Posts Tagged ‘economics’

James Sanborn, Adam Smith’s Spinning Top (1998)

In this post, I continue the draft of sections of my forthcoming book, “Marxian Economics: An Introduction.” The first five posts (herehereherehere, and here) will serve as the basis for chapter 1, Marxian Economics Today. The text of this post is for Chapter 2, Marxian Economics Versus Mainstream Economics (following on from the previous posts, herehereherehere, and here).

Classical Political Economy

Marxian economists have been quite critical of contemporary mainstream economics. As we saw in Chapter 1, and will continue to explore in the remainder of this book, Marxian economists have challenged the general approach as well as all of the major conclusions of both neoclassical and Keynesian economics.

But what about Marx, who wrote his critique of political economy, let’s remember, before neoclassical and Keynesian economics even existed?

Marx, writing in the middle of the nineteenth century, trained his critical eye on the mainstream economic theory of his day. He read Adam Smith’s Wealth of Nations and David Ricardo’s Principles of Political Economy and Taxation, as well as the writings of other classical political economists, such as Thomas Robert Malthus, Jean-Baptiste Say, and John Stuart Mill.

Marx’s critique of political economy can rightly be seen as both an extension of and break from the work of those late-eighteenth-century and early-nineteen-century mainstream economists. So, in order to understand why and how Marx proceeded in the way he did, we need to have a basic understanding of classical political economy.

Before we begin, however, we have to recognize that Marx’s interpretation of the classical economists was very different from the way they are referred to within contemporary mainstream economics. Today, within non-Marxian economics, the classicals are reduced to a few summary ideas. They include the following: a labor theory of value (which mainstream economists reject, in favor of utility), the invisible hand (which, as it turns out, Smith mentioned only three times in his writings, once in the Wealth of Nations), and comparative advantage (but not the rest of Ricardo’s theory, especially his theory of conflict over the distribution of income).

We therefore need a good bit more in order to make sense of Marx’s critique of political economy.

Adam Smith

Let’s start with Adam Smith, the so-called father of modern economics. The author of, first, the Theory of Moral Sentiments and, then, the Wealth of Nations, Smith asserted that people have a natural “propensity to truck, barter, and exchange one thing for another.” In other words, according to Smith, the ability and willingness to participate in markets were natural, and not social and historical, aspects of all humanity.

That’s not unlike contemporary mainstream economists’ insistence on presuming the existence of markets, and thus writing down supply and demand functions (or drawing them on a graph), without any further evidence or argumentation. They’re presumed to be natural.

Smith then proceeds by showing that the division of labor (such as with his most famous example, of the pin factory) has two effects: First, it leads to increases in productivity, and therefore an increase in production. Second, the extension of the division of labor within factories propels a division of labor within capitalism as a whole, as firms specialize in the production of some goods, which they can then trade with other producers in markets. In turn, the expansion of markets leads to more division of labor and higher productivity, thus increasing the wealth of nations.

Again, the parallel with contemporary mainstream economics is quite evident, which is recognized in the “classical” portion of the name for neoclassical economic theory. Using Gross Domestic Product as their measure of the wealth of nations, contemporary mainstream economists celebrate capitalism because higher productivity results in more output, which is then traded on markets. This is the basis of contemporary mainstream economists’ definition of development as an increase in GDP per capita, that is, more output per person in the population.

However, unlike contemporary mainstream economists, Smith analyzed the value of commodities in terms of the amount of labor it took to produce them. With increasing productivity, more goods and services could be produced and sold in markets, each containing less labor—and therefore available at lower prices to consumers. The nation’s wealth would therefore grow, especially as the number of workers grew.

Still, Smith worried about whether capitalist growth would persist in an uninterrupted fashion. The division of a nation’s production into “natural” rates of wages, profits, and rent to workers, capitalists, and landlords was not sufficient. What if, Smith asked, a large portion of capitalists’ profits was used to hire more “unproductive” labor, that is, the labor of household servants and others that did not contribute to increasing productivity? Purchasing labor involved in what we now call conspicuous consumption represented, for Smith, a slowing of the accumulation of additional capital. Therefore, it created a problem, an obstacle to future capitalist growth.

David Ricardo

David Ricardo picked up where Smith left off. He extended the celebration of capitalist markets to international trade. His argument was that if nations specialized in the production of commodities for which they had a relative advantage, and traded them for goods from other countries (his most famous example was British cloth and Portuguese wine), both countries would benefit. Their wealth would increase.*

That’s the only reason Ricardo’s work is cited by contemporary mainstream economists. However ironically, they ignore the fact that Ricardo made his argument based on the labor theory of value—just as they never mention Ricardo’s concern that conflicts over the distribution of income might slow capitalist growth.

In particular, Ricardo was worried that, as capitalism developed, the profits received by capitalists would be squeezed from two directions: an increase in workers’ wages and a rise in rent payments to landlords. Lower profits would mean less capital accumulation and slower growth—and, in the limit, capitalism would grind to a halt.

We can see how this might happen in the chart above. At a certain point (a level of population P, which is the pool of workers), total output (the red line) would be divided into workers’ wages, capitalists’ profits, and landlords’ rent).

It is easy to see that, at any point in time, if the wage rate paid to workers increased (which would mean an increase in the slope of the blue line), that would cut into profits (the vertical distance between the blue and green lines would decrease). That’s the major reason Ricardo supported free trade (and thus a repeal of the so-called Corn Laws): so that cheaper wheat could be imported from abroad, thus lessening the upward pressure on workers’ wage demands.

Even if the rate paid to workers remained the same over time (and thus the total amount of wages rose at a constant rate, with an increase in population), capitalists’ profits would be squeezed from the other direction, by an increase in the rents paid to the class of landlords (the vertical distance between the green and red lines). Basically, as agriculture production was moved to less and less fertile land, the rents on more productive land would rise, siphoning off a larger and larger portion of profits.

At a certain point (e.g., at a level of population P*), the entire output would be divided between workers’ wages and landlords’ rent, and nothing would be left in the form of capitalists’ profits. As a result, capitalists would be forced to stop investing and capitalist growth would cease.

Other Classicals

The Reverend Thomas Malthus was, if anything, more pessimistic than Ricardo. But he foresaw capitalism’s problems coming from the other direction, from the working masses. In his Essay on the Principle of Population, he argued that population would likely grow faster than the expansion in food production, especially in times of plenty. With such an increase in the supply of workers and a rise in the price of available food, workers’ real wages would inevitably fall and poverty would rise. The only solution was for capitalists and landlords to hire all the additional labor, and for workers’ wages to be restored to their “natural” level.

If Malthus focused on the up-and-down cycles of population and wages, and both Smith and Ricardo the potential limits to capitalist growth, the French classical economist Jean-Baptiste Say emphasized the inherent stability of capitalism. Why? Say’s argument was that the production of commodities causes income to be paid to suppliers of the capital, labor, and land used in producing these goods and services. And because the sale price of those commodities was the sum of the payments of wages, rents, and profit, income generated during production of commodities would be used to purchase all the commodities produced. Moreover, entrepreneurs were rewarded for correctly assessing the needs reflected in markets and the means to satisfy those needs. The result is what was later coined as Say’s Law: “supply creates its own demand.”

Finally, it was John Stuart Mill who added utilitarianism to classical political economy. Extending the work of Jeremy Bentham, especially the “greatest-happiness principle” (which holds that one must always act so as to produce the greatest aggregate happiness among all sentient beings), Mill argued that the greatest happiness and the least pain could be achieved on the basis of free markets, competition, and private property—with the proviso that everyone should be afforded an equal opportunity, however unequal the actual results might turn out to be. In particular, Mill defended the profits of capitalists as a just recompense for their savings, risk, and economic supervision.*

Marx’s Critique of Mainstream Economics

That, in a nutshell, is the mainstream economic theory Marx confronted while sitting in the British Museum in the middle of the nineteenth century. Marx both lauded the classical political economists for their efforts—especially Ricardo, who in his view “gave to classical political economy its final shape” (Critique of Political Economy)—and engaged in a “ruthless criticism” of their theory.

In this sense, Marx took the classical political economists quite seriously. Even as he broke from their work in a decisive manner, many of the themes of Marx’s critique of political economy stem directly from the issues the classicals attempted to tackle. That’s why the overview provided in previous sections of this chapter is so crucial to understanding Marxian economics.

Still, the question remains, how does Marx’s critique of the mainstream economics of his day transfer over to contemporary mainstream economists? As we will see, although neoclassical and Keynesian economists reject the labor theory of value and other crucial elements of classical political economy, both the basic assumptions and conclusions of their approach are so similar to those of the classicals as to make it a relatively short step from Marx’s critique of the mainstream economic theory of his day to that of our own.

However, before we look at that theoretical encounter, in the next chapter, we will see how Marx’s critical engagement with classical political economy emerged over the course of his writings before, in the mid-1860s, he sits down to write the three volumes of his most famous book, Capital.

