Classical, Neoclassical, and Keynesian

In direct contravention to Marxian theories of capitalism are those of (Neo)Classical Economics. This is a broad topical group and difficult to summarize in such limited space due, especially due to the depth of its infiltration into our lives and the seaming conflation of economics and capitalism that pervades Western notions of economic life. Much of this tradition starts with what Robert Heilbronner (1996) calls the “Commercial Revolution” and centers on mercantile systems of trade and economic interaction. During this time period (c. 17^th C), an intellectual shift began as Thomas Mun theorized money as more than a means of exchange (Heilbronner 1996:25). Richard Cantillon also conceptualized “market driven society as constituting a ‘system’ with a spontaneous mechanism of self-adjustment and a coherent relationship between the supply of money and the prosperity of the society as a whole” (Heilbronner 1996:30), and a study of the economy became more systematized and focused on the increasingly expansive commercial aspects of society (Heilbronner 1996). 

This intellectual foundation lay ground work for the rise of classical economic theorists that began with the publication of Adam Smith’s Wealth of Nations in 1776, and who’s theories were systematically tightened and expanded upon by David Ricardo in On the Principles of Political Economy and Taxation in 1817. These two works became known as classical political economy and “with many additions and changes, it dominated European thought about economics from 1780 to 1880” (Wolff and Resnik 2012: 15).

Smith ultimately believed that for society as a whole to achieve its greatest levels of economic and social success, there should no interference in a “free market” for goods and services (Smith 1991:322). He believed in the private ownership of property, and that each individual should become an “expert in his own peculiar branch” of the economy or market, and that through diversifying labor – and becoming experts – “more work is done upon the whole, and the quantity of science is considerably increased” (Smith 1991:16). This was founded upon a belief that “the difference between the most dissimilar characters, between a philosopher and a common street porter… seems to arise not so much from nature as from habit, custom, and education,” and that as each person acted in their own self-interest, developed their own niche and differentiated themselves and their expertise from others, unique skillsets and expertise would develop and help lift society as a whole (Smith 1991:20-1). In other words, Smith believed that we were not born unequal per say, but through education and diversifying our labor we created differentiation that he thought was good for society and created a stimulating and competitive environment “where every man may purchase whatever part of the produce of other men’s talents he has occasion for” (Smith 1991: 23, 151).

Smith believed that “whatever part of his stock a man employs as a capital, he always expects it to be replaced to him with a profit” (Smith 1991:272), and that they should always work for more than they put in. This wage based diversity of labor, with everyone industriously and competitively seeking to create their own comparative advantage, would lead to ever more “revenue and stock” and ever more demand for wage laborers. This pattern would ultimately and continually lead to an increase in “the revenue and stock of every country,” something that “cannot possibly increase without [this process]” (Smith 1991:73). In other words, people innately seek growth and to profit from their work, and this is the only way society and countries will develop. Yet, in a departure from neoclassical and neoliberal principles Smith did not believe in overworking people, he believed they’d be more productive without being overworked (Smith 1991:86). He believed that the improvement of those “of the lower ranks” (the majority of society) should not be seen as an inconvenience to society, but rather an advantage, and that society can only flourish if “the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, clothed, and lodged” (Smith 1991:83).

What Smith and his adherents brought to “classical economics” was a focus on production and larger macro levels of analysis. However, around the time that Karl Marx published Capital (1867), classical economics shifted towards more detailed “micro” level studies of the economy that theoretically centered on the decision-making processes of individuals and individual enterprises. This focus lasted through the 1930’s and became labeled as neoclassical or micro-economics (Wolff and Resnik 2012:14-15). These principles have seen a resurgence since the 1970’s and is based on the:

“claim that the result of individuals' self-interested buying, selling, working, saving, and so on, is, in effect, an economic utopia: a perfect economic harmony among all individuals and between them and nature. For this utopia to be achieved, according to neoclassical theory, society must (1) endow and protect each individual with the full freedom to act in his or her own self-interest and (2) establish the institutional framework (competitive markets and private property) that guarantees that freedom” (Wolff and Resnik:15).

