The different emphasis on individuals and class in the economy:
A comparative view of Marxian and Neoclassical economics
Author: Tomas Freitas
Introduction
Neoclassical economics has influenced the capitalist economy today; we can see that the market determines a price which in some stages has replaced the labour theory of value which was claimed in earlier classical economics. According to the ‘Marshallian Cross’ theory of supply and demand, neoclassical economics strongly believes that the market will provide an equilibrium of prices (Stilwell, 2002). As stated by Say’s law, supply for goods and services can create their own markets, (Baumol, 1999). These notions need to be tested through empirical study, however neoclassical deductive methodology maybe difficult to justify. This paper will present the different Marxian and neoclassical views on individuals and classes in the contemporary economy. This essay also will introduce some historical background of how neoclassical ideas developed their theories, some of which have become strong ideology today.
Historical Background
Traditionally, neoclassical ideas come from some of the greater classical political economists such as David Ricardo with his ‘Marginal principle’ (Kaldor, 1956), John Stuart Mill (2007) with his ‘Utilitarianism’, Jeremy Bentham (2009) with his ‘Greatest Happiness’, and Jean Baptiste Say with his famous ‘Say’s Law’(Kates, 2003). All these ideas have inspired some of the neoclassical economists.
Neoclassical economics was born in the late 1830s to mid 1850s and become strong and influential in the early 1870s, growing to be very popular in the mid-1880s to mid-1890s. This historical background can see as three evolutionary which include the proto-marginalists, the revolutionaries and the consolidators of neoclassical economic ideas.
The Proto-Marginalists
Historically, neoclassical economics was born from a few founders considered as main proto-marginalists including Augustin Cournot, Jules Dupuit, Johann Thunen and Heinrich Gossen. Cournot (2008) began his work with Researches into the Mathematical Principles of Wealth in 1838’ he also developed an analysis of monopolies which later on created his concepts of a profit-maximising producer. Jules Dupuit was an engineer of bridges with his history curve of Diminishing Marginal Utility in 1844 (Vickers, 1995). Despite the curve of diminishing marginal utility, Dupuit also had a brilliant argument for delivery of ideas of free exchange in 1861. Johann Thunen was a German landowner who developed the essence of The Marginal Productivity Theory of Distribution in 1850 (Ekelund & Hebert, 1999). The last of the protagonist marginalists was Heinrich Gossen with his famous ‘Gossen Second Law’ in 1854, which described equalisation between the ratios of exchange of goods to the ratio of marginal disutility of work (Blaug, 2003). These four protagonists successfully delivered their original theories which later on become embryos for marginal theories of neoclassical economics.
The Revolutionaries
After the main marginalist protagonists drew the foundation for marginal theory from 1838 up to 1854, neoclassical economics began to be born starting with the revolutionary marginalists like William Stanley Jevons, Carl Menger and Leon Walras. In launching the ‘marginal revolution’, Jevons began with his famous work of Theory of Political Economy in 1871. He began by underlining the principle of diminishing marginal utility and introduced individual preference (Steedman, 1997). After Jevons, the revolutionary marginalists were followed by Carl Menger from Austria at the same time, 1871, Menger’s Grunds tze was considered to represent the basic concepts of marginal value theory or marginal utility, despite the fact that he did not officially use the term “marginal”; he did however state that the consumer usually formed lists of needs, classifying them as less satisfying or less urgent needs (Streissler & Streissler, 1994). After Menger emphasised his marginal utility theory in 1871, in 1874 French economist Leon Walras was one of the three revolutionists who cemented marginal theory as a formal general equilibrium setting and later on become the father of general equilibrium theory. Besides his general equilibrium theory, Walras also contributed several other theories including providing reflections on monopoly market and imperfect competition (Tieben, 2009).
