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Marxian Economics vs. Neo-Classical Economics

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Voting Style: Open Point System: 7 Point
Started: 2/11/2014 Category: Economics
Updated: 5 years ago Status: Post Voting Period
Viewed: 3,048 times Debate No: 45668
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Greetings. This is an open debate on the functionality of Marxian Economics against Neo-Classical Economics, which will be won or lost on the evidence for or against the following claims:

Marxian Economics ability to explain market structure, labor relations, and value better than that of a Neo-Classical structure.

Some Definitions
Neo-Classical Economics:
An approach to economics that relates supply and demand to an individuals rationality and his or her ability to maximize utility or profit.

Marxian Economics:
A school of economic thought tracing its foundations to the critique of classical political economy first expounded upon by Marx and Engles.

Market Structure:
A Market Structure is a set of conditions in which buyers and sellers meet each other for the purpose of exchange of goods and services for money.

Labor Relations:
The relationship between those who control the means of production and the workers.
~No semantics
~No lawyerism
~No new arguments 5th round.
~Serious arguments only
~Cite all sources
~Have fun!
~First round is only for acceptance.




I accept.

Preliminarily, I point out that some of the definitions and words used by Pro require further clarification.

The Pro side fails to define "value." Value = the estimated or assigned worth of something that is either tangible or intangible. [1]

The Pro side defines labor relations as "[t]he relationship between those who control the means of production and the workers." I will assume that my opponent really means "the relationship between business owners and their workers." To Marx, the "means of production" meant tangible objects used to produce goods. [2] My opponent's definition of "labor relations" itself shows the outdatedness of Marx's theories. Marx wrote at a time when markets were dominated almost entirely by the production of *goods.* Marx did not even see *services* as being part of the economy. Since Marx's time, we have shifted from producing almost 100% goods to being a primarily services-based economy . [3] Marx also wrote at a time where intangible property (such as a license to use software code) did not exist. Without updating my opponent's definition to modern times, the vast majority of workers in the US would not be considered to be in a "labor relationship" with their bosses because they are either in the services industry or make intangible intellectual property. [3]

For "market structure," I would simply like to add that "conditions" in markets are typically measured by the relative strength of buyers and sellers. [4] There are four quintessential examples of market structures: (1) perfect competition, (2) oligopoly, (3) monopoly, and (4) monopsony. [4] Markets generally fall on a scale somewhere between the extremes of a complete monopoly/monopsony and perfect competition.

Lastly, before we begin, I would just like to set a simple framework for the debate. Both theories of economics are judged by their explanatory power. They both use models to help us understand the world. The model that better explains why certain things happen in the world is the better model. But no model is perfect. They aren't meant to be. A perfect model would have so much complexity that it would no longer serve its purpose as a model, which is to *simplify* certain processes in order to aid us in understanding them. As an example, picture the model of atom that you learned in chemistry. The depicted rotation of electrons is drastically over-simplified. But this over-simplication was to aid you in understanding and conceptualizing how an atom worked. The same is true for economic models. Therefore, proof that an assumption of one of the models is not completely true (such as proving that people do not always act fully rationally) does not invalidate the model unless it deprives it of its explanatory power (for example, by proving that as a result, supply and demand have no explanatory power).

Lastly, to aid my opponent in writing his next round, I will do him the service of warning him that I intend not only to defend neoclassical economic's ability to better explain why our current economy works the way it does, but also to explain why Communism fails. Therefore, if he intends to defend Marx's theories, it would behoove him to offer his defense of how Marx would explain the failure of his ideas in the USSR.

And with that, I turn the debate over to my opponent.

Debate Round No. 1


A.WitherspoonVI forfeited this round.


I'm not too happy that my opponent forfeited. I already took the time to type out most of my argument. Since it's already prepared, I figure I'll post it anyway.

=== To begin, a note on academic acceptance ===

Just to give some necessary background -- no serious modern economist subscribes to Marx's economic theories. If you attended any economics course at a modern university, you would be taught neo-classical economics, not Marxian economics.

Robert M. Solow, who created the Solow Growth Model, stated, "[M]ost serious . . . economists regard Marxist economics as an irrelevant dead end." [1] George Stigler, who won a Nobel Prize in Economics, stated, "Economists working in the Marxian . . . tradition represent a small minority of modern economists, and . . . their writings have virtually no impact upon the professional work of most economists." [2]

I hope to show why Marxian economics has fallen out of favor. Let's begin with the two models' abilities to explain "value."

=== "Value" ===

Marxian economics posits that the value of a commodity is *only* dependent upon the labor that was necessary to produce the commodity. [Das Kapital I, Chapter I, section 1].