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*Mill did defend various redistributive tax measures, in order to limit intergenerational inequalities that would otherwise constrain equality of opportunity. Moreover, he argued in a later edition of his Principles of Political Economy in favor of economic democracy: “the association of the labourers themselves on terms of equality, collectively owning the capital with which they carry on their operations, and working under managers elected and removable by themselves” (Principles of Political Economy, with some of their Applications to Social Philosophy, IV.7.21).

In this post, I continue the draft of sections of my forthcoming book, “Marxian Economics: An Introduction.” The first five posts (herehereherehere, and here) will serve as the basis for chapter 1, Marxian Economics Today. The text of this post is for Chapter 2, Marxian Economics Versus Mainstream Economics (following on from the previous posts, here, here, here, and here).

Limits of Mainstream Economics Today

Keynes’s criticisms of neoclassical economics set off a wide-ranging debate that came to define the terms of—and, ultimately, the limits of debate within—mainstream economics.

On one side are neoclassical economists, who celebrate the invisible hand and argue that markets are the best way to efficiently allocate scarce resources. On the other side are Keynesian economists, who argue instead for the visible hand of government intervention to move markets toward full employment.

That tension, between the theories and policies of neoclassical and Keynesian economics, is the reason why in most colleges and universities the principles of economics are taught in two separate courses: microeconomics and macroeconomics. Moreover, the tension between the two schools of thought plays out within every area of economics, including (but certainly not limited to) microeconomics and macroeconomics.

One way of understanding the differences between the two approaches is to think about them as conservative and liberal interpretations of mainstream economics. Conservative mainstream economics tend to presume that the basic assumptions of neoclassical economics hold in contemporary capitalism, while liberal mainstream economists think they don’t.

Let’s consider two examples. First, within microeconomics, conservative mainstream economists (such as the late Milton Friedman) believe that individuals make rational decisions within perfectly competitive markets. Therefore, if markets exist, they should be allowed to operate within any regulations; and, if a market doesn’t exist, it should be created. Liberal mainstream economics (such as Joseph Stiglitz), on the other hand, see both individual decisions and markets as being imperfect—because individuals have limited or asymmetric information, some firms have more market power than others, and so on. Therefore, they argue, markets need to be guided to the best outcome.

The second example is from macroeconomics. The view of conservative mainstream economists (such as Thomas J. Sargent) is that capitalism operates at or close to full employment (where, in the chart above, aggregate demand intersects the vertical portion of the aggregate supply curve), whereas liberal mainstream economists (such as Paul Krugman) believe that unregulated markets often lead to considerable unemployment (where aggregate demand intersects the horizontal portion of the aggregate supply curve, at level of output less than full employment).*

To attempt to reconcile the two competing views, many mainstream economists argue for a “middle position”—somewhere between the opposed neoclassical and Keynesian views. There (in the red portion of the aggregate supply curve), mainstream economists find a tradeoff between increases in output and changes in the price level, that is, between inflation and unemployment.

And the predominant view within mainstream economics shifts back and forth between the two poles. Sometimes, as in the years before the crash of 2007-08, mainstream economics moved closer to the neoclassical approach. That’s when policies such as deregulation, privatization, the reduction of government deficits, welfare reform, and so on were all the rage, within both academic and political circles. After the crash, when the neoclassical approach was said to have failed, mainstream economics swung back in other direction. That’s when there were calls for more government intervention and fewer worries about budget deficits and the like.

In the midst of the Pandemic Depression, much the same kind of debate between advocates of the two poles of mainstream economics has been taking place. On one side, conservative mainstream economists have argued in favor of rescuing banks and corporations, such that an economic recovery would “trickle down” to workers and their households. Liberal mainstream economists, on the other hand, have favored direct payments to workers who were furloughed or laid off—an idea that was attacked by their conservative counterparts, because such payments were seen as providing a “disincentive” for workers to return to their jobs.

Every time capitalism enters into crisis, the same kind of debate breaks out between conservative and liberal economists (and, of course, between different groups of politicians and voters).

If mainstream economists are so divided between the two approaches, what in the end unites them into what I have been calling mainstream economics? Like all such labels, it is defined in part by what it includes, and in part by what it excludes.

What mainstream economics includes is the idea that neoclassical and Keynesian approaches establish the limits within which theoretical and policy debates can and should take place. Together, they define what is in the “economic toolkit,” and therefore what it means to “think like an economist.” Moreover, the two groups of economists argue that capitalist markets are the way a modern economy can and should be organized. They may disagree about the relevant approach—for example, the “invisible hand” of free markets versus the “visible hand” of government intervention. But they all agree on the goal: to create the appropriate institutional environment so that capitalist markets work properly.

They also share the view that the only way capitalism operates falls below its general equilibrium, full-employment potential is because of some external “shock.” In other words, all economic downturns, such as recessions and depressions, are due to external causes, not because of anything internal to the normal workings of capitalism.

What the definition of mainstream economics excludes is any approach, such as Marxian economics, that is based on a theoretical approach that lies outside the protocols of neoclassical and Keynesian economics. So, for example, the idea of class exploitation is generally overlooked or ignored within mainstream economics. Similarly, imagining and creating ways of allocating resources other than through capitalist markets are pushed to or beyond the margins by mainstream economists.

Together, the inclusions and exclusions contained within the definition of mainstream economics serve to define what mainstream economists think and do in their theoretical practice as well as in the policy advice they offer.

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*As many contemporary Post Keynesian economists have noted, when neoclassical and Keynesian were combined in a single approach to economics (for example, in the “neoclassical synthesis” in the decades following World War II), many of the critical aspects of Keynes’s writings—including the notion of uncertainty and the idea that much stock market investment was merely speculation and added little to the productive capacity of the “real” economy—were downplayed or ignored altogether.

In this post, I continue the draft of sections of my forthcoming book, “Marxian Economics: An Introduction.” The first five posts (herehereherehere, and here) will serve as the basis for chapter 1, Marxian Economics Today. The text of this post is for Chapter 2, Marxian Economics Versus Mainstream Economics (following on from the previous posts, here, here, and here.)

Keynesian Economics

Once it was created as a new theory of capitalism, neoclassical economics expanded its influence—in its original countries as well as elsewhere.* Not surprisingly, it was also criticized, for example, by the so-called institutionalists (such as Thorstein Veblen, the author of The Theory of the Leisure Class: An Economic Study of Institutions) and by economists who challenged various of its assumptions, including the presumption of perfect competition (especially at Cambridge University, in England, by the likes of Piero Sraffa and Joan Robinson).**

Within mainstream economics, the most far-reaching critique occurred during the Great Depression of the 1930s, when, against one of the main conclusions of neoclassical economists—that capitalism would aways tend toward full employment—millions of workers were thrown out of their jobs and the rate of unemployment soared to over 25 percent.

British economist John Maynard Keynes is the most famous of those critics. He challenged two major features of government policy at that time, measures that were consistent with neoclassical economics: first, that a decrease in wages would restore full employment, and, second, that government budget deficits should be avoided at all costs. Instead, Keynes argued, lowering wages would merely lead to less spending, and therefore more unemployment, and budget deficits during economic downturns were actually a good thing, as they were a way for governments to stimulate private spending in order to move capitalist economies back toward full employment.

In 1936, Keynes wrote and published his magnum opus, The General Theory of Employment, Interest and Money, which provided the theoretical basis for his attacks on austerity measures and his alternative program of government deficit spending.

One way to see the impact of Keynes’s theoretical innovation is to use the contemporary model of aggregate supply and aggregate demand.*** Basically, neoclassical economists conclude that a capitalist economy will always be at full employment (at a level of output Y FE, where Y is inflation-adjusted national output, measured in terms of Gross Domestic Product, and FE is full employment) at the intersection of downward-sloping aggregate demand (AD*) and perfectly vertical aggregate supply (AS) curves. Therefore, any attempt to raise aggregate demand (e.g., to AD2), will only raise prices (an increase in the price level, on the vertical axis) and leave the level of output (and therefore employment) unchanged.****

Keynes, in contrast, argued that, during economic downturns, aggregate demand would decline (e.g., to AD1) and, with a perfectly elastic aggregate supply curve at less than full employment (the horizontal section of AS), output would fall to less than full employment (Y1). Moreover, there were no automatic mechanisms within capitalism to restore full employment. Without the visible hand of government intervention—for example, deficit spending—the economy would operate at a level of output below full employment. Finally, Keynes argued, aggregate demand could be increased without provoking inflation (again, a general increase in the price level), an idea that economists and politicians opposed to deficit spending argued then and continue to claim today.

How did Keynes arrive at conclusions that ran so much against the neoclassical grain? Keynes did not reject all aspects of neoclassical economics—especially its theory of income distribution or its celebration of capitalism. But he did criticize some key assumptions, especially the idea that capitalism should be analyzed starting from individual decisions based on utility-maximization and complete knowledge. Instead, Keynes placed a great deal of importance on mass psychology and the limits to knowledge or uncertainty.

