Marxian Economics and Modern
Economic Theory
I. In a recent issue of the Kvoto Universitv Economic Review1 Professor
Shibata brought up the question & the relativLmerits of Marxian economics
and the modern theory of economic equilibrium. He contends that the theory
of general economic equilibrium, which has received its most precise and
complete formulation in the works of the School of Lausanne, " is ineffectual
in making clear systematically either the organisation of present-day capitalistic
society or the laws of its development "2, while the Marxian political economy,
" though it is now shown to contain many defects, sets forth theories which are
either intended .to enunciate systematically the organisation of present-day
capitalistic society and the laws governing its development, or have inseparable
and necessary bearings on them.'j3 And Professor Shibata asks what it is
that makes Marxian economics so powerful a tool for understanding the basic
phenomena of Capitalism while the mathematical theory of economic
equilibrium is quite powerless.
This superiority of Marxian economics seems strange, indeed, in view of
the fact that it works with concepts which are long since outdated and which
ignore the whole development of economic theory since the time of Ricardo.
Professor Shibata thinks that the sterility of the theory of general economic
equilibrium is due to its complexity and the high degree of abstraction which
make its application to actual problems impossible. Marxian economics
instead, being concerned rather with aggregates and averages than with the
mental structure of the individuals taking part in the organisation of capitalist
production, is more amenable to direct practical application. Professor Shibata
tries, therefore, to restate and simplify the Lausanne system of equations so
as to make it possible to apply them practically. In this Professor Shibata
has performed an exceedingly fine piece of analysis for which any serious
economist should be grateful. I t seems to me, however, that Professor Shibata
has not touched the very essential point which accounts for the (real or alleged)
superiority of Marxian over " bourgeois " economics. I t is, therefore, my
purpose to discuss : (I) in what the real or alleged superiority of Blarxian
economics consists, and ( 2 ) whether this superiority is due to the economic
concepts used by Marx, or to an exact specification of the institutional (or, if
the reader prefers the expression, sociological) data which form the framework
in which the economic process works in Capitalist societye4
1 Kei Shibata, hiarx's Analysis of Capitalism and the General Equilibrium Theory of the
Lausanne School, The Kyoto University Economic Review, July 1933.
loco cit. p. 107. Ibidem p. 108.
4 As the word Capitalism is used frequently very ambiguously i t should be mentioned here
that it is used in this paper in its Marxian sense, . Capitalism means an exchange-economy
with private ownrrship of the means of production, to which the further sociological datum is
added that the population is divided into two parts, one of which owns the means of production
while the other patt, owning no means of production, is compelled to work as wage-earners with
the means of production belonging to the other part. Only because of this sociological datum
do profit and interest appear as personal income separate from wages.
189
THE REVIEW OF ECONOMIC STUDIES
2. The Marxist's claim to superiority for his economics is that
" bourgeois " economics has utterly failed to explain the fundamental ten-
dencies of the development of the Capitalist system. These tendencies are :
the constant increase of the scale of production which by substituting
large-scale for small-scale production has led to the transition from the free-
competitive Capitalism of the nineteenth century to the present monopolistic
(or rather oligopolistic) Capitalism ; the substitution of interventionism and
" planning " for laisser-faire ; the transition from free trade to high pro-
tectionism and economic nationalism in international relations ; the constant
expansion of the capitalist method of production in non-capitalist countries,
which as long as competition was free led to a relatively peaceful permeation of
capitalist economy and Western civilisation through the whole world, but which
with oligopolistic and interventionist Capitalism leads to imperialist rivalry
among the principal capitalist powers ; the increase of economic instability in
the capitalist system, which by destroying the economic and social security of
the population of capitalist countries, causes them to rebel against the existing
economic system, whatever the ideology and programme u~derlying this
rebellion (Socialism or Fascism).
The claim that " bourgeois " economists have failed to explain these
tendencies in the development of Capitalism, and to formulate them into a
theory of economic evolution seems to be justified indeed. How utterly they
failed to do so is conspicuous from the fact that many of them denied this
development until the phenomena apparently became so overwhelming as to
be familiar to anybody but the professional economist who was always the
last to recognise their existence. Thus the tendency towards the concentration
of production was denied, or, if admitted, was regarded as of minor significance
for the nature of the economic system, until the monopolistic (or oligopolistic)
character of the basic industries became so obvious that a special theory of
limited competition had to be developed to supplement orthodox economic
theory. The transition from free trade to protectionism was mainly interpreted
as an act of economic folly ; its close connection with the transition from free
competition to monopolistic control has as yet scarcely been realised by
" bourgeois " economists. The imperialist rivalry of capitalist powers has
mainly been explained in purely political terms, the connection between
imperialist rivalry and the fight for monopolistic control scarcely being realised.
