The greatest critique of classic econmics was by a German journalist and political activist, Karl Marx. By the time that Marx wrote his major works in the 1840s and 1850s, the Industrial Revolution was in full swing. Marx, at the time, spent a lot of time in the British Museum’s reading room reading the works of Smith, Malthus, and Ricardo and concluded that, for the most part, they were all wrong.

While it is common today to portray Marx as a revolutionary trying overthrow the status quo, but his criticism of capitalism and economics was quite traditional. Marx is often misquoted and misunderstood and many of the statements attributed to him come from either a) that few today read Marx because his prose is dense and his vocabulary opaque and b) willful misreadings. Perhaps the most common misinterpretation is the slogan of “from each according to his means and to each according to needs” suggesting radical equality and redistribution. What this quotation often leaves out is that Marx wrote in his Critique of the Gotha Programme that “our banner SHOULD NOT read from each according . . .” [ emphasis added ]. In the end Marx was a first rate journalist, a first rate political scientist, a second rate economist, and fourth rate revolutionary. Many themes swirling in the winds today have their provenance in Marx’s ideas such as globalization, materialism, the growth of the state/public sector, the socialization of risk, and the interpreation of the Civil War in most American history textbooks comes straight from Marx’s writings. UC-Berkeley economist Bradford Delong discusses Marx's current and historical relevance as an economist below.

Marx attacked the foundations of modern capitalism -- the division of labor, the "invisible hand" market system, and the labor theory of value -- laid out by Adam Smith. Marx thought modern capitalism was a "stark utopia". It was a utopia because it would enable humans to produce more than ever thought possible and we could escape persistent poverty and penury, but it was "stark" because while we could make paradise, we would never be able to enjoy it. Capitalism, in Marx's view, would turn us into cogs of a machine and eliminate our humanity by either turning us into brutish beats or soulless Naz-gul, not to mention it would probably destroy our planet, invite war and social conflict, and many other bad things in the process.

Smith praised the division of labor because its ability to make human societies more productive. Marx, however, though it would produce alienation. Marx observed that under the division of labor no one would actually make anything. We would only be a part of the process. We could not look at our work and be proud of it because we could not claim it as our own. For example, as a teacher, our "work" are students, but each individual teacher only produces a "part" of the student's education. We would become "alienated" from our work, merely replaceable cogs in a machine that capitalist managers would toss away and replace when they became worn out. This view of society is lampooned in Charlie Chaplin's movie Modern Times below.

The larger social problem would be that we would create an "autistic" society of social morons who only understood our specific tasks, but could not relate to others, except through anti-social behavior. Think Pink Floyd's "Another Brick in the Wall," Green Day's "Longview" or The Who's "Quadrophenia" as examples of where Marx thought we were going. We can relate to things, but not people. We would only care about our little corner of the world, but be unable to see the world as a whole. Here is a college student with too many ideas in her head trying to explain "alienation" and a more informed perspective on the effects of the division of labor on our sense of moral responsiblity by French social observer, Jacques Ellul


The second groups of criticisms regarded Adam Smith's idea of the "invisible hand." Smith believed in the natural harmony of human interests. The invisible hand would bring together all of our individual actions to produce a greater result than before. Marx observed that history was the history of class conflict. There were always haves and have nots and one group exploiting another. In the ancient world it was masters over slaves, in the middle ages, Lords exploited serfs, and now capitalists, who owned the factories would exploit workers. Applying the classical notion of a LABOR THEORY OF VALUE, Marx inferred that the evident inequalities in society were due to the extraction of workers' surplus value to the capitalists and that they did not reap the benefits of their contribution to production. As this Monty Python clip illustrates, there is "violence inherent in the system" to which Marx attracted attention.

The second issue for Marx was the distinction between USE VALUE and EXCHANGE VALUE of commodities. The USE VALUE is the intrinsic value an item has when "in use," i.e., the value of a hammer is its ability to drive nails. The EXCHANGE VALUE is the price the item commands in a market. The best example this is the demand for branded or designer merchandise. It has the same "use value" as generic merchandise, but individuals put a higher "exchange value" on the item because of its association with a brand. Marx thought this would a) fundamentally gum up the operation of the system because there was no objective system of determining value, and b) it would make us all materialistic. Recently, social critic Naomi Klein has called attentiont to this problem in her book NO LOGO, detailed in the clip below.


The final axis of Marx's attack was on the LABOR THEORY OF VALUE and the classical defense of free labor. Yes, Marx wrote, the institutions of slavery and serfdom had dissolved, but only to be reconstituted in capitalists exploiting wage laborers. The form had changed, but the pattern of class conflict recurred. A famous study called Time on a Crossby Nobel Laureate Robert Fogel found that the nutritional level of Irish-American wage laborers in Boston was lower than for African-American slaves in the South before the American Civil War. This does not mean that slavery was not abhorrent, but that factory wage-laborers were also doing poorly and not sharing in the benefits of capitalism. Before the Industrial Revolution, most households were self-sufficient: they grew their own food, built their houses, and made their own clothes. Now, crammed into small tenement apartments in cities, they depended upon earning money by working for someone else to provide for the basic necessities of life. They lived to work and did not work to live. Like animals raised for slaughter, capitalism condemned many to spending 18 to 20 hours a day, six or seven days a week to labor simply to stay alive. In the end, Marx observed, this is not a humane way to organize society or the economy. In addition, workers were more dependent on wages than before. They could not, as they had as farmer-peasants, grow their own food, make their own clothing, build their own shelter, but depended on earning a wage from another to support themselves with the basic necessities of life. Therefore, they could be controlled by capitalist who owned and ran the factories they depended on for their livelihood. This had political as well as economic implications.

