Inflation continues to run hot—and now, finally, the debate about inflation is heating up.
On one side of the debate are mainstream economists and lobbyists for big business, the people Lydia DePillis refers to as having a simple mantra: “Supply and demand, Economics 101.” In their view, inflation is caused by supply and demand in the labor market, which is allowing workers’ wages to increase at an unsustainable rate (a story that, as I showed in April, has no validity), and supply and demand in the economy as a whole, with too much money chasing too few goods.
Simple, straightforward, and. . .wrong.
Fortunately, there’s another side to the debate, with heterodox economists and progressive activists arguing that increasingly dominant corporations are taking advantage of the current situation (the pandemic, disruptions in global supply-chains, the war in Ukraine, and so on) to jack up prices and rake in even higher profits than they’ve been able to do in recent times.
Josh Bivens, of the Economic Policy Institute, has offered two arguments that challenge the mainstream story: First, while “It is unlikely that either the extent of corporate greed or even the power of corporations generally has increased during the past two years. . .the already-excessive power of corporations has been channeled into raising prices rather than the more traditional form it has taken in recent decades: suppressing wages.” Second, inflation can’t simply be the result of macroeconomic overheating. That would suggest, at this point in a classic economic recovery, that profits should be shrinking and the labor share of income should be rising. As Biven notes, “The fact that the exact opposite pattern has happened so far in the recovery should cast much doubt on inflation expectations rooted simply in claims of macroeconomic overheating.”*
So, we have dramatically different analyses of the causes of the current inflation, and of course two very different strategies for combatting inflation. The mainstream policy (as I also wrote about in April) is to slow the rate of growth of the economy (for example, by raising interest rates) and increase the level of unemployment, thus slowing the rate of increase of both wages and prices. And the alternative? Bivens supports a temporary excess profits tax. Other possibilities—which, alas, are not yet being raised in the debate—include price controls (especially on commodities that make up workers’ wage bundles), government provisioning of basic wage goods (including, for example, baby formula), and subsidies to workers (which, while they wouldn’t necessarily lower inflation, would at least make it easier for workers to maintain their current standard of living).
What we’re witnessing, then, is an important debate about the causes and consequences of inflation. But, as DePillis understands, the debate is about much more than that: “The real disagreement is over whether higher profits are natural and good.“
In the end, that’s what all key debates in economics are about. Profits are the most contentious issue in economics precisely because the analysis of profits reflects both a theory and ethics about two things: whether capitalists deserve the profits they capture and what they can and should do with those profits. For example, profits can be theorized as a return to capital (and therefore natural and fair, as in mainstream economics) or they are the result of price-gouging (and therefore social and unfair, as in Bivens’s theory of corporate power).**
Similarly, capitalists can be seen as investing their profits (and therefore making their firms and the economy as a whole more productive, with everyone benefitting) or they can distribute a significant portion of their profits toward other uses (such as pursuing mergers and acquisitions, engaging in stock buybacks, and offering higher dividends, which do nothing to increase productivity but instead lead to more corporate concentration and make the distribution of income and wealth even more unequal).
Mainstream economists and capitalists have long sought to convince us that profits are both natural and good. In other words, when it comes to corporate profits and escalating charges of “greedflation,” they prefer to see, hear, and say no evil. The rest of us know what’s actually going on—that corporations are taking advantage of current conditions to raise prices, both to increase their profits and to lower workers’ real wages. We also know that traditional attempts to contain inflation through monetary policy will hurt workers but not their employers or the tiny group that sits at the top of the economic pyramid.
It’s clear then: the debate about inflation is actually a debate about profits. And the debate about profits is, in the end, a debate about capitalism. The sooner we recognize that, the better off we’ll all be.
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*Even the Wall Street Journal admits that the wage share is not in fact growing: “The labor share of national output is roughly where it was before the pandemic.” Moreover, the current situation represents just a continuation of the trend of recent decades: “Over the last two decades. . .the share of U.S. income that goes to labor has fallen, despite periods of low unemployment.”
