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. 

Marxism

This processes created a capitalist mode of production, in which “the capitalist” claimed the “surplus labor” of a worker (the output of the worker’s labor output beyond what they need to sustain themselves), and after paying the costs of production, retains the “surplus value” (or profit) of the production process as their own to distribute as they please. In short, capitalists retain ownership and the right to the distribution and income of the produce of the workers labor. This creates a division that polarizes individuals, communities, and societies, and leads to class based societies of the rich bourgeoisie and the working class proletariat (Marx (1992[1867]; Marx and Engels; Wolf 1982).

To Karl Marx, capitalism began when precapitalist modes of exchange that used money as a medium to exchange two commodities (Commodity à Money à Commodity, C-M-C), transitioned to capitalist modes of exchange where money was exchanged for more money using commodities as a medium of exchange (Money à Commodity à Money, M-C-M) (1992[1867]).  According to Marx, within the capitalist process, money is not spent but rather “advanced,” as commodities are no longer exchanged based on their “use-value,” but on their “exchange value” within monetary terms (Marx 1992[1867]:249). Within capitalist modes of production, money is advanced into the market through a commodity that is then sold for an additional amount that adds on “surplus value” through a valorization process, better understood today as profit. The valorization of this surplus value happens when the capitalist transforms a use-value into an exchange value by producing a good “greater in value than the sum of the values of the commodities used to produce it and usually equates to labor value” (Marx 1992[1867]:293). To Marx, capitalist modes of production begin with this desire to exchange money for more money (M-C-M’), and charging more for the end product than the cost of the material and labor inputs needed to create it – the investment of capital to create even more capital.

This ability to charge more for the end product comes through surplus labor, the output of the worker’s labor beyond what they need to sustain themselves. Upon the sale of goods, the capitalist pays the laborer, but retains the value of the surplus labor to pay the cost of production, and then is left with a surplus value (i.e. profit) to distribute as they please. In short, the capitalist retains ownership of the produce of the workers labor, and the right to distribute all its proceeds as they see fit (e.g. capital). This creates a division that polarizes individuals, communities, and societies, and leads to class based societies of rich bourgeoisie and a working class proletariat (Marx (1992[1867]; Marx and Engels 1848; Wolf 1982).

“By turning his money into commodities which serve as the building materials for a new product, and as factors in the labour process, by incorporating living labour into their lifeless objectivity, the capitalist simultaneously transforms value, i.e. past labour in its objectified and lifeless form, into capital, value which can perform its own valorization process, an animated monster which begins to ‘work’ as if its body were by love possessed’” (Marx 1992[1867]: 302).

Marx, writing earlier with Freidrich Engels, saw the outcome of this capitalist transformation as creating “[t]he need of a constantly expanding market for its products chases the bourgeoisie over the whole surface of the globe. It must nestle everywhere, settle everywhere, establish connections everywhere” (Marx and Engels 1948: 83). This is a process we now call globalization, but which has transformed over time.

Marxist scholar, activist, and communist leader, Vladimir Lenin (writing in 1916-17), believed that commodity production was key to capitalism, but it was being undermined by big profits going to “the ‘genius’ of financial manipulation” (Lenin 1918:187). Lenin claimed that in the early 1900’s that “the old capitalism, the capitalism of free competition with its indispensable regulator, the Stock Exchange, is passing away. A new capitalism has come to take its place, bearing obvious features of something transient, a mixture of free competition and monopoly,” (Lenin 1918:197-8) which is reminiscent of today’s capitalism. Lenin calls this “financial capitalism,” or “monopoly capitalism” in which large companies and banks inbreed with each other (and the government), and all work towards one goal – one monopoly of capital (Lenin 1918:199-200)! Within this form of capitalism, capital is consolidated amidst a small number of “financially powerful” people and states, in which “profits of production” are replaced by “profits of commissions” as capitalism (especially today) shifts from a “system of production into a system of financial speculation” (Harvey 2005:142). This consolidation of capital and power in the hands of only a few, allows those individuals to control a majority of global trade (and economies more generally) with little impetus to share – unless it makes them more money. This is perhaps one of the most poignant critiques of capitalist production; that “surplus capital will never be utilized for the purpose of raising the standard of living of the masses in a given country, for this would mean a decline in profits for the capitalists, but for the purpose of increasing profits by exporting capital abroad to the backward countries” (Lenin).

