The Marxist school is based upon the thinking of Karl Marx. Marxism is the theory that economic forces determine the social and political structure of society, and is applied to explain the development of the capitalist society. Marx is in the tradition of the classical school, but uses economics as a weapon for revolutionary politics. He provides a social analysis of classes and supports the 'class struggle'. He also analyses the interaction of the work environment with the social structure, and proposes a natural development of working conditions which impacts upon the social structure.

Marx was born in Trier 1818 of a middle-class Jewish family. He studied at the Universities of Bonn and Berlin and was involved with the young Hegelians in Germany, the most advanced German intellectuals of the time. Dissatisfied with Hegelian philosophy, he took to journalism as a practical method of social criticism and political activity working on the Rheinische Zeitung for a year. Marx moved to Paris and in 1843 became the editor of Deutsch-franzosiche Jahrbucher. Here he wrote two important articles on the Jewish question and on the Marxian theory of history that embodied the idea of the class struggle and the nature of revolution. Marx proposed that philosophy was the head of the revolution, and that the proletariat were its heart. He became interested in political economy and in due course met his life long friend Friedrich Engels. Persecution by the Prussian government forced Marx to move to Brussels in 1845. He returned to Germany during the revolution of 1848 to work at Cologne's Neue Rheinische Zeitung. Exiled again, he went to London in 1850 and lived there until his death in 1883.

Marx's works include la Misere de la Philosophie 1847, a critical reply to Proudhon; The Communist Manifesto, 1848, published on the eve of the revolution. The Eighteenth Brummaire of Louis Bonaparte, 1852; The Civil War in France, 1871; A Critique of Political Economy 1859, containing Marx's only theory of money; and das Kapital (first volume) 1867. Engels published volume two of das Kapital in 1885, after Marx's death, and volume three in 1894. Volume four, itself in three parts gives an account of the history of economic doctrines and was published after Engel's death by Karl Kautsky under the title Theorien über den Mehrwert 1904-1910.

In criticism of Marx, we should note that class does not depend upon ownership of means of production and members of each class do not nowadays act according to Marxian postulates. Industrial concentration and increases in fixed capital are excellent anticipations of the twentieth century experience, but increasing misery of the working class has not necessarily materialised in the Western world. (However, modern day apologists have used the idea of 'colonial exploitation' to explain the delayed fulfillment of this last prediction). Essentially there are no new thoughts from Marx's successors and no innovative economic tools of analysis were used by Marx. A culmination of existing theories and new social ideas yes, an economic breakthrough no.

M. A. Mannan in Islamic Economics, Theory and Practice comments that Marx regards the economic system as the 'unterbau' (substructure) and the religious ethical and legal system as the 'oberbau' (the superstructure). He says that the dominant classes concoct the oberbau, and that in reality there is no such thing as religion or morals. Oberbau is concocted in order to force the working classes to do what the dominant classes want them to do.

Marx's economic theory has five principles a) the law of concentration: business is concentrated into fewer and fewer hands until the small businessman is forced out of business and becomes the employee of one of the few large employers; b) the concept of surplus value: the value of a good is held to depend upon its labour value but businessmen take profit from the sale of goods produced by labour (surplus value) hence, de facto, the labourer's wage cannot be equal to the full value of his work. c) the two-class struggle: each class (capitalists and workers) developing due to the concentration of wealth described in the law of concentration; d) the overproduction theory of depressions: because of the existence of surplus value, labour cannot buy all the product that it produces, hence there will be over-production and a depression in due course; e) the idea of social revolution: the workers must overthrow the capitalists and the communist party must rule with an iron hand (the dictatorship of the proletariat in which an intelligent minority called the communist party rules) in order to establish first the Socialist Society (in which a democratically elected state controls all means of production) and finally the Communist Society (a utopian state in which the state withers away leaving an educated caring society in which 'from each according to his ability to each according to his need' is the overriding principle).

Marx holds that the basic contradiction of capitalism is that it requires co-operation between groups of people in order to produce, but separates ownership of wealth from labour. Thus antagonism arises between these two groups whose interests are incompatible. Orthodox economists focus upon production, consumption, distribution and exchange. Natural laws applying to these forms of economic activity have been mistakenly identified with reference to the economic structure of a current period of history, leading to confusion as to their true nature. Each of these laws is in fact linked to one another in a manner determined by the existing social structure. Where there is private property, a class structure inevitably exists, and that class structure describes the control of the means of production. Thus the social structure determines the economic structure and vice versa. For example, division of labour allows society to apportion workers to producing those things required by the whole society and this is a form of social labour that is determined by the economic structure. In contrast the peasant family organises production on the basis of the family unit. Each historical era has a given social structure, but as economic development takes place, the old social structure becomes out-dated and irrelevant. Thus continual revolutions occur.

Marx agrees with Ricardo that distribution is the subject of political economy, but holds that distribution is subject to historical events, not a natural law as proposed by Ricardo. Labour and natural resources are the two sources of value. He argues that use value is determined by the material qualities of the good in question. In capitalist society every commodity has a dual nature, use-value and exchange value. Use value may exist without exchange value, for example gifts of nature, but exchange value cannot exist without use-value.

