Marxian Economics

Poster of the First Communist International

Soon after the death of Karl Marx in 1883, a Marxian school of economics emerged under the leadership of Marx's inner circle of companions, notably Friedrich Engels and Karl Kautsky, both of whom were German.  However, the Marxian school was soon embroiled in a "Revisonist" debate within the ranks - in the humanist challenge issued by Eduard Bernstein against the older materialist interpretation of Marx.  Specifically,  Bernstein (1899) challenged the Marxian notion that the economic breakdown of capitalism was "inevitable" and thus if socialism is to exist, it must be a conscious choice, channeled through the political end educational system, rather than a matter of preparing for the "inevitable" revolution.  A similar position was taken by Sidney Webb and the Fabian Socialists in Great Britain and Jean Jaurès in France.

Bernstein's political message was channeled into an economic debate that embroiled the early Marxians on the theory of crisis and breakdown.  In the second volume of Capital, Karl Marx suggested that the number of conditions required for steady-state growth were too numerous for capitalism to avoid breakdown.   Following up on Bernstein, Michal Tugan-Baranovsky (1905) disputed this and suggested that capitalism could achieve steady state growth, so the breakdown of capitalism is not inevitable.  Furthermore, practical experience suggested that, if anything, the capitalism was entering an ameliorative phase in the early 1900s.

All the big guns of the orthodox Marxian school -- Karl Kautsky, Rosa Luxemburg, Georgy Plekhanov and  more -- came out against Bernstein and the revisionists.  But the orthodox response was not uniform and itself was transformed in the ensuing discussion.   For instance, Karl Kautsky first replied that there was no theory of breakdown in Marx's work at all, and then, in 1902, Kautsky acknowledged there was a theory of "chronic depression" -- not a big-bang breakdown, but rather one that stressed the increasing severity of recurrent crises.  This theory was also expressed by Louis Boudin.  

This was followed up by another twist by  Rosa Luxemburg (1913).  Effectively, she argued that it was not obvious what "surplus-accumulation" was supposed to achieve, particularly if there was nobody to buy the goods produced by expanded production and thus realize the surplus.   "Where is the demand for the goods?" she asked over and over again. In her critique of the Marxian system, she argued that crisis is inevitable in a closed system, but that in an open system (i.e. a system with exogenous consumption), the crises can be averted by obtaining new buyers in non-capitalist  countries.   Imperialism, she argued, was the competition of capitalist nations for precisely these consumers.  Both Vladimir I. Lenin (1916) and Nikolai Bukharin (1917) disagreed with Luxemburg's theory and provided their own view of imperialism.  Imperialism, they argued, is the outcome of capitalist competition for profit rents, not necessarily the outcome of crisis avoidance.  They regarded the First World War precisely as a "hot" version of competitive capitalism.  

The revisionist debate energized a group of Viennese lawyers and scholars, the famous Austro-Marxists -- Max Adler, Otto Bauer, Rufold Hilferding and Karl Renner.  In contrast to the Germans, the Austrians were less concerned with the issue of revolutionary strategy and more with the issue of the Marxian theoretical analysis. This permitted them to embrace a quasi-revisionist attitude.

The Austro-Marxists were particularly inspired by neo-Kantian philosophy of science and the then-nascent positivist philosophy that was the rage in Vienna.   In the Austro-Marxian perspective, the Marxian system was a system of sociological enquiry, or rather, a system of economic theory which was embedded in a more general social theory which itself gave a central position to economic relationships.

[The so-called "Western Marxism" that emerged in the 1920s with the work of Georg Lukacs (1923) and the Frankfurt School (Horkheimer, Adorno, Marcuse, etc.) of sociology, was partly inspired by this "sociological" approach, but moved away from the stress on political economy of the Austro-Marxists and towards the role of the state in society, philosophy, culture and art,  which emphasized the subjective human element even more than any Austro-Marxist ever dared.  But we should not even begin to attempt to cover this here!]

The Austro-Marxists were also contemporaries of the then-prominent Neoclassical Austrian School and thus were forced to take the theoretical and economic aspects of Marx perhaps a bit more seriously and to listen to the Neoclassical critiques more carefully.  Of particular importance were the criticisms on the Marxian theory of value by the Neoclassical economists Philip H. Wicksteed, Vilfredo Pareto and, perhaps most formidably, Eugen von Böhm-Bawerk (1896). All these theorists claimed to have detected inconsistencies in Marx's "labor theory of value".  In particular, they identified the famous "Transformation Problem" of converting labor values into prices of production.