Mass psychology and uncertainty are particularly important when it comes to capitalists’ investment decisions, which are an important component of aggregate demand. For Keynes, working-class households were expected to use for consumption a large and relatively stable share of their income (what is often referred to as the consumption function). Investors, however, engaged in a much more volatile set of decisions, and that’s because in many instances they had no rational knowledge about the future. They simply could not know.

So, given their uncertainty, how could capitalists make investment decisions? Much to the chagrin of other mainstream economists, then as now, Keynes argued in the General Theory that investors were guided by “animal spirits”—an urge to act that could not be understood in terms of quantitative benefits and probabilities.

So, if capitalists couldn’t make rational decisions, and were propelled instead by their “animal spirits,” what guide could they follow? Keynes turned to mass psychology, a kind of herd mentality, according to which capitalists looked at what everyone else was doing and followed suit—sometimes in a positive vein, other times in a negative direction.

That made investment demand, the other key component of aggregate demand, quite volatile—and could often (as during and after the stock market crash of 1929) initiate a downward spiral. Capitalists would stop investing, thereby decreasing production and destroying investor confidence, which would lead to even less investment and production, in a kind of capitalist freefall. Moreover, since private decisions in markets only worsened the initial downturn, there was no mechanism within capitalism to turn things around. The invisible hand failed.

That’s why Keynes argued—first in letters to government leaders, including Franklin Delano Roosevelt, and then in the General Theory—that the only thing that would save capitalism would be for the government to step in with aggressive fiscal policy (deficit spending) and an accommodating monetary policy (such as lowering interest rates), to raise aggregate demand (from AD1 back toward AD*, in the chart above). In other words, the solution Keynes proposed was the visible hand of government intervention.

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*The second generation of neoclassical economists included the following: in England, Philip Wicksteed, Francis Edgeworth, and Alfred Marshall; in Switzerland, Vilfredo Pareto; and, in Austria, Eugen Böhm von Bawerk and Friedrich von Wieser. Neoclassical economics also found fertile ground in the United States, early on in the work of such economists as John Bates Clark, Fred M. Taylor, and Frank William Taussig. Later, especially after World War II, with the rise of U.S. hegemony, both economically and intellectually, neoclassical economics was spread throughout the world.

**Many contemporary readers, including students of economics, will not recognize the names of Veblen, Sraffa, and Robinson precisely because of the predominance of neoclassical economics.

***While Keynes introduced the concepts of aggregate supply and demand in chapter 3 of the General Theory, a model based on aggregate supply and demand as a way of representing and teaching mainstream macroeconomics wasn’t common until the 1990s. Today, it is ubiquitous. The problem is, in many principles and intermediate-level economics texts, aggregate supply/aggregate demand analysis has had the effect of misleading students into thinking that the analysis of the aggregate economy is essentially the equivalent to market equilibrium analysis. While we don’t need to go into detail here, the underpinnings of aggregate supply and aggregate demand have nothing to do with the way we market supply and demand are determined, such as in the section above on neoclassical economics.

****Therefore, the only way to raise output and employment in the neoclassical model is to increase (push out to the right) the vertical aggregate-supply curve. That can only happen if the exogenous determinants of aggregate supply change—for example, through an increase in labor, capital, and land or an improvement in technology.

In this post, I continue the draft of sections of my forthcoming book, “Marxian Economics: An Introduction.” The first five posts (herehereherehere, and here) will serve as the basis for chapter 1, Marxian Economics Today. The text of this post is for Chapter 2, Marxian Economics Versus Mainstream Economics (a short addendum to a previous post on Economic Theories and Systems).

The relation between economic theories and economic systems is even more dynamic. The various economic theories of capitalism are not just different ways of making sense of that particular economic system. They emerge, develop, and change over time as capitalism itself changes—and, in turn, they have effects back on capitalism.

The history of economic thought shows that both mainstream economics and the Marxian critique of mainstream economics first appeared—and then grew or declined in influence, were debated and questioned, gave rise to new concepts and methods, and so on—as capitalism first came into existence and then changed over time. Thus, for example, after the crash of 2007-08, mainstream economics was widely questioned: because its theories and policies, in part, created the conditions that led to the crash; because it failed to include even the possibility of such a crash in its models; and because, once the crash occurred, it had little to offer in the way of effect remedies.

At the same, there was a resurgence of interest in theories that presented criticisms of mainstream economic theory and capitalism, including Marxian economics. Many people, inside and outside the academy, went back to ideas, including those associated with the Marxian critique of political economy, to make sense of what was going on. Precisely because they didn’t find answers to such pressing questions as capitalist instability, the role of finance, growing inequality between the top 1 percent and everyone else, a wide variety of professors, students, activists, and pundits questioned the theories and policies of mainstream economics and expressed renewed interest in Marxian and other non-mainstream approaches to economics that had been sidelined or ignored in recent years.

But the relation between economic theories and economic systems doesn’t go in only one direction. The ideas of different schools of thought within economics also have an impact on the economic systems they’re designed to analyze. This is what is often called the “performativity” of economics. The ideas that are produced by professional economists (as well as noneconomists, inside and outside the academy) often lead to changes in capitalism itself.

This is particularly true, as neoclassical economist Milton Friedman famously wrote, in times of crisis.

Only a crisis‐—actual or perceived—produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable. (Capitalism and Freedom, xiv)

Economic theories are not just out there, as a matter of academic curiosity and endeavor (or, sometimes for students, a necessary evil to be learned and recited on an exam). They often lead to changes in capitalism, especially if they influence the way people think about their role in capitalism and attract the attention of influential economic and social groups who run capitalism’s key institutions.

In fact, economic theories are designed to do exactly that. When, for example, mainstream economists argue that free markets are the best solution to various economic and social problems—whether budget deficits or poverty or unemployment—they are saying that the world should have more of such markets. And, when changes are made to introduce more markets, mainstream economics has performed its role.

The Marxian critique of mainstream economics also has that performative dimension—with one key difference: whereas mainstream economists want to create a world of which their theory is a better representation, Marxian economists want to do exactly the opposite. They want to contribute to the project of eliminating capitalism, and when that happens, Marxian economics will no longer have a reason to exist.

The performativity of the Marxian critique of political economy is precisely to be its own grave-digger.

In this post, I continue the draft of sections of my forthcoming book, “Marxian Economics: An Introduction.” The first five posts (herehereherehere, and here) will serve as the basis for chapter 1, Marxian Economics Today. The text of this post is for Chapter 2, Marxian Economics Versus Mainstream Economics (following on from the previous post).

Mainstream Economics Today

Readers today will be more familiar with contemporary mainstream economics than with the mainstream economics of Marx’s day. So, let’s start there.

Mainstream economics is the predominant approach that is taught in academic courses, applied in government policymaking, and used in media stories about economic ideas and events. Today, what we refer to as mainstream economics is a combination of neoclassical economics and Keynesian economics.

Mainstream economics is a framework of analysis that encompasses both microeconomics and macroeconomics. It also extends far beyond them, to include a wide variety of topics, from labor markets through capitalist instability to globalization.

In this chapter, we’ll look at the basic building blocks of mainstream economic theory, as well as the key criticisms from the perspective of Marxian economic theory. In later chapters, we will take up some of the principal extensions of the theory and the various ways it is challenged by Marxian economists.

Neoclassical Economics

Neoclassical economic theory came first, having emerged simultaneously in the writings of three economists in three different countries: William Stanley Jevons (1835-1882), in England; the French-born Léon Walras (1834-1910) in Switzerland; and Carl Menger (1840-1921) in Austria. Capitalism had already produced and been subsequently transformed by the First Industrial Revolution (the birth of capitalist industry lasting, following Eric Hobsbawm, from the 1780s to the 1840s) and was on the cusp of launching the Second Industrial Revolution (the revolutionizing of capitalist industry, which took place from 1870 to the beginning of World War I), in Europe and the United States.

Separately, but roughly at the same time, Jevons, Walras, and Menger were the major contributors to what we now call the Marginalist Revolution in economics. Their goal was to create a theory of economic value that mimicked the scientific protocols of nineteenth-century physics.

You have probably read about the paradox of diamonds and water? The idea is that diamonds are not as useful as water but they do tend to fetch a much higher price on markets. Why is that? Neoclassical economists argued that is not the total usefulness but the extra or marginal utility gained from consuming an object that matters in determining the prices of commodities. Overall, water is much more abundant and useful than diamonds. But the larger marginal utility of less-abundant diamonds—the extra usefulness of the last unit consumed—compared to that of water is what explains its higher price.

There, in a nutshell, we can see the foundations of what has become neoclassical economic theory—a theory of economic value based on scarcity, utility, and decisions at the margin (along with the corresponding mathematics, calculus). The result is a celebration of capitalism, an economic system based on private property and free markets.

Without going into unnecessary detail, let’s see how neoclassical economics works.