I t was very generally held among " bourgeois " economists both at the
beginning of the twentieth century and in the years preceding 1929, that the
economic stability of Capitalism was increasing and that business fluctuations
were becoming less and less intense. Thus the Marxian claim that "bourgeois"
economists failed to grasp the fundamental tendencies of the evolution of the
Capitalist system proves to be true. They either denied the existence of these
tendencies or if they took account of them they never succeeded in explaining
them by a consistent theory of economic evolution, but effectively offered no
more than a historical description. On the other hand, Marxian economics
must be admitted to have anticipated these tendencies correctly, and to have
developed a theory which investigates the causal mechanism of this evolution
and thus shows its inevitability.
MARXIAN ECONOMICS AND MODERN ECONOMIC THEORY 191
I t may be contended, however, that the lack of understanding of the basic
phenomena of the evolution of Capitalism bv the professional economists was
not a failure of their science, but rather a personal failure due to their middle-
class social allegiance. They certainly could not be expected to look with favour
on a theory of evolution which draws the conclusion that the middle-class will
be wiped out in the process of evolution. If this were the case, it would have
been an "error artificis" rather than an "error artis ", the psychological grounds
of which are easily explained. There are, however, reasons which seem to suggest
that the failure is more than a purely personal one and that some " error
artis " is involved. In order to display this let us imagine two persons : one
who has learned his economics only from the Austrian School, Pareto and
Marshall, without ever having seen or even heard a sentence of Marx or his
disciples ; the other one who, on the contrary, knows his economics exclusively
from Marx and the Marxists and does not even suspect that there may have
been economists outside the Marxist School. Which of the two will be able
to account better for the fundamental tendencies of the evolution of Ca~italism ?
To put the question is to answer it.
But this superiority of hlarxian economics is only a partial one. There
are some problems before which Marxian economics is quite powerless, while
" bourgeois " economics solves them easily. What can Marxian economics say
about monopoly prices ? What has it to say on the fundamental problems of
monetary and credit theory ? What apparatus has it to offer for analysing
the incidence of a tax, or the effect of a certain technical innovation on wages ?
And fironv of Fate !) what can Marxian economics contribute to the ~roblem
of t h i op;imum distiibution of productive resources in a socialist ecinomy ?
Clearly the relative merits of Marxian economics and of modern
" bourgeois " economic theory belong to different " ranges ". Marxian
economics can work the economic evolution of capitalist society into a consistent
theory from which its necessity is deduced, while " bourgeois " economists
get no further than mere historical description. On the other hand, " bourgeois "
economics is able to grasp the phenomena of the every-day life of a capitalist
economy in a manner that is far superior to anything the Marxists can
Further, the anticipations which can be deduced from the two types of economic
theory refer to a different range of time. If people want to anticipate the
development of Capitalism over a long period a knowledge of Marx is a much
more effective starting point than a knowledge of Wieser, Boehm-Bawerk,
Pareto or even Marshall (though the last-named is in this respect much superior).
This difference is connected, of course, with the respective social functions of " bourgeois "
and Marxian economics. The first has to provide a scientific basis for rational measures to be
taken in the current administration of the capitalist economy (monetary and credit policy,
tariffs, localisation, monopoly prices, etc.), the social function of the latter has been to provide
a scientific basis for long range anticipations guiding the rational activity of a revolutionary
movement directed against the very institutional foundations of the capitzlist system. But in
providing a scientific basis for the current administration of the capitalist economy " bourgeois "
economics has developed a theory of equilibrium which can also serve as a basis for the current
administration of a socialist economy. I t is obvious that Marshallian economics offers more for
the current administration of the economic system of Soviet Russia than Marxian economics does,
though the latter is surely the more effective basis for anticipating the future of Capitalism. In
so far, modern economic theory, in spite of its undoubted "bourgeois" origin, has a universal
significance.
192 THE REVIEW OF ECONOMIC STUDIES
But Marxian economics would be a poor basis for running a central bank or
anticipating the effects of a change in the rate of discount.