The defense of Marxian theory against the Böhm-Bawerk challenge was largely conducted by the Austro-Marxians -- notably, Rudolf Hilferding (1904).   It was Ladislaus von Bortkiewicz (1907) who showed that Marx's own "quantitative" solution to the transformation problem was incomplete, and provided his own.  In a little known work, Vladimir Dmitriev (1898) had provided another one. The question remained dormant until Marxian revival of the 1940s. 

The Marxian school faced two great challenges in 1918 -- the aftermath of World War I in Germany and Austria, and the success of the Bolshevik Revolution in Russia.  When the war ended, the economic and political systems of both Germany and Austria were in a mess.  The Social Democrats in both countries were suddenly thrust into power, and these included many Marxians among them.

In Germany, a "socialization committee" was set up under  Karl Kautsky and Rudolf Hilferding and left-leaning "reform" economists such a Emil Lederer, Eduard Heimann, Adolph  Lowe and (surprise) Joseph Schumpeter to handle the transition.  Hilferding went on to serve as Minister of Finance in two SPD governments in the 1920s.  In Austria, Karl Renner became Chancellor (later President), while Otto Bauer  served as secretary of state for foreign affairs (their minister of finance was, once again, Joseph Schumpeter, on whose unlucky shoulders the blame for the  ensuing hyperinflation was placed).  

The Marxians in general, and the Austro-Marxians, in particular, were to play an important role in Central European politics until the rise of Fascism in the 1930s. With post-war demobilization, hyperinflation, reparations difficulties to handle all at once and, in 1929, the rise of mass unemployment, the economic challenges were acute and they were much blamed for it by practically everybody.    Furthermore, with the success of the Russian Revolution beckoning the imagination, the parties were riven between those who wanted to aim straight for full-blown socialism and those who preferred a more incremental, pragmatic approach to social reform. 

At least after the failure of the German Revolution of 1918, the Marxians, in general, opted for the latter.  To justify their newly-found position and alleviate the fears of the middle classes, they retreated from the breakdown theory and embraced the revisionist idea of socialism being a "conscious choice" of the proletariat, not an inevitable outcome.  The great exceptions were  Henryk Grossman (1929) and Otto Bauer (1936) who set forth a new (and more formalized) "breakdown" theory arising from underconsumption.

With the exception of the unlucky  Schumpeter, the rival Austrian School economists, most of whom had played important roles in the pre-1918 Hapsburg public life, withdrew into the harbor of private businesses and chambers of commerce  and observed the procession of events.   They were particularly incensed at the Social Democrats  plans for nationalization of certain industries and social insurance schemes.  It was during this time that the  "Socialist Calculation" Debate with Ludwig von Mises and Friedrich von Hayek erupted.  The Austro-Marxian planners had, on their side, the exceptional abilities of several sympathetic Paretian economists -- notably,  Oskar Lange and Abba Lerner.   Other economists closer to the Marxian tradition, notably  Fred M. Taylor, Emil Lederer, Jacob Marschak and Henry Dickinson,   participated in this debate on the Marxian side.

Planning was also the problem in Soviet Russia itself.    In the 1920s, the main debate that emerged was on the relative stress that should be given to industry and agriculture.   Yevgeni Preobrazhensky (e.g. 1922, 1926)  came down heavily in favor of rapid industrialization at the expense of agriculture, via what he called "primitive socialist accumulation" (i.e. replacing markets with State trading monopolies on agricultural commodities).  He was opposed by Nikolai Bukharin, who argued that the disincentive effects of appropriation of peasant surplus would lead to a complete collapse of the Russian agricultural sector.   Bukharin's  "market-based" New Economic Policy, where peasants were allowed to market and keep the surplus of their own production, was attempted under Lenin in 1921  With the rise of Stalin, the NEP was scrapped, the agricultural sector brought to heel with terror and collectivisation, and State-led industrialization (and Preobrazhensky himself) came back into vogue.  It was really only after Stalin's death in the 1950s that Soviet planning methods were revitalized by the work of Oskar Lange and Leonid Kantorovich via the use of "Neoclassical" pricing theory rather than the Marxian labor theory of value.   

In Central Europe, the debate that swirled around Tugan-Baranovsky   initiated a tradition of the development of  multi-sectoral business cycle theory which maintained itself throughout the 1920s and 1930s period.  This can be viewed from the prism of Marx's scheme of extended reproduction and/or his theory of crises.  Particularly important contributions are the theories of structural economic growth by Adolph  Lowe, Wassily Leontief and the Kiel School and Grigorii A. Fel'dman's work on two-sector growth models in the Soviet Union.  Michal Kalecki's theory of distribution cycles were developed largely in response to the Marxian debate on "underconsumption" crises.

For developments after the inter-war period, see our discussion of the Neo-Marxian/Radical School.




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