The Consolidators
In order to consolidate the ideas of neoclassical economics apart from the three famous revolutionary marginalists, there are a number of neoclassical economists who provide additional reasons to support neoclassical ideas, including; Eugen Bohm-Bawerk with his famous work of Capital and Interest which he wrote in 1884, explaining the positive side of real interest rates (Pressman, 1999). There was also Friedrich von Wieser in 1889 with his two main contributing theories including the theory of ‘imputation’ which established that factor prices are determined by output prices (Albertazzi et al, 1996). Alfred Marshall in 1890 became famous with his Marshallian Cross which analysed the market with the theory of supply and demand (Stilwell, 2002). John Bates Clark was an American neoclassical economist who in 1891 proudly contributed one of his works called ‘marginal productivity concept’ which assumed that the contribution of output by additional workers has determined the value of demand for labour (Geetika et al, 2008). Irving Fisher was one of the famous consolidators, whose contribution to neoclassical theories included the curve device invention for the Walrasian theory of equilibrium price in 1892 (Fisher, 2007), and his last works which were popular in the post-Keynesian era include his debt-deflation theory in 1933, which has been used by Hyman Minsky for developing Financial Instability Hypothesis, (Minsky, 1986). After Fisher neoclassical economists consolidated their works through Knut Wicksell with his works of Value, Capital and Rent in 1893 (Lutz, 2006). Philip Wicksteed in 1894 produced his work Co-ordination of the Laws of Distribution, which criticised some of the economists who preferred to recast the theory of distribution. Wicksteed preferred to use mathematics as an investigation method to ensure the allocation of distribution (Marchionatti, 2004). Vilfredo Pareto in 1896 was part of the second generation of neoclassical revolutionaries even though his works of tastes-and-obstacles (Gomes, 2003) only gently resurrected the general theory of equilibrium, however he was one of the leaders of the Lausanne School which was one of the famous neoclassical schools in constructing Walras’ general equilibrium theory (Andersen, 2009). The last consolidators for neoclassical economics is Enrico Barone, an Italian economist who gave his dedication to follow Walras and Pareto, his main contribution to the neoclassical school being to influence Walras to integrate some elements into production technique, his works considered an extension to marginal productivity theory (Jaffe & Walker, 1983). After all of them consolidated neoclassical theory, only Alfred Marshal become popular in synthesising Jevons, Menger and Walras’ earlier theories into the ‘Marshallian Cross’ which illustrated that supply and demand determined the equilibrium price which satisfied both sides, consumers and sellers.
Comparison between Marxian and Neoclassical Economics
Deductivism Vs Historical Materialism
The neoclassical method of deductive methodology, according to John Stuart Mill, is..
“ a complex subject matter like political economy can only be studied scientifically by means of the deductive method. Since so many causal factors influence economic phenomena, and experimentation is generally not possible, there is no way to employ the methods of induction directly”, (Hausman, 1992, pp14)
In a reverse of the neoclassical approach of deductive methodology, Marxian economics preferred to study historical processes (Stilwell, 2002), through historical dialectic of materialism, or bourgeoisie class, or capitalist society. Marxism found that these brought broad pictures to understanding the construction of modern capitalism (Lunn, 1982).
If we apply these notions to the contemporary economy today there will appear some disparities. Deductivism these days is still adopted by economic rationalists (Katouzian, 1980) such as international financial institutions like the World Bank and IMF. These institutions still hold regular annual general meetings (IMF, 2010) for evaluating their strategy and methods which they have applied, and normally through these annual meetings they can study economic activities which have taken place over the last twelve months. Deductivism may be good for some economists to make their own judgement after coming to the end of a project or activity, however indirect observation may also miss some evidence uncovered during the process of observation.
Opposed to neoclassical deductivism, Marxism believes that historical materialism is the only way to understanding capitalist and bourgeois society in terms of the mode of production (Rockmore, 2002) because according to Stalin “historical materialism is the extension of the principle of dialectical materialism to study of social life” (Rockmore, 2002, pp7). Marx’ historical materialism does make sense in understanding capitalist economy today because capitalism as a mode of production already includes technical and social characters in producing goods and services. Social characters mean the class relationship between the labourers as the working class and the bourgeoisie society as the capitalist who own the firms, technologies and raw materials (Stilwell, 2002).