3. The difference between the explanatory value of Marxian and
" bourgeois " economics respectively is easily accounted for if the essential
features of modern economic theory are recalled. Economic theory as
developed by the Austrian, Marshallian and Lausanne schools is essentially a
static theory of economic equilibrium analysing the economic process under a
system of constant data and the mechanism by which prices and quantities
produced adjust themselves to changes in these data. The data themselves,
which are psychological (the preference scales of the consumers), technical (the
production functions), and institutional (the forms and distribution of property
of the factors of production, the monetary and banking system, etc.) are
regarded as outside the scope of economic theory. The study of the data is a
matter of descriptive and statistical investigation, the study of changes in the
data is the province of economic history. If there are any " laws " discoverable
in the change of data, their study is outside the range of economic theory.
Further, the institutional data of the theory are not specified. In so far as
the theory of economic equilibrium is merely a theory of distribution of scarce
resources between different uses it does not need any institutional data at all,
for the relevant considerations can be deduced from the example of Robinson
Crusoe. In so far economics is not even a social science. When economic
theory is concerned with the pricing process, the specification of institutional
data is very general. All that is assumed is the existence of the institutions
necessary for the functioning of an exchange economy. But the consequences
of the additional institutional1 datum which distinguishes Capitalism from
other forms of exchange economy, . the existence of a class of people who do
not possess any means of production, is scarcely examined.
Now, Marxian economics is distinguished by making the specification
of this additional institutional datum the very corner-stone of its analysis,
thus discovering the clue to the peculiarity of the Capitalist system by
which it differs from other forms of exchange-economy. Another character-
istic feature of Marxian economics (which will be shown to be closely connected
with the former one), is that it provides not only a theory of economic equili-
brium, but also a theory of economic evolution. For modern "bourgeoisJ'
economics the problem of economic evolution belongs not to economic
theory but to economic history. The study of changes in the data of the
economic system is regarded as being beyond the scope of economic theory :
for these changes are considered to be from the economists' point of view acci-
dental, not results of the economic p r o~e s s . ~ In opposition to this point
1By calling the fact of division of society into proletarians and owners of means of production
an institutional datum I do not mean to imply that i t is imposed by law. I t might be better,
perhaps, to distinguish between institutional data, resulting from legal institutions, and other
types of sociological data which are not expressed in the form of legal institutions, but as the term
" institutional " is used generally in a very broad sense there is no need to make such distinction
for the purpose of this paper.
a Also H. L. Moore's theory of moving equilibrium explains only the reaction of the economic
system to a given continuous change of data. The change of data itself is determined statistically
but is not an obiect of theoretical analysis. The same is true of the " dynamic " theories which
deduce the necessity of fluctuations from time lags in adjusting supply to changes in price.
MARXIAN ECONOMICS AND MODERN ECONOMIC THEORY 193
of view, Marxian economics provides further a theory of economic
The Marxian theory of economic evolution is based on the contention
that it is possible, in certain circumstances, to deduce the necessity for, and
also the direction of a certain change of economic data, and that such a change
follows, in a particular sense, from the very mechanism of the economic process
in capitalist society. What this mechanism is and what the term " necessity "
means in this connection will be seen later ; here it is sufficient to mention that
the fundamental change in data occurs in production (a change of the production
function) and that the " necessity " of such change can be deduced only under
the institutional set-up specific to Capitalism. Thus a " law of development "
of the Capitalist system is established. Hence the anticipation of the future
course of events deduced from the Marxian theory is not a mechanical extra-
polation of a purely empirical trend, but an anticipation based on the recognition
of a law of development and is, with certain reservations, not less stringent
than an anticipation based on the static theory of economic equilibrium such
as, for instance, the anticipation that a rise in price leads, under certain
circumstances, to a decline of the amount of a comniodity demanded.
4. The economist whose horizon does not extend beyond the limits of a
purely static theory of equilibrium usually denies the possibility of a theory of
economic evolution. He is too much accust~med to see in the evolution of
what he regards as the pure data of his science a certain kind of " accident "
which may be described by the historian and statistician but which cannot be
accounted for causally, at any rate not by economic theory. His argument is
in general that the phenomena are too complicated to be capable of theoretical
formulation, . to be accounted for by one single principle (or a few principles).
He contends that in the study of economic evolution so many factors must
be taken into account that economic evolution can virtually only be described
historically and cannot be forced into the pattern of an oversimplified (and
therefore wrong) t h e ~ r y . ~ However, this argument is scarcely convincing, it
is too much like that put forward by the historical school against the possi-
bility of even static economic theory. The pricing problem, so the historical
and purely institutionalist economist argues, is much too complicated to be
explained by one single principle (marginal utility), but should rather be
described historically and statisticaIly so as to take due account of all the
factors infuencing the price of a commodity. And such factors are, besides
utility, the cost of production, relative scarcity, the cost of transportation,
the extent to which the commodity is imported or exported, its quality, the
climate if the commodity is an article of clothing, etc., How crazy, one
These theories deduce the impossibility of an equilibrium in certain cases from the very nature
of the adjustment mechanism, but they cannot deduce theoretically the changes of data responsible
for the trend on which the fluctuations due to the process of adjustment are superimposed.
