History of Economic Thought

Submitted by : Mahmuda Akter

Roll : BKH1712067F

1.A) What do you think of Karl Marx and his theory?

Karl Marx was a German philosopher, economist, historian , sociologist, political theorist,
journalist and socialist revolutionary. Karl Marx was the first philosopher who felt that his job
was not merely to interpret the world, but to change it. His writing influences politics till date.
Marx is popularly associated of socialism and communism. However, in the literature written by
Marx and Engels there is little reference to how a socialist /communism should be organized i.e.
the incentive structure needed to run an economy.
Karl Marx has given a lot of theories as in theory of history, theory of socialism and communism,
economic theories based on commodities and classes, labor theory of value, surplus and
exploitation etc.
Marx believed that the capitalist system created a class struggle that oppressed the working class,
created a poor quality of life, and was an ineffective way to structure society. He believed that the
tensions between the worker and the capitalist owners would create an antagonistic environment
that would eventually lead to the rise of socialism and the destruction of capitalist political and
social structures. His ideas are often controversial, with brutal dictators and authoritarian regimes
throughout human history often citing them. Marx’s theories can be interpreted through many
different lenses – philosophical and historical, as well as economical view point.
Marx believed that in a capitalist system, society would inevitably divide themselves into two
classes – the business owners and the workers. The workers would produce the material goods
and conduct all the labor, while the owners would reap all the financial and social benefits.

Marx’s analysis centered around the social cost of giving up the value and ownership of one’s
own labor to the owners. He further explored what that would ultimately mean for society at large
and the purpose of life for those working as the means of production in factories and other outfits.
He would often explore and analyze what would drive the workers if they did not own their own
labor.

I particularly think in many ways, Marx argued against profit maximization and the capitalist
economic system. He believed in many socialist ideas and principles that seek to return the
benefits and fruits of labor to the individual. Marx believed that the ideal system is not one that
seeks to maximize a behavioral economic system that promotes maximum profit and productivity,
but rather one that empowers the worker and returns control of their lives to them. He believed
that the allocation of capital created the social-economic system in which we live our lives.

B) What do Karl Marx mean by the term “Surplus value”? How exploitation is related with
surplus value?
According to Karl Marx theory, surplus value is equal to the new value created by
workers in excess of their own labor-cost, which is appropriated by the capitalist as profit
when products are sold. The concept originated with Ricardian Socialism, with the term
"surplus value" itself being coined by William Thompson in 1824; however, it was not
consistently distinguished from the related concepts of surplus Labor and Surplus
product. The concept was subsequently developed and popularized by Karl Marx. Marx's
formulation is the standard sense and the primary basis for further developments, though
how much of Marx's concept is original and distinct from the Ricardian concept is
disputed.
In his opinion, although capital performs important role during the production, without
labor it could do nothing!
W = Vmeans + Vadded = Vmeans + Vlabor +Vothers
W denotes the value of whole production the factory produced in the past one year.
Vmeans denotes the value of the means of production.
Vadded denotes the added value during the production.
Vlabor denotes the salary of workers.
Vothers denotes the rest of the values.
In this formula, capitalist called Vothers profit, because they deem it the outcome of the
capital; Marx called it surplus value, because it was created by labor but token by the
capital! If we take off the Vmeans from both sides of the formula, we get a new formula.
Vadded = Vlabor +Vothers
Now we sum up both sides of the above formula of all the factories and companies.
∑Vadded = ∑Vlabor + ∑Vothers
Looking at the left side of this formula carefully, maybe we can call it GDP what means
all the new produced of the nation in past one year. Then, smart guys could realize one
thing that people’s salary always less than the production if capitalists keep they profits.
Year after year, it comes a strange phenomenon that workers are too poor to buy
something to feed themselves, and on the other hand many many goods be stored in the
wear-house and could not been sold. It is called cyclicle economic crisis. Marx said the
economic crisis is the inherent weakness of the capitalism.
Economic exploitation implies the idea of a certain gain or profit through the production,
distribution and consumption of goods and services. This material interest has an impact
on the economy of a certain unit, be it the State, the community or the family.Surplus
value can be increased by exploitation.There are two distinct ways for a capitalist to
increase Surplus value. Two modes of exploitation are given below :
1.Absolute Surplus Value : By lengthening the working day without a corresponding
increase in labor compensation which means work longer.
2. Relative surplus value : By decreasing the necessary labour time needed to produce
labor power is another way of exploitation. This is accomplished by cheapening the value
of labor power by increasing productivity.
2.A) Why is marginal theory said to be a revolution in economics?
Marginalism describes both an economical method of analysis and a theory of value.
According to between classical and modern economics .In the history of economic
thought, the “Marginal Revolution” is usually considered as a revolutionary event, since it
established a subjective utility theory of value and adopted the marginal approach as an
effective analytical tool for economics.In this theory, individuals make economic
decisions "on the margin." That value is determined by how much additional utility an
extra unit of a good or service provides .The development of marginal theory is
 commonly referred to as the Marginalist Revolution and is seen as the dividing line
Marginalism seeks to understand the additional value a consumer gains from an
additional unit of a good or service and how their purchasing decisions are affected by
that. Marginalism helps businesses price their goods accurately as it gives an insight into
what a consumer values. The price decreases as consumption increases and vice versa.
Price and quantity, therefore, have an inverse relationship.
The marginal theory said to be an revolution in economics for its magnitude and
implications. The marginalist revolution in economics became the foundation for the
modern regulatory State with its “mixed” economy. Marginalism, whose development
defines the boundary between classical political economy and neoclassical economics,
completely overturned economists’ theory of value. It developed in the late nineteenth
century in England, the Continent and the United States. For the classical political
economists, value was a function of past averages. Marginalism substituted forwarded
looking theories based on expectations about firm and market performance. The optimal
rate of wages became the laborer’s expected contribution to the value of the employer;
and the value of the corporation became the firm’s anticipated profits.
2.B)Jevons claimed that, “the utility of something is not an intrinsic quality” explain it.
Jevons's claim; The utility of something is not an ‘intrinsic quality' means Utility is not included
in something/ naturally, it is in addition of happiness. Utility doesn't exist proportionately of
quantity of goods. He maintained that the value of pleasure and pain varies according to four
circumstances:

