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Classical Economics

Classical economics refers to the broad arguments made in the eighteenth and nineteenth centuries for the free operation of markets. The arguments proceeded more by observation and logic than by models or trade statistics. Today these come under the heading of macroeconomics, which develops models that explain the relationship between such factors as national income, output, consumption, inflation, investment, savings, trade and international finance. Of particular interest to governments are business cycles and long-term economic growth. {1}

William Stanley Jevons (1835-82) made many contributions to economic theory, most notably in the fields of price indices and marginalism. In the last, he argued that companies will stop producing when the cost of manufacturing the last item exceeds the price they'd receive in selling that item. The 'marginal' item was the key to events, not what had happened before. Differing from Marx's theory of congealed labour, he regarded past expenditures as irrelevant: sunk costs could not be recovered. {2}

Coming from a family of Utilitarians, Jevons was concerned to give concepts like the 'greatest good for the greatest number' a sound mathematical basis. His first articles were on the railway and land problems in New South Wales, where he had gone to work as a gold assayer, but he returned to London in 1859 to finish his education, and then entered academia, though he did not enjoy lecturing so much as the independence and solitude required to develop his remarkably wide spread of ideas in science, logic and economic modelling. He championed accurate statistics and graphic models, substituting them for the 'guess work and groundless argument' of previous writers, and came later to concentrate on the utility and consumption of individuals. {3}

With Carl Menger (1840-1921) and Léon Walrus (1834-1910), Jevons laid the foundations for econometric modelling and 'indifference curves, all essential to contemporary microeconomics. Menger also attacked the Marxian approach, arguing that value does not lie in the amount of work or other goods needed to produce it, but the importance we place on it through the satisfaction we believe that it can offer. Walrus argued for equilibrium in markets, which would reach stability when supply and demand were satisfied. Alfred Marshall (1842-1924), founded the neoclassical school of economics by combining marginalism with the wealth distribution of the classical school (i.e. Adam Smith, David Ricardo and John Stuart Mill). His 1890  'Principles of Economics' became the most widely read manual in microeconomics of its time. {4}

Multicentric Organizational Models

Many less market-orientated economic theories derive from the work of David Ricardo (1772-1823), Thorsten Veblen (1857-1929), Karl Polyani (1886-1964), Piero Straffa (1898-1983) and John Kenneth Galbraith (1908-2006).

Ricardo concluded that incomes of most workers would not rise above subsistence levels, which was indeed the case for much of the nineteenth century. {5}

Veblen's The Theory of the Leisure Class (1898) saw capitalists as modern manifestations of the ancient warrior class, gaining wealth and power through predatory manipulations. Far from being free and rational creatures, consumers were culturally induced to show off their wealth by 'conspicuous consumption'. {6}

Polyani's The Great Transformation (1944) argued that the market is always embedded in a cultural and political context, and the transformation of workers, nature and monetary gold into 'fictional commodities' was responsible for the destruction of community, environment and democracy. {7}

Straffa re-established political economy through commodities produced by commodities, and was critical of simplistic and atomistic approaches. Based on Ricardo's writings, he constructed equations that would yield consistent prices, something he demonstrated that neoclassical economics was unable to do. {8}

Galbraith was a popular author who argued that mathematical modelling was unrealistic, often resulting in 'certainties' that misled their authors, (as did derivatives in the financial crash). He stressed the power that corporations tend to seek, often through advertising, and the increasing numbers of specialists they employ: scientists, engineers, lawyers, accountants, marketing specialists, government liaison officers, etc., the so-called 'technostructure'. His 'New Industrial State' (1967) identified eight controlling strategies:

1. Creation of consumer demand by advertising.

2. An aim for steady profit that provides dividends for stockholders and reduces outside loans.

3. Collective bargaining with 'tame' trade unions.

4. Prices set by companies and industries rather than by markets.

5. Relentless expansion in each market sector by competition or takeovers.

6. Funding and therefore control of relevant university research.

7. Influence on government policies and budgets.

8. Identification with popular culture, spending revenues gained in avoiding tax on public relations exercises.

Galbraith further argued that Americans are happy to believe that all is generally well in their country, ignoring dangerous inequalities at home and indulging in wishful thinking abroad. Government does not serve reality but only the cosy beliefs of the 'contented majority'. Action is always short-term, because long-term improvements benefit only later generations. Work that is especially hard, unpleasant and socially demeaning is by definition given to the poor. Bureaucracy is endemic: big companies employ teams of specialists so that directors can build empires by delegation, thereby avoiding what they're paid to do, i.e. to think. Far from self-correcting, modern capitalism is self-destructive: management buy-outs, junk bonds and other devices have devastated reputable companies, saddling them with enormous debts or driving them into bankruptcy. Government expenditure — except on banking, insurance, the military and perhaps education — is seen as a burden on the taxpayer. Dissent from the majority view — from left-wing journalists, scholars and minority politicians — only enforces the fiction of democracy: it has no real influence. {10}

Gloomier outlooks prevail in these models. Workers are not necessarily better off under market economies because companies aim for wealth and power rather than the most efficient satisfaction of consumer wants. Unless prevented by legislation, competition is a race to the bottom, and wages must trend towards subsistence. Industrialists are equally vulnerable unless they have exclusive access to scarce resources, and often depend on governments and lobbying to maintain or extend their operations. Reducing everything to commodities priced in money terms by the market devalues human beings and encourages over-exploitation of natural resources. Alongside private affluence grows public squalor because profit is internalised by market forces but social costs are externalised. Companies are happy to use a workforce housed, fed and educated by the country concerned, but see no responsibility to that country beyond paying the going wage. American companies in particular evade their social responsibilities by off-shoring and widespread tax avoidance. {11}

