Contending Economic Theories: Neoclassical, Keynesian, and Marxian

Contending Economic Theories: Neoclassical, Keynesian, and MarxianMichel
Michel
Michel
2012
Michel
Contending Economic Theories: Neoclassical, Keynesian, and Marxian
Richard D. Wolff and Stephen A. Resnick
The MIT Press Cambridge, Massachusetts London, England
Contents
To Our Readers xiii
2 Neoclassical Theory 51
3 Keynesian Theory 105
4 Marxian Theory 133
7 The Importance of Theoretical Differences 347
Notes 379
References 383
Index 387
1.1 This Book and Theories of Economics 1
1.1.1 Theories: Economic and Otherwise 4
1.1.2 Economic Theories in Disagreement 5
1.1.3 Are We All Economic Theorists? 6
1.2 Theories and Society 9
1.2.1 Changes in Europe and the Humanist Tradition 10
1.2.2 The New Economic Theories 12
1.2.3 Classical Political Economy 14
1.2.4 The History of Neoclassical Economics 14
1.2.5 The History of Keynesian Economics 16
1.2.6 Keynesian Theory 18
1.3 The History of Marxian Economics 25
1.4 Comparing Different Economic Theories 33
1.4.1 Comparing Theories in General 33
1.4.2 The Logics of Different Theories 35
1.4.3 How Theoretical Differences Matter 36
1.5 An Introduction to the Three Theories 37
1.5.1 Entry Point, Objects, and Logic of
Neoclassical Theory 37
Keynesian Theory 40
1.5.3 Entry Point, Objects, and Logic of Marxian Theory 41
1.5.4 A Digression: Theories and Their Objects 43
1.5.5 The Logic of Marxian Theory 44
1.5.6 Communication among Neoclassical, Keynesian,
and Marxian Economists 47
2 Neoclassical Theory 51
2.1.1 Neoclassical Theory ’ s Contributions 52
2.1.2 Emergence of Neoclassical Theory after Adam Smith 53
2.1.3 Which Economic Theory Will We Present? 55
2.2 Market Values: The Analytics of Supply and Demand 55
2.2.1 The Determinants of Supply and Demand 58
2.2.2 Markets, Private Property, Conservatives, and Liberals 60
2.2.3 Preferences: Determining the Demand for Commodities 64
2.2.4 Preferences: Determining the Supply of Labor 73
2.2.5 Preferences and Scarcity: Determining the
Demand for Labor 77
2.2.8 Preferences and Scarcity: Determining the Demand
for Capital 88
2.2.10 Distribution of Income in Society: Returns to Capital
and Labor 90
Supply of Commodities 91
2.3 Effi ciency and Markets 97
2.3.1 Adam Smith ’ s “ Invisible Hand ” 97
2.3.2 Pareto Optimality 101
3 Keynesian Theory 105
3.2 The Neoclassical Answer to Capitalist Recessions 108
3.3 The Keynesian Answer to Capitalist Recessions 115
3.4 Investment Behavior 122
Appendix: Rational Expectations 131
4 Marxian Theory 133
4.1.1 Marx ’ s Contributions 135
4.1.2 Marxism since Marx 138
4.1.3 Which Marxian Theory Will We Present? 140
Detailed Table of Contents ix
4.2 The Logical Structure of Marxian Theory 142
4.2.1 The Basic Concepts of Marxian Economics 142
4.2.2 Overdetermination and Process 143
4.2.3 Contradictions 147
4.2.5 A Theoretical Dilemma 149
4.2.6 Marxian Theory and Its Entry Point 150
4.2.7 The Class Process 152
4.3 The Marxian Concept of Class Elaborated 153
4.3.1 The Fundamental Class Process and Exploitation 154
4.3.2 The Subsumed Class Process 157
4.3.3 Different Forms of the Fundamental Class Process 160
4.3.4 Social Formations and Social Transitions 164
4.4 The Capitalist Fundamental Class Process and Commodities 165
4.4.1 Products, Markets, and Commodities 166
4.4.2 Commodity Values 167
4.4.4 Marx ’ s Labor Theory of Capitalist Commodity Values 169
4.4.5 Surplus Value of Capitalist Commodities 171
4.4.6 A Summary of Marxian Value Theory 172
4.5 Capitalists and Laborers 173
4.5.1 What Are Capitalists? 174
4.5.2 What Are Laborers? 176
4.5.3 Exploitation 177
4.5.6 Competition 185
4.6 Capitalist Economies and Social Development 189
4.6.1 Growth of a Capitalist World Economy 189