1.Intensity

2.Duration

3.Certainty or uncertainty

4.Nearness or remoteness
He discussed each of these at length. Pain is simply the negative of pleasure, and in individual
calculations the algebraic sum (i.e., net pleasure) is the meaningful quantity.He asserted that
maximizing pleasure is the object of economics. Humans seek to procure the "greatest amount of
what is desirable at the expense of the least that is undesirable. He defined a commodity as an "object,
substance, action, or service which can afford pleasure or ward off pain," and he denoted the "abstract
quality whereby an object serves our purposes, and becomes entitled to rank as a commodity."

Jevons clearly specified that a utility function is a relation between the commodities an individual
consumes and an act of individual valuation. Utility is not, in sum, an intrinsic or inherent quality that
things possess. Instead, utility has meaning only in the act of valuation.

c)Draw the Edgeworth box diagram.Draw the initial allocation in the Edgeworth box. What is
the set of allocations that improves the welfare of both A and B compared to the initial
allocation?Draw the contract curve in the Edgeworth box

Edgeworth Box

Let, two consumers: person A, person B; and two goods: x1 , x2 ,pure exchange (no production)
In a pure exchange economy, a fixed amount of goods is exchanged.
Initially, every consumer is endowed with some of each good; then they may engage in trade. This
allows us to study how prices change in response to relative scarcity.
We can represent this in an Edgeworth box

:
an allocation X of goods:
bundle (x1A, x2A) (person A); bundle (x1B, x2B) (person B)
This is any distribution of the two goods between the two consumers.
Any allocation is feasible if the amount of good 1 that person A holds and the amount
of good 1 that person B holds add up to the total amount of good 1 in the economy,
and similarly for good 2.
an endowment W (or, initial allocation) of goods:
-bundle ( ω1A, ω2A) (person A); bundle (ω1B, ω2B) (person B)

An allocation X is feasible if the total amount of each good consumed is equal to the total amount
available:
x1A+ x1B=ω1A+ω1B
x2A+ x2B=ω2A+ω2B
Any allocation in the Edgeworth box is feasible.
The initial endowment allocation (ω1A, ω2A) (person A) and (ω1B, ω2B) (person B) determines the
size of the Edgeworth box.
Pareto Efficiency:
Allocation X is a Pareto improvement over allocation Y if:
every agent prefers (or is indifferent between) her consumption bundle under X to
her bundle under Y;
that is: if for every agent allocation X is on a higher (or at least the same) indifference
curve.
Allocation X is Pareto efficient if there is no other allocation that is a Pareto improvement over X.

Contract Curve: The locus of all Pareto efficient allocations is the contract curve
The contract curve joins all the tangencies between A’s and B’s indifference curves
The definitions are in terms of preferences We want a criterion that tells us whether an allocation is
“good” in some sense. According to the Pareto welfare criterion, an allocation X is (socially) better
than Y if X is a Pareto improvement over Y.