Marx’s Law of Crises and Depressions

All five of Karl Marx’s Laws of Capitalist Motion supposedly lead to economic crises and permanent depression (Ekelund & Hébert, 1990):

• Law of Accumulation and the Falling Rate of Profit
• Law of Increasing Concentration and the Centralization of Industry
• Law of a Growing Industrial Reserve Army
• Law of Increasing Misery of the Proletariat
• Law of Crises and Depressions (p. 276-278)

Each of these laws simply highlights imperfections present in pure capitalism, if such a system actually exists. Together these laws do not constitute a valid alternative to capitalism, but taken individually they offer some valid criticism -- Marx did not leave implementation instructions though.

Marx’s law of Crises and Depressions is an extension of Marx’s increasing misery doctrine. According to Marx, a crisis would ensue and a depression would take hold because of the capitalists’ never ending propensity to accumulate -- that is, pure capitalism would be pursued, without modification, no matter what the outcome.

There are several questionable assumptions behind the notion of permanence of the Law of Crises and Depression (Ekelund & Hébert, 1990):

• Technological advances have stopped. Labor is a perfect substitute for machinery and vice versa. Does a computer replace a secretary or instead make he/she more productive?
• Machinery does not require a significant number of associated workers. Does a foundry completely eliminate the role of the blacksmith or simply change the job?
• Workers do not readily adapt to displacement by machinery from old specialized jobs and therefore develop new skills. Will new skills be in demand? Is the division of labor a curse or a blessing?
• Long cycles of low wages among a mass of workers will exist.
• The capitalist’s drive for accumulation will always be unbridled and always leads to overinvestment -- information about the general level of overinvestment in other businesses supposedly would not be available, and thereby no change in behavior of individual capitalists would occur.
• Capitalists are innately blind to the plight of the workers and that pure capitalism would always be pursued regardless of the human cost.
• Class divisions are discrete and unchanging. Clearly, a democratic form of government might alter the class rigidity and social immobility that Marx described.

Perhaps the major implication of Marx’s law of Crises and Depression is that the depression would be permanent. This would result in an expanding industrial reserve army and social revolution. In practice though there is a group of persons who are unemployed, but this pool of talent is added to and drawn from as jobs are created, worker skills change, and jobs are eliminated over time. Certainly, in the West, the industrialized nations of the Far East, and the former Soviet Bloc, the law of Crises and Depression has not held a grip on an economy for long periods as Marx suggested.

Reference

Ekelund, R. B., Jr., & Hébert, R. F. (1990). A history of economic theory and method (3rd ed.). New York: McGraw Hill.

Alfred Marshall’s Time and Ceteris Paribus Theory

One of the most confusing aspects of economic analysis is the wide range of interrelated forces that can affect the behavior of an individual or firm over extended periods. Alfred Marshall (1842-1924) constructed an ingenious methodology for isolating the influence that these forces could exert over periods and which could be used to treat these variables separately (Ekelund & Hébert, 1990). Marshall proposed that one variable could be examined in isolation, while other variables were assumed constant. This new methodological construct called Ceteris Paribus, meaning other things being equal, allowed the researcher, who often had limited data, resources, and analytical tools at his disposal to study a phenomenon by breaking a problem into its component parts. The effect of each component part could then be ruled out in having an effect on the variable under study.

Ceteris Paribus was a breakthrough because it provided a clear name and methodology to a technique that had been employed somewhat sporadically in classical economic analysis. The Historicists among others rejected classical economic analysis in favor of their own holistic views because of the very point that economic forces were too complex overall to comprehend. Marshall’s advancement of Ceteris Paribus shattered the notion that internal and external forces exerted on both the firm and the industry were always too complex for analysis.

Marshall’s own example of the fishing firm within the context of the fishing industry gives clear examples of the importance of judicious application of Ceteris Paribus. Seasons and weather affect the demand for fish in the short run. Availability of substitutes and changes in consumer tastes affect the long run demand. Underemployed anglers and existing boats being used for other nautical purposes could then fish existing waters to help allow for responses to short-run demand. Training new anglers and building new boats allow for long-run response to increased demand. Clearly, isolating these forces allows one to choreograph changes in competitive equilibrium with some sort of rational explanation. With Ceteris Paribus, Marshall demonstrated in his example of the fishing industry that some long run and short-run factors that do affect the fishing trade can be ignored or assumed constant for short periods.

Through application of Ceteris Paribus, one can understand the problems of continuous change over time on various forces that affect demand and supply. Marshall applied Ceteris Paribus to define the relationship between changing demand and production costs with normal price and competitive equilibrium. Marshall further noted that variables held constant under a Ceteris Paribus assumption are done so on a provisional basis only—problems unfolding over long periods of time could make special study of some variables necessary to determine the validity of holding the variables constant with Ceteris Paribus.

Reference

Ekelund, R. B., Jr., & Hébert, R. F. (1990). A history of economic theory and method (3rd ed.). New York: McGraw Hill.