Karl Marx political economy theory aimed to explain why humanity undergoes a lot of suffering. He argued that capitalism is characterized by a falling rate of profit with each production period that will eventually lead to a collapse of the economy. This paper expands this theory and shows how similar it is to both Smith’s and Ricardo’s theories.
Marx theory of a falling rate of profit under capitalism notes that capitalist’s major aim is to make a profit by increasing the total capital. Total capital only increases if the sum of variable capital and constant capital produced as a finished commodity is greater than the initial constant capital and variable capital used. In simplistic terms, Marx defined variable capital as human labor measure in its money equivalent and not its actual value. Constant capital, according to Marx’s theory refers to physical means of production such as factories and hospitals. Marx claimed that because of the ultimate aim of a capitalist to make profit, the nature of capitalism is to expand capital and the fulfillment of consumer needs is just a byproduct (Potts p.273).
Marx claimed that combination of constant capital and variable capital forms organic capital. He added that profit rate of an industry is the ratio of total profits to organic capital. In the theory, constant capital is unchanging in the given period and therefore the only way capitalist expand capital is by increasing the use value of labor. In this case, use value is the monetary amount equivalent of a finished good attributed to labor as a variable capital (Potts p.281). Thus to expand capital, capitalists increase the efficiency of variable capital (labor) by simply paying less for the equal amount of output. Technological improvements reduce the number of labor units needed in production and therefore reduce the cost of production.
In the real world, each increment of capital inform of the finished product goes back to increase the constant capital for the nest period, however the expansion of the new capital is only possible from further squeezing value out of variable capital. Profit obtained by the capitalist is the difference between the real cost of variable capital and the market cost of variable capital (wage). The human nature of variable capital (labor) makes it difficult to increase at a faster rate than the increase of constant capital. Therefore, with each subsequent production period, the profit ratio decreases as organic capital increases relative to increase in actual profit.
Marx, Smith’s and Ricardo’s theories have a similarity of postulating that capitalism aims to regulate nature by altering its resources to fit production. All three theories further imply that the only way of increasing production is by increasing the use value of labor. Smith in his labor theory of value claims that natural endowments, resources do not make up the spring of prosperity and wealth, instead human activity does. Smith predicted the fall of prices when property rights created scarcity of land and technology created scarcity of means of production such that the rent and profit obtained from products is not proportional to the labor expended to produce them. Ricardo’s theory claims that increase in any income category (wages, profits or rent) must be accompanied by a decrease in the other two given that there is a determinate output value in any given economic period. To sum up, all three theories examined in this paper point to the eventual disproportionality of profit to production inputs by using the value of labor as the true measurement of economic value.
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