Neo-classical economics posits that the value of anything (or its "price") is dependent upon the supply and demand for that thing. More demand or less supply = a higher price. Less demand or more supply = a lower price. To see why, picture an auction. Two things are going to affect the price that items sell for at the auction: (1) the number of bidders and (2) the rarity of the item.

(1) Number of potential buyers

If an item comes up for auction and more people are bidding on it, the price will end up at a higher point than if fewer people bid on it. The number of people that *want* to buy something represents *demand* for that thing. So for any given quantity of supply, more demand means a higher price [note: in the case of an auction, the quantity supplied = usually one item, i.e. the item being auctioned off].

(2) Rarity

If the auctioneer says, "this tiny cannon from the Criterion collection is one of only FIVE in existence," people will be willing to pay more to acquire the item than if the auctioneer says, "this tiny cannon is mass produced by a toy company in China - there are 3.5 million of them in existence." People recognize that when there is fewer of something, they are going to need to pay more in order to acquire it because other people want it too. Therefore, for any fixed quantity of demand, less supply means a higher price.

[Note: supply is the reason the value of an artist"s paintings skyrockets when the artist dies. A dead artist means a fixed, finite supply of his art. An alive artist means a potentially inexhaustible supply. Death = a sudden constriction of potential supply = a spike in price.]

You might say, "Enough about basic economics already Bluesteel, tell us why Marxian economics is wrong."

Sure thing. Marxian economics cannot account for why the price (or valuation) of goods changes when no labor is expended [remember, Marxian economics posits that value is solely dependent on labor]. For example, let's say it's the year 2001. The housing market has not crashed yet, and you decide to buy a second home as an investment. You don't live in the home. You don't do anything to home. Yet, six years later, the home has appreciated in value by 20%. Marxian economics has no way to explain why the home has increased in value. No labor has been expended. However, modern economics *can* explain the increase in value: increased demand. The housing market is booming; more and more people want to buy houses and fewer people want to rent. In his book "The Two Trillion Dollar Meltdown," Charles Morris writes about the surging demand for housing pre-2008, stating, "By 2005, 40 percent of all home purchases were either for investment or as second homes." This massive demand for real estate as an investment vehicle explains why housing prices skyrocketed during the height of the housing bubble.

Not only can Marxian economics not explain why home values increased, it also cannot explain why the bubble burst, since no change in the labor market occurred *prior* to the crisis. However, modern economics can explain: banks issued mortgages to people who couldn't pay; eventually, the banks had to foreclose on them; when foreclosure happened, banks tried to re-sell the houses; however, there were so many foreclosures, supply started to outstrip demand; excess supply = a drop in price; as prices began dropping, people started panicking; the homes they had invested in were no longer worth as much money; suddenly, people didn't want to buy new houses anymore because real estate looked like a risky investment; fewer buyers = lower demand. Both excess supply and a dead-drop in demand translated to the floor falling out from under the housing market. Prices plummeted.

Interestingly, we now see the opposite trend in rent prices. Rent prices are rising fast in major cities because fewer homeowners = more demand for rental housing. More demand = higher prices. As The Atlantic explains, "The decline of homeownership has moved more people onto the rental market, pushing rental vacancies down and the asking price for available units up." [3]

Marxism has a hard time explaining any asset-value bubble. Take the Dot Com bubble as another example. If a Dot Com company was worth *only* the value of its combined labor (as Marx predicted), it would be worth a fixed amount as long as the number of workers at the company did not change. Yet the Dot Com bubble occurred because there was massive demand by venture capital firms to purchase equity stakes in Dot Com companies, which caused the valuations of these companies to skyrocket (even though these companies maintained the same number of workers). Increased demand among VC firms meant higher and higher valuations for Dot Com companies. Eventually, many of those companies proved unprofitable; VC firms lost lots of money and stopped investing so heavily in Dot Com companies; demand fell out from under the market; and the bubble burst.

Even in the auction example above, Marx would have a hard time explaining why some items sell for more than other items. It can"t possibly be because of the *labor* of the auctioneer (who works no harder when selling a rare item than a common one and works no harder when selling a highly demanded item than one that no one wants).

Thus, Marx is simply wrong. The value of a good is not a function *solely* of labor. Labor sometimes plays a role in price (through the mechanism of supply). When labor costs rise, some sellers cannot afford to sell the good anymore (because for them, the cost of making the good is higher than the price they can sell it for in the market [i.e. the market price]). These sellers exit the market. As sellers leave the market, supply declines. When supply declines, price increases. So when the price of labor rises, prices in the market increase [through the mechanism of supply]. So yes, labor *can* affect price. But Marx was wrong to assert that labor is the *only factor* that affects price.