In practice, economics cannot be divorced from politics and national interests. Globalisation has unfairly benefited the richer classes in both the west and developing countries, with the main burden of social costs falling on a dwindling middle class at home and on the poor in developing countries. According to US government figures, for example, the inflation-adjusted incomes for the lowest 20% of households have increased only 2% over the 1979-2004 period, but incomes of the top 20% have increased 63%. The top one percent has done even better, with a 154% increase over this period. Even in 2000, a UN University study found that the bottom 50% of the world owned only 1% of its wealth, while the richest 1% owned 40% of global assets (land, buildings and financial assets). Between 1979 and 2013, US productivity grew 64.9 percent, while hourly compensation of production and non-supervisory workers, who comprise over 80 percent of the private-sector workforce, grew just 8.0 percent. Nonetheless, it was the banks whose recklessness caused the recession that were bailed out with public funds, even while the military-industrial complex pushed for armed intervention overseas, receiving government contracts that were often poorly supervised. {12}

Marxist Models

Marxism of course derives from Karl Marx (1818-1883) but was developed further by Vladimir Ilyich Lenin (1870-1924), Gramsci (1891-37) and Spike Peterson, and many others. {176} {13}

Marx laid the foundations of this most important group of economic theories through a penetrating critique of nineteenth century capitalism. His three-volume study, simply called 'Capital', looked at the nature of capitalism: where it came from, how it worked, what was wrong with it, why it was a temporary phase in human history, and what was needed to speed up its demise. He studied the ugly factory towns and their exploitation of labour under the most oppressive conditions, and took from David Ricardo and Thomas Malthus the view that what allowed the exchange of commodities was the amount of labour time involved. Marx was more philosopher than economist, but his 'dialectic materialism' (as his system came later to be called) envisaged: {14}

1. All phenomena are interrelated and interdependent: Marxism is not reductionist.

2. All societies are in a state of change, and even markets do not tend towards equilibrium.

3. Change is evolutionary: primitive communism evolved into ancient civilizations, and these into feudal Europe and then capitalism, which in turn will evolve into communist societies.

4. Change is driven by contradictions or tensions between classes.

5. The basic reality for men is not ideas but material existence: food, housing, fighting ill health, competing with others, etc.

6. From these material phenomena come men's ideas of himself and his purpose in the world.

7. Relationships between these material phenomena are regular, and may be studied in a scientific way, though the approach must be holistic and the underlying forces need some ferreting out: people's lives are often driven in certain directions while they themselves are preoccupied with other matters.

8. The scientific approach must combine theory and practice: detached observation lacks the essential contact with reality.

9. Capitalists make their profits from 'surplus value', the difference between the sale price of an item and the average socially necessary amount of labour time spent in bringing it to market: that labour time included creation of food and housing, construction of plant and marketing, etc.

10. Workers own only their labour, and are locked in a continual struggle with capitalists for a share of the latter's profits.

11. Though the extraction of surplus value from labour would drive wages down to subsistence levels, the inevitable shift to using less labour and more capital would lead to business cycles and eventually the destruction of the capitalist system.

12. Money is a commodity. Precious metal becomes a measure of value because mining and minting employ labour. That labour (or, more exactly, 'congealed labour time') is the basis of money's ability to act as a universal measure of value.

Lenin argued that capitalists' investments were more easily protected under imperialism, which paid little heed to local needs or cultures. More famously, he led the Bolshevik Revolution in Russia, though the Stalinist Soviet empire was a parody of Marx's views of an ideal society. {15}

Gramsci modified Marxist thought to take more account of civil society and cultural controls. {16}

Peterson surveyed how capitalists cut labour costs by using women in part-time, non-unionised and poorly-paid work. {17}

Contemporary Marxists have a long catalogue of social ills, even for a rich country like the USA. Only a minority of workers belong to a trade union, or have health insurance. Ideology is propagated throughout society by advertising, education and the media. Capitalists employ divisive social issues in political campaigns to divert interest from more fundamental issues: abortion, immigration and same-sex marriage. The rich get richer at the expense of other classes in America and elsewhere. {18}

As in any other branch of economics, Marxism is not without its theoretical problems. If expended labour is the common denominator of price, how are land, labour and capital to be equated? Clearly they are different: capital is mobile, labour much less so and land not at all. Other economic models treat them as necessary inputs to surplus value, and hence profits, but Marxism continues to wrestle with its labour theory of value. {19}

Other Economic Models

Economists, like academics generally, are a community with many strands of thought. Modifications to mainstream neoclassicism include:

1. Austrian school: similar to neoclassicism but with less emphasis on market equilibrium. {20}

2. Post-Keynsian economics: builds on the work of Keynes and Kalecki: more emphasis on uncertainty. {21}

3. Complexity and econophysics: attempts to apply nonlinear dynamics to stock markets and economic issues: much is proprietary to companies engaged in the work. {22}

4. Evolutionary economics: treats the economy as evolving systems, sometimes with complexity. {23}

5. Monetarism: associated with Milton Friedman and concentrates on the money supply: influenced waned in the 1980s. {24}

Other economic theories are not taught at undergraduate level in America, and alternative economists have difficulty getting their papers into mainstream journals, though often publishing widely on the Internet.

1. Yves Smith at Naked Capitalism.

2. Michael Hudson at his Michael Hudson blog.

3. Dan Denning at Daily Reckoning.

4. Max Keiser at The Keiser Report.

5. Mish Shedlock at Global Trend Analysis.

6. Chris Martenson at Peak Prosperity.

7. Bill Mitchell on the Billy blog.

8. Steve Keen on his blog.

9. Edward Harrison at Credit Writedowns.

10. New Economic Perspectives at the University of Missouri.

11. Institute for New Economic Thinking.

12. Levy Institute at Bard College.

13. Zero Hedge.

References and Further Reading

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