Individuals Vs Classes
In contrast to neoclassical theory, Marxian economic analysis focuses on classes not individuals. Classes mean the proletariat as labour power which produces goods and services, and bourgeoisie as capitalists who own the means of production (Stilwell, 2002). Individuals according to neoclassical theory are the consumers and sellers who freely exchange their income and goods; in other words allocation in free market economies occurs via voluntary exchange among individuals (Bergh, et al, 1997).
Both terminologies are still relevant these days, because presumably individuals according to neoclassical theory are consumers who have ultimate power in determination of prices. Classes in contemporary economy are also still relevant because these days labourers as working class have organised themselves and established and joined unions, syndicates and legal organisations to protect their rights and advocate their interests. The idea of ‘free exchange’ was adopted in the 19th century by neoliberal economists which become ‘free market’ ideology and this faith has been strongly pushed by the World Bank and IMF today.
Utility Vs Value
In contrast to neoclassical theory, Marxist economics analyses production based on the labour theory of value and neoclassical analysis of exchange based on the theory of utility, (Stilwell 2002). Labour theory of value means the price of the goods or products is determined by the quantity or qualitative of labour power. In neoclassical theory of utility means the price of commodities determined by consumer satisfaction, (Stilwell 2002). According to Menger in his marginal utility theory, this is when the consumer decides to spend their income on goods or products depending to which goods or products provide the most satisfaction (Stilwell, 2002). And according to Jevons diminishing marginal utility theory is when the consumer decides to allocate their earnings into several commodities. The consumer will test each commodity one by one and try to find out which commodities provide the most satisfaction. The extra satisfaction gained will determine the price of the commodity (Stilwell, 2002).
This utility theory and labour value theory are still relevant today, because both can be applied depending on how big the market and the firm are. For example, if I as a consumer go to a small local business of handmade furniture, the theory of marginal utility or my satisfaction will not determine the price because normally such a small business would determine the price of goods depending on raw materials and the value of labour power plus some profits. However, if I as a consumer go to a large furniture retailer, the theory of utility can be applied because the seller who represents the big company provides various numbers of furniture with variable prices which can be compared for my satisfaction.
Equilibrium Vs Underconsumption
According to neoclassical theory, general equilibrium means that prices for commodities and the factors of production will be determine by the balance of supply and demanded for that product. As mentioned before in Say’s Law, supply can generate its own demand. However, in contrast to Marxian economics, oversupply can generate underconsumption which means that if supply of goods runs out of consumers, the market can turn to failure (Stilwell, 2002). According to Marshallian Cross, determination of price depends on the quantity of demand and supply; let us have a look the scissor theory, which has two characteristics; first, when price decline this normally provokes more consumers to buy, and when prices increase, this can induce firms to supply more quantity (Stilwell, 2002).
As reflected in the market these days, when prices decline this can provoke more consumers to buy and then when demand increases, suddenly the sellers shifted the prices and it requires more supply from the firms; then when firms increase the supply, prices will fall again. This phenomenon is a cycle each with its own movements. According to Marx this is an unstable economy because more supply can result in underconsumption and the market can face a downturn.
Marginal Vs Structural
The neoclassical theory of marginal analysis originated from the David Ricardo theory of marginal principle which has been used for analysing rent, and this theory has been adopted as a doctrine for neoclassical economists broadly, taking for granted that all the factors are related. However, to apply the marginal principle Ricardo has introduced the principle of substitution in order to understand the relationship between labour and land (Kaldor, 1956).
In contrast to the neoclassical theory marginal analysis, Marxist structural analysis criticised capitalist the state which stays in power. In his manifesto communist Marx described the exploitation of the workers by the bourgeoisie, finding that the bourgeoisie keeps manipulating in order to maintain capitalist power. The capitalist system as a tool of the state has created devices to protect their regimes, including institutions of the state such as the police, judicial system, universities and religions. Marxism strongly criticised these institutions which kept providing their blessing to the state, creating a ‘false consciousness’ (Newton & Deth, 2005).
