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Final Exam
Economics 5060/6060(001)-Fall 2008
Answer any two out of the following three questions (40 points in total, 20 points each):
1. Capitalism, Imperialism, and War
Early 20th Century Marxists believed that the expansion of capitalism would inevitably lead to
increasingly more destructive economic crises. Based on your reading of Rosa Luxemburg,
discuss why under capitalism, consumer demand tends to fall behind the expansion of production
capacity and why export of capital is essential for modern capitalism to survive and expand.
Lenin further argued that the drive for capital export would inevitably lead to wars and
conflicts between major imperialist powers. Explain Lenin’s argument.
Answer Keys:
(a) Workers spend all of their income on consumption but as productivity rises, the gap
between the workers’ purchasing power and potential output continually widens (5
points).
(b) Capitalists could spend their profits either on consumption or investment; but there is an
upper limit in time and money on capitalist consumption; and capitalists are motivated
primarily to accumulate capital to make more profit; therefore capitalists would never
expand consumption as fast as production capacity (5 points).
(c) As consumer demand falls behind production capacity, a glut of capital will develop and
export of capital provides the only assured outlets for profitable investment: by exploiting
cheap raw materials, cheap labor power, and stimulating demand for imperialist
countries’ exports of commodities (5 points).
(d) The drive for capital export led to division of the world among imperialist powers and the
competition for colonies led to imperialist wars (5 points).
2. John Maynard Keynes and the Destruction of the Myth of Self-Adjusting Market
Both neoclassical economics and Keynesian economics agree that the equality between saving
and investment is a necessary condition for full employment. In the neoclassical theory, if
investment is different from saving, how would the economy adjust to return to full employment
equilibrium?
Keynes rejected the argument that the capitalist market could automatically adjust to
equate saving and investment. Discuss Keynes’s theory of saving and how a capitalist economy
could fall into a depression with massive unemployment (no graph is required).
Answer Keys:
(a) Neoclassical theory: if saving is greater than investment, interest rate would fall, leading
to less saving and more investment; if saving is less than investment, interest rate would
rise, leading to more saving and less investment (8 points).
(b) Keynes: saving is primarily a function of income; interest rate is not a reward for saving
but the price of money (8 points).
(c) If the interest rate were too high, there would be excess saving. This would lead to
overproduction and a vicious circle of declining income, output, and employment (4
points).
3. The Capital Controversy and the Destruction of the Marginal Productivity Theory of
Distribution
A meaningful concept of capital is essential for the neoclassical marginal productivity theory of
distribution. Discuss why the concept of capital cannot be meaningfully defined within the
neoclassical theoretical framework and why the inability to define capital fatally undermines the
marginal productivity theory (no graph is required).
A meaningful concept of capital is not only essential for marginal productivity theory, but
also essential for the other two fundamental tenets of neoclassical theory. Discuss how the lack
of a meaningful concept of capital undermines the neoclassical theory of invisible hand and the
theory of market self-adjustment towards full employment.
Answer Keys:
(a) Marginal productivity of capital cannot be defined without knowing the quantity of
capital (which requires aggregating capital goods); but capital goods cannot be
aggregated without knowing the prices; but the prices of capital goods cannot be
determined without first knowing productivity. Thus, the neoclassical theory falls into a
circular reasoning (10 points).
(b) Invisible Hand: the notion of efficient allocation of capital across different industries and
efficient allocation of resources across different times points are meaningless without a
well-defined, downward-sloping marginal productivity of capital schedule (5 points).
(c) Automatic self-adjustment: the theory has no meaning if there is not an inverse
relationship between the interest rate and investment, which requires definition of capital
and marginal productivity of capital (5 points).