The difference between a theory of economic evolution and a mere historical account of it is
excellently explained in Chapter I1 of Schumpeter's Theory of Economic Development (English
translation. Cambridge, Mass., 1934) Schumpeter is the only economist outside the Marxist
camp who has formulated a theory of economic evolution. However, the close connection of
his theory with Marxian ideas is obvious.
2 The same type of argument is generally raised against the theory of historical materialism
which explains social evolution in terms of a few definite principles.
1 know, for instance, of an institutionalist economist who actually maintained that the
price level depends on exactly xz factors. From his enumeration of these factors I happen
I94 THE REVIEW OF ECONOMIC STUDIES
might conclude on this type of argument, to explain the complicated result
of so many causes by one single principle such as marginal utility.
Another argument is that even if a theory of economic evolution is in
principle possible it does not belong to the field of economics. If by this it is
meant that the theory of economic evolution requires additional assumptions
beyond those contained in the theory of economic equilibrium this is obvious,
for if the theory of economic equilibrium already contained these assumptions
it would deduce a process of evolution instead of a state of equilibrium.
Whether, however, the deduction of the necessity for a change of certain data
from certain principles is called economic theory or not is merely a matter of
terminology. I t should be noted, however, that in Marxian theory this change
of data is deduced from the principle of profit maximisation which is at the
basis of the theory of economic equilibrium and that the phenomena connected
with it were regarded by the classical economists as belonging to the
traditionally established body of economic theory. Hence a theory of economic
evolution explaining certain changes of data as resulting from " within " the
economic process in capitalist society may duly be included in the science of
economics.
5 . I have pointed out that the real source of the superiority of Marxian
economics is in the field of explaining and anticipating a process of economic
evolution. I t is not the specific economic concepts used by Marx, but the
definite specification of the institutional framework in which the economic
process goes on in capitalist society that makes it possible to establish a theory
of economic evolution different from mere historical description, Most
orthodox Marxists, however, believe that their superiority in understanding
the evolution of Capitalism is due to the economic concepts with which Marx
worked, . to his using the labour theory of value. They think that the
abandonment of the classical labour theory of value in favour of the theory of
marginal utility is responsible for the failure of " bourgeois " economics to
explain the fundamental phenomena of capitalist evolution. That they are
wrong can be easily shown by considering the economic meaning of the labour
theory of value. I t is nothing but a static theory of general economic equi-
librium. In an individualistic exhange economy, based on division of labour,
in which there is no central authority to direct which commodities, and in what
quantities, are to be produced, the problem is solved automatically by the fact
that competition enforces such a distribution of productive resources between
the various industries that prices are proportional to the amount of labour
necessary for producing the respective commodities (these being the " natural
prices "of classical economics). In essence this is as static as the modern theory
of economic equilibrium, for it explains price and production equilibrium only
under the assumption of certain data (. a given amount of labour such as is
necessary to produce a commodity-an amount determined by the technique
of production). Nor is this theory based on more speciaiised institutional
to remember : the confidence people have in the national currency, whether the national budget
is balanced or not, the balance of foreign trade, the size of agricultural crops (and thus indireccly
ra'infall). The ratio of the volume of monetary and credit circulation to the volume of trade he
recognised as one of the factors, of course, but how wrong, he argued, to think of it as the principle
explaining the price level.
MARXIAN ECONOMICS AND MODERN ECONOMIC THEORY 195
assumptions than the modern theory of economic equilibrium ; it holds not
only in a capitalist economy, but in any exchange economy in which there is
free c~mpetit ion.~ To be exact, however, it really holds precisely only in a
non-capitalistic exchange-economy of small producers each of whom owns his
own means of production (an exchange economy composed of small self--
working artisans and peasant farmers, for instance ; Marx calls it " einfache
Warenproduktion ") .a In a capitalist economy it requires, as Marx has shown
himself in the third volume of Das Kapital, certain modifications due to
differences in the organic composition of capital (. the ratio of the capital
invested in capital goods to the capital invested in payment of wages) in
different industries. Thus the labour theory of value has no qualities which
would make it, from the Marxist point of view, superior to the modern more
elaborate theory of economic I t is only a more primitive form
of the latter, restricted to the narrow field of pure competition and even not
without its limitations in this field.* Further, its most relevant statement
(. the equality of price to average cost plus " normal " profit) is included in
the modern theory of economic equilibrium. Thus the labour theory of value
cannot possibly be the source of the superiority of Marxian over " bourgeois "
economics in explaining the phenomena of economic evolution. In fact, the
1 Cf. for instance, Das Kapital, vol. I, p. 132 (7th ed. Hamburg, Meissner, 1914).
8Cf. Das Kapital, vol. 111, I, p. 154 seq. (4th ed. Hamburg, Meissner, 1919).