**Corporate profits can also be theorized as the result of exploitation (and thus a different kind of social determination and unfairness, as in Marxian theory).
You don’t have to read Marx to understand the lack of power workers have under capitalism. But you do have to read beyond mainstream economists and economic pundits. You might turn, for example, to the business school.
Yes, I know, that’s a strange assertion. But let me explain.
The usual argument these days is that workers have acquired a lot more power because of the scarcity of labor. When labor is scarce (basically, when the quantity supplied of labor is less than the quantity demanded), workers can fetch higher wages and be pickier about the jobs they’re willing to accept. That, of course, drives employers crazy and, as usual, mainstream economists and commentators just echo those concerns.
So, is it true? Well, look at the data they cite:
The blue line represents the number of job openings, while the red line is the number of unemployed workers. And, look, way over on the right-hand side of the chart the blue line is slightly higher than than the red line! (Numerically, there were 10.1 million job openings recorded at the end of June and 9.5 million unemployed workers.In other words, for every available 100 jobs, there are only 94 unemployed people available.) And that scares the bejesus out of employers and those who always take the side of employers: they might have to pay workers more to take the terrible, low-paying jobs they are offering.
The result is an increase in workers’ power, as Ben Popken explains:
A pandemic-tightened labor market has given willing and able workers more of an upper hand with their employers for the first time in generations. . .
Worker power is the ability of an employee to command higher wages and benefits and set terms about their working conditions.
Not so fast! Yes, some workers might benefit from the current tight labor market but certainly not all of them, especially at the bottom of the economic pyramid.
Moreover, as Julie Battilana and Tiziana Casciaro remind us, while “it’s understandable” that some claim that workers have more power now than they did during the worst months of the pandemic, it’s still the case that “power remains highly unbalanced in most American workplaces.”
In non-unionized, hierarchical organizations, it is still concentrated in the hands of top executives and shareholders who control all company decisions and priorities, from pay levels to hiring (and firing), and company strategy and policies. Workers continue to have no representation on most corporate boards of directors and have no or very little say over any of these decisions even though they affect their work lives and livelihoods. This lack of control has detrimental effects on worker health and well-being: It has been associated with job dissatisfaction, greater mental strain and damaged physical health. The philosopher Elizabeth Anderson has written that American “workplaces are small tyrannies,” resembling dictatorships more than democracies.
In other words, workers have two positions within capitalism: they sell their ability to work in markets for labor power and then, after those exchanges are concluded, they leave the market and enter another realm, where they perform labor. And inside the enterprises where they work, they have no power at all. There, in the realm of production, their employers—the corporate boards of directors or capitalists—have all the power. That’s why capitalists enterprises are dictatorships, not democracies.
And if workers did have power inside the enterprises—if, for example, the enterprises were organized instead as worker-owned cooperatives?
giving workers more power means giving them the right to collectively validate or reject important decisions that affect their work lives, including the choice of the CEO, how profits are shared, what strategies to pursue and what to prioritize in the face of a health crisis like the pandemic.
And if employers and mainstream economists don’t attempt “to reduce the extreme power imbalance that so clearly puts workers at a disadvantage”? Then, Battilana and Casciaro warn, workers might take matters into their hands:
when the distribution of rewards in an economic system is so unequal as to appear blatantly unfair, those with less power are more likely to upend the current system entirely.
That, of course, would mean the end of capitalism. . .
In this post, I continue the draft of sections of my forthcoming book, “Marxian Economics: An Introduction.” The first five posts (here, here, here, here, and here) will serve as the basis for Chapter 1, Marxian Economics Today. The next six (here, here, here, here, here, and here) are for Chapter 2, Marxian Economics Versus Mainstream Economics. This post (following on four previous ones, here, here, here, andhere) is for Chapter 3, Toward a Critique of Political Economy.
The necessary disclosure: these are merely drafts of sections of the book, some rougher or more preliminary than others. I expect them all to be extensively revised and rewritten when I prepare the final book manuscript.
