MARXIAN CRITIQUE OF MAINSTREAM

ECONOMICS

Prepared by

Pravin Dhas (76)

Prianca Pereira (77)

Priyanka Luharuka (78)

Ramya H V (79)

Pentakota Rao V (80)

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 Table of Contents

1 Introduction

2 A peek into the Classical theory of Macroeconomics

3 Opponents and leading critics

4 Summary

5 References

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Introduction

American writer and Economist, Thomas Sowell famously quoted once –

“The first lesson of economics is scarcity: There is never enough of anything to

satisfy all those who want it. The first lesson of politics is to disregard the first
lesson of economics.”

It seems hardly necessary to stress the fact that Marx was among the warmest admirers
as well as the keenest students of that trend in economic thinking for which he invented
the term ‘classical political economy’. It is important to remember that Marx used this
term in a way radically different from that of many later writers, in particular Keynes. By
classical political economy Marx meant to designate that strand in economic theory
originating in France with Boisguillebert (1646-1714) and in Britain with William Petty
(1623-87) and reaching its high point with the work of Smith and Ricardo (1772-1823)
who ‘gave to classical political economy its final shape’. It is important to keep this
definition in view because the term ‘classical economics’ has often been used in a much
broader sense – for Keynes it was a school embracing all those who, following Ricardo,
subscribed to one version or another of Say’s Law, who believed, that is to say, in the
self-regulating nature of capitalist economy. On such a definition, classical economics
culminated with Marshall and Pigou. Marx was always conscious of the enduring
achievements of this school when contrasted with the work of the ‘vulgar school’, which
emerged in the period following Ricardo’s death. In Marx’s estimation, classical political
economy constituted a decisive stage in the investigation of the capitalist mode of
production; around 1830 this phase begins to draw to a close, a close intimately bound
up, for Marx, with the appearance of a new social and political force increasingly conscious
of itself, the working class. Marx did not, of course, mean to imply that in a somewhat
mystical manner the modern working class ‘killed’ political economy. Rather he wished to
stress that the methodological limitations of classical political economy increasingly
paralysed it in the face of this new phenomenon.

This article attempts to explain the criticisms of classical theory of macroeconomics from a
Marxian point of view. It will begin with introducing classical theory of macroeconomics
followed by critics for the same.

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A peek into the Classical Theory
Since the dawn of economics 2 centuries ago, economists have wondered whether or not
a market economy has a tendency to move spontaneously toward a long run, full
employment equilibrium without the need for government intervention. In modern
language we label as classical those approaches that emphasize the self correcting forces
in an economy. The Classical School of macroeconomics emphasizes that the price
mechanism contains powerful equilibrating forces that will keep the economy near full
employment without any government actions; consequently there is little involuntary
unemployment.

Mercantilism:

To Abraham Lincoln has been attributed the remark, “I don’t know much about the tariff. I
do know that when I buy a coat from England, I have the coat and England has the
money. But when I buy a coat in America, I have the coat and America has the money.”
This reasoning represents an age-old fallacy typical of the mercantilist writers of the
seventeenth and eighteenth centuries. They considered a country fortunate which sold
more goods than it bought, because such a “favourable” balance of trade meant that gold
would flow into the country to pay for its export surplus. The mercantilist argument
confuses means and ends. Accumulating gold or other monies will not improve a country’s
living standard. Money is worthwhile not for its own sake but for what it will buy from
other countries. Most economists today therefore reject the idea that raising tariffs to run
a trade surplus will improve a country’s economic welfare. Adam Smith was the father of
economic liberalization. He exposed the folly of mercantilism. He was the champion of
laissez faire. Now advanced countries are following neo-mercantilist policies. For example,
the agricultural subsidies by the USA and other western European countries, under the
WTO regime.

Level of output and employment:

In classical macroeconomic theory, output is the function of employment. Classical

macroeconomists believed in diminishing returns in production. Marginal Physical
Productivity (MPP) is the number of units of output produced by the last or extra worker.
When MPP is multiplied by price per unit, we get the Marginal Revenue Product (MRP). The
employer is interested in the monetary value of the MPP. Real wage is the number of
goods and services that a worker can buy out of his nominal wage. Nominal wage is

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expressed in terms of rupees and paisa. If price level increases or nominal wage falls, real
wage decreases.

Say’s Law of Markets:

Classical analysis revolved around Say’s Law of Markets. This theory, propounded in 1803
by the French economist J.B.Say, states that overproduction is impossible by its very
nature. This is expressed as “supply creates its own demand.” It rests on a view that
there is no essential difference between a monetary economy and a barter economy-that
whatever factories can produce, workers can afford to buy. A long line of distinguished
macroeconomists including David Ricardo (1817), J.S Mill (1848), and Alfred Marshall
(1890) subscribed to the Classical Macroeconomic view that overproduction is impossible.
This theory holds that wages and prices are flexible so that markets will very quickly
return to equilibrium. As a result, the economy operates at full employment.

Quantity Theory of Money:

The final shape of this theory was given by Irving Fisher-the famous American economist.
He gave the famous equation: MV=PO, where M is the money supply, V is the velocity of
circulation of money, P is the price level and O is output. The velocity of circulation of
money may remain constant in the short period; similarly the output may remain
unchanged. Thus, the general price level will be influenced directly by the quantity of
money in circulation.

A stable money supply would produce stable prices; if the money supply grew rapidly, so
would prices. Similarly, if the money supply was multiplied by 10 or 100, the economy
would experience galloping inflation or hyperinflation. For example, prices raised a billion
fold in Weimar Germany after the central bank unleashed the monetary printing presses.
This is the quantity theory with a vengeance.

Thus the core of this theory is that prices move proportionately with the supply of money.
Although the quantity theory of money is only a rough approximation, it does help explain
why countries with low money growth have moderate inflation while others with rapid
money growth find their prices galloping along.

The Classