COMPARE

AND CONTRAST THE NEO-CLASSICAL UNDERSTANDING OF THE ECONOMY WITH MARXIST POLITICAL ECONOMY

When Alan Greenspan was asked about the failure of his ideology in the immediate aftermath of the global economic crisis, he answered well remember that what an ideology is, is a conceptual framework with the way people deal with reality. Everyone has one, to exist you need an ideology. The question is whether it is accurate or not (PBS, 2008). In accordance with this line of reasoning in order to accurately compare and contrast Marxism with the neoclassical school of economics, its necessary to explain how their respective conceptual frameworks influence their vastly different conclusions. Marxisms focus is on analysing capitalism in its totality by explaining its many social contradictions and antagonisms such as the existence of poverty alongside wealth, over- work alongside unemployment, homeless people alongside peopleless homes, and constant warfare. Neoclassical economics later emerged in opposition to both Marxism and classical political economy. It refers to a school of thought based on the ideas of William Jevons, Carl Menger, Leon Walras, and Alfred Marshall (Stilwell, 2004, p. 148-9). This paper will focus on the works of Carl Menger, and Alfred Marshall as well as the insights of contemporary neoclassical economists Eugene Fama and Gary Becker. This paper will argue that the fundamental difference between the two schools stems from the philosophical conflict between the materialist reasoning of Marx and the idealism of the neoclassical school. Idealism in the Hegelian tradition argues that the evolution of ideas is the driving force for historical change, and more broadly, idealism refers to the notion that reality is a reflection of ideas (Hegel, 1830, vii.86). Marxist theory inverted this notion proposing instead a materialist conception of history which argues that material forces drive historical movement (Engels, 1880, Part III) and also that ideas are a reflection of material conditions (Marx, 1859). The methodological differences between Marxism and neoclassical economics helps to explain their vastly different conclusions. The neoclassical school defines economics according to an extremely narrow criteria. According to Alfred Marshall [economics] examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of wellbeing (Marshall, 1890, p. 13). By focusing their analysis on the actions of individuals, the entire capitalist system is presented as a series of isolated exchanges between buyers and sellers. A Marxist critique of this outlook would argue that this focus on individual motives conceals more than it reveals because it ignores the existing class & property relations under capitalism, within which individuals exercise their ostensibly free actions. Recognising class differences is important considering the vast social inequality in the real world between capitalists who are defined as such by their ownership over the means of production, and workers who are defined as such by their need to sell their labour-power for a wage (Marx & Engels, 1848). By abstracting away these class differences, the activities of capitalists and workers are conflated to mere buying and selling. In doing so, no differentiation is made between those individuals who buy labour- power and sell commodities (capitalists), and those other individuals who choose to sell their labour-power and buy commodities (workers). The understanding of history advanced by the two schools is also a major point of difference. Marxism considers the capitalist mode of production a particular stage in human development which emerged after successful bourgeois revolutions in Europe resulted in the abolition of feudalism and the emergence of new class-relations defined by the inherent antagonism between capitalists and workers (Marx & Engels, 1848). The neoclassical school by comparison doesnt recognise capitalism as a mode of production quite distinct from the economic systems that preceded it which explains why they rarely use the word capitalism to describe the existing social order (Stilwell, 2004, p. 147). Having said this, Alfred Marshall did recognise that in primitive societies, people are chiefly concerned with the production of desirable things, and with their direct uses and who are little concerned with exchange and marketing (Marshall, 1890, p. 74). However because neoclassical theorys focus is on individual action, Marshalls concern was purely directed towards explaining how all individuals throughout history seek to

maximise utility. These assumptions expose the neoclassical schools normative bias to the extent that the dynamics governing the existing social order are presented as unchangeable and therefore eternal. Value theory is central to understanding the differences between classical, neoclassical and Marxist political economy. Marxism and the neoclassical school built their respective value theories by criticising Adam Smiths labour theory of value. Marxs criticisms were focused on correcting the theory while still accepting its basic premise that human labour is the sole source of value. However the neoclassical school (the marginalists) rejected this basic premise and argued instead that it was the subjective preferences of individuals that gave items value and determined their market price. According to Carl Menger the value of goods arises from their relationship to our needs, and is not inherent in the goods themselves and therefore the measure of value is entirely subjective in nature (Menger, 1871, p. 120). The significance of marginal utility theory was that it provided an answer to Adam Smiths paradox which asked why diamonds have a higher exchange-value than water even through water has more utility given its necessity for human life (Smith, 1776, I.4.12). The marginalists answered this by arguing that a goods exchange-value isnt determined by its total utility, or the labour-time that went into its production, rather its marginal utility. Also, the more scarce a good, the higher utility it provides upon initial consumption. For example Carl Menger presents a hypothetical scenario in which a desert dweller considers water more valuable than gold because under such conditions greater utility is gained from drinking water than from possessing gold, however the utility derived from this water diminishes after more of it is consumed (Menger, 1871, p. 140). Adam Smiths paradox stemmed from his inability to reconcile the contradiction between the use-value and exchange-value of a commodity. The marginalists reconciled Smiths paradox by arguing that a commoditys marginal use-value/utility determined its exchange-value. In contrast, Marxs labour theory of value defended Adam Smiths basic premise (that labour is the source of value) by providing a dialectical explanation of the relationship between use-value and exchange-value, that is between a commoditys usefulness and its price. Marx recognised that a commodity has both usefulness and a price, however unlike the marginalists he didnt consider the usefulness itself to be the source of value precisely because a commodity would only be produced if it was useful in the first place (Cooney, 2010). Instead he argued that the value of a commodity is equal to the socially necessary labour time required for its production. This refers to the average time it takes society to produce a commodity. Under the coercive laws of competition, capitalists are compelled to engage in technological innovations that will increase the output per hour of human labour which in turn decreases the socially necessary labour time required for the production of the commodity in question. After all capitalists have followed suit and improved productivity in this way, the socially necessary labour time required for the production of the commodity falls because it represents less value, this then translates to the commoditys price falling in the marketplace. Therefore commodities that require a higher amount of socially necessary labour time to produce, have more value. In essence, Marx argued that the form taken by a commodity was its use-value, however the substance of value is the socially necessary labour time required for its production which then expresses itself as an exchange-value (price) in the marketplace (Marx, 1867, Ch. I). The neoclassical school considers all economic transactions to be forms of exchange whereas Marx differentiated between exchange and production. By following marginal utility theory to its logical end, Carl Menger argues that exchange happens only if it leaves both parties with higher subjective value (Menger p. 195). This means firstly that workers will only sell their labour-power if they feel that the wage that theyll receive has more value to them than the time theyre giving up, and secondly that commodities will only be purchased if workers feel that the utility theyll receive has more value to them than the cash theyre giving up. In contrast, Marxism differentiates between the first example which describes production, and the second example which describes exchange. The production process is where value is created because only human labour