Finally, because of a contractual commitment (which limits the amount of the draft of the book I am allowed to publish on this blog), this will be the last book-related post for a few months.
Toward Marx’s Critique of Political Economy
There is no necessary trajectory to Marx’s writings, no reason his earlier writings had to lead to or culminate in Capital. However, as we look back from the vantage point of his critique of political economy, we can see the ways his thinking changed and how the elements of that critique emerged.
In this section, we take a quick look at some of Marx’s key texts prior to writing Capital: the Economic and Philosophic Manuscripts of 1844, the Theses on Feuerbach, the German Ideology, the Grundrisse, and A Contribution to the Critique of Political Economy. Together, they will give us a sense of how Marx’s ideas developed over time.
We will also see two themes emerge over the course of these texts: the role of critique and a focus on social context. First, Marx doesn’t start (in these texts or, for that matter, in Capital) with a given approach or set of first principles. Instead, his method is to engage with ideas and problems that were “out there,” in the intellectual and social worlds he inhabited, and to formulate a critique, thereby giving rise to new ways of posing issues and answering questions. Second, Marx’s concern is always with social and historical specificity, as against looking for or finding what others would consider to be given and universal. Thus, for example, Marx eschews any notion of a transhistorical or transcultural “human nature.” Instead, in his view, different human natures are both the condition and consequence of particular social and historical circumstances. Much the same holds for his method of engaging economic issues.
Once Marx left Germany and found his way to Paris, he met Engels for the first time (thus initiating, following on their previous correspondence, a life-long collaboration) and also began what he considered to be a “conscientious critical study of political economy,” the mainstream economics of his day. The result was a series of three manuscripts (often referred to as the Economic and Philosophic Manuscripts of 1844 or the Paris Manuscripts, which were written between April and August 1844 but only finally published, to considerable interest, in 1932).* What readers will find in the manuscripts is, having “proceeded from the premises of political economy” (meaning “its language and laws,” the assumption of “private property, the separation of labor, capital and land, and of wages, profit of capital and rent of land,” and so on), Marx arrives at conclusions and formulates new terms that run directly counter to those of Smith, Ricardo, and the other classical political economists. In particular, Marx argues that, under capitalism, as workers become reduced to commodities, what they produce confronts them as “something alien.” Therefore, their labor (using terms borrowed from Feuerbach’s critique of Hegel) becomes “alienated” or “estranged.”
it is clear that the more the worker spends himself, the more powerful becomes the alien world of objects which he creates over and against himself, the poorer he himself – his inner world – becomes, the less belongs to him as his own. It is the same in religion. The more man puts into God, the less he retains in himself. The worker puts his life into the object; but now his life no longer belongs to him but to the object. Hence, the greater this activity, the more the worker lacks objects. Whatever the product of his labor is, he is not.
He then demonstrates that the taken-for-granted assumptions of classical political economy—private property, wages, and so on—are themselves the products of estranged labor. Thus, the distinctions made by the mainstream economists of Marx’s time—between profit and rent, between both and wages, and so on—are rooted not in the nature of things, but in particular social and historical circumstances. They are, in other words, peculiar to capitalism.**
As we saw in a previous section, Marx then (in 1845) developed a critique of Feuerbach. Over the course of his eleven short theses, Marx rejects the idea of a single anthropology (the “essence of man” or human nature) and focuses, instead, on the ensemble of “social relations,” the “historical process,” and “social humanity.” The result is social practice, that is, the goal of not just interpreting the world, but of changing it.
The next year, Marx coauthored with Engels a long set of manuscripts (like the 1844 manuscripts, only published in 1932) in which they challenge the one-sided criticisms of Hegel by Bruno Bauer, other Young Hegelians, and the post-Hegelian philosopher Max Stirner. There, in their attack on German philosophy for having been obsessed with religion (and therefore self-consciousness or the realm of ideas), Marx and Engels announce for the first time what they call the “materialist conception of history,” with an alternative starting-point: “real individuals, their activity and the material conditions under which they live, both those which they find already existing and those produced by their activity.” This focus on social production means Marx and Engels can transform consciousness itself into a “social product,” which develops historically and changes according to particular forms of society or social relationships.***
Later, once Marx had settled in London, he spent much of his time in the British Museum (a national public museum, which contained both natural history objects and a massive library) studying the texts of the classical political economists. The result were a set of notebooks, called the Grundrisse (literally outlines or plans), which are often considered to be first draft of Capital.**** While the topics Marx covered are wide-ranging, from value and labor to precapitalist forms of economic and social organization and the preconditions for communism, what is of interest here is his announcement of where he thinks the critique of political economy should start: with “socially determined individual production.”