The usual starting point is the supply-and-demand conception of markets. Neoclassical economists assume that there are markets for all goods and services—not only butter and banking services, but also the “factors of production,” land, labor, and capital. Each has a corresponding set of supply (SS) and demand (DD) curves and an equilibrium price (P0) and quantity (Q0), as in the diagram above.

But that’s only the beginning of the story. In order for the model to work, each of the supply and demand curves has to be tied back to their ultimate determinants.

In neoclassical economics, the given or exogenous determinants of supply and demand reside in nature—mostly human nature, but also physical nature. Thus, for example, the demand for goods and services is determined by human preferences (along with consumers’ incomes). Those preferences are assumed to be given, from outside the economy, and to behave in predictable ways (as in the marginal utilities of the diamond-water paradox).

Households are assumed to maximize utility in choosing between different bundles of commodities in the “celestial supermarket.” When they make their purchases at the market equilibrium, the prices in markets can be shown to correspond to those given preferences or utilities.*

Household incomes, meanwhile, derive from the sum of wages, profits, and rent they obtain when they sell labor, capital, and land to the firms that are producing the goods and services they purchase. Those “factor” incomes are determined, like all other commodities, by supply and demand in markets. Firms demand labor, capital, and land according to their marginal productivity, in order to maximize profits.

Meanwhile, households are assumed to make utility-maximizing choices in selling those services to firms. The result is that consumer incomes also correspond to nature—human nature in terms of individual preferences, along with the physical nature of land. And the more labor, capital, and land they choose to sell, the higher their incomes, and the more commodities they can purchase.

The final neoclassical assumption is perfect competition, such that all consumers and firms are said to be “price-takers.” They don’t set prices but, instead, take the prices as given when they make their utility-maximizing and profit-maximizing decisions as households and firms.**

The neoclassical conclusion is that not only is each market in equilibrium, the economy as a whole is assumed to reach a general equilibrium. What this means is that the economy-wide equilibrium represents a perfect balance between the limited means of available resources and the unlimited desires of consumers. Production is at its maximum and full employment is achieved. Moreover, the set of equilibrium prices can be said to correspond to the preferences of consumers, that is, to human nature.

Ethics

As will be evident to readers, that’s a very powerful conclusion! Starting with atomistic individuals, directed only by their own self-interest, neoclassical economists conclude that the economy as a whole reaches a position where no one can be made better off without making someone worse off.***

But neoclassical economics is not only a theory about the efficiency of capitalism or the way it solves the problem of scarcity or, for that matter, a proof that market prices correspond to human nature. Implicit within neoclassical economics, as in all economic theories, is also a particular theory of ethics or economic justice.

The first key ethical claim made by neoclassical economists is that everyone is equal. Households may have vastly different amounts of income or wealth (because of their different utility-maximizing decisions to sell labor, capital, and land to firms) but they are all fundamentally equal. That’s because they are all assumed to be price-takers and, as if by an “invisible hand,” they are led to make decisions such that their individual utilities are the same as those of everyone else.****

According to neoclassical economists, capitalism is also characterized by “just deserts”—the idea that everyone gets what they deserve. This is shown in two ways. First, consumers purchase commodities at prices that are equal to their preferences. Second, the incomes households use to buy goods and services are the sum of the wages, profits, and rents they receive for selling factor services to firms. And those factors—labor, capital, and land—are remunerated according to their marginal contributions to production.***** What that means is that households receive incomes and firms pay for factor services according to their contributions to production. So, in both product markets and factor markets, everyone within capitalism—households as well as enterprises—receives the appropriate reward for their decisions and actions.

From the perspective of neoclassical economics, then, capitalism promotes both equality and fairness. That’s true even if there is considerable inequality among households—in terms of either income or wealth. Those inequalities are due to the different decisions households make, as well as their different initial endowments, which are considered to be determined outside the economy. Therefore, according to neoclassical economists, capitalism, even if it delivers different levels of remuneration, as long as they correspond to to the decisions and abilities of individual households, still delivers economic justice.

There is one final ethical principle that is prominent within neoclassical economics, and that’s the notion of freedom. It stems from what is considered a more Austrian interpretation of neoclassical theory (in a line that runs from Menger through such economists as Ludwig von Mises and Friedrich Hayek to Milton Friedman). Dispensing with some of the arguments above (such as general equilibrium and economy-wide efficiency), Austrian economists emphasize the freedom that capitalism grants to individuals—whether households or firms—to decide on their appropriate actions. They alone (and not, for example, governments) have the knowledge of their particular circumstances and, to the extent they are free to choose what is best for themselves within markets, capitalism can be said to be just.

———

*Technically, the ratio of prices (p1/p2) is equal to the ratio of marginal utilities (MU1/MU2), where the subscripts 1 and 2 represent two different commodities.

**An obvious question immediately arises: if everyone is assumed to be a price-taker, then who sets the prices of commodities? The neoclassical answer is the “auctioneer.” That’s the name given to the fictional entity that calls out different sets of prices until all markets are in equilibrium.

***This is known as Pareto Efficiency, named after the Italian sociologist and economist Vilfredo Pareto (1848-1923) who succeeded Walras to the chair of Political Economy at the University of Lausanne in Switzerland.

****The way this works is, the ratio of prices (p1/p2) is equal to the ratio of marginal utilities of each and every individual (MU1/MU2)A. . .(MU1/MU2)N, where the subscripts 1 and 2 represent two different commodities and the superscripts A through N represent all individuals.

*****In more technical terms, the real wage rate is equal to the marginal product of labor, that is, the extra contribution to production by the last unit of labor hired; the real profit rate is equal to the marginal product of capital; and the real rental rate is equal to the marginal product of land.

In this post, I continue the draft of sections of my forthcoming book, “Marxian Economics: An Introduction.” This, like the previous four posts (hereherehere, and here), is written to serve as the basis for chapter 1, Marxian Economics Today. The text of this post should pretty much finish up the draft of the first chapter.

Is Marxian Economics Still Relevant?

It’s an obvious question for those of us living now, in the twenty-first century. Is Marxian economics still relevant?

After all, Marx wrote Capital in the middle of the nineteenth century, when both capitalism and mainstream economics were quite different from what they are today.

Back in the mid-1800s, capitalism was a relatively new way of organizing economic and social life; having emerged first in Great Britain, it still encompassed a small part of the world. As Marx looked around him, he saw both the tremendous progress and the horrendous conditions of the Industrial Revolution. The introduction of steam power, gigantic factories, growing cities, and increased production. And thus great wealth, at least on the part of the small group of successful merchants and industrial capitalists at the top of the economic pyramid. But also squalor, malnutrition, low wages, and long working hours for factory workers—men, women, and children.

Radically new ideas both prepared the ground for, and emerged as a result of, the emergence and spread of capitalism. New freedoms, such as the possibility of buying and selling people’s ability to work, and the consequent abolition of slavery, the ownership of human chattel. New forms of political representation, like democracy, which entailed the abolition (or at least the curtailing) of monarchies. And new sciences, including evolutionary biology, first elaborated in Charles Darwin’s On the Origin of Species (or, more completely, On the Origin of Species by Means of Natural Selection, or the Preservation of Favoured Races in the Struggle for Life).

The world today is, of course, quite different. We take for granted many of the ideas that were once considered radically new. While other ideas, which were barely even imagined at the time, are today considered novel: demands for a guaranteed income, the extension of democracy beyond politics to workplaces, and synthetic biology.

As for capitalism, in some parts of the world, it would be immediately recognizable by nineteenth-century observers. Giant steel mills, workers denied the right to form labor unions, polluted living environments, minds and bodies damaged by demanding and dangerous jobs. Elsewhere, capitalism has changed in many ways, both large and small. Cutting-edge technologies in the twenty-first century include robotics, extended reality, and artificial intelligence. Production of many goods and services is dispersed around the world instead of being concentrated in single factories. And a much larger share of production and of the world’s population—although certainly not all—has become part of capitalism.

And yet. . .The gap between a small group at the top and everyone else is increasing. Workers still labor much longer, even utilizing much more productive technologies, than many had predicted. Squalor, hunger, and poverty are still the condition of many in the world today—to which we need to add the dangers created by the looming climate crisis.

Throughout this book, we will therefore have to ask, is the kind of critique of capitalism that Marx pioneered more than 150 years ago relevant, at least in broad outlines, to contemporary economies? And, following on that, in what ways have Marxian economists changed and extended their theory to account for the many changes the world has undergone since the mid-1800s?

Much the same question holds for the Marxian critique of mainstream economics. In what ways might Marx’s original critique of classical political economy be relevant to contemporary mainstream—neoclassical and Keynesian—economics?

As will see in the next chapter, Smith and the other classical political economists made five major claims about capitalism, which Marx in his own writings then criticized. They are, in no particular order, the following:

  1. Capitalism produces more wealth, and thus higher levels of economic development.
  2. Capitalism is characterized by stable growth.
  3. Everybody gets what they deserve within capitalism.
  4. Capitalists are heroes.
  5. Capitalism represents the end of history.