can produce value. Exchange however does not create any value at all because the mere act of buying and selling commodities amounts to an equivalent exchange (Cooney, 2010). Therefore beneath the equality of exchange lies the inequality in production. The neoclassical schools normative bias is exposed by their insistence that ALL exchanges result in a subjective benefit for all parties. By claiming that workers benefit from purchasing commodities in the same way that capitalists benefit from exploiting workers, this analysis serves to conflate the actual profits extracted by capitalists via the exploitation of workers, with the supposed subjective profits experienced by workers when they buy commodities. Such bias in analysis stem from the neoclassical schools emphasis on the individual which erases the question of class from their models. Marx also provided an explanation as to why the neoclassical school subscribed to the illusion that market-exchange was the source of value. This illusion stems from the reality that under capitalism, human labour is indirectly social, whereas in pre-capitalist societies like feudalism, the majority of production was for direct use. As a result, workers are alienated from the products of their own labour because they produce commodities in the workplace not for their own consumption but to earn a wage which can then be used to purchase commodities in the marketplace (Marx, 1867, 1.1.4). Similarly, capitalists are not interested in the use-value of commodities rather their exchange value. Under these social conditions, it appears as though value arises, not from the labour process, but from exchange (Cooney, 2010). A major point of contention between Marxism and the neoclassical school is with their respective evaluations of economic crises. In response to the 2008 global financial crisis, neoclassical economists argued that it was government intervention and not capitalism that was at fault. Gary Becker (2011) blamed both the U.S. Federal Reserve for maintaining low interest rates, and Fannie Mae & Freddie Mac (both government agencies) for encouraging irresponsible mortgages that required little down payment. Similarly Eugene Fama (2010) summed up this position by arguing that the crisis was not a failure of the market but of government policy. Since the neoclassical school considers governments to be outside their model of capitalism, economic crises are always described as an external force destabilising the market. In stark contrast to this analysis, Marx argued that the real barrier of capitalist production is capital itself meaning that crises arose from the internal contradictions of capitalist accumulation (Marx & Engels, 1894, III.15.2). The U.S. governments role in authorising Fannie Mae & Freddie Mac to issue risky loans didnt cause the crisis, it merely protracted the crisis of overproduction which emerges from the contradictory feature of capitalism in which capitalists are seeking to keep wages as low as possible while also needing a market with enough effective-demand to sell their goods. In the U.S. this contradiction was evident in the inability of the wage-repressed working class to afford the very houses they themselves had built a contradiction that stems from the reality that under capitalism, houses arent built for their use-value but for their exchange-value. As late as 2009 in the US, there wasnt a single state where the minimum wage was high enough to afford a one-bedroom apartment at fair market rent, let alone to buy a house even though there is a physical abundance of housing in the United States (NCH, 2009). Therefore the crisis reflected the inherent contradiction and permanent conflict between the forces of production which are employed by capital only as a means of generating surplus value, and the class-relations of production (Marx, K & Engels, F 1859). The fundamental ideological differences between the two schools of thought appears in every facet of their approach. Marxism argues that value has its basis not in consumer desires but in the material forces of production, moreover it also explains why neoclassical economics interprets value the way it does, by pointing out that the indirectly-social character of capitalist production & exchange makes it appear as though value emerges from an exchange of use-values under conditions of scarcity. Marxisms theoretical building blocks allows it to explain why economic crisis emerges from the internal contradictions of capitalism whereas the neoclassical school can only crucify the spectre of government intervention for the sins of capitalist accumulation. In contrast to Marxs materialist analysis, the neoclassical schools idealist approach is apparent firstly because it arbitrarily insists that economics should be exclusively concerned with the

actions of class-neutral individuals. This is an idealist premise by definition because theres no material basis for narrowing the scope of economics down to this level. Within this conceptual framework its no surprise that value, and by extension the entire marketplace, are considered expressions of consumer desire. The ultimate irony overall is that the neoclassical schools idealist focus on individuals assumes the existence of precisely what Marxism as a normative theory advocates a classless society.

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