4.6.2 Capitalism and Real Incomes 192
4.6.3 Cycles or Crises of Capitalist Economies 195
4.6.4 Cycles and Policy “ Solutions ” 200
4.7 Capitalist Subsumed Classes 203
4.7.1 Moneylenders and Subsumed Classes 203
4.7.2 Managers and Subsumed Classes 205
4.7.3 Merchants and Subsumed Classes 207
4.7.4 Other Capitalist Subsumed Classes 210
4.8 Class Positions and Individuals ’ Incomes 214
4.8.1 Class Processes and the Distribution of Income 214
4.8.2 Occupying Multiple Class and Nonclass Positions 216
x Detailed Table of Contents
4.9 The Complex Class Structure of Capitalist Firms 218
4.9.1 Class Analysis of Capitalist Firms 219
4.9.2 Capitalists and Corporate Boards of Directors 221
4.9.3 A Marxian Theory of Industrial Profi t 223
4.10 The Complex Class Structure of Other Social Sites 227
4.10.1 Class Analysis and Households 228
4.10.2 Class Analysis and the State 232
4.10.3 Class Analysis and International Relations 238
Appendix A: Why Does Marxian Theory Make Class Its Entry Point? 242
Appendix B: The “ Transformation Problem ” 243
Appendix C: Capitalist Competition 246
Appendix D: Rising Exploitation with Rising Real Wages 250
5 Late Neoclassical Theory 251 with Yahya M. Madra
5.1 Introduction: Why This Chapter? 251
5.1.1 Criticisms and Their Consequences 252
5.1.2 The Responses: An Overview 255
5.2 Theories of Market Imperfections 258
5.2.1 Externalities and Ways of Managing Them 259
5.2.2 Forms of Imperfect Competition 266
5.2.3 Transaction Costs and Economic Organization 274
5.2.4 Information Failures and Missing Markets 277
5.3 New Theories of Human Behavior 279
5.3.1 Theories of Motivational Diversity 283
5.3.2 Theories of Bounded Rationality 287
5.3.3 Behavioral Economics 288
5.4.1 Different Notions of Equilibrium in the
Neoclassical Tradition 294
5.5 Conclusion 308
6.1 Capitalism Has Always Been Changing 311
6.1.1 Instabilities and Capitalism 312
6.1.2 Capitalism and Economic Theories 314
6.1.3 How Economic Crises Infl uenced Economic Theories 315
6.2 Oscillations of Economy and Oscillations of Theory 320
6.2.1 Classical Political Economy and Marxism 320
Detailed Table of Contents xi
6.2.2 Neoclassical Economics 327
6.2.4 Keynesian Economics 331
6.3 Two Modern Oscillations: The 1970s and the Crisis That
Began in 2007 336
and Orthodox Marxism 336
6.3.3 Back to State Intervention 341
7 The Importance of Theoretical Differences 347
7.1 Marxian versus Keynesian versus Neoclassical Theory 347
7.1.1 Different Points of Entry 347
7.1.2 Different Logics 348
7.2 Analytical Consequences of Contending Theories 352
7.2.1 Income Distribution: The Neoclassical View 353
7.2.2 Capitalism: The Neoclassical View 355
7.2.3 Poverty: The Neoclassical View 356
7.2.4 Income Distribution: The Marxian View 357
7.2.5 Income Distribution: The Keynesian View 359
7.2.6 Different Explanations of the Returns to Capitalists 360
7.3 Political Consequences of Contending Theories 362
7.3.1 Political Conditions Shape Theories 364
7.3.2 Struggles among Theories and Theorists 365
7.4 Which Theory Do We Choose? 366
7.4.1 Choosing Theories Because of Their Consequences 368
7.4.2 Choosing Theories Based on an Absolute Standard 371
7.4.3 Empiricism 372
7.4.4 Rationalism 373
Choosing Epistemologies 374
Notes 379
References 383
Index 387
To Our Readers
Our previous and far less ambitious version of this book, Economics: Marxian versus Neoclassical was well-received and quite widely used in colleges and
universities since its publication in 1987. That success fl owed, we believe,
from that book ’ s two broad goals and the extent of their achievement. First,
we sought to produce an introduction to Marxian economics that would include
and build upon several of the major analytical breakthroughs in that tradition