By the 1930’s, this focus on deregulating markets and minimized state intervention, led to a global economic crisis, and many people to question both neoclassical economic theory and the very merits of capitalism itself. In response to these crisis, John Maynard Keynes published The General Theory of Employment, Interest, and Money in 1937. Keynes believed the chief reason for the collapse of the economy was a huge drop in private spending which plunged the economy into depression. He thought that the only way to be able to guard against the ups and downs of the capitalist economy’s “business cycle” was to have the state act to intervene in the economy in order to regulate lending, money supplies, and the “macro” part of the economy on the whole. His overarching theory “analyzes and presents (1) the rules and laws that give the economy its overall structure and (2) the ways in which that structure essentially governs the activities of producers, consumers, and other individual economic actors” (Wolff and Resnik 2012:19). This prescription was very different from (neo)classical economics which focused on individual human beings acting and making decisions, and aimed to remove all structural hindrances to free markets.  Keynes believe that there were economic structures surrounding us, governing us, and that we needed to understand and control them with greater efficacy if we were to keep better control of the ups and downs of capitalist cycles (Wolff and Resnik 2012:19). 

While Keynesian ideas are often still turned to in times of crisis (the recent Great Recession and its “bank bailouts”), starting in the 1970’s there was a very propitious decline in the favor of Keynesian principles as neoclassical and (soon to be labeled) neoliberal economics began to increase in popularity and eventually seemingly monopolize political debates (Harvey 1994). As we can see in Adam Smith’s work, the individual is the main actor in a larger social structure.  However, this notion of the individual – central to any understanding of capitalism – was expounded upon by both Friedrich Hayek and Ayn Rand in the 20^th century, and encapsulates the role of the rational individual in capitalist life. In both of their works the individual is primary not just as an actor, but as an ideological notion for the primary object and origins of any social analysis. As Hayek states:

“there is no other way toward an understanding of social phenomena but through our understanding of individual actions directed toward other people and guided by their expected behavior. This argument is directed primarily against the properly collectivist theories of society which pretend to be able directly to comprehend social wholes like society, etc., as entities sui generis which exist independently of the individuals which compose them… It is the contention that, by tracing the combined effects of individual actions, we discover that many of the institutions on which human achievements rest have arisen and are functioning without a designing and directing mind” (Hayek 1948:6)

The logic that Hayek is espousing – and largely attributes to individualist thinkers such as Adam Smith – is that we has human beings can only know so much. We could never portend to understand or know everything about our immediate surroundings, nevermind a larger society; nationally, globally, etc. He believed that within this framework, and knowing what we know of ourselves and those around us, we should act within our local knowledge sphere and do what we can and know. Hayek saw the market as a perfect mechanism for individuals to engage with a larger – incomprehensible – social society, and where we would be treated equally; or more so, “be rewarded, not according to the goodness or badness of his intentions, but solely on the basis of the value of the results to others (Hayek 1948:21-22). In short, while the market may be harsh, it is equally harsh to everyone that engages with it.

In terms of navigating the difficulties of the market, Ayn Rand contradicts Hayek to some extent.  While she sees “the free market [as] a continuous process that cannot be held still, an upward process that demands the best (the most rational) of every man and rewards him accordingly” (Rand 1967:25), she also believed that “man’s most valuable attribute [is] the creative mind” (Rand 1967:19). She sees the genius of humans as the key aspect to our existence, and where as Hayek thinks our intellect is limiting to its surroundings and that we should focus on the here and the now, Rand see’s this genius as the foundation for rational thought – what she considers the key to navigating the market successfully – and seemingly not limited by locale or knowledge. The also differed slightly on the emancipatory possibilities of the rational individual acting within the market. While they both believed this individual freedom could afford opportunity for all, Hayek also felt that “the preservation of individual freedom [was] incompatible with a full satisfaction of our views of distributive justice” (Hayek: 21-22). Yet regardless of their differences, they both see the individual as primary and the market as the only pathway toward individual freedom, regardless of possible outcomes.