8 In the Marxian system the labour theory of values serves also to demonstrate the exploita-
tion of the working class under Capitalism, . the difference between the personal distribution
of income in a capitalist economy and in an " einfache Warenproduktion " I t is this deduction
from the labour theory of value which makes the orthodox Marxist stick to it. But the same fact
of exploitation can also be deduced without the help of the labour theory of value. Also without
it , i t is obvious that the personal distribution of income in a capitalist economy is different from
that in an "einfache Warenproduktion " (or in a socialist economy based on equalitarian principles,
in which the distribution of income would be substantially the same as in an " einfache Waren-
duktion "), for profit, interest and rent can obviously be the personal income of a separate class
of people only in a capitalist economy. If interest is explained by the marginal productivity of
capital, i t js only because the workers do not own the capital they work with that interest is the
personal income of a separate class of people. If interest is regarded as due to a higher valuation
of present than future goods it is only because the workers do not possess the subsistence fund
enabling them to wait until the commodities they produce are ready that the capitalist advancing
it to the workers gets the interest as his personal income. Just as in Marx's case it is because
the workers do not possess the means of production that the surplus value is pocketed by the
capitalist. To make the Marxian concept of exploitation clearer by contrast it may be noticed
that Pigou (The Economics of Welfare, 3rd ed., 1929, p. 556) and Mrs. Robinson (The Econoinics
of Imperfect Competition, p. 281 seq.) define exploitation of the worker as occurring when he gets
less than the value of the marginal physical product of his labour. This means that exploitation
is defined by contrasting the distribution of income in monopolistic Capitalism and in competitive
. The middle-class character of this idea of social justice is obvious. For the Socialist
the worker is exploited even if he gets the full value of the marginal product of his labour, for
from the fact that interest or rent is determined by the marginal productivity of capital or land
it does not follow, from the socialist point of view, that the capital- or land-owner ought to get
it as his personal income. The Marxian definition of exploitation is derived from contrasting the
personal distribution of income in a capitalist economy (irrespective of whether monopolistic or
competitive) 'with that in an " einfache Warenproduktion " in which the worker owns his means
of production.
4 I t is limited to the assumption that the ratio of capital goods to labour in each industry
is determined by technical considerations alone, . is a datum and not a variable depending
on wages and the prices of capital goods. The very moment substitution between capital goods
and labour is assumed to be possible the theory of marginal productivity must be introduced
to determine the organic composition of capital, the knowledge of which is necessary in the
Xfarxian systcm to determine the deviation of " production prices " from the respective labour
values.
196 THE REVIEW OF ECONOMIC STUDIES
adherence to an antiquated form of the theory of economic equilibrium is the
cause of the inferiority of Marxian economics in many fields. The superiority
of Marxian economics on the problem of the evolution of Capitalism is
due to the exact specification of the institutional datum which distinguishes
Capitalism from " einfache Warenproduktion ". I t was thus that Marx
was able to discover the peculiarities of the capitalist system and to establish
a theory of economic evolution.
6. The shortcomings of Marxian economics due to its antiquated theory
of economic equilibrium and its merits due to its possession of a theory of
ec~nomic evolution both become conspicuous if the contribution of Marxian
and of " bourgeois " economics to the theory of the business cycle are
considered. Neither of them can give a complete solution of the problem.
That Marxian economics fails is due to the labour theory of value, which
can explain prices only as equilibrium prices (. " natural prices " in the
terminology of Ricardo). Deviations of actual from " natural prices " are
more or less accidental and the labour theory has nothing definite to say
about them. But the central problem of business cycle theory is one of
deviation from equilibrium-of the causes, the course and the effect of such
deviation. Here the labour theory of value inevitably fails. The inability of
Marxian economics to solve the problem of the business cycle is demonstrated
by the considerable Marxist literature concerned with the famous reproduction
schemes of the second volume of Das Kapital. This whole literature tries to
solve the fundamental problems of economic equilibrium and disequilibrium
without even attempting to make use of the mathematical concept of
functional relationship.