Why is this important? Because it represents Marx’s break from the notion of natural production, and therefore from the mainstream economics of his day (as of our own). In classical political economy (as in neoclassical economics), capitalism and other economies are considered to be natural, because they are finally reduced to and can be explained by certain given or exogenous factors, such as population, technology, and resources (to which neoclassical economists add given preferences). Also, they take individuals as their point of departure (the most famous example being Robinson Crusoe, a story that is repeated even today in mainstream economic textbooks).
Marx’s alternative view is that economics should start with social individuals, “individuals producing in society,” not given individuals outside of particular historical and social contexts. Moreover, the focus should be on “social production”—different, socially determined ways of producing goods and services—not on any kind of production in general (which students today will recognize in the technical apparatus of isocost and isoquant curves).
Marx also demonstrates his debt to Hegel, in discussing the relationship among production, distribution, exchange, and consumption. Where the classical political economists posit that the goal of production is consumption, and many of the critics worry about distribution, Marx sees them in terms of a “dialectical unity.” In its most general form,
A definite production thus determines a definite consumption, distribution and exchange as well as definite relations between these different moments. Admittedly, however, in its one-sided form, production is itself determined by the other moments.
It’s a distinction that shows up today in the debate about distribution (through free markets) versusu redistribution (through government programs). What the participants in that debate forget about is the initial distribution related to production (and all that entails for consumption, distribution, and exchange), that is, society produces itself through its initial distribution. It’s that initial distribution that is taken as given in mainstream economics, then as now.
Marx also announces his break from existing ways of carrying out economic analysis, whether starting from abstract first principles (and deducing the rules that govern reality) or from empirical reality (whereby certain “laws” are extracted). Instead, he argues, the method he proposes is a movement from the abstract to the concrete. In other words, economic analysis is itself a process of production—one that starts from relatively abstract notions and, adding more and more determinations or circumstances, arrives at a relatively concrete notion (“the way in which thought appropriates the concrete, [which] reproduces it as the concrete in the mind”). It is not a question of bridging the gap between thought and reality (in terms of some kind of validity criterion) but of producing within thought a particular conception of economic and social reality. The implication, of course, is that different economic theories will lead to different, incommensurable conceptions of capitalism and other economic systems.
Finally, in 1859, Marx published A Contribution to the Critique of Political Economy. There, he designates his break from the philosophies of both Hegel and Feuerbach with what has become one of his most famous expressions:
It is not the consciousness of men that determines their existence, but their social existence that determines their consciousness.
This is Marx’s critique of both Hegel’s notion of the Absolute Spirit and of Feuerbach’s alienated consciousness. It’s not an issue of individual consciousness or virtue within existing social order but the conflict-ridden social order itself. Another way of putting this in terms of contemporary debates is: you can’t just have a semblance of freedom (which often means blaming the victims) but you need real freedom, that is, economic and social change that makes the exercise of freedom possible. It’s the same idea that has motivated many working-class political movements, from the nineteenth century onwards, which have demanded an end to poverty and access to decent housing, healthcare, and so on for the majority of people by identifying and seeking to eliminate the economic obstacles to what they consider to be fundamental human rights.
Marx then appends a quotation from Dante Alighieri’s Divine Comedy, which can also serve as a warning to readers as we embark, starting in the next chapter, on a detailed study of Marx’s critique of political economy:
Qui si convien lasciare ogni sospetto Ogni vilta convien che qui sia morta.*****
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*The Economic and Philosophic Manuscripts of 1844 was first published in Germany by the Institute of Marxism-Leninism in Moscow in 1932, in the language of the original. In English, this work first appeared in 1959, published by the Foreign Languages Publishing House in Moscow, translated by Martin Milligan.