during the last thirty-fi ve years. Second, we wanted to formulate that introduc-
tion in a systematic relation to the neoclassical economic theory prevalent in
the United States and elsewhere. Having long taught introductory economics
courses, we had learned that presenting Marxian theory through a sustained
and systematic comparison with neoclassical theory is an exceptionally effec-
tive method of teaching both.
Many users of our earlier book urged that we produce a new and updated
version. They also offered important criticisms. One concerned Keynesian
economics: it deserved to be treated alongside neoclassical and Marxian eco-
nomics by means of systematic comparison. Once the long and deep economic
crisis hit the world in 2007, the calls for inclusion of Keynesian economics in
a new version of our book became urgent. Critiques of neoclassical economics
and renewed interest in Keynesian and Marxian economics have been spread-
ing globally now for years. Because of the rising demand for a book that
presents and compares these three major paradigms and because none cur-
rently exists, we transformed, enlarged and elaborated our earlier book to meet
that demand in this one.
This new book sets forth neoclassical and Keynesian economics, each
developed and discussed in its own chapter, yet also differentiated from and
compared to the other. To do so, we extended our humanism versus structural-
ism grid for differentiating economic theories to explain the tensions and
oppositions between them. We connect the comparative theory analysis to
the larger policy issues that divide the two camps of theorists around the
central issue of the role government should play in the economy and society.
xiv To Our Readers
In treating Keynesian economics in a separate chapter, we emphasize
Keynes ’ s notion of radical uncertainty as it impacts the individual business
investor and thereby provides an explanation for the business cycle. In showing
how Keynes ’ s structuralist economics displays an individualist (humanist)
moment, we offer a new way too see the crucial similarities and differences
between the Keynesian and the contending neoclassical theoretical arguments.
Readers of our earlier book also asked us to analyze recent extensions
and developments of neoclassical economics (around such topics as market
imperfections, information economics, new theories of equilibrium, behavioral
economics, etc.). We treat these new developments in neoclassical economics
in a new chapter 5. With this chapter ’ s co-author, Yahya Madra, we raise a
fundamental question: Does this body of work break from the neoclassical
economic tradition? Is it a different paradigm in the sense we apply to both
Keynesian economics and Marxian economics? Chapter 5 extends our com-
parative approach to contested economic theories to answer this question.
Based on our many years of teaching experience since the earlier book ’ s
1987 publication and also on the changed conditions of contemporary econo-
mies (including the post 2007 global crisis), we have produced a thoroughly
revised introduction chapter. It now foregrounds a central theme of this new
book: that the contesting theories and their relative social prominence are both
effects and causes of the social conditions in which they occur. Chapter 1
presents a sustained historical examination of how various forms and para-
digms of economic thinking react back upon the society out of which they are
born. We hope that this revised chapter will provide readers with a better
understanding of the complex social causes of these theories and why they and
their differences matter so much to the lives of citizens.