We’ve already touched on the first three in previous sections of this chapter, and we will return to them in some detail in the remainder of the book. For example, capitalism produces more wealth but, Marx argues, it only does so on the basis of class exploitation. Capitalism is inherently unstable because of the private appropriation and distribution of the surplus. And, even if commodities are bought and sold at their values, capitalism is based on a fundamental class injustice, whereby the producers of the surplus are excluded from participating in decisions about that surplus.

What about the other two claims? Capitalists are celebrated but only if they accumulate more capital and thus create the conditions for more wealth and more employment. If they don’t, and that is often the case, then there’s nothing heroic about their activities. As for capitalism representing the end of history—the problem is, it still rests on class exploitation, not unlike feudalism, slavery, and other societies in which workers produce, but do not participate in appropriating, the surplus. That still leaves the possibility of creating an economy without that class injustice.

Those, in short, are Marx’s main criticisms of classical political economy.

Contemporary mainstream economists, as is turns out, make all five of those claims. They don’t do so in exactly the same manner as the classicals but they make them nonetheless.

  1. Capitalism produces more wealth, and thus higher levels of economic development—and it’s now measured in terms of Gross Domestic Product and GDP per capita.
  2. Capitalism is characterized by stable growth—and the possibility of crises is not even included in contemporary mainstream models.
  3. Everybody gets what they deserve within capitalism—especially when, in the modern view, all “factors of production” receive their marginal contributions to production.
  4. Capitalists are heroes—to which modern mainstream economists add that everyone is a capitalist, since they have to decide how to rationally utilize their human capital.
  5. Capitalism is fundamentally different from previous ways of organizing economic and social life, such as feudalism and slavery—although in one crucial dimension it’s exactly the same: capitalists are just like feudal lords and slaveowners in appropriating the surplus produced by others.

So, while the language and methods of mainstream economics have changed since Marx’s time, many of Marx’s criticisms do seem to carry over to contemporary mainstream economics.

We will see, in the remainder of the book, just exactly how that works.

This Book

The other eight chapters of this book are designed to flesh out and explore in much more detail the issues raised in previous sections of this chapter.

Chapter 2, Marxian Economics Versus Mainstream Economics

The aim of this chapter is to explain how the Marxian critique of political economy has, from the very beginning, been a two-fold critique: a critique of mainstream economic theory and of capitalism, the economic system celebrated by mainstream economists. We will discuss the key differences between Marxian and mainstream approaches to economic analysis, both then and now.

Chapter 3, Toward a Critique of Political Economy

I do not presume that readers will have any background in Marxian economic and social theory. In this chapter, we discover where Marx’s critique of political economy came from—in British political economy, French socialism, and German philosophy—and how his ideas changed and developed in some of the key texts of the “early” Marxian tradition prior to writing Capital.

Chapter 4, Commodities and Money

In this chapter, I will present the material contained in the first three chapters of volume 1 of Capital, perhaps the most difficult and misinterpreted section of that book. Marx begins with the commodity, proceeds to discuss such topics as use-value, exchange-value, and value, presents the problem of “commodity fetishism,” and then introduces money.

Chapter 5, Surplus-Value and Exploitation

The goal of this chapter is to explain how Marx, starting with the presumption of equal exchange, ends up showing how capitalism is based on surplus-value and class exploitation.

Chapter 6, Distributions of Surplus-Value

According to Marx, once surplus-value is extracted from workers, it is then distributed to others for various uses: the “accumulation of capital,” the salaries of corporate executives, the financial sector, and so on. Herein are the origins of the theory of economic growth and the treatment of the role of instability and crises within capitalist economies, as well as the Marxian understanding of the distribution of income.

Chapter 7, Applications of Marxian Economics

How have Marxist concepts been applied to major trends, debates, and events in recent decades? In this chapter, we examine the ways Marxist thinkers, especially younger scholars and activists, have opened up and applied Marxian economics to the theory of the firm, imperialism and globalization, development in the Global South, the role of finance, systemic racism, gendered hierarchies, and the relationship between capitalist and noncapitalist economies in contemporary societies.

Chapter 8, Debates in and around Marxian Economics

Marxian economic theory has, of course, been discussed and debated from the very beginning—by both Marxian and mainstream economists. In this chapter, I present some of the key criticisms of Marxian economics by mainstream economists, focusing in particular on their rejection of the labor theory of value. I also explain some of the key debates among different schools of thought within the Marxian tradition and present their contributions to contemporary Marxian economics.

Chapter 9, Transitions to and from Capitalism

Much to the surprise of many students, Marx (and his frequent collaborator Engels) never presented a blueprint of socialism or communism, either in Capital or anywhere else. However, Marxian economics is based on a clear understanding that capitalism has both a historical beginning and a possible end. In this concluding chapter, I discuss how Marx and later generations of Marxian economists have analyzed both the transition to capitalism (e.g., from feudalism in Western Europe) and the transition to noncapitalism (in the contemporary world).

Before We Dive In

As I wrote above, this book is not written with a presumption that readers have any kind of background in Marxian economic and social theory. Much the same holds for mainstream economic theory. Perhaps some readers will have learned some Marx or mainstream economics in the course of their studies but, if not, everything they need to understand Marxian economics is presented in this book.

Here are some other issues I’d like readers to keep in mind as you work your way through this book.

As is often the case in theoretical debates, the same words often have different meanings. So, for example, the way Marx defines and uses such concepts as markets, value, labor, capital are quite different from what they mean in mainstream economics. To help you make sense of those differences, I have included a brief glossary of terms at the beginning of the book. You should feel free to turn back to it on a regular basis as you work your way through the remaining chapters. In Part 2 of the book (Chapters 4, 5, and 6), all concepts will be carefully defined, while using as little technical jargon as possible. I have also added a couple of technical appendices for readers who want to follow up on the discussion in the main text.

Since we’re dealing with economics, some technical language and illustrations are indispensable. I have kept them to a minimum but readers should be prepared for some statistical charts, a few equations, and a bit of algebra. I’ll pass on the best piece of advice I received as a student: when something doesn’t make sense immediately, be prepared to work it out with paper and pencil.

The context for Marx’s critique of political economy, written in the middle of the nineteenth century, is unfamiliar to many of us in the twenty-first century. How many of us today have read Hegel, after all? The necessary background will be covered later, in Chapters 2 and 3.

While Marx’s name has long been linked with socialism and communism, readers won’t find any kind of blueprint or detailed plan for either idea in Marx’s writings. Nor does any general—valid for all times and places—economic policy or political program follow from his work. That’s a topic we will return to in Chapter 9.

This book is prepared as a stand-alone introduction to Marxian economics. No other texts are necessary to understand the material in this book. However, I have added references (to specific works and chapters) in the event readers want to use this book as a companion text, as they read Capital and other writings by Marx.

Finally, while the book is aimed at students in economics (both undergraduate and post-graduate), it will also be relevant for and accessible to students in other disciplines—such as sociology, geography, history, and cultural studies. My fervent hope is it will also be useful to interested individuals who are not currently college and university students, because a clear and concise introduction to Marxian economics is relevant to their work and lives.

In this post, I continue the draft of sections of my forthcoming book, “Marxian Economics: An Introduction.” This, like the previous three posts (here, here, and here), is written to serve as the basis for chapter 1, Marxian Economics Today.

Why study Marxian economics?

One of the best reasons for studying Marxian economics is to understand all those criticisms—the criticisms of mainstream economic theory and the criticisms of capitalism.

Students of economics (and, really, all citizens in the world today) need to have an understanding of where those criticisms came from and what implications they have.

Marx certainly took those criticisms seriously. As he carried out his in-depth study of both the mainstream economic theory and of the capitalist system of his day, his work was influenced by the criticisms that had been developed before he even turned his attention to economics. And then, in turn, Marx’s critique of political economy has influenced generations of economists, students, and activists. While certainly not the only critical theory that can be found within the discipline of economics, Marxian economics has served as a touchstone for many of those theories, not to mention public debates about both economics and capitalism around the world.

Understanding both the broad outlines and the specific steps of Marxian economics is therefore crucial to making sense of all those debates.

Consider a contemporary example. On 26 February 2019, Alexandiria Ocasio-Cortez responded to Ivanka Trump’s attack on her idea of a living wage by explaining that “A living wage isn’t a gift, it’s a right. Workers are often paid far less than the value they create.”

While there’s no evidence that Ocasio-Cortez ever studied Marxian economics (or, for that matter, considers herself a Marxist), certainly the idea that within capitalism workers are often paid less than the value they produce resonates with Marxian criticisms of both mainstream economic theory and capitalism.

Mainstream economists, as any student of contemporary mainstream microeconomics is aware, generally presume that workers’ wages are equal to their marginal contributions to production. The same is true of capitalists’ profits and landlords’ rents. Everyone within a market system, mainstream economists argue (after a great deal of theoretical work, involving lots of equations and graphs), gets what they deserve. Therefore, since capitalism delivers “just deserts,” it should be considered fair.

