Socialism and the Centrally Economy: Why Were Marx's Predictions Wrong

Why Were Marx's Predictions Wrong In a nutshell, Marx's predictions about wages proved to be wrong, because labor market conditions in most capitalist nations did not develop as he expected. Although competition among firms does tend to push economic profits in a given industry down to zero in the long run, new profit opportunities always arise with changes in demand and technology. Entrepreneurs who seize the opportunity to respond to changes in supply and demand can earn profits by creating new products and processes. There may still be conflict between workers and capitalists, as can be seen by occasional labor disputes between unions and employers. However, there is no doubt that both workers and their employers have gained from the tremendous growth in productivity associated with capital accumulation. Simple analysis of labor market changes over time will show you why wages have risen well above the subsistence level in most nations. Suppose that, at the beginning of the Industrial Revolution, wages were close to subsistence. Over time population growth increased the supply of workers, which puts downward pressure on wages. However, increased capital accumulation increases the productivity of workers. When productivity increased, employers were willing to pay higher wages because each worker produced more and added more to employer revenue. A firm that didn't raise wages when productivity increased was likely to lose workers to competing firms that could pay higher wages and still increase profits by hiring away the first firm's most productive workers. Competition among firms for labor services tended to bid up wages because additional profits could be made by hiring more workers when their productivity increased. The resulting increase in demand for workers put upward pressure on wages. Over time it's apparent that, on average, the increase in demand for labor outstripped the increase in supply. Population growth in industrial nations turned out to be much slower than many 19th-century economists predicted. The rate of increase in worker productivity was also greater. As shown in the graphs in Box 1, shifts in the demand for and supply of labor have pushed wages well above subsistence for the average factory worker since the 1850s. Marx's prediction of a huge reserve army of unemployed simply didn't materialize. Technological advances increased the incomes of workers in modern capitalist economies and helped provide the markets for the goods produced by the system. Although the business cycle still exists and there are inevitable ups and downs in the economy, the lot of workers, on average, has improved vastly since the turn of the century. Of course, labor unions have helped provide a voice for workers and have contributed to higher wages in capitalist systems, but less than 15 percent of the labor force in the United States currently belongs to unions. The main factors keeping wages high are competition among employers for workers and technological change and investment that contribute to increased labor productivity. Finally, advances in social policy, as evidenced by increased government transfer programs and social insurance, have helped alleviate poverty and improve working conditions. Much of the growth of government in the United States, particularly in the 1970s, can be attributed to policies designed to ensure retired workers minimum standards of living through more generous Social Security pensions. Welfare programs provide support for the nonworking poor. Government intervention in the marketplace to pursue social goals and provide services that profit-motivated firms lack the incentive to make available has served to prevent the social unrest that Marx expected to lead to revolution. All this is not to suggest that the modern mixed economy works perfectly. Poverty and low wages for unskilled workers remain as social problems in the United States. In spite of this country's many advantages, a distressingly large percentage of the U.S. population is still classified as living in poverty. There is also concern about the monopoly power exercised by firms in certain sectors of the economy. However, the widespread misery and the vast gap between the well-being of the entire class of workers and a small minority of capitalists that were envisioned by Marx have failed to materialize. Extensive social programs administered by governments and improved productivity of workers have served to lift average living standards well above the subsistence level for the vast majority of workers.