-- A note on the value of money --

Marx also believed that money's value (silver and gold) derived from the labor that was necessary to produce it [to mine it, smelt it, etc.]. [Das Kapital, I, Chap III, section 2, part c]. Marx stated that paper money derived value only because it was tied to the value of gold or silver. However, the United States stopped pegging the value of its dollar to gold in 1971. Since then, the value of the dollar has been "free floating" and depends on the supply and demand for dollars. When the government prints more money, the supply goes up and the value of the dollar drops. When more foreigners demand dollars (to buy US goods or Treasury bonds), the value of the dollar rises. Marx's theory in this regard appears absurd - that the value of a US dollar is determined by how much labor is expended in making it.

=== Labor Relations ==

Marx's theory of labor relations proceeds as follows: the "value" of a product is solely determined by the labor it takes to produce that item. Value = labor expended. Therefore, when a business owner sells a product, he owes the entire value of the sale price to the workers because the price was determined solely by the input of their labor. Yet, the business owner (or "capitalist") instead pays the workers the bare minimum - a subsistence wage. The capitalist pays the workers only enough to keep them alive and pockets the rest of the money earned from their labor.

There are a number of problems with this theory. First, the value of a product is not determined by labor, but is instead determined by the market forces of supply and demand. The workers are not *owed* the entire value of the product because the business owner did some work as well, such as taking *all* the risk of developing the product, putting together other inputs (like buying factories, paying accountants and lawyers, etc.), and coming up with an invention/novel product in the first place. It would be hard to argue that Elon Musk should earn zero money from selling Tesla's because his workers create all of the value of the car. In fact, Musk created most of the value. He came up with the design himself, solved a number of really difficult technical design problems, filed a bunch of patents, assembled a company, bought the necessary manufacturing equipment, hired a team of workers, helped take the stock public to secure funding, etc. Marx's thesis that capitalists are just greedy and steal all the value from their workers without doing anything themselves is patently absurd.

My argument will continue in the next round...

[1] Robert M. Solow, "The Wide, Wide World of Wealth," New York Times, March 28, 1988.
[2] "Palgrave's Dictionary of Economics". Journal of Economic Literature 26 (4): 1729"1736.
Debate Round No. 2


I concede, we shot are self in the foot and set up an unwinnable scenirio~Zach

Look forward to future debates, my opponent has this one.



I'm thoroughly disappointed that my opponent conceded. But I take it as a great compliment that my opponent now agrees that Marxism is an unwinnable position, given his own Marxist tendencies.

Since I already typed up more stuff, I will post it here for your reading enjoyment.

We left off at why it's absurd to believe that workers create all the value of a company and therefore are entitled to 100% of the company's profits.

As another example: imagine a drug company that spends $300 billion in R&D developing a drug that cures cancer! The drug company patents and sells the drug and starts making profits of $15 billion a year. The drug company took a *huge* risk investing $300 billion in researching and developing the drug. The drug could have not had any effect on cancer. Or been lethal and failed Phase II testing. Or failed to garner FDA approval. The company wants to recoup its huge investment. Yet, Marx would say that the entire $10 billion a year that the company made from selling the drug should go to the workers who *produce* it. Namely, Marx believes that the single factory worker who runs the automation equipment at the factory should be paid the entire $10 billion a year. Sound fair? [You hopefully answered no].

So the first problem with Marx"s thesis is his assertion that the worker is entitled to be paid the full value of the product [because, Marx asserts, value comes entirely from the labor expended in production].

The second problem with Marx"s theory is that workers are not paid subsistence wages. Software engineers at Google are paid $250,000 per year. [4] I don"t think anyone would argue that this is a subsistence wage. Wages are dependent on supply and demand in the labor market. Software programmers make ridiculous amounts of money because (1) there is high demand for them and (2) there is low supply. First, there is high demand. There are tons of huge Silicon Valley tech companies that really need software engineers right now: Apple, Google, Twitter, Facebook, Oracle, Microsoft, etc. Demand for labor is high so the price these employers have to pay for that labor is high. Second, supply is low. As this article explains: not enough students are majoring in computer programming in the United States. [4] Lower supply of labor means higher "prices" for labor, i.e. higher wages. A modern economist looks at a $250,000 paycheck at Google and says, "That wage is determined by supply and demand in the labor market for software programmers." In contrast, Marx would look at a Google engineer"s $250,000 paycheck and say, "That"s a subsistence wage. Google arrived at that number because its bosses determined the minimum amount it could pay its workers while still allowing them to survive and paid them that minimum amount." Once again, Marx"s theories are proven absurd in the modern era.