Not so quick, says Ocasio-Cortez, just like Marx decades before her. If workers are paid less than the value they create, then they are “exploited”—that is, they produce a surplus that goes not to them, but to their employers. And while Marxian economists argue a living wage wouldn’t by itself eliminate that exploitation, it would certainly lessen it and improve workers’ standard of living.

Much the same holds for alternatives to capitalism. They often take their name from some version of socialism (and sometimes communism). That’s why Ocasio-Cortez calls herself a “democratic socialist.” It’s also why so many people these days, especially young people, have positive views of socialism—even more so than capitalism. That represents a big break both from mainstream economists and from their parents and grandparents.

Moreover, many ideas and policies that were once labeled (and then quickly dismissed) as “Marxist” or “socialist” are now accepted parts of the contemporary economic and social landscape. Progressive income taxes, a social security system for retirees, public healthcare and health insurance, minimum wages, labor unions for workers in private industry and public services—all were at one time derided, and now they form part of the common sense of how we think about economic and social policy. Much the same kind of change may now be taking place—for example, with the Green New Deal and the links between contemporary capitalism and the history of slavery.

Marxian Economics Today

So, it’s a fascinating time to be studying Marxian economics. It’s a way of learning some of the main criticisms of mainstream economic theory and of capitalism, now as in the past. It also serves to lift the taboos and learn that there are in fact alternatives to how economics is often taught and used to celebrate the status quo and deny the possibility of other ways of organizing economic and social life.

In the most general sense, studying Marxian economics is a path to learn what it means to be an intellectual. Within modernity, intellectuals are necessarily critical thinkers. Whether professors in colleges and universities or people who work in research units of enterprises or government offices, or really anyone who has to think and make decisions on or off the job, as intellectuals, they have to follow ideas wherever they might go. That means not being afraid of the conclusions they reach or of conflict with the powers that be.

That tradition of critical thinking is in fact what animated the work of Marx (along with Engels). He didn’t have a predetermined path. Instead, he worked his way through existing economic theory, carefully and critically engaging the process whereby mainstream economists produced their extreme conclusions. He then started from the same general premises they did—in a sense, offering mainstream economists their strongest possible case—and showed how it was simply impossible for capitalism to fulfill its stated promises.

For example, capitalism holds up “just deserts” as an ideal—everybody gets what they deserve—but it actually means that most people are forced to surrender the surplus they create to their employers, who are allowed to either keep it (and do with it what they want) or distribute it to still others (the tiny group at the top that manages the way those enterprises operate). Capitalism also pledges stable growth and full employment but then, precisely because of that private control over the surplus, regularly delivers boom-and-bust cycles and throws millions out of work.

So, Marx, following his critical procedure, arrived at quite different conclusions—conclusions that were at odds both with those of mainstream economics and of capitalism itself. And then he kept going—with more reading and more thinking and more political activity. He established some initial ideas, threads that were then picked up and extended by other Marxian economists, right on down to the present.

The implication, of course, is Marx didn’t provide a settled theory, to be simplistically or dogmatically applied, but instead a tradition of critical thinking and action.

And, as we will see over the course of this book, the effects of his work have been felt not just in economics, but in many other academic disciplines, from sociology and anthropology through political science and cultural studies to philosophy and biology. In fact, one of the most famous and influential historians of the nineteenth century, whose books are read by thousands of college and university students around the world every year, is the British Marxist Eric Hobsbawm.

In this post, I continue the draft of sections of my forthcoming book, “Marxian Economics: An Introduction.” This, like the previous two posts, is for chapter 1, Marxian Economics Today.

Beyond the Mainstream

This is certainly not the first time people have looked beyond mainstream economics. There is a long history of criticisms of both mainstream economic theory and capitalism from the very beginning. Although students won’t have read about them in traditional economics textbooks.

Those texts are generally written with the presumption there’s only one economic theory and one economic system. The existence of Marxian economics opens up the debate, creating space for both multiple ways of thinking about economics and a variety of different economic systems.

Criticisms of Mainstream Economic Theory

In the history of economic thought, criticisms of the mainstream approach were formulated early on. Adam Smith, David Ricardo, and others (such as Jean-Baptiste Say, Thomas Robert Malthus, and John Stuart Mill) developed classical political economy in the late-eighteenth and early-nineteenth centuries, when the new economic system we now call capitalism was just getting off the ground—and almost immediately their approach was debated and challenged.

The classical political economists developed a labor theory of value to analyze the value of commodities, the goods and services that were bought and sold on markets. They utilized that labor theory of value to then argue that capitalism, based on increasing productivity and free international trade, would lead to the growth of industry and an increase in the wealth of nations.

The early critics of classical political economy included a wide variety of writers, especially in the United Kingdom and Western Europe, from Thomas Carlyle (an English Romantic who expressed his opposition to the market system, because it rewarded “salesmanship” and not hard work) and John Barton (a British Quaker who argued that the introduction of labor-saving machinery would permanently displace workers who would not be absorbed by other branches of industry) to Jean-Charles-Léonard Simonde de Sismondi (a Swiss historian who viewed capitalism as being detrimental to the interests of the poor and particularly prone to crisis brought about by an insufficient general demand for goods) and Thomas Hodgskin (an English socialist, critic of capitalism, and defender of both free trade and early trade unions).

In the middle of the nineteenth century, Marx (along with his friend and frequent collaborator Friedrich Engels) became a close student of classical political economy, developing his now-famous critique. During the course of his writings, he expressed both admiration for and opposition to the methods and the conclusions of the classical political economists. Over the course of this book, we will examine in considerable detail the ways Marx and later Marxian economists both built on and broke from classical political economy.

But the debate about early mainstream economics didn’t stop there.

In the late 1800s, a new school of economic thought, neoclassical economics was created, which represented both an extension of and break from classical political economy, although in a manner quite different from that of Marx. The early neoclassicals—such as William Stanley Jevons, Karl Menger, and Léon Walras—rejected the classicals’ labor theory of value, in favor of consumer utility, but accepted the classicals’ celebration of capitalism’s rising productivity and free trade. Hence, both the “neo” and the “classical” of their name.

The neoclassical economists’ basic argument was that, if all markets are allowed to operate freely, all consumers would maximize utility, all firms would maximize profits, and the economy as a whole would reach full employment. The “invisible hand” became the central thesis of contemporary mainstream microeconomics.

And it had general validity within mainstream economics until the Great Depression of the 1930s, when in the United States and elsewhere capitalist economies crashed and the unemployment rate soared to over 25 percent. Not surprisingly, the neoclassical orthodoxy was challenged at the time by many economists, including John Maynard Keynes. Keynes’s idea was that, because of fundamental uncertainty, especially on the part of investors, it was highly likely that capitalist economies would regularly operate at less-than-full employment. The need for the “visible hand” of government intervention to achieve full employment was the basis of the mainstream macroeconomics.

Attempts to combine neoclassical microeconomics and Keynesian macroeconomics—the invisible hand of markets and the visible hand of government fiscal and monetary policy—have defined mainstream economics ever since. That’s why, today, in most departments, mainstream economics is still taught in two separate courses, microeconomics and macroeconomics. And very few of them include any references to other approaches, especially Marxian economics.

Criticisms of Capitalism

Just as mainstream economic theory has been challenged from the very beginning, so has capitalism, the economic and social system celebrated by mainstream economists.

Perhaps the most famous early mass movement against capitalism was directed by the Luddites, a radical faction of English textile workers who in the early-nineteenth century attacked mills and destroyed textile machinery as a form of protest against low pay and harsh working conditions. While the name has come to be associated with anyone opposed to the use of new technologies, the actual historical movement objected to machinery that was introduced to speed up production and change the terms of negotiation in favor of employers and against workers.

Later, when workers were able to form labor unions—against a great deal of opposition from their employers and governments that backed those employers—they developed new strategies to challenge the ways they were considered and treated within capitalism. They often demanded higher pay, more secure employment, additional benefits, and even a say in how the enterprises in which they worked were managed. Depending on the situation, they set up picket lines, went on strike, occupied their workplaces, and organized unemployed workers. In many cases, while the workers were primarily concerning with meeting their daily needs, their activities were treated as attacks on capitalism itself.

That was certainly the case in the campaign for an eight-hour workday, which reached its peak in May 1886 in Haymarket Square in Chicago. It began as a peaceful rally to limit the length of the workday (at the time, workers were regularly required to labor much longer—often 10, 12, or more hours a day, without overtime pay) and then, when the police intervened to disperse the gathering, it became a full-on riot with a number of casualties. Ironically, in commemoration of the rally, 1 May has come to be celebrated around the world as Labor Day—except as it turns out, in the United States, where Labor Day was pushed back to the first Monday in September and no law has ever been passed to limit the length of the workday.

