Capitalism and Karl Marx

Karl Marx

In Capitalism, The Critics I wrote that Karl Marx was one of the most consequential critics of capitalism. Depending on who is doing the counting Communists inspired by Marx killed over a hundred million people in the 20th century. That is a lot of consequences! We will never know the real number and it might be considerably more.

If Karl Marx’s poetry is any indication there was a lot of darkness in his soul. A few verses from “The Fiddler” written in 1837:

“Fiddler, with scorn you rend your heart. A radiant God lent you your art,
To dazzle with waves of melody,
To soar to the star-dance in the sky.”

“How so! I plunge, plunge wihout fail My blood-black sabre into your soul.
That art God neither wants nor wists,
It leaps to the brain from Hell’s black mists.

“Till heart’s bewitched, till senses reel: With Satan I have struck my deal.
He chalks the signs, beats time for me, I play the death march fast and free.

The Fiddler, Karl Marx

Apologists will say that mass murder and genocide was not his intention, that his ideas were misinterpreted of mis-applied. Of the poem it was just youthful exuberance. It is true that later Communists like Lenin did interpret Marx to suit their purposes. That was probably inevitable given how disconnected many of Marx’s ideas were from reality. Let’s look at a few of those now.

The Labor Theory of Value

According to this theory as interpreted by Marx the value of an article is dependent on the amount of labor required to produce it. He adds other qualifications like the product being “socially necessary,” whatever that means, and that the labor must be on current technology. The details argued by many economists are more complex, but in the end the theory is nonsense in the real world.

It is nonsense because the final objective economic value of any product is dependent on the demand for the product. Sometimes the demand is in some real sense “socially necessary” and sometimes it is not. Sometimes the demand is driven by rational desires and sometimes it is not entirely rational.

Food is definitely a social necessity, but how much you often pay for it is dependent on a lot of factors other than the labor required to harvest it. Some food is simply more desirable to many people than others and the supply vs. the demand determines the price that can be charged. A nice New York cut sirloin steak is almost always more valuable than a pork chop regardless of the labor involved in raising cattle vs. pigs.

One of the more curious examples of price (value) vs. labor is tulips in Holland during the early 1600s. The tulip introduced into Holland in 1593 became more and more valuable as demand surged. People began to speculate on tulip crops and as demand surged the price (value) rose to what now seem ridiculous heights. People literally made fortunes in tulips, which other than beauty, don’t have much “social necessity.”

Eventually the “tulip bubble” burst and the Dutch came back to their senses and the price of tulips dropped to something like a hundredth of what it had been. This is an example of how human demand, either rational or irrational, drives the price or perceived value of products independent of the amount of labor and capital invested to bring it to market.

In the real world the capitalist looks first to find a real demand, then tries to calculate how much capital and labor will be required to bring that product to market at a price that earns a profit. In making those calculations correctly, and finding innovative ways to lower the cost the capitalists earn their profits.

Sometimes the capitalist may invent an entirely new market. Such was the case with Steve Jobs and the iPhone (see What is Capitalism?). It is this kind of speculation on what people will buy, and how much they will pay for it, that fuels the innovations in capitalism that one almost never sees in Communist economies.

In the final analysis, the Labor Theory of Value is a failed dead end in trying to explain values and prices.

Surplus Value

Marx didn’t invent the theory of surplus value. However Marx elaborated on it to try to show that the capitalist was unfairly cheating the worker out of some portion of the value the worker created by his manual labor.

“According to Marx’s theory, surplus value is equal to the new value created by workers in excess of their own labor-cost, which is appropriated by the capitalist as profit when products are sold.”


The Labor Theory of Value is useful for Marx’s theory. It assumes the laborer adds some intrinsic value out proportion to what he is paid for his labor. That is simply not true. As we have already seen the economic “value” of a product is equal to the price an uncoerced buyer will pay and not a penny more or less.

In fact the free market is the greatest experiment in democracy the world has ever seen! In this market the buyers vote with their dollars as to what things are worth and their cumulative votes set the price of all services and commodities. This is sometimes called the Price Mechanism by economists. It is the fairest and most accurate way to set prices by the voluntary consent of all of the participants.

In free markets labor is a service that the laborer sells to the highest bidder. The value of that labor is ultimately determined by supply and demand. Low skilled manual labor is usually more in supply than demand and that holds down wages for people with few skills. For the laborer the key to earning more in a free market is to acquire skills that are in demand.

As a laborer climbs up the ladder of skill and experience he may even stash away savings in the hope of becoming a capitalist himself. The man in the picture below who has his own hot dog stand is a capitalist.

A Capitalist
A Capitalist

Contrary to Karl Marx social classes are not rigid. A worker can become a capitalist, and a failed capitalist may need to become a worker

Marx and history

“As Darwin discovered the law of evolution of organic nature, Marx discovered the law of mankind’s historical evolution …”

Friedrich Engels speaking at Karl Marx’s funeral

Marx believed that he had discovered basic principles of history. Based on his beliefs Marx made definite predictions about how the future would play out. Well over a century since his passing it is clear that Marx was wrong on all of his predictions.

Marx predicted that the proletariat (working class) would increase in size and become poorer as more and more people were pushed out of the middle class and forced to sell their labor. Therefore wages would decrease even more. Marx also predicted that due to the fierce “dog eat dog” competition of capitalism that many capitalists, the losers in the competition, would be forced also into the proletariat. In the end you would have a few winners at the top and most everyone else living desperately at the bottom of society.

One of the major fallacies of Marx’s thinking was the belief that capitalism is a zero-sum game where one’s loss is another’s gain. In this view wealth is largely static. But in fact the history of capitalism since the Industrial Revolution demonstrates that capitalism generates an enormous amount of new wealth. Capitalism is demonstrably not a zero-sum game.

In fact by the early twentieth century the amount of manual laborers as a percentage of the population had decreased and were better off. The middle class had greatly expanded in size and wealth. Marx’s prediction of a proletariat growing in size and desperation, leading to a proletariat revolution simply didn’t happen. Pretty much just the opposite of what Marx predicted was what really happened.

Marx believed that once Communism was firmly established by violent revolution that the state would wither away and a utopian society would arise largely without the need for government and laws. The historical record shows that in fact Communism has led to murderous totalitarian regimes that seek to monitor and control just about every aspect of human life.

We have only touched briefly on some of Marx’s ideas and beliefs. All that we have touched on shows that Marx was consistently wrong in his views of economics, society, government, and history. While Karl Marx was one of the most consequential critics of capitalism those consequences led to the deaths of millions and millions of human beings.

Perhaps Marx was right once in his poem “The Fiddler“:

“Till heart’s bewitched, till senses reel: With Satan I have struck my deal.
He chalks the signs, beats time for me, I play the death march fast and free.”

Next I will discuss some of the issues that I personally see with capitalism, and some of the modern issues facing capitalism today. In reality I think a lot of the problems are more problems of human nature than of capitalism per se. Unlike the Utopian dreams of some Socialists and Communists I really don’t see any system likely to transform human beings into angels anytime soon.