Marxian Economics vs. Neo-Classical Economics

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. [4] http://www.good.is... [5] http://democrats.edworkforce.house.gov...