**Marx also presents in those manuscripts his critique of “piecemeal social reformers,” including the French socialist Pierre-Joseph Proudhon, “who either want to raise wages and in this way to improve the situation of the working class, or regard equality of wages,” for not going far enough, because they accept the existence of private property and estranged labor. In this sense, they want to improve, but not eliminate and move beyond, capitalism. And, in the third manuscript, Marx credits Hegel with understanding the importance of labor as the source of alienation; but then criticizes Hegelian philosophy for focusing entirely on “abstractly mental labor” (as a question only of “self-consciousness”) and therefore overlooks (just like the classical political economists) economic and political alienation.
***They also announce what, at least at this stage, what they mean by “communism”: “not a state of affairs which is to be established, an ideal to which reality [will] have to adjust itself. We call communism the real movement which abolishes the present state of things. The conditions of this movement result from the premises now in existence.”
****The seven notebooks were written during the winter of 1857–58 but were only published in 1939. The first English-language translation (by Martin Nicolaus) appeared in 1973. The publication of the Grundrisse was important not only for readers of Capital (and much discussion has ensued about the overlaps and differences between the two), but also for other fields, especially for the new field of cultural studies (in the work of, among others, Stuart Hall and the famous Center for Contemporary Cultural Studies at the University of Birmingham).
*****The lines are from Canto III of “Inferno” (as Virgil’s reply to Dante, who has just read the inscription over the Gates of Hell). The translation is: “Here one must leave behind all hesitation; here every cowardice must meet its death.”
In this post, I continue the draft of sections of my forthcoming book, “Marxian Economics: An Introduction.” The first five posts (here, here, here, here, and here) will serve as the basis for Chapter 1, Marxian Economics Today. The next six (here, here, here, here, here, and here) are for Chapter 2, Marxian Economics Versus Mainstream Economics. This post is a draft of the first section of Chapter 3, Toward a Critique of Political Economy.
The Marxian Critique of Political Economy
In the first two chapters, we looked at some of the major differences between Marxian economics and mainstream economics, both in Marx’s time and in our own.
But where did Marx’s critique of mainstream economics come from? It certainly did not emerge in one fell swoop, as a ready-made theory of capitalism. And it wasn’t produced in isolation, independently of the society within which it was first produced and then further elaborated.
Quite the opposite: we can trace the development of Marx’s critique through a variety of texts—many of them now quite famous, even if they are rarely mentioned or discussed within economics. There, we can see Marx’s ideas developing and changing, until he began to work on his critique of political economy, finally presented in Capital.
Moreover, Marx’s critical appraisal of both mainstream economic theory and capitalism was, like all theories or discourses, a product of its time—of the economic and social structures as well as of the ideas that were prevalent when he was writing. In turn, once they were produced, Marx’s ideas participated in changing that same intellectual and social environment—as they continue to do, right up to the present.
In this chapter, we will examine some of the influences on Marx’s critique of political economy. These include the larger economic and social environment of capitalism in the middle of the nineteenth century as well as Marx’s intellectual heritage, especially the politics of utopian socialism and the philosophy of G. W. F. Hegel—in addition to classical political economy. Without having a basic sense of those moments, it is impossible to understand where Marx’s critique came from.
The task is even more germane because those influences are so different from those of our own own time, when you are reading this book. Capitalism has changed a great deal in the intervening period, and the ideas we take to be relevant today are quite different from those that influenced Marx’s work. How many of us, for example, know about or read Hegel today? Instead, in recent decades, postmodernism has been much more of an influence on contemporary interpretations of Marxian economics.
Once we have accomplished that goal, we will turn our attention to some of Marx’s most famous writings before Capital. These include such texts as The Economic and Philosophical Manuscripts of 1844 and The German Ideology, as well as the copious notebooks, the Grundrisse, Marx kept as he first started delving into classical political economy.