Conclusion
This essay has explored some of the fundamental ideas and theories of both neoclassical and Marxist economics. Through this expose, it has provided a comparison between the two. Neoclassical theory has brought us an elegant theory of supply and demand which neoclassical economists believe will provide equilibrium of prices. The free exchange between consumers and buyers has indicated that prices are determined by the markets, and with the elaboration of deductive methodology, individual’s analysis, utility theory, equilibrium prices and marginal analysis, have given reasons for neoclassical economics to claim the consumer as the ultimate power in deciding the price.
The original ideas from classical economists like Ricardo with his marginal principle, John Stuart Mill with his utilitarianism, Jeremy Bentham with his greatest happiness and Jean Baptiste Say with his Say’s law, has provided the greatest ideas for neoclassical economists. With help from excellent works of proto-marginalists likes Cournot, Dupuit, Thunen and Gossen, and the marginalist’s revolutionaries such as Jevons, Menger and Walras, including consolidators such as Bohm-Bawerk, Wieser, Marshal, Clark, Fisher, Wicksell, Wicksteed, Pareto and Barone, neoclassical economics has contributed a magnificent number of theories, and some of these theories have become pioneers in capitalist economics today, such as the free exchange between consumer and buyers becoming the embryo for the free market ideology as one of the neoliberal missions.
Marxism on the other hand has provided a fundamental contribution to economic phenomena today. Through historical materialism, class analysis, labour theory of value, underconsumption, and structural analysis, all of these arguments and notions have been used for debates in the political economy arena today. For example, one Marxist theory that is still popular and has become a pioneer in market analysis is underconsumption theory, which believes that oversupply can result in market failure.
References
Albertazzi, L., Libardi, M., & Poli, R., 1996. ‘The school of Franz Brentano’, Kluwer Academic Publisher, Netherlands
Andersen, S, E., 2009. ‘Schumpeter's Evolutionary Economics: A Theoretical, Historical and Statistical Analysis of the Engine of Capitalism’, Anthem Press, United Kingdom
Baumol, J, W., 1999. ‘Retrospectives Say’s Law’, The Journal of Economic Perspectives, Vol 13, No 1, pp 195-204
Bentham, J., 2009. ‘Deontology or, the science of morality: In which the harmony and co-incidence of duty and self-interest’, Bibliobazaar LLC, United States
Bergh, V, D, C, J, M, J., Straaten, V, D, J., & International Society for Ecological Economics., 1997. ‘Economy and ecosystems in change: analytical and historical approaches’, Edward Elgar Publishing, United States
Blaug, M., 2003. ‘Economic theory in retrospect’, Cambridge University Press, United Kingdom
Cournot, A, A., 2008. ‘Researches into the Mathematical Principles of Wealth’, Bibliobazaar, New York
Ekelund, B, R., & Hebert, F, R., 1999. ‘Secret origins of modern microeconomics: Dupuit and the engineers’, The University of Chicago Press, Chicago
Fisher, I., 2007. ‘The nature of capital and income’, Cosimo Inc, New York
Geetika., Ghosh, P., & Choudhury, R, P., 2008. ‘Managerial economics’, Tata McGraw-Hill, India
Gomes, L., 2003. ‘The economics and ideology of free trade: a historical review’, Edward Elgar Publishing, United Kingdom
Hausman, M, D., 1992. ‘Essays on philosophy and economic methodology’, Cambridge University Press, United States
International Monetary Fund., 2010. ‘About the annual meetings’, available from http://www.imf.org/external/am/2010/about.htm
Jaffe, W., & Walker, A, D., 1983. ‘William Jaffe’s Essays on Walras’, Cambridge University Press, United States
Kaldor, N., 1956. ‘Alternative theories of distribution’, The Review of Economic Studies, Vol 23, No 2, pp 83-100
Kates, S., 2003. ‘Two Hundred Years of Say's Law: Essays on Economic Theory's Most Controversial Principle’, Edward Elgar Publishing, United Kingdom
Katouzian, H., 1980. ‘Ideology and method in economics’, Macmillan, London
Lunn, E., 1982. ‘Marxism and modernism: an historical study of Lukacs, Brecht, Benjamin, and Adorno’, University of California Press, United States
Lutz, A, F., 2006. ‘The theory of interest’, Transaction Publisher, New Jersey
