeter offers a threefold criticism of the Marxian system. Schumpeter points to Marxs important contribution about the relationship between ideology and ideas, but he points out that while Marx was keen to highlight the ideological underpinnings of capitalism he did not notice or discuss the ideological underpinnings of his own system. Second, writes Schumpeter, Marx reduces [ideological systems of thought] to emulsions of class interests which are defined in exclusively economic terms. Finally, to borrow from Ludwig von Mises, Marx and his followers felt that identifying the interests behind an ideology was enough to dismiss it.
Marxs system is undermined by the bankruptcy of his theories of value and exploitation. Where classical and neoclassical economic analysis sees profit as an indispensable element of the market economy and as a return to capitalists and entrepreneurs for risk-taking, Marxian economics sees this line of thinking as mere apologetics for capitalist interests. According to Marx, any product of labor above and beyond what is needed to call labor into production that does not go into the pockets of the laborers is extracted and appropriated surplus value. In classical and neoclassical economics, this exploiter plays a crucial role by identifying prospective opportunities for moving factors of production from lower-yield to higher-yield employment. In his thorough critique and refutation of the Marxian system, Thomas Sowell (himself a former Marxist) points out that the entire Marxian system collapses on itself when one admits that factors other than labor have value.
The current crisis is not a crisis of capitalism. It is a crisis of interventionism spawned by the hubris of political leaders who, to borrow from F.A. Hayek, were arrogant enough to think that they could design what they could not possibly understand. Governments regulate, which means two things. First, the regulators are insulated from competition. Removing the determination of standards from the cash nexus of the market process means that they are circumventing the information-generating process that would tell providers of rules and regulations whether they are choosing wisely or choosing poorly. Second, turning market decisions into political decisions means creating political incentives. We should not be surprised that financial market regulations are being bent to the benefit of those who are in the best position to influence policy and to the detriment of everyone else.
Marxs status as an important figure in the history of ideas is unassailable, but the decisive and multi-faceted refutations of his system suggests that we wont learn much by perusing his work for insight into the roots of the global economic crisis. For real insight we have to look elsewhere. Im starting with Ludwig von Mises and Friedrich Hayek. Like Marx, both offered complete social systems, internally consistent monetary theories, and explanations of economic crises. The difference is that Mises and Hayek got the economics right.