As a side note: it is possible that most workers earned subsistence wages during *Marx"s time,* however these low wages were due to supply and demand in the labor market. Marx was writing at the height of the Industrial Revolution. There was basically only one type of job in the labor market: low skilled factory work. And there was basically an infinite supply of labor: the Agricultural Revolution, which preceded the Industrial Revolution, had put massive numbers of farmers out of work, and they were moving to cities in hopes of finding a job. With an inexhaustible supply of labor, the price that factory owners were willing to pay for labor was really low (likely at or near subsistence).

Marx is also wrong, as a theoretical matter, because there is no reason that a capitalist would pay a subsistence wage. If supply and demand resulted in a wage lower than subsistence, that wage is what an employer would pay. Wal-mart, for example, has been accused of paying a below-subsistence wage, forcing its workers onto welfare and food stamps in order to subsist. [5] Wal-mart can get away with paying below subsistence because people are so desperate for jobs [demand is high and supply is low, especially in the unskilled labor market]. So pretty much every part of Marx"s theory of labor relations is wrong. Marx fails to explain both (1) why workers are entitled to 100% of a company"s profits and (2) how business owners arrive at the number they decide to write on their workers" paychecks.

Lastly, Marx is also wrong about his ideas that stem from labor relations, namely his ideas about "class struggle." Marx believed that the workers did not need the capitalists, so they could overthrow the capitalists and seize the means of production. However, there are two problems with this. First, workers need their business owners. Tesla would be nothing without Elon Musk"s inventiveness, investment capital, and willingness to take risks. Apple would be nothing without Steve Jobs" incredible vision and highly effective management style. Microsoft would be nothing without Bill Gates" genius and ruthlessness. Does anyone really believe that the workers in any of these companies would be better off by overthrowing their "capitalist" overlords?

Second, Marx"s theory is wrong because *anyone* can become a capitalist. Anyone can become an entrepreneur. Anyone can start their own business. Unlike during Marx"s time, there are not even many limitations to doing so. When Marx was alive, it was really expensive to build a factory. In many countries, the government heavily subsidized industry. Therefore, if a worker wanted to become a business owner, it was necessary to "seize" the means of production. However, today, anyone can start programming their own website for the cost of a low-end computer ($300).

Modern economics posits that there is an *opportunity cost* to everything we do. Opportunity cost is the value of a person"s next-best option. For example, if my highest paying job is as a doctor and my second highest paying job is as an entrepreneur, I will become a doctor and I give up becoming an entrepreneur (opportunity cost). Opportunity cost is like the road not taken. Modern economics therefore posits that if it was more valuable for a person to be an entrepreneur than to be a worker, then that person would become an entrepreneur. The reason people *don"t* become business owners is because they calculate that they can make more money working for someone else than for themselves. People don"t become workers because of some capitalist conspiracy. They become workers for someone else because it is in their rational self-interest to do so.

=== Market Structure ===

The structure of markets is determined by market power. When there are a lot of firms in a market that supply a homogenous (non-differentiated) product, the firms have very little market power. If the market has no barriers to entry, as long as there are potential profits to be made, more firms will enter the market. As more firms enter the market, supply increases. When supply increases, price drops. Therefore, as long as profits exist to be made, more firms will enter and drive profits towards zero. Neo-classical economics characterizes a market where prices are driven as low as possible as having "perfect competition" (no barriers to entry). In contrast, if the market has high barriers to entry, it may have only a few firms or only *one* firm (a monopoly). Microsoft, for example, has a monopoly in the PC operating system market. The reason for this, as explained in the case United States v. Microsoft, is that there is an "application barrier to entry," meaning that application developers have already developed a host of applications for Windows. App-developers do not want to develop for a new operating system (OS) that has no user base. Users do not want to switch to a new OS that has no applications for it. This application barrier to entry prevents other firms from entering the market for PC operating systems. As a monopolist, Microsoft can reap much higher profits than in a perfectly competitive market. Microsoft can charge a "monopoly price," which is currently around $500 for Windows.

The reason that firms cannot control price in a perfectly competitive market is that they cannot control supply. If one firm does not want to supply the product, another one will. The reason that a monopolist can charge almost any price it wants is because it has complete control over supply, so it can hold the market demand hostage to whatever price it asks for. Marxian economics has no way to explain market structure. Yet market structure forms the basis for our antitrust laws, which attempt to protect consumers against *illegal* forms of monopolization.

Debate Round No. 3


A.WitherspoonVI forfeited this round.