While many of the movements that have challenged capitalism have emerged from, been based on, or allied with workers and labor unions, many others have not. Students may recognize the names of some of the early utopian socialists and utopian experiments (although you probably read about them in courses other than economics): Charles Fourier, Henri de Saint-Simon, Robert Owen, and Henry George. Beginning in the nineteenth century, in the United States and around the world, groups of individuals (often, but not always, influenced by various strands of socialist thinking) formed “intentional communities” and cooperative societies. The Shakers (in the United States) and Mondragón (in Spain) are perhaps the best known.

And the list of critics of capitalism—both individuals and movements—goes on. It includes, of course, a wide variety of left-wing populist, socialist, and communist political parties (some of which have come to power, either through democratic elections or revolutions). A fundamental questioning of the capitalist system has also emerged from and influenced many other individuals, groups, and traditions, from civil rights leaders (such as Martin Luther King, Jr., in the United States) and religious groups (for example, the liberation theologians in Latin America) to independence movements (Angola and Mozambique are cases in point) and transnational protests (like Occupy Wall Street).

What can we conclude from this brief survey? From the very beginning, both mainstream economic thought and capitalism have brought forth their critical others.

In this post, I continue the draft of sections of my forthcoming book, “Marxian Economics: An Introduction.” This, like the previous post, is for chapter 1, Marxian Economics Today.

A Tale of Two Capitalisms

Marxian economists recognize, just like mainstream economists, that capitalism has radically transformed the world in recent decades, continuing and in some cases accelerating long-term trends. For example, the world has seen spectacular growth in the amount and kinds of goods and services available to consumers. Everything, it seems, can be purchased either in retail shops, big-box stores, or online. And, every year, more of those goods and services are being produced and sold in markets.

That means the wealth of nations has expanded. Thus, technically, Gross Domestic Product per capita has risen since 1970 in countries as diverse as the United States (where it has more than doubled), Japan (more than tripled), China (almost ten times), and Botswana (where it has increased by a factor of more than 22).

International trade has also soared during the same period. Goods and services that are produced in once-remote corners of the world find their way to customers in other regions. Both physical commodities— such as smart phones, automobiles, and fruits and vegetables—and services—like banking, insurance, and communications—are being traded on an increasing basis between residents and non-residents of national economies. To put some numbers on it, merchandise trade grew from $318.2 billion dollars in 1970 to $19.48 trillion in 2018. And exports of services have become a larger and larger share of total exports—for the world as a whole (now 23.5 percent, up from 15 percent) and especially for certain countries (such as the United Kingdom, where services account for about 45 percent of all exports, and the Bahamas, where almost all exports are services).

The world’s cities are the hubs of all that commerce and transportation. It should come as no surprise that the urbanization of the global population has also expanded rapidly in recent decades, from about one third to now over half. In 2018, 1.7 billion people—23 per cent of the world’s population— lived in a city with at least 1 million inhabitants. And while only a small minority currently reside in cities with more than 10 million inhabitants, by 2030 a projected 752 million people will live in so-called megacities, many of them located in the Global South.

We’re all aware that, during recent decades, many new technologies have been invented—in producing goods and services as all well as in consuming them. Think of robotics, artificial intelligence, and digital media. And, with them, new industries and giant firms have emerged and taken off. Consider the so-called Big Four technology companies: Amazon, Google, Apple, and Facebook. They were only founded in the last few decades but, as they’ve continued to grow, they’ve become intertwined with the lives of millions of companies and billions of people around the world.

The owners of those tech companies are, to no one’s amazement, all billionaires. When the first Forbes World Billionaires List was published in 1987, it included only 140 billionaires. Today, they number 2825 and their combined wealth is about $9.4 trillion. That works out to be about $3,300,000,000 per billionaire. Their wealth certainly represents one of the great success stories of capitalism in recent decades.

Finally, capitalism has grown in more countries and expanded into more parts of more countries’ economies over the course of the past 40 years. Both large countries and small (from Russia, India, and China to El Salvador, Algeria, and Vietnam) are more capitalist than ever before. As we look around the world, we can see that the economies of rural areas have been increasingly transformed by and connected to capitalist ways of producing and exchanging goods and services. Global value chains have incorporated and fundamentally altered the lives of millions and millions of workers around the world. Meanwhile, areas of the economy that had been formerly outside of capitalism—for example, goods and services provided by households and government—can now be bought and sold on markets and are the source of profits for a growing number of companies.

But, unlike mainstream economists, Marxists recognize that capitalism’s extraordinary successes in recent decades have also come with tremendous economic and social costs.

All that new wealth of nations? Well, it’s been produced by workers that receive in wages and salaries only a portion of the total value they’ve created. The rest, the surplus, has gone to those at the top of the economic pyramid. So, the distribution of income has become increasingly unequal over time—both within countries and for the world economy as a whole.

According to the the latest World Inequality Report, income inequality has increased in nearly all countries, especially in the United States, China, India, and Russia. In other countries (for example, in the Middle East, sub-Saharan Africa, and Brazil), income inequality has remained relatively stable but at extremely high levels.

At a global level, inequality has also worsened. Thus, for example, the top 1 percent richest individuals in the world captured more than twice as much of the growth in income as the bottom 50 percent since 1980. Basically, the share of income going to the bottom half has mostly stagnated (at around 9 percent), while the share captured by the top 1 percent has risen dramatically (from around 16 percent to more than 20 percent).

And it’s no accident. Inequality has increased because the surplus labor performed by workers, in both rich and poor countries, has not been kept by them but has gone to a small group at the top of the national and world economies.

So, we really are talking about a tale of two capitalisms: one that is celebrated by mainstream economists (but only benefits those in the top 1 percent) and another that is recognized by Marxian economists (who emphasize the idea that the growing wealth of nations and increasing inequality are characteristics of the same economic system).

But that’s not the end of the story. All that capitalist growth has been anything but steady. The two most severe economic downturns since the Great Depression of the 1930s have happened in the new millennium: the Second Great Depression (after the crash of 2007-08) and the Pandemic Depression (with the outbreak and spread of the novel coronavirus). In both cases, hundreds of millions of workers around the world were laid off or had their pay cut. Many of them were already struggling to get by, with stagnant wages and precarious jobs, even before economic conditions took a turn for the worse.

And then those same workers had to look up and see one part of the economy recovering—for example, the profits of their employers and shares in the stock market that fueled the wealth of the billionaires—while the one in which they earned their livelihoods barely budged.

Meanwhile, those stunning global cities and urban centers, the likes of which the world has never seen, also include vast slums and informal settlements—parking lots for the working poor. According to the United Nations, over 1 billion people now live in dense neighborhoods with unreliable and often shared access to basic services like water, sanitation and electricity. Many don’t have bank accounts, basic employment contracts, or insurance. Their incomes and workplaces are not on any government agency’s radar.

They’re not so much left behind but, just like their counterparts in the poor neighborhoods of rich countries, incorporated into capitalism on a profoundly unequal basis. They’re forced to compete with one another for substandard housing and low-paying jobs while suffering from much higher rates of crime and environmental pollution than those who live in the wealthy urban neighborhoods. In countries like the United States and the United Kingdom, a disproportionate number are ethnic and racial minorities and recent immigrants.

The working poor in both urban and rural areas are also the ones most affected by the climate crisis. A product of capitalism’s growth, not only in recent decades, but since its inception, global warming has created a world that is crossing temperature barriers which, within a decade, threaten ecosystem collapse, ocean acidification, mass desertification, and coastal areas being flooded into inhabitability.

Meanwhile, the democratic principles and institutions that people have often relied on to make their voices heard are being challenged by political elites and movements that are fueled by and taking advantage of the resentments created by decades of capitalist growth. The irony, of course, is many of these political parties were elected through democratic means and call for more, not less, unbridled capitalism as the way forward.

Clearly, the other side of the coin of capitalism’s tremendous successes have been spectacular failures.

So, it should come as no surprise that there’s more interest these days in both criticisms of and alternatives to capitalism. And Marxian economics is one of the key sources for both: for ways of analyzing capitalism that point to these and other failures not as accidents, but as intrinsic to the way capitalism operates as a system; and for ideas about how to imagine and create other institutions, fundamentally different ways of organizing economic and social life.

Young people, especially, have become interested in the tradition of Marxian economics. They’re trying to pay for their schooling, find decent jobs, and start rewarding careers but they’re increasingly dissatisfied with the effects of the economic system they’re inheriting. Mainstream economics seems to offer less and less to them, especially since it has mostly celebrated and offered policies to strengthen that same economic system. Or, within more liberal parts of mainstream economics, offer only minor changes to keep the system going.

Marxian economics offers a real alternative—in terms of criticizing capitalism and the possibility of creating an economic system that actually delivers longstanding promises of fairness and justice.

[ht: adm]

I’ve just signed a contract with Polity Press to write a new book, “Marxian Economics: An Introduction.” The idea is to publish it in late 2021 or early 2022.