Marchionatti, R., 2004. ‘Early mathematical economics’, 1871-1915’, Routledge, New York
Mill, S, J., 2007. ‘Utilitarianism, Liberty & Representative Government’, Wildside Press LLC, United States
Minsky, P, H., 1986. ‘Stabilizing an unstable economy’, Yale University Press, United States
Newton, K., & Deth, W, J., 2005. ‘Foundations of comparative politics: democracies of the modern world’, Cambridge University Press, United States
Pressman, S., 1999. ‘Fifty major economists’, Routledge, New York
Rockmore, T., 2002. ‘Marx after Marxism: the philosophy of Karl Marx’, Wiley-Blackwell, Great Britain
Steedman, I., 1997. Jevons's Theory of Political Economy and the 'Marginalist Revolution’, The European Journal off the History of Economic Thought, Vol 4, No 1, pp 43-64 available from: http://pdfserve.informaworld.com.ezproxy2.library.usyd.edu.au/50145_731193556_739386890.pdf
Stilwell, F., 2002. ‘Political Economy: the contest of economic ideas’ Oxford University Press, Singapore.
Streissler, W, E., & Streissler, M., 1994. ‘Carl Menger’s lectures to crown Prince Rudolph of Austria’, Edward Elgar Publishing Limited, United Kingdom
Tieben, B., 2009. ‘The concept of equilibrium in different economic traditions: a historical investigation’, Rozenberg Publishers, Amsterdam
Vickers, D., 1995. ‘The tyranny of the market: a critique of theoretical foundations’, The University of Michigan Press, United States
A comparative view of Marxian and Neoclassical economics
Author: Tomas Freitas
Introduction
Neoclassical economics has influenced the capitalist economy today; we can see that the market determines a price which in some stages has replaced the labour theory of value which was claimed in earlier classical economics. According to the ‘Marshallian Cross’ theory of supply and demand, neoclassical economics strongly believes that the market will provide an equilibrium of prices (Stilwell, 2002). As stated by Say’s law, supply for goods and services can create their own markets, (Baumol, 1999). These notions need to be tested through empirical study, however neoclassical deductive methodology maybe difficult to justify. This paper will present the different Marxian and neoclassical views on individuals and classes in the contemporary economy. This essay also will introduce some historical background of how neoclassical ideas developed their theories, some of which have become strong ideology today.
Historical Background
Traditionally, neoclassical ideas come from some of the greater classical political economists such as David Ricardo with his ‘Marginal principle’ (Kaldor, 1956), John Stuart Mill (2007) with his ‘Utilitarianism’, Jeremy Bentham (2009) with his ‘Greatest Happiness’, and Jean Baptiste Say with his famous ‘Say’s Law’(Kates, 2003). All these ideas have inspired some of the neoclassical economists.
Neoclassical economics was born in the late 1830s to mid 1850s and become strong and influential in the early 1870s, growing to be very popular in the mid-1880s to mid-1890s. This historical background can see as three evolutionary which include the proto-marginalists, the revolutionaries and the consolidators of neoclassical economic ideas.
The Proto-Marginalists
Historically, neoclassical economics was born from a few founders considered as main proto-marginalists including Augustin Cournot, Jules Dupuit, Johann Thunen and Heinrich Gossen. Cournot (2008) began his work with Researches into the Mathematical Principles of Wealth in 1838’ he also developed an analysis of monopolies which later on created his concepts of a profit-maximising producer. Jules Dupuit was an engineer of bridges with his history curve of Diminishing Marginal Utility in 1844 (Vickers, 1995). Despite the curve of diminishing marginal utility, Dupuit also had a brilliant argument for delivery of ideas of free exchange in 1861. Johann Thunen was a German landowner who developed the essence of The Marginal Productivity Theory of Distribution in 1850 (Ekelund & Hebert, 1999). The last of the protagonist marginalists was Heinrich Gossen with his famous ‘Gossen Second Law’ in 1854, which described equalisation between the ratios of exchange of goods to the ratio of marginal disutility of work (Blaug, 2003). These four protagonists successfully delivered their original theories which later on become embryos for marginal theories of neoclassical economics.
