The Marxist critique of capitalism: explained but not endorsed

This article aims to provide a brief explanation of some of the key fallacies that Karl Marx observed as inherent in capitalism. The motivation to write this piece was not to endorse the subject matter, but was rather born from a proclivity to explore influential ideas. Before the concepts are presented, there are two important points to be made.

Firstly, put politics to one side. To objectively accept or reject the Marxist critique of capitalism, it is vital that one comprehends it in isolation from the failure to construct a viable socialist alternative in practice.

Secondly, it is important to acknowledge that Marxist methodology is almost a polar opposite of neo-classical methodology. It is historical, concrete, empirical and idiographic. It aims to understand capitalism as something observably shaped by history – an experience, not an abstract ideal – and something not necessarily nomothetic. In other words, it treats economics as more of a social science, and less of a natural science.

The Labour Theory of Value

This idea underpins much of why Marx saw capitalism as an unjust system, and many of his other ideas stand or fall on its validity. The idea itself predates Marx, it is generally credited to David Ricardo, but Marx embraced it and built on it. It basically holds that the total value designated to a given commodity is ultimately traceable to the labour needed to produce it.

It comes with three key footnotes; 1) value is defined by socially necessary labour, reflective of the general standards of productivity and technology available in a given time and space; 2) that the indirect labour expended to gain the skills necessary to apply direct labour is taken into account; and 3) that the indirect labour expended supervising or managing the direct labour is also taken into account.

For Marx, the key take-away from the Labour Theory of Value was that it implies that the price of labour is reflective of the quantity of labour necessary to produce it. That is, a given wage is equivalent to the cost of sustaining the ability to work a given job, and is not a direct function of the value produced by that work. [1]

The Under-Consumption Paradox

Marx saw an employer’s primary goal as extracting surplus value from the worker, surplus value being the product of labour above what is returned to the worker as a wage. Conversely, he saw an employee’s primary goal as wage maximisation, which by nature hinders the employer’s ability to extract surplus value.

Marx saw this contradiction in the relations of production as a destabilising force in an economy – a perpetual conflict with no tendency towards any equilibrium. If employer’s gain the upper hand then surplus value is produced, but cannot be transformed into profits as lower wages translate to lower consumption capacity. If employee’s gain the upper hand, consumers have the capacity to consume, but surplus value is not produced adequately in the first place.

What is important is that Marx essentially identified a contradiction between microeconomics and macroeconomics. A firm’s inclination to minimise wages to reduce marginal costs is rational. But if all firms do this, workers have lower disposable income, translating to a shortage of aggregate demand and therefore, economic adversity. Some have argued that this rejection of methodological individualism, in the context of market rationality, planted the seeds for Keynes’ macroeconomic theories. [2]


Surprisingly, Marx conceded that capitalism was an exceptionally strong force when it came to continued productivity growth and technological innovation.

However, he also claimed that capitalism is path-dependent – where it goes next depends on where it last came from. While it is not necessarily a problem that exponential technological and productive gains would be immune from undoing, Marx also argued that monopolisation from the centralisation and concentration of capital grows congruently with such phenomena, and is problematically also immune from long-term reversals. [3]

The Tendency of the Rate of Profit to Fall

Marx viewed production as a circuit accumulating capital for the producers. In order to best accomplish this, the natural tendency over time for a firm is to increase constant inputs and reduce variable inputs (labour).

If the Labour Theory of Value holds, the gradual reduction in variable inputs means the real value of goods produced declines over time. Profits slowly decrease and the capital accumulation circuit gradually loses momentum. At some point, the forecast for the next circuit is a loss. The circuit is not undertaken, and the economy stalls. [4]


Marxism rejects static models that produce a simultaneous outcome. Marx proposed that the vast time constraint disproportionality between supply and demand is a critical factor in the instability of capitalism. Specifically, he argued that supply side decisions are based on probabilistic assumptions about future demand.

Much like Keynes, Marx stressed the importance of uncertainty. Imperfectly rational humans operate the capital accumulation circuit, hopeful of the realisation of what are fundamentally uncertain expectations.

Thus, if over-confident forecasts of demand are made, then investments are not rewarded, firms stop hiring and demand falls further. Here, Marx saw a structural imbalance that transforms itself into an economic crisis by way of vicious circular and cumulative causation. [3]

Money as a Commodity

Marx saw money as more than just a medium of exchange. He purported that it is a commodity within itself, with the value to the holder being the power of the separation of time and space of a transaction. Such a property was thought to give money a constant excess demand.

The crucial implication of this is that the primary motivation of production is not to accumulate use-value commodities, but to accumulate the commodity of money. [1] Furthermore, due to money fostering separation of buyer and seller in time and space, it cultivates undesirable situations in which the ‘proletariat’ is at the mercy of producers who are pessimistic and unwilling to invest, because their preferences are slanted towards prolonging that separation. [5]


Many of the tools Marx used to explain capitalism have been adopted and refined by other heterodox economics schools. Path-dependence and circular and cumulative causation are central tenants of Old Institutional Economics, and the role of uncertainty is emphasized by Post-Keynesians.

Post-Marx economic thought has, more or less, rejected the Labour Theory of Value – principally because it pays inadequate attention to consumer preferences. Marx viewed capitalism as immoral because he saw a system in which workers were exploited by capitalists, who unjustly extracted surplus value for their own gain. If the Labour Theory of Value doesn’t hold, neither does this contention.

It would be wise for the author to advise that this short article probably does not do justice to the complexity of Marxist economics. The main mission of this article was to point out that ideological blinkers should not prevent one from exploring ideas that have had a definitive impact on our world.




[1] Howard, M & King, J 1976, ‘Introduction’, in M Howard & J King (eds.), The Economics of Marx: Selected Readings of Exposition and Criticism, Penguin Books Ltd, Great Britain, pp. 9-47.

[2] Howard, M & King, J 2001, ‘Where Marx was right: towards a more secure foundation for heterodox economics’, Cambridge Journal of Economics vol. 25, no. 6m pp. 785-807.

[3] Stilwell, F 2012, Political Economy: The Contest of Economic Ideas, Oxford University Press, Australia.

[4] Fine, B & Saad-Filho, A 2004, Marx’s Capital, Pluto Press, European Union.

[5] Hodgson, G M 1991, After Marx and Sraffa: Essays in Political Economy, Macmillan, London.