While we may not use descriptors such as “backward countries” today, Lenin’s point is still relevant; and been used by David Harvey within his discussions of accumulation by dispossession, and within World-Systems analysis’ notion of core and peripheral states. In both of these theories there is a capitalist elite (be they countries, people, corporations, or organizations) that have or are accumulating wealth from other states that must (perhaps forcibly) stay in a subservient – or periphery – position to those within the core areas (Arrighi 2000, Harvey 2005). It is those core states and areas that bringing in more money than they are investing elsewhere (Arrighi 2000:138).  For it would not be capitalism if MàCàM brought back less money! Within this calculation, capitalism must use financial capital (and money) to invest in commodities to make the invested money back plus a surplus, or profit. As we will see later in the section of (neo)classical interpretations, mainstream capitalist economics is based on growth that Marx (1992[1867]:762-772) calls capital accumulation and which he envisions inevitably leading to a “chronic crisis of over accumulation” (Harvey 2005:144). To Harvey, this accumulation is done by dispossessing the working classes and periphery countries of their capital and wealth. This begins by “forcing” non-capitalist territories open their economies, “not only to trade (which could be helpful) but also to permit capital to invest in profitable ventures using cheaper labor power, raw materials, low-cost land, and the like” (Harvey 2005: 139). This can be seen from colonial expansion, to imperial expansion, to the “new” imperialism of today; and to Harvey is simply a new name for accumulation “based upon predation, fraud, and violence” and which was labeled as ‘primitive’ or ‘original’ accumulation by Marx, but claimed to no longer be relevant in today’s capitalist systems (Harvey 2005). It is Harvey’s contention that this accumulation by dispossession is in fact the essence of capitalist production, that capital creates and maintains disproportionate systems of power in which countries and people in high capital positions subordinate and disposes countries and people in lesser capital positions, and that capitalism is about accumulating capital by dispossessing it from others – using markets, coercion, or force – that inherently “creates its’ own ‘other’” and then positions them beneath those with the capital (Harvey 2005: 141; chapter 4).

World-Systems Theory is another Marxist inspired theory of global accumulation and differentiation.  Largely penned by Immanuel Wallerstein and Ferdinand Braudel, World-Systems Theory sees a world economy not bound by one political force, but based upon a division of labor leading to “significant internal exchange of basic or essential goods as well as flows of capital and labor” (Wallerstein 2004:23).  Within World-Systems Theory the world-economy and capitalism are symbiotic, with the modern world-system is seen as “the only world-economy to have survived for a long time… and that is because the capitalist system took root and became consolidated as its defining feature.” This is a framework that Wallerstein claims the capitalist system cannot exist outside of.  To Wallerstein “capitalism is not the mere existence of persons or firms producing for sale on the market with the intention of obtaining a profit. Rather, such persons or firms have existed for thousands of years all across the world. Nor is the existence of persons working for wages sufficient as a definition. Wage-labor has also been known for thousands of years. We are in a capitalist system only when the system gives priority to the endless accumulation of capital… [and] that people and firms are accumulating capital in order to accumulate still more capital, a process that is continual and endless” (Wallerstein 2004:24, my emphasis). 

This process of accumulation leads to an unequal relationship between a capital intensive core and a weaker periphery that lacks the same capacity to generate profit. This relationship creates similar types of monopolization and consolidation as Lenin and Harvey speak of; and amalgamates the higher capital core into less and less political units; therefore pushing semi-peripheral political units into a growing periphery and semi-periphery that compete against each other.

“Core-periphery is a relational concept. What we mean by core-periphery is the degree of profitability of the production processes. Since profitability is directly related to the degree of monopolization, what we essentially mean by core-like production processes is those that are controlled by quasi-monopolies. Peripheral processes are then those that are truly competitive. When exchange occurs, competitive products are in a weak position and quasi-monopolized products are in a strong position. As a result, there is a constant flow of surplus-value from the producers of peripheral products to the producers of core-like products. This has been called unequal exchange” (Wallerstein 2004: 28).

And this inequality is the cornerstone of Marxist inspired interpretations of capitalism. There is always a creation – or expansion – of “new classes, new conditions of oppression, new forms of struggle in the place of old ones” that are splitting society more and more “into two great hostile camps, into two great classes directly facing each other: Bourgeoisie and Proletariat” (Marx and Engels 1848:80). Within Marxist interpretations of capitalism, society is about capital exploiting both labor and society in general – political, economic, and social – in ways to maximize surplus values through maximizing labor hours worked in exchange for the minimum pay at the expense of individual and groups of labors. This therefore creates two classes of individuals, the bourgeoisie (those with control of capital), and the Proletariat (the workers that control only their own labor). And with this division of people, also the division of capital and wealth.