But on the other hand, " bourgeois " economics has also failed to establish
a consistent theory of business cycles. I t has done an exceedingly good
job in working out a number of details of the greatest importance for a theory
of business cycles, such as studying the effects of the different elasticities of
the legamina in our econornic system. And it has elucidated in a manner
hitherto unprecedented the rBle of money and credit in the business cycle.
But it has not been able to formulate a complete theory of business cycles.
This inability is a direct consequence of its being only a static theory of equi-
librium and of adjustment processes. Such a theory can analyse why, if a
disturbance of equilibrium has occurred, certain adjustment processes necessarily
follow. I t can also analyse the nature of the adjustment processes following
a given change of data. But it cannot explain why such disturbances recur
regularly, for this is only possible with a theory of economic evolution. Thus
the modern theory of economic equilibrium can show that a boom started by
an inflationary credit expansion must lead to a breakdown and a process of
liquidation. But the real problem is to explain why such credit inflations occur
again and again, being inherent in the very nature of the capitalist system.
Similarly with the case of technical innovations as a cause of the business
cycle. In a theory of economic evolution the business cycle would prove to
be the form in which economic evolution takes place in capitalist
1 This character of the business cycle as the specific form of economic development under
Capitalism has been stated very clearly by Cchumpcter.
MARXIAN ECONOMICS AND MODERN ECONOMIC THEORY 197
Only by a theory of economic evolution can the " necessary " recurrence of
a constellation of data leading to a constantly recurring business cycle be
explained. A mere theory of economic equilibrium which considers the problem
of change of data to be outside its scope can tackle the problem of the business
cycle only in two ways : (I) either by seeking the regularity of the recurrence
of business cycles in a regularity of changes of data resulting from forces
outside the economic process as, for instance, meteorological cycles or successive
waves of optimism or pessimism, or (2)by denying the existence of a regularly
recurrent business cycle and regarding business fluctuations as due to changes
of data which are, from the economic theorist's point of view, " accidental "
and hence the concern rather of the economic historian. In the latter case the
scope of economic theory would be limited to explaining each business fluctua-
tion separately, as a unique historical phenomenon, by applying the principles
of the theory of economic equilibrium to the factual material collected by the
economic
7. I have stressed the point that the distinguishing feature of Marxian
economics is the precise specification of an institutional datum by which Marx
defines Capitalism as opposed to an " einfache Warenproduktion ", . an
exchange economy consisting of small independent producers each of whom
possesses his own means of production. The institutional datum, which is the
corner-stone of the Marxian analysis of Capitalism, is the division of the popula-
tion into two parts, one of which owns the means of production while the other
owns only labour power. I t is obvious that only through this institutional
datum can profit and interest appear as a form of income separate from wages.
I believe that nobody denies the important sociological bearing of this institu-
tional datum. However, the question arises whether this institutional datum
which is the basis of the Marxian definition of Capitalism has any bearing on
economic theory. Most of modern economic theory is based on the tacit
assumption or even flat denial that any such bearing exists. I t is generally
assumed that, however important the concept of Capitalism (as distinct from
a mere exchange economy), may he for sociology and economic history, it is
unnecessary for economic theory, because the nature of the economic process
in the capitalist system is not substantially different from the nature of the
economic process in any type of exchange economy.
This argument is perfectly right in so far as the theory of economic equi-
librium is concerned. The formal principles of the theory of economic
equilibrium are the same for any type of exchange economy. The system of
Walrasian equations is applicable indiscriminately to a capitalist economy or
to an " einfache Warenproduktion ". Whether the persons who own the
productive services of labour and capital (labour power and the means of pro-
duction in the Marxian terminology) are the same or not affects, of course, the
concrete results of the economic equilibrium process, but not its formal
theoretical aspect. But the same is true of the formulation of the theory of
economic equilibrium which was used by Marx, . of the labour theory of
value. This theory, too, applies indiscriminately to any type of exchange
1 This point of view has been argued very ably by Friedrich Lutz, Dns I<onjunkturproblenz
in der h'ntionaloekonomie, Jena 1932.
198 THE REVIEW OF ECONOMIC STUDIES
economy, provided only that there is pure competition. I t was argued
repeatedly by Marx himself that the " law of value " by which equilibrium
asserts itself in an exchange economy based on the division of labour holds for
any type of exchange economy, whether capitalistic or an " einfache Waren-
produktion ". Even more, Marx develops his theory of value first for an
" einfache Warenproduktion " later showing the (unessential from his point of
view) slight modification it must undergo if applied to a capitalist economy.
