Articles on Islamic Economics

Critical Questions on Marxian Economics

Salman Ahmed Shaikh

Marx said that labor creates surplus value in production process which the capitalists extract in exchange. The surplus accumulates and this is exploitation of labor by capitalists. However, we note few observations below.

First, the payoffs to the labor and the capitalists are different. Labor gets fixed wage. Capitalists earn random profits from the sale of goods or services in the exchange process. In statistical sense, if labor gets fixed wage of Rs 10,000 per month and capitalist has 50% chance of earning Rs 20,000 per month and 50% chance of no profit, then, the expected value of the payoffs is the same for both.

Capitalists provide certain important functions to which Marx seemed to have given little importance. Capitalists provide employment to labor. Labor gets fixed wage irrespective of profit to the capitalists which could be negative as well. Tendency of losses at the height of industrial revolution was rare, but that did not suggest that profits are the necessary outcome of every production process for the capitalists.

Capitalists compete among themselves and their competition in theory may bring prices down to the level of marginal cost. If there is allocative efficiency, then the producer price is only as much as the cost of production which only includes normal profit for the entrepreneur.

Looking at data, we see that 75% of the total gross national income goes to the labor. Furthermore, per capita income in the same countries where labor was exploited during the industrial revolution has increased manifold. We also know that most of the new startups fail. So again, all capitalists are not always able to reap greater benefits than labor from the production and exchange process. Capitalists take the risk of random profits, prices and sales fluctuations and they must have an incentive to take the risk. The incentive is the ability to make a profit from the sale of commodities. But, profits can be negative as well. As long as they are earning profits from the sale of goods (with intrinsic value) sold to willing buyers at competitively set market prices, it does not seem to be exploitation.

Also, social relations are not mutually exclusive these days. Employee stock ownership plans, general and limited partnership and joint stock companies have pretty much modified factor relations. In a joint stock company, there is no one big capitalist. There are small shareholders in large numbers. These shareholders are workers in other organizations. So, present day labor-capitalist relations are not as black and white as they used to be. Now, scientists, programmers and artists can have copyrights and patents.

As per Marx, labor has only one thing which he can use to earn income, i.e. labor power. However, why the labor does not become a capitalist? It maybe because he has lack of wealth. In most developed countries, there is much less borrowing constraints. Why then majority of people do not become entrepreneurs by choice? If working class is always greater in number than the capitalists, why then most democracies do not overthrow market system?

Social relations have changed a lot ever since Marx. Nowadays, financial institutions with fractional reserve banking and credit money creation ability can exploit capitalists. These institutions demand compound interest on fiat money lent to businesses. In case of default, they take back the assets of the borrower.

Class tension is definitely there in history. It is between powerful and weaker groups. It may be between powerful nations versus weaker nations. Within nations, it could be between capitalists and labor. It could also be seen as between wealthy and poor. Poor capitalist is also exploited by its financier (bank or any money lender) with exorbitant rate of interest as in micro finance.

Markets create incentives, encourage competition and that allows capital accumulation, technological change, economic growth and transaction of wide range of goods as well as services.

Maybe, the value based approach is not the only way necessary to look at the production processes. People specialize and trade. That trade must be voluntary. The market must be competitive and sufficiently regulated. The income distribution must not be too unequal and that can be dealt with progressive taxes and removing fixed compensation to capitalists in the form of interest on wealth. The endowments inequality (which is primarily responsible for alienation and exploitation in Marxist approach) can also be reduced with tax on wealth.

Almost all of the exploitative practices against labor had either been rectified to a certain extent or can be rectified in current capitalism practice. But, there are two reasons why wealth inequality may still persist in a capitalist society, i.e. 1) interest bearing capital accumulation and 2) incapacitated wealth redistribution mechanisms.

Both the absence of broad based wealth taxes and the legal decree of allowing compound interest on money capital are the prime sources of wealth concentration. If both are corrected, capitalists would not be able to systematically exploit in competitive markets.

4 replies »

  1. There are many problems associated with capitalism, which came in front many times like in ,1930 and 2008 financial crisis. In the time of crisis, Islamic finance showed not only stability but at the same time continued momentum in growth. But still some papers showed that this stability of Islamic finance is not due to its Islamic nature but because of the nature of countries in which Islamic finance is emerging since most of them are closed economies and hence insulated from contagion effects. Yes, theoretically Islamic financial system is more just and welfare based as compared to Capitalism, Socialism or Marxism. But we need to present strong practical examples.


  2. The world should be convinced with the Islamic Financial system. Then all will consider the strengths and limitations in it. But the world is in long practice of Capitalistic system that could be named capitalist culture. The said explanation of Marxist economy and Capitalist economy is very confusing. I have very limited read about both economic systems. But the present world economy is running fast towards an international war-like situation that is nothing but a Capitalistic-competition only. The modern world has faced two World-wars which were also the result of international Capitalistic competition and the results were in the form of loss-of millions of people. It is also observed that so-called development is boosted, irrespective of economic-loss to resources and the environment. The developed world is enjoying mostly with political and economic power. On the other hand, most Islamic countries are suffering from severe law and order problem and poverty. Islamic countries are major oil-producing countries and some are financially rich. Why the expected egalitarian distribution is absent from common people’s reach? So far, Marxism is a science without any discrimination of race, religion or sentiment of culture. Humans may not accept, that is not matter of science. We may die with in-fighting as like Dinosaurs. That will not affect science. It is only a cultural option of power-leaders of this world.


  3. The real exploitation exists in the whole interest based system regardless of who are the capitalists and who is labor. They are suffering from unjust exploitation. An African president said on the unfairness caused by the interest: “We have borrowed $5 billion, we paid $15 billion and we owe $18 billion”. So, the world would benefit, if it removes the unjust activities. Nowadays, the world is moving to a system, which is just and more equitable i.e. Islamic finance.


  4. Almost all of the exploitative practices against labour had either been rectified to a certain extent or can be rectified in current capitalism practice. But, there are two reasons why wealth inequality may still persist in a capitalist society, i.e. 1) interest bearing capital accumulation and 2) incapacitated wealth redistribution mechanisms.—-good.


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