The many years of deepening hostilities between advocates of more and
less government economic intervention led us to write an altogether new
chapter 6. There we identify and discuss two interrelated kinds of oscillations
that occur in society: (1) movements among the social predominance of one
versus another economic theory, and (2) movements among alternative forms
of capitalist economies themselves. We show that capitalism always varies: its
shifting forms display more or less free markets; more or less private property;
more or less personal freedoms. We also show why these kinds or forms of
capitalism are different from socialism and communism. We hope this expla-
nation will provide a new view of the major economic changes and confl icts
across the twentieth century and why they matter to those already underway
shaping the twenty-fi rst century. Similarly we show that economic theory
always varies and is always contested. It too oscillates from one to another
approach and then back again. Neoclassical gives way to Keynesian economics
To Our Readers xv
and the latter to the neoclassical dominance again. Sometimes Marxism
appears as the other in this movement between different theories. Chapter 6
explores these oscillations in society and theory and their interconnections.
This book also introduces readers to major new developments inside
Marxian economics since the 1980s. These are integrated into the chapter 4 ’ s
focus on what that paradigm of economics offers in comparison to the insights
produced via neoclassical and Keynesian analytics. Chapter 4 assumes little
or no familiarity with the subject. It proceeds from fi rst principles through
basic analytics to various applications. Since the Marxian economics tradition
includes several distinct theories, we identify the particular theory that we have
found most convincing and that we therefore present here. However, in this
chapter and throughout the book we also try to distinguish the Marxism we
present from the more traditional or orthodox Marxism that arose after Marx
died and became dominant in the former USSR.
Similarly the overviews of neoclassical economics in chapter 2 and Keynes-
ian economics in chapter 3 offer respectively a basic grounding in neoclassical
micro- and Keynesian macroeconomics. We treat both as distinct and often
contested theories rather than presenting “ economics ” as reducible to a set of
neutral tools to solve economic problems in the so-called real world. Readers
will see how each theory differently constructs its economic world including
those problems it recognizes as such and for which it fi nds unique policies and
solutions. These differences yield the debates over contested economics and
policies (taxes, government spending, market controls, nationalizations of
property, etc.) that profoundly impact our lives.
This new book is directed especially to readers interested in comparing and
contrasting different ways of understanding the economy and why those dif-
ferences matter so profoundly. For college and university teaching purposes,
the book serves both introductory and more advanced courses. As a supple-
mentary reading, it can usefully accompany courses at all levels (including
introductory economics) where instructors wish to introduce students to alter-
native approaches or merely to sharpen students ’ grasp of neoclassical and
Keynesian theories by comparing them with Marxian theory. Finally, for
courses across the social sciences generally, this book introduces economics
as a contested terrain struggling with its own disagreements and alternative
visions as do most other self-conscious disciplines. The book clearly dissents
from any notion of economics as a technical or mechanical profession.
Throughout the book, but especially in the fi rst, fourth, and seventh chap-
ters, important philosophical issues are addressed as they pertain to a compari-
son of economic theories. Recent work in epistemology is briefl y and summarily
raised to ground our method for comparing economic theories. We discuss
xvi To Our Readers
verifi cation and validity to address the important problem necessarily posed
by such comparative endeavors — namely how to assess and decide among
the competing claims and analyses offered by different economic theories.
Consistent with the book ’ s method throughout, we explain that theoretical
differences in economics are matched by theoretical differences within phi-
losophy, including the epistemological issue of how to decide among alterna-
tive theories.
This book ’ s particular method of comparing and contrasting different
economic theories is a useful analytical tool to compare still other forms of
thinking. What we describe here as each theory ’ s distinguishing entry-point
concepts, logic, produced objects, and social consequences are generally appli-
cable indices of difference among theories. Readers are presented with a
concrete examination of particular economic theories in terms of how they
differ from alternative theories.