The Revolutionaries
After the main marginalist protagonists drew the foundation for marginal theory from 1838 up to 1854, neoclassical economics began to be born starting with the revolutionary marginalists like William Stanley Jevons, Carl Menger and Leon Walras. In launching the ‘marginal revolution’, Jevons began with his famous work of Theory of Political Economy in 1871. He began by underlining the principle of diminishing marginal utility and introduced individual preference (Steedman, 1997). After Jevons, the revolutionary marginalists were followed by Carl Menger from Austria at the same time, 1871, Menger’s Grunds tze was considered to represent the basic concepts of marginal value theory or marginal utility, despite the fact that he did not officially use the term “marginal”; he did however state that the consumer usually formed lists of needs, classifying them as less satisfying or less urgent needs (Streissler & Streissler, 1994). After Menger emphasised his marginal utility theory in 1871, in 1874 French economist Leon Walras was one of the three revolutionists who cemented marginal theory as a formal general equilibrium setting and later on become the father of general equilibrium theory. Besides his general equilibrium theory, Walras also contributed several other theories including providing reflections on monopoly market and imperfect competition (Tieben, 2009).
The Consolidators
In order to consolidate the ideas of neoclassical economics apart from the three famous revolutionary marginalists, there are a number of neoclassical economists who provide additional reasons to support neoclassical ideas, including; Eugen Bohm-Bawerk with his famous work of Capital and Interest which he wrote in 1884, explaining the positive side of real interest rates (Pressman, 1999). There was also Friedrich von Wieser in 1889 with his two main contributing theories including the theory of ‘imputation’ which established that factor prices are determined by output prices (Albertazzi et al, 1996). Alfred Marshall in 1890 became famous with his Marshallian Cross which analysed the market with the theory of supply and demand (Stilwell, 2002). John Bates Clark was an American neoclassical economist who in 1891 proudly contributed one of his works called ‘marginal productivity concept’ which assumed that the contribution of output by additional workers has determined the value of demand for labour (Geetika et al, 2008). Irving Fisher was one of the famous consolidators, whose contribution to neoclassical theories included the curve device invention for the Walrasian theory of equilibrium price in 1892 (Fisher, 2007), and his last works which were popular in the post-Keynesian era include his debt-deflation theory in 1933, which has been used by Hyman Minsky for developing Financial Instability Hypothesis, (Minsky, 1986). After Fisher neoclassical economists consolidated their works through Knut Wicksell with his works of Value, Capital and Rent in 1893 (Lutz, 2006). Philip Wicksteed in 1894 produced his work Co-ordination of the Laws of Distribution, which criticised some of the economists who preferred to recast the theory of distribution. Wicksteed preferred to use mathematics as an investigation method to ensure the allocation of distribution (Marchionatti, 2004). Vilfredo Pareto in 1896 was part of the second generation of neoclassical revolutionaries even though his works of tastes-and-obstacles (Gomes, 2003) only gently resurrected the general theory of equilibrium, however he was one of the leaders of the Lausanne School which was one of the famous neoclassical schools in constructing Walras’ general equilibrium theory (Andersen, 2009). The last consolidators for neoclassical economics is Enrico Barone, an Italian economist who gave his dedication to follow Walras and Pareto, his main contribution to the neoclassical school being to influence Walras to integrate some elements into production technique, his works considered an extension to marginal productivity theory (Jaffe & Walker, 1983). After all of them consolidated neoclassical theory, only Alfred Marshal become popular in synthesising Jevons, Menger and Walras’ earlier theories into the ‘Marshallian Cross’ which illustrated that supply and demand determined the equilibrium price which satisfied both sides, consumers and sellers.