My goal is to write a textbook that can fulfill two purposes: first, a stand-alone book for courses that are focused on Marxian economics or survey courses that have a section devoted to Marxian economics; second, it will also be useful as a companion text in a course that is based on reading all of or major selections from Karl Marx’s Capital. While the book will be aimed at college and university students (both undergraduate and graduate) in economics, it will also be relevant for and accessible to students and professors in other disciplines—such as sociology, geography, history, and cultural studies—as well as to interested individuals outside the academy.

Here then is the proposed outline of chapters:

Part 1, INTRODUCTION TO MARXIAN ECONOMICS

Chapter 1, Marxian Economics Today

Chapter 2, Marxian Economics Versus Mainstream Economics

Chapter 3, Toward a Critique of Political Economy

PART 2, MARXIAN VALUE THEORY

Chapter 4, Commodities and Money

Chapter 5, Surplus-Value and Exploitation

Chapter 6, Distributions of Surplus-Value

PART 3, EXTENSIONS AND DEBATES

Chapter 7, Applications of Marxian Economics

Chapter 8, Debates in and around Marxian Economics

PART 4, CONCLUSION

Chapter 9, Transitions to and from Capitalism

The content of much of the manuscript is in my lecture notes, since I taught Marxian economic theory for almost four decades. But some of it is not, and will require exploring a few new areas and topics. My plan is to use this blog to compose the new sections, in 1000-1500-word posts—much as I have been doing for my other book, “Utopia and Critique” (see here). I welcome feedback to any and all of the book-related posts that will appear in the coming months.

When the book is done and accepted, I will post the link for interested readers.

And the necessary disclaimer: these are not sections of the final manuscript. Far from it! They are merely first drafts of some of the material that I will edit later on for the book.

OK, let’s get started. . .

Marxian Economics Today

As you open this textbook, you may be wondering, why should I study Marxian economics?

In the United States and in many other countries, Marxian theory, including Marxian economics, is a controversial topic. That’s certainly been true for the past few decades, when the topic was all but taboo. But beginning with the crash of 2007-08—the Great Recession or what some have called the Second Great Depression—the climate has dramatically changed. More and more people, especially young people, have become interested both in Marxian criticisms of mainstream economics and in possible alternatives to capitalism.

Here’s Nouriel Roubini, professor of economics at New York University’s Stern School of Business and the chairperson of Roubini Global Economics, an economic consultancy firm: “So Karl Marx, it seems, was partly right in arguing that globalization, financial intermediation run amok, and redistribution of income and wealth from labor to capital could lead capitalism to self-destruct.”

And then, from the other side of the Atlantic, there’s George Magnus, Senior Economic Adviser to the UBS Investment Bank: “Policy makers struggling to understand the barrage of financial panics, protests and other ills afflicting the world would do well to study the works of a long-dead economist: Karl Marx. The sooner they recognize we’re facing a once-in-a-lifetime crisis of capitalism, the better equipped they will be to manage a way out of it.

Many of us were surprised, including those of us who have spent decades studying and teaching Marxian economics. I did so at the University of Notre Dame for almost 4 decades.

Living and working in the United States, we’d just been through a 30-year period in which Marx and Marxian ideas had been marginalized, in the discipline of economics and in the wider society. Marx was declared either dangerous or irrelevant (or, often, both).

Capitalism was humming along (with, of course, the usual ups and downs) until. . .the Crash of 2008, when the world economy was brought to the brink of disaster. And Marx, almost in a blink of an eye, was relevant again.

To be honest, it wasn’t that Marxists could take all, or even much of, the credit (or blame). It was actually the spectacular failure of mainstream economics that led to this dramatic change.

Mainstream economists failed to predict the crash.

Even more, they didn’t even consider a crash even a remote possibility. The chance of a crisis starting with the housing and banking sectors didn’t even exist in their theoretical framework.

And, once the crash happened, they didn’t really have much to offer. The policy that went along with their models suggested letting the banks sort out the problems on their own. Until, of course, the panic that set in with the failure of Lehman Brothers, which brought first the American economy and then the world economy to the brink of collapse.

The kinds of problems building up for decades simply didn’t figure prominently in mainstream economic theoretical models and empirical analyses. Problems such as:

  • The deregulation of banks and the growth of the financial sector within the U.S. and world economies
  • The housing bubble that was supported by bank loans, and then sliced and diced into collateralized debt obligations and other derivatives
  • The outsourcing of jobs and the decline of labor unions, which if they paid attention at all were seen as freeing up markets

The result of these and other changes in the U.S. economy created, for the first time in U.S. history, a growing gap between steadily growing productivity and stagnant real wages.

And, of course, an increasingly unequal distribution of income, reminiscent of the period just before the first Great Depression, when the share of income received by the richest 10 percent of Americans approached 50 percent of total income, and that of the bottom half of the population hovered in the low teens.

Mainstream economics—neoclassical and Keynesian economists, both microeconomists and macroeconomists—either ignored these issues or explained them away as a matter of efficient markets and good for growth.

The financial sector needed no oversight or regulation, because of the idea of efficient markets (which meant that all risk was calculated into prices, and all participants had all the relevant information)

And inequality was either good for growth or, if seen as a problem, just the inevitable result of technology and globalization, which could be handled by workers acquiring better skills and more education.

Not to mention the fact that both economic history and the history of economic thought—the history of capitalism and the history of thinking about capitalism—had disappeared as relevant areas of training for mainstream economists. As a result, not only had they never read Marx; they’d never read Adam Smith, John Maynard Keynes, or Hyman Minsky.

Then things changed, especially as the problems cited above never really disappeared, even as stock markets entered another boom period. Marxian criticisms of both capitalism and mainstream economic theory became appropriate topics of discussion and debate again.

Reading Marx

While references to Marxian economics have increased in recent years, there’s no indication commentators have actually read the works of Karl Marx. Perhaps they remember reading the Communist Manifesto at some point in their education but not Marx’s magnum opus Capital. And they certainly haven’t read the scholarly work on Marx.

Perhaps they were afraid to or didn’t know how to, or were just too lazy. But the fact remains the time is ripe for a new reading of Marx’s Capital.

If they did such a reading, what would they find?

They would encounter something quite different from what they—and perhaps you, reading this book—expect. For example, you won’t discover a blueprint for socialism or communism. Nor will you find a set of predictions about how the crises of capitalism would lead to socialism or communism. Or much else that is regularly attributed to Marx and Marxian economics.

What readers would find is a critique of political economy, in two senses: a critique of mainstream economic theory; and a critique of capitalism, the economic system celebrated by mainstream economists. That’s what Marx came up with after spending all those hours reading the classical political economists and the factory reports in the British Museum. And what generations of Marxian economists have been discussing and developing ever since.

Marxian economics is organized around five key ideas: critique, history, society, theories, and class. These are ideas you’ll encounter many times over the course of this book.

Critique: Capital (and the many other economic texts Marx wrote) are less a fully worked-out theory of capitalism than a critique of the ideas—the concepts and models—that are central to mainstream economics. In other words, Marx carefully studied the works of the famous classical economists, such as Adam Smith and David Ricardo. He used them as his starting-point but then ended up in a very different place, challenging much of what is taken as the “common sense” within economics. You may find yourself questioning some of the key ideas within contemporary mainstream economics during the course of reading this book.

History: Much of mainstream economics is based on models that never really change. Marxian economics is different; it is focused on history—both the history of economic systems and the history of economics ideas—that change over time. Thus, for example, within Marxian economics, capitalism has a history: it didn’t always exist; once it came into existence, it has continued to change; and, at least in principle, capitalism can come to an end, replaced by a fundamentally different way of organizing economic and social life.

Society: Marx’s approach was always about an economy within society, both affecting and being affected by everything else—social rules, political power, cultural norms, and much else. Therefore, different societies (and, for that matter, different parts of society) have different ways of managing economic life, now as in the past. So, they have radically different ways of allocating labor, organizing production, exchanging goods and services, and so on.

Theories: Not only are there different economies and societies; there are also different economic theories. Marxian economics is one, mainstream economics is another. (And there are many others you may have read or heard about: radical, Post Keynesian, feminist, postcolonial, green, and the list goes on.) And economic theories are different from economic systems. So, for example, Marxian and mainstream economists have different theories—they tell different stories, they arrive at different conclusions—about the same economic system. So, as you will see over the course of this book, the Marxian theory of capitalism is very different from the mainstream theory of capitalism.

Class: One of the particular interests of Marx and Marxian economists is class, the particular way workers (for example, wage-laborers under capitalism or serfs within feudalism) perform more labor than they receive to sustain their lives. The rest, the extra or surplus labor, is appropriated and controlled by another, much smaller group (for example, the class or capitalists or feudal lords). Marx created a special name for this: class exploitation.

So, according to Marxian economics, different societies have different class structures, which have changed historically. And Marx was critical of both the mainstream economic theories that deny the existence of exploitation as well as the economic systems in which the class of workers who perform the surplus labor are excluded from making decisions about the surplus.

You can therefore see how there would be, from the very beginning, an animated debate between the advocates of mainstream and Marxian economic theories.