In conclusion, this book offers two interdependent formulations that are
not, to our knowledge, available elsewhere. First, it presents economics as a
discipline in a format of sustained comparison of alternative theories. Modern
principles of discourse analysis are applied to the confrontation among
Marxian, neoclassical, and Keynesian economic theories. The distinguishing
features of these theories are examined in juxtaposition as a method of teach-
ing economics. Second, a Marxian theory is developed systematically, rigor-
ously, and comparatively from its fi rst principles and assumptions through its
formal analytics to some of its distinctive applications to social analysis.
Acknowledgments
We wish to thank three individuals who helped us to prepare this revised
edition. Alex Coram, a political scientist at the University of Western Australia
who often writes on economics especially social choice theory and game
theory, read the introductory, neoclassical, and Keynesian chapters and offered
extensive comments and criticisms. David Ruccio, an economist at the Uni-
versity of Notre Dame who writes extensively in political economy and post-
modern economics, urged us to produce a newer and better version of our
earlier text. We thank both of them for their comments and support.
Special thanks go to our co-author of chapter 5. Yahya Madra is an econo-
mist at Gettysburg College and currently at Bo g azi ç i University, Istanbul,
Turkey. Yahya helped produce what we think is a unique presentation of “ late
neoclassical theory ” not found elsewhere. Chapter 5 systematically examines
recent developments in neoclassical theory to show how they respond to criti-
To Our Readers xvii
cisms of that theory and how they extend that theory to new topics in econom-
ics and beyond. Neoclassical theory ’ s lively evolution can be read and evaluated
in this chapter. We also thank Yahya for his help and guidance in preparing
comments on post-Keynesian economics found in chapter 3.
We also wish to express our appreciation to the many teaching assistants
who worked with us over the years and to the thousands of students in our
introductory micro, macro, and Marxian economics courses. Their reactions
to the ideas contained in this book helped to shape it. Finally, we are very
aware of the complex overdetermination that shapes our work and want to
recognize the profound infl uences of our spouses and children.
1
1.1 This Book and Theories of Economics
This book contrasts three very different and clashing kinds of economics. One
is usually called neoclassical (or micro) economics, another Keynesian (or
macro), and the third Marxism. Each is a distinct way of understanding how
economies work and how they interact with the larger societies around them.
In other words, these are three different theories about the economic part of
society. This book introduces you to all three and to their differences since
they compete for our attention as well as shape today ’ s actions of governments,
enterprises, unions, and others. In short, these different theories impact our
lives in basic ways.
We wrote this book partly because students need to know that there is more
to economics than just neoclassical and Keynesian theories. Students deserve
to know not only how neoclassical and Keynesian theories differ from one
another but how both differ from Marxism. We hope that learning from and
about these contending theories will undermine tendencies to dismiss, repress,
or even demonize whichever of them are not popular at any particular moment.
Most important, we want to show how understandings based on one theory
versus the others will lead individuals, families, enterprises, governments, and
societies in very different directions. Right at the start we provide an example
to illustrate this important point. It responds to the question: What might be
at stake in and for our lives in adopting one as opposed to another economic
theory?
Consider any society whose economy is structured by private ownership of
enterprises and private markets. The presence of these two institutions is
usually referred to as capitalism. Whatever else can be said about capitalism,
in actuality it exhibits a profound economic instability or unevenness. Times
of economic expansion give way to periods of decline out of which emerge
resumed intervals of expansion. Simply put: capitalism displays those ups and
downs that economists, politicians, journalists, and others call its business
cycles.
Three Different Theories
2 Chapter 1
The three theories differ in their understandings of the causes, solutions,
and the very nature of those cycles. Their differences matter in shaping our
lives. We can show this by considering, fi rst, the neoclassical and Keynesian
theories and how they view capitalist economies. For both theories, capitalism
is — to use a metaphor — a truly wonderful machine. For all its faults, including
its uneven motion, it nonetheless remains the best of all comparable machines.
Both theories affi rm (and usually presume) that capitalism alone can deliver
to humans the maximum wealth…