Comparison between Marxian and Neoclassical Economics
Deductivism Vs Historical Materialism
The neoclassical method of deductive methodology, according to John Stuart Mill, is..
“ a complex subject matter like political economy can only be studied scientifically by means of the deductive method. Since so many causal factors influence economic phenomena, and experimentation is generally not possible, there is no way to employ the methods of induction directly”, (Hausman, 1992, pp14)
In a reverse of the neoclassical approach of deductive methodology, Marxian economics preferred to study historical processes (Stilwell, 2002), through historical dialectic of materialism, or bourgeoisie class, or capitalist society. Marxism found that these brought broad pictures to understanding the construction of modern capitalism (Lunn, 1982).
If we apply these notions to the contemporary economy today there will appear some disparities. Deductivism these days is still adopted by economic rationalists (Katouzian, 1980) such as international financial institutions like the World Bank and IMF. These institutions still hold regular annual general meetings (IMF, 2010) for evaluating their strategy and methods which they have applied, and normally through these annual meetings they can study economic activities which have taken place over the last twelve months. Deductivism may be good for some economists to make their own judgement after coming to the end of a project or activity, however indirect observation may also miss some evidence uncovered during the process of observation.
Opposed to neoclassical deductivism, Marxism believes that historical materialism is the only way to understanding capitalist and bourgeois society in terms of the mode of production (Rockmore, 2002) because according to Stalin “historical materialism is the extension of the principle of dialectical materialism to study of social life” (Rockmore, 2002, pp7). Marx’ historical materialism does make sense in understanding capitalist economy today because capitalism as a mode of production already includes technical and social characters in producing goods and services. Social characters mean the class relationship between the labourers as the working class and the bourgeoisie society as the capitalist who own the firms, technologies and raw materials (Stilwell, 2002).
Individuals Vs Classes
In contrast to neoclassical theory, Marxian economic analysis focuses on classes not individuals. Classes mean the proletariat as labour power which produces goods and services, and bourgeoisie as capitalists who own the means of production (Stilwell, 2002). Individuals according to neoclassical theory are the consumers and sellers who freely exchange their income and goods; in other words allocation in free market economies occurs via voluntary exchange among individuals (Bergh, et al, 1997).
Both terminologies are still relevant these days, because presumably individuals according to neoclassical theory are consumers who have ultimate power in determination of prices. Classes in contemporary economy are also still relevant because these days labourers as working class have organised themselves and established and joined unions, syndicates and legal organisations to protect their rights and advocate their interests. The idea of ‘free exchange’ was adopted in the 19th century by neoliberal economists which become ‘free market’ ideology and this faith has been strongly pushed by the World Bank and IMF today.
Utility Vs Value
In contrast to neoclassical theory, Marxist economics analyses production based on the labour theory of value and neoclassical analysis of exchange based on the theory of utility, (Stilwell 2002). Labour theory of value means the price of the goods or products is determined by the quantity or qualitative of labour power. In neoclassical theory of utility means the price of commodities determined by consumer satisfaction, (Stilwell 2002). According to Menger in his marginal utility theory, this is when the consumer decides to spend their income on goods or products depending to which goods or products provide the most satisfaction (Stilwell, 2002). And according to Jevons diminishing marginal utility theory is when the consumer decides to allocate their earnings into several commodities. The consumer will test each commodity one by one and try to find out which commodities provide the most satisfaction. The extra satisfaction gained will determine the price of the commodity (Stilwell, 2002).
This utility theory and labour value theory are still relevant today, because both can be applied depending on how big the market and the firm are. For example, if I as a consumer go to a small local business of handmade furniture, the theory of marginal utility or my satisfaction will not determine the price because normally such a small business would determine the price of goods depending on raw materials and the value of labour power plus some profits. However, if I as a consumer go to a large furniture retailer, the theory of utility can be applied because the seller who represents the big company provides various numbers of furniture with variable prices which can be compared for my satisfaction.