Thus the institutional basis of capitalist society has no essential significance
for the general theory of economic equilibrium. In so far, the prevailing
opinion of economists is right. The whole significance of this datum is in
terms of a sociological interpretation of the economic equilibrium process.
However, the institutional datum underlying the hlarxian analysis of
capitalism becomes of fundamental significance where the theory of economic
evolution is concerned. A theory of economic evolution can be established
only on very definite assumptions concerning the institutional framework in
which the economic process goes on. The instability of the technique of
production which is the basis of the Marxian1 theory of econon~ic evolution
can be shown to be inevitable only under very specific institutional data. I t
is clear that it could not be shown to exist in a feudal society, or even in an
" einfache Warenproduktion ". Of course, a certain amount of technical
progress exists in any type of human society, but only under Capitalism can
it be shown to be the necessary condition for the maintenance of the system.
8. The necessity of technical progress2 for the maintenance of 'the
capitalist system is deduced in Marxian economics by showing that only in a
progressive economy can capitalist profit and interest exist.
The profit of the capitalist entrepreneur, from which also interest on capital
is derived, is explained by Marx to be due to the difference between the value
of the worker's labour power and the value of the product created by the
worker. Now, according to the labour theory of value, the value of labour
power is determined by its cost of reproduction. As in any civilised society
a worker is able to produce more than he needs for his subsistence he creates
a surplus which is the basis of his employer's profit. However, the crucial
point in the Marxian theory is the application of the labour theory of value
to the determination of wages. If the market price of cotton cloth exceeds
its " natural price " capital and labour flow into the cotton cloth industry
until, through increase of the supply of cotton cloth, its market price conforms
to the " natural price ". But this equilibrating mechanism, which is the
foundation of labour theory of value, cannot be applied to the labour market.
If wages rise above the " natural price " of labour power so as to threaten to
annihilate the employers' profits, there is no possibility of transferring capital
and labour from other industries to the production of a larger supply of labour
power. In this respect labour power differs fundamentally from other com-
modities. Therefore, in order to show that wages cannot exceed a certain
maximum and thus annihilate profits a principle different from the ordinary
1And also of Schumpeter's.
2 By technical progress I mean here not only technical improvements in the narrow meaning
of the word, but also improvements in organisaticn, etc., . any innovation increasing the
efficiency of the optimum combination of factors of production.
MARXIAN ECONOMICS AND MODERN ECONOMIC THEORY 199
mechanism making market prices tend towards " natural prices " must be
introduced.
The classical economists found such a principle in the theory of population.
They taught that the pressure of the reproductive instincts of the population
on the means of subsistence reacts on any increase of wages above the " natural
price "of labour power to such an extent as to counteract effectively the increase
of wages. Ricardo says explicitly1 : " However much the market price of
labour may deviate from its natural price, it has, like commodities, a tendency
to conform to it. . . . When the market price of labour exceeds its natural
price, . . . by the encouragement which high wages give to the increase of
population, the number of labourers is increased, wages again fall to their
natural price." Thus the working class is assumed to be in a vicious circle
which it cannot transcend. Marx rejected the Malthusian theory of popula-
tion2, contending that even without such reproductive facilities wages could
not rise so as to annihilate profits. For Capitalism creates, according to Marx,
its own surplus population (industrial reserve army) through technical progress,
replacing workers by machines. The existence of the surplus population
created by technical progress prevents wages from rising so as to swallow
profits. Thus technical progress is necessary to maintain the capitalist system3
and the dynamic nature of the capitalist system, which explains the constant
increase of the organic composition of capital, is established.
That the labour theory of value is not necessary for this argument is
easily seen, for its application to the labour market is a purely formal one, since
the equilibrating mechanism which is at the basis of this theory does not work
on the labour market. I t is technical progress (or the " law of population "
in the case of the classical economists) which prevents wages from swallowing
profits.
We can now see in what sense Marxian economics deduces from theoretical
considerations the " necessity " of economic evolution. Of course, the
necessity of the fact that labour-saving technical innovations are always
available at the right moment cannot be deduced by economic theory and in
this sense the " necessity " of economic evolution cannot be proved. But
Marxian economics does not attempt to prove this. All it establishes is that
the capitalist system cannot maintain itself without such innovations. And
this proof is given by an economic theory which shows that profit and interest
on capital can exist only on account of the instability of a certain datum, .