For a Ruthless Criticism of Everything Existing
So, where to begin? Perhaps the best place is one of the letters Marx wrote to his friend Arnold Ruge.
Marx was 25, just two years beyond completing his Doctor of Philosophy at the University of Jena. He had recently married Jenny von Westphalen—but, seeing that working in his native Germany was becoming increasingly difficult, he was already planning to leave and move to France. Police reprisals had forced Marx to resign from the editorship of Rheinische Zeitung (Renish Newspaper). During that time, Marx corresponded with Ruge, and their eight-letter exchange was eventually published in the Deutsch-Französische Jahrbücher(German-French Annals), which appeared in Paris in 1844.*
The most relevant piece of that correspondence is the letter Marx composed in September 1843, which eventually acquired the title “For a Ruthless Criticism of Everything Existing.”** With those words, Marx announced the task confronting him and other “young Hegelians” at that moment:***
the ruthless criticism of the existing order, ruthless in that it will shrink neither from its own discoveries, nor from conflict with the powers that be.
In one sense, there’s nothing remarkable about Marx’s formulation of their task. It’s part and parcel of modernity, the “tradition of no tradition,” defined by self-criticism, openness to novelty, suspicion of authority, questioning of the existing common sense, and much else. It is, in short, what modern intellectuals (including students) are supposed to do: follow ideas wherever they may go, without being afraid of their consequences or, as we say these days, of “speaking truth to power.”
In another sense, Marx formulated his project of “ruthless criticism” in a novel fashion. He ties it to socialism and communism—and therefore a radical transformation of the world. He was, even at that young age, a radical thinker and acivist.
However,
This does not mean that we shall confront the world with new doctrinaire principles and proclaim: Here is the truth, on your knees before it! It means that we shall develop for the world new principles from the existing principles of the world. We shall not say: Abandon your struggles, they are mere folly; let us provide you with true campaign-slogans. Instead, we shall simply show the world why it is struggling, and consciousness of this is a thing it must acquire whether it wishes or not.
Therefore, Marx explains, he does not believe in nor is he in favor of holding up any kind of “dogmatic banner.”
That, in a nut shell, is how Marx understands his project—a “ruthless criticism of everything existing”—which, as we will see in this chapter, passes through various stages on his way to composing the critique of political economy in Capital.
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*The aim of this chapter is not to present the details of Marx’s life. The focus here, as in the book as a whole, is on the development of Marx’s ideas as well as their conditions and consequences. For interested readers, the classic biography is Franz Mering’s Karl Marx: The Story of His Life (published in 1918). A recent film directed by Raoul Peck, The Young Karl Marx (2017), is an excellent historical drama about Marx and his relationship to Friedrich Engels. It also emphasizes, perhaps for the first time, the important role played by their respective wives, Jenny von Westphalen and Lizzie Burns.
**Most of Marx’s texts cited in this chapter can be found in the second edition of The Marx-Engels Reader, edited by Robert C. Tucker.
***”Young Hegelians” refers to the influence on Marx of Hegel’s philosophy, which will be discussed in the next section.
In this post, I continue the draft of sections of my forthcoming book, “Marxian Economics: An Introduction.” The first five posts (here, here, here, here, 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, here, 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 agricultural 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 incomes 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, the incomes generated during the production of commodities would be used to purchase all the commodities brought to market. 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 (here, here, here, here, 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 (here, here, here, here, 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 (here, here, here, here, 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 (here, here, here, here, 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.
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*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 (here, here, here, 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:
Capitalism produces more wealth, and thus higher levels of economic development.
Capitalism is characterized by stable growth.
Everybody gets what they deserve within capitalism.
Capitalists are heroes.
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.
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.
Capitalism is characterized by stable growth—and the possibility of crises is not even included in contemporary mainstream models.
Everybody gets what they deserve within capitalism—especially when, in the modern view, all “factors of production” receive their marginal contributions to production.
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.
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.
occasional links & commentary 