Below, famous linguist and political activist Noam Chomsky discusses how many equated wage slavery with chattel slavery at the time of the American Revolution.


Marx was an atheist and famous for describing religion as the "opiate of the masses," however, many religions shared elements of his critique of life under capitalism. Most religions preach a version of communism, sans the atheism. Most religious texts instruct us to share with the widow and orphan, to help out those less fortunate than ourselves, tell us the emptiness of worldly riches and the like. For example, one of the pillars of Islam is zakat or the duty to give money to charitable causes and from Christianity there are norms of noblesse oblige, i.e. that rich people are responsible for providing for those less fortunate than themselves. Andrew Carnegie, the famous robber baron, wrote a tract called The Gospel of Wealth where he expressed his belief that someone who died rich had failed. For most of the Middle Ages, as dramatized by Shakespeare in his Merchant of Venice, there was the sin of usury, or lending money out at interest. In Ancient Judaism, there was the year of jubilee that occurred every 40 years ( = one generation) where all land would be pooled and redivided equally so that inequities would not grow or be permanent. In most Asian religions, there is a decided indifference to wealth and merchants (and their family) were held in low esteem. Buddhism taught that attachment to material things (including wealth) was the cause of all suffering and Westerners chimed in with the notion that money was the root of all evil. Religious clergy in both the East and West tooks vows of poverty.
For purposes of illustration consider these following passages from the Judaeo-Christian-Islamic Tradition:
  • "It is easier for a camel to pass through the eye of a needle than for a rich man to enter the kingdom of heaven."
  • "Blessed are the poor, theirs is the Kingdom of God."
  • "Hearken to this, you who swallow up the needy and cut off the poor of the land. You who purchase the poor with money and the needy in order to inherit them and the refuse of the grain we will see. The Lord swore . . . I will never forget any of their deeds. Shall not the land quake and its inhabitants be destroyed? yea, it shall rise up wholly like the rain cloud and it shall sink like the river of Egypt."

However, something happened on the way to the rapture. Beginning with the Protestant Reformation (and the rise of the heterodox Mohist sects in China and what sociologist Robert Bellah called "Tokugawa Religion" in Japan), the relationship between the eternal and the economic changed. Instead religion stunting economic development, certain strands of Protestantism seemed to encourage profit-seeking behavior. This theory, popularized by famous German sociologist and economic historian Max Weber, argued that the tenets of Calvinism (a.k.a. Pilgrims and Puritans) was particularly conducive to the development of capitalism. In a study titled The Protestant Ethic and the Spirit of Capitalism, Weber argued that the Calvinist belief in predestination made them desperate for signs that they were selected for eternal bliss in heaven. They could not change the final outcome, but they could find evidence to “read God’s mind” by looking at their material prosperity. Those that God had destined for heaven, he would also bestow earthly blessings. As a result, these new age religionists equated work with prayer, taking the Benedictine Rule “laborare est orare” – work is prayer – to its logical extreme. They wanted to earn money, but not spend it. This unspent money became savings that could be used for investment. In addition, because they held that the Bible was the only legitimate source of divine inspiration and instruction, they required a literate population and literacy is one of the preconditions of Smith’s division of labor.
Finally, obsessed as they were with their own salvation, they became compulsive calculators – time is money and idle hands make for the devil’s work. They pioneered the mechanical clocks that made it possible to measure time – and hence effort – to the smallest increment. Before the Protestant Reformation, religious buildings had bell towers, or minarets in the Islamic world, but afterward clock towers replaced the approximate time keeping of bell towers and minarets. Clocks are important to the development of the modern economy for two reasons. First, they are the epitome of the machine and cultures that are good at clock making, such as the Netherlands and Japan, will likely have the mechanical aptitude to develop the machines and machine tools needed for industrial production. Second, mechanical clocks allow people to measure labor in terms of time and therefore compensate industrial workers based on a time clock.
There seems to be some evidence for Weber’s theory. Areas strong in Calvinist Protestantism were at the fore of the Industrial Revolution: Scotland, Switzerland, and the Huguenots, the Pilgrims / Puritans / Congregationalists of the New World were all descendants of this strict form of Protestant Christianity. So, instead of religion being a barrier to economic development, it became a midwife.

7.1 LAISSEZ-FAIRE & 19th CENTURY POLITICS Laissez-faire, often associated today with conservative thinkers, was often considered a progressive idea in the 19th century. You have to be pretty progressive to suggest that letting orphans starve or throwing grandma from the train is a good idea. It was closely tied to Darwinian ideas of evolution and called "Social Darwnisim." This is somewhat of a misnomer because these ideas and their application to human societies predate the publication of Darwin's major works. However, the spread of these ideas lead to notions that competition was natural, that survival of the fittest was not only a description of how the world worked, but also how it should work. The market acted as the mechanism of natural selection, rewarding those well-suited to survive in modern society and eliminating those that were less adapted. If one removed the artificial supports that enabled weaker elements of society to survive, society as a whole would have better traits and qualities passed on to the next generation promoting social evolution. More recent forays in evolution and sociobiology have largely refuted these notions, showing that cooperation, not competition may be a more evolutionary adapted behavior, but at the time many social reformers believed that removing artificial supports provided by government or society was the means to improve social wellbeing. Still, who the favored group was differed from country to country depending on what resources were relatively scarce. The following discussion draws upon historical sociologist Barrington Moore Jr.'s magnum opus The Social Origins of Dictatorship and Democracy. It begins with the notion that there are three basic inputs into economic production: land (i.e, natural resources), labor, and capital (i.e., $$$$). At any given time, one of these three inputs were be relatively scarce compared to the other two and therefore be more expensive and earn a quasi-rent or premium to draw it into the production process.