Equilibrium Vs Underconsumption
According to neoclassical theory, general equilibrium means that prices for commodities and the factors of production will be determine by the balance of supply and demanded for that product. As mentioned before in Say’s Law, supply can generate its own demand. However, in contrast to Marxian economics, oversupply can generate underconsumption which means that if supply of goods runs out of consumers, the market can turn to failure (Stilwell, 2002). According to Marshallian Cross, determination of price depends on the quantity of demand and supply; let us have a look the scissor theory, which has two characteristics; first, when price decline this normally provokes more consumers to buy, and when prices increase, this can induce firms to supply more quantity (Stilwell, 2002).
As reflected in the market these days, when prices decline this can provoke more consumers to buy and then when demand increases, suddenly the sellers shifted the prices and it requires more supply from the firms; then when firms increase the supply, prices will fall again. This phenomenon is a cycle each with its own movements. According to Marx this is an unstable economy because more supply can result in underconsumption and the market can face a downturn.
Marginal Vs Structural
The neoclassical theory of marginal analysis originated from the David Ricardo theory of marginal principle which has been used for analysing rent, and this theory has been adopted as a doctrine for neoclassical economists broadly, taking for granted that all the factors are related. However, to apply the marginal principle Ricardo has introduced the principle of substitution in order to understand the relationship between labour and land (Kaldor, 1956).
In contrast to the neoclassical theory marginal analysis, Marxist structural analysis criticised capitalist the state which stays in power. In his manifesto communist Marx described the exploitation of the workers by the bourgeoisie, finding that the bourgeoisie keeps manipulating in order to maintain capitalist power. The capitalist system as a tool of the state has created devices to protect their regimes, including institutions of the state such as the police, judicial system, universities and religions. Marxism strongly criticised these institutions which kept providing their blessing to the state, creating a ‘false consciousness’ (Newton & Deth, 2005).
Conclusion
This essay has explored some of the fundamental ideas and theories of both neoclassical and Marxist economics. Through this expose, it has provided a comparison between the two. Neoclassical theory has brought us an elegant theory of supply and demand which neoclassical economists believe will provide equilibrium of prices. The free exchange between consumers and buyers has indicated that prices are determined by the markets, and with the elaboration of deductive methodology, individual’s analysis, utility theory, equilibrium prices and marginal analysis, have given reasons for neoclassical economics to claim the consumer as the ultimate power in deciding the price.
The original ideas from classical economists like Ricardo with his marginal principle, John Stuart Mill with his utilitarianism, Jeremy Bentham with his greatest happiness and Jean Baptiste Say with his Say’s law, has provided the greatest ideas for neoclassical economists. With help from excellent works of proto-marginalists likes Cournot, Dupuit, Thunen and Gossen, and the marginalist’s revolutionaries such as Jevons, Menger and Walras, including consolidators such as Bohm-Bawerk, Wieser, Marshal, Clark, Fisher, Wicksell, Wicksteed, Pareto and Barone, neoclassical economics has contributed a magnificent number of theories, and some of these theories have become pioneers in capitalist economics today, such as the free exchange between consumer and buyers becoming the embryo for the free market ideology as one of the neoliberal missions.
Marxism on the other hand has provided a fundamental contribution to economic phenomena today. Through historical materialism, class analysis, labour theory of value, underconsumption, and structural analysis, all of these arguments and notions have been used for debates in the political economy arena today. For example, one Marxist theory that is still popular and has become a pioneer in market analysis is underconsumption theory, which believes that oversupply can result in market failure.
References
Albertazzi, L., Libardi, M., & Poli, R., 1996. ‘The school of Franz Brentano’, Kluwer Academic Publisher, Netherlands
Andersen, S, E., 2009. ‘Schumpeter's Evolutionary Economics: A Theoretical, Historical and Statistical Analysis of the Engine of Capitalism’, Anthem Press, United Kingdom
Baumol, J, W., 1999. ‘Retrospectives Say’s Law’, The Journal of Economic Perspectives, Vol 13, No 1, pp 195-204
Bentham, J., 2009. ‘Deontology or, the science of morality: In which the harmony and co-incidence of duty and self-interest’, Bibliobazaar LLC, United States
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