Marxian Economics vs. Neo-Classical Economics

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. [3] http://tinyurl.com...