Wow, I forgot this debate exists. Well I still have more stuff I typed out, so:

=== Marx cannot explain why Communism failed ===

Marx wanted the workers to rise up and throw out the capitalists, which is what happened in the USSR and Mao’s China. Marx believed that once the workers collectively owned the means of production, everything would be well and good.

However, as Ludwin von Mises has famously explained, collective ownership requires a command economy (someone in control) for the following reason: under a capitalist system, I own only my own labor and am paid only for what I produce. Under a Marxist system, I collectively own “my share” of what everyone produces. Thus, if there are 10,000 people in a Communist country, I would own 1/10,000th of everyone else’s labor. However, this system is very difficult to police. How do I know that everyone is working equally as hard as me? [Answer, I don’t; the USSR was notorious for having problems with motivating its workers without the incentive of pay]. How do I know that everyone is sharing what they produce? The only way to enforce my 1/10,000th ownership over everyone else’s labor is to have a central government enforcing my ownership rights. The central government plans the entire economy (which is known as a command economy), rather than leaving the economy to the market forces of supply and demand.

The problem with a command economy, however, is two-fold. First, the economy has no way of knowing how to allocate resources. Government bureaucrats would have to simply “guess” how much of a given product people might want in a command economy. The USSR was notorious for never having enough toothpaste in stock because of the failure of government planning. Ludwig von Mises and Friedrich Hayek described this problem as the “economic calculation problem” – that supply and demand do a good job of funneling resources to where they are wanted and needed, but central planning does not. As Tibor R. Machan has explained, "Without a market in which allocations can be made in obedience to the law of supply and demand, it is difficult or impossible to funnel resources with respect to actual human preferences and goals." [6] For example, during Gorbachev’s reign, he decided that factories should start producing more expensive goods. [7] Gorbachev’s centrally planned decision forced factories to move away from producing everyday consumer goods. [7] Supply for everyday goods - like toothpaste, bread, and shoes – suddenly went way down. [7] As a result, the prices of these everyday commodities skyrocketed. [7] People were understandably upset. [7] Central planning is a horrible system. Supply and demand do a much better job of allocating resources where they are needed.

Maoist China’s Great Leap Forward, during which Mao forced peasant farmers to produce steel in their backyards, rather than grow crops, is a good example of how central planning can allocate resources to really inefficient uses. Mao’s steel-making venture resulted in really poor quality steel, and it resulted in millions of peasants dying of starvation because not enough food was grown. Central planning is *bad.*

The second problem with central planning in a Communist economy is that not every business idea succeeds. In fact, in the United States, almost nine out of ten new businesses fail. [8] In a Communist economy, the state loses money for each failed enterprise. [8] In a market-based system, the risk-taker (the capitalist) eats the loss. Fundamentally, this problem stems from Marx’s misunderstanding of the value that a capitalist adds to a product. The capitalist earns a high rate of return because the capitalist takes the *entire risk* of the business venture on his shoulders. If he succeeds, he may reap huge profits. If he fails, he may go massively into debt and end up living on the street. Thus, Marx’s theory is really, really wrong to assert that workers should get 100% of a company’s profits and should overthrow their capitalist overlords because capitalists add nothing of value. In the United States, the entire intellectual property system is built on the acknowledgement for the need to balance the risk-reward calculation of “capitalists.” No risk-taking would mean an economy would eventually stagnate and fail, which is exactly what happened to the USSR.

In sum, Marx was wrong, basically about everything. Vote Con.



[8] [a surprisingly insightful response and where I got my idea for this argument from]

Debate Round No. 4


A.WitherspoonVI forfeited this round.


Lots of conceded arguments. Vote Con.
Debate Round No. 5
2 comments have been posted on this debate. Showing 1 through 2 records.
Posted by bluesteel 5 years ago

I'm sure this will be fleshed out in the debate, but countries are categorized both by their economic and political systems. Stalinism = a Marxist economy plus a dictatorship. Your conception of true "Marxism," I assume, = a Marxist economy plus democracy. This debate is about the economic, not political system, but whether a Marxist economy could even function without a dictator (and central planning) is questionable, as I will point out in the debate.
Posted by Enoch_deftinwolf 5 years ago
i must point out the USSR wasn't entirely Marxist it was far more of a Stalinist culture. just like how china and N. Korea are Maoist even though Maoism/Stalinism are derived from Marxism.
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Vote Placed by Krazzy_Player 5 years ago
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Total points awarded:03 
Reasons for voting decision: Concession
Vote Placed by Mikal 5 years ago
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Total points awarded:15 
Reasons for voting decision: concession

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