Marx repeats Smith's labour theory of value in a complicated manner, so as to prepare the way for his theory of exploitation. Exchange value measures the amount of 'socially necessary' labour input (i.e. a lazy unskilled labourer takes a long time to produce a good but does not make that good more valuable, so only the necessary labour input should be measured by exchange-value). Marx believes that to speak of the value of labour is equivalent to speaking of the value of value. Money is the universal equivalent of social labour, made so by law, in addition to its own use-value. Different commodities, being different amounts of social labour, are measured by different quantities of the one commodity that is money.

The following objections to Marx's labour theory arise: a) How can prices of commodities fluctuate if commodity exchange-value measures the amount of embodied labour? Marx answers this question with the theory of competition; b) Isn't labour itself a commodity with an exchange-value? Marx answers this question with the theory of wage-labour and capital; c) If exchange value is embodied labour time, then should not exchange-value of wages equal the exchange-value of labour? Marx answers this question with the theory of wage-labour and capital by refining the concept of surplus value; d) How can commodities exist with exchange-value if no labour time has been spent on creating them? Marx answers this question with theory of rent.

Marxian Theory of Capitalist Competition
Competition acts to reduce industry wide profits to the same rate. But capitalists strive to increase productivity in order to increase profits. Increased productivity usually involves increased reliance on capital, thus reducing proportion of variable capital and increasing rate of surplus value. Tendency from competition is therefore to increase fixed capital. Supply and demand cause fluctuation of market price from normal price, the latter being the price of production, but competition acts to bring these two prices into line. Here there is a contradiction between the supply and demand theory of value, cost-of-production theory of value, and Marx's labour theory of value.

Marxian Theory of Wage Labour and Capital
Marx proposes two methods of circulating money and commodities, a) Commodity sold / money received / money spent on new commodity (here the objective is to acquire a use-value); b) Commodity bought / money spent / commodity sold (here the objective is to increase one's holding of money, in other words to acquire exchange-value). The latter process involves an extraction of surplus value by the capitalist in the process. The surplus value is extracted from human labour, this being the commodity purchased in the first half of the transaction. When human labour is 'consumed' (i.e. when workers work) their use value is that they produce exchange value. The amount of exchange value produced net is then appropriated by the capitalist when the second half of the transaction is completed. Surplus value (produit net) arises because labour is only ever paid its subsistence wage. It can be increased by extending the working day, or by reducing that part of the working day required to meet labourers' subsistence requirements. The degree of exploitation is measured by the rate of surplus value (surplus value divided by the amount of variable capital employed). Surplus value does not equal the rate of profit because it excludes any measurement of fixed capital.

Marxian Theory of Rent
Marx asks where gifts of nature obtain an exchange-value. He develops a theory of rent to answer this question. One theory is that rent is the payment to capital that is invested to make land productive. Marx rejects this theory since it doesn't explain why land in which no capital has been invested still accrues rent, and also because he sees it as an attempt simply to justify rent with reference to another capitalist institution (that of rent on money capital). A second theory is that differential rents arise because of the different fertility of various pieces of land. Differential rent is calculated by setting the exchange value of produce to be equal with the cost of producing on land used at the margin (thus making rent equal to zero here but positive on more fertile land). Marx rejects this theory since he subscribes to the labour theory of value. A third theory is that the aristocracy controls the land and that this monopoly gives rise to rent (this is the Historical school's interpretation of rent). The fourth theory is Marx's own theory, building on monopoly theory, stating that competition cannot occur with certain gifts of nature, because for example, the better productivity of some land above other land cannot be transferred as can the better productivity of one factory to another. Thus, the rate of profit to a landowner can remain above the economy-wide rate of profit and this 'surplus-profit' gives rise to absolute rent. Rent is a form of surplus value. Interest too is a form of surplus value. Money, like labour employed, allows the holder to derive a use-value from it, that use value being the fact that money (or labour) produces exchange-value. Only surplus value and wages are the sources of revenue in capitalist society.

Marxian Theory of Economic Development
This is the most appealing section of Marx's work according to some commentators, mostly in das Kapital. The Law of Capitalist Accumulation states that capital employed by capitalists increases over time through the accumulation of the surplus value of larger workforces. The increased application of capital results in an increasing proportion of fixed capital in the production process, and requires the squeezing out of small capitalists in the familiar drive to achieve economies of scale. Joint-stock companies, bank and credit facilities all help to achieve this goal. Larger industrial units arise and the demand for labour increases, but technology demands a continual reduction of labour as a proportion of capital employed. As the proportion of fixed capital increases, the profit rate declines and mergers are sought by the capitalists in an effort to reduce industry costs. Industrial power is thereby focused in fewer hands, thus the Law of the Increasing Misery of the Working Class under capitalism. In due course an 'industrial reserve army' of unemployed is created, but higher unemployment means that goods remain unsold. Eventually an industrial crisis must occur.