1Principles, Chap. V ,p. 71 (of Gonner's ed. 1929).
2 Das Kapital, I, chap. XXIII.
8Marx himself did not see clearly that in his theoretical systcm the virtual existence of a
surplus population created by technical progress is necessary for the maintenance of the capitalist
system. He applied the labour theory of value to the labour market without being aware that
the equilibrating mechanism a t the basis of this theory does not work in respect to labour power.
But his theory of surplus population which he opposed to the Malthusian theory allows us to
complete Marx's argument so as to bridge the gap in his system. I t may be mentioned that a
proletarian surplus population can also be created through driving out of small independent pro-
ducers (for instance, artisans and peasants) from the market through the competition of capitalist
industry. This source of surplus population was very important in the early history of Capitalism.
So long as such a source of surplus population exists the capitalist system might exist, in theory,
even without technical progress other than the dynamic process inherent in the destruction of
pre-capitalist systems.
200 THE REVIEW OF ECONOMIC STUDIES
the technique of production, and that it would necessarily disappear the
moment further technical progress proved impossible. The economic theory
presented here is, of course, but a mere sketch of how Marx explains the
evolution of Capitalism and a suggestion as to how his theory can be completed
so a s to bridge over the gaps he left. The modern development of economic
theory, however, makes it possible to construct a far more satisfactory theory
of economic evolution.
I t is obvious that the necessity of economic evolution under Capitalism
is entirely due to the institutional datum distinguishing Capitalism from an
" einfache Warenproduktion " and that it would not exist in the latter form
of exchange economy. Therefore, " bourgeois " economics, omitting to
specify exactly the institutional datum of Capitalism, is unable to establish a
theory of economic evolution, for such a theory cannot be evolved from the
very broad assumptions of exchange economy in general. From our account
of the Marxian theory of economic evolution, it becomes evident that the
necessity of economic evolution does not result from the exchange and pricing
process as such, but from the special institutional set-up under which this
process goes on in a Capitalist The specification of institutional data
by " bourgeois " economic theory is too broad, since it gives no more than the
institutional data common to any type of exchange economy. But since this
very broad specification gives results which are too general to be applicable to
special problems, it usually superimposes a very narrow specification of
institutional data concerning the monetary and banking system (. the
existence or non-existence of the gold standard, whether the banking system
makes an inflationary credit expansion possible or not, etc.). But between the
first specification of institutional data which is very broad and the second
specification which is very narrow there is a gap : the institutional datum
distinguishing Capitalism from an " einfache Warenproduktion ". And this
is precisely the datum which is of fundamental significance for the theory of
economic evolution.
g. Through the exact specification of the institutional framework of
capitalist economy, Marxian economics is able to establish a theory of economic
evolution in which certain data evolve " from within " the economic system.
But not all changes of data are explained in this way by the Marxian theory.
The evolution of certain data resulting from the very mechanism of the
economic system influences certain extra-economic factors such as the policy
of the state, political and social ideas, etc., which, reacting back on the economic
system, change other of its data. This consideration supplies the explanation
of the transition from laissez-faire to state interventionism and from free trade
to protectionism and economic nationalism, the emergence of imperialist
rivalries, etc. The causal chain through which the evolution of certain
economic data influences certain extra-economic factors and the reaction of these
factors back on the data of the economic system is, however, not within the
subject-matter of economics. I t belongs to the theory of historical materialism
the object of which is to elucidate the causal chains connecting economic
Similarly Schumpeter's theory of economic evolution is based on very definite institutional
data and does not hold for any type of exchange economy.
MARXIAN ECONOMICS AND MODERN ECONOMIC THEORY 201
evolution with social evolution as a whole. Therefore, the full evolution of
Capitalism in all its concreteness cannot be explained by a theory of economic
evolution alone. I t can be explained only by a joint use of both economic
theory and the theory of historical materialism. The latter is an inseparable
part of the Marxian analysis of Capitalism.
10. Our results may be summarised as follows :
(I) The superiority of Marxian economics in analysing Capitalism
is not due to the economic concepts used by Marx (the labour theory of
value), but to the exact specification of the institutional datum dis-
tinguishing Capitalism from the concept of an exchange economy in
general.
(2) The specification of this institutional datum allows of the
establishment of a theory of economic evolution from which a " necessary "
trend of certain data in the capitalist system can be deduced.
(3) Jointly with the theory of historical materialisnl this theory of
economic evolution accounts for the actual changes occurring in the
capitalist system and forms a basis for anticipating the future.
Cambridge,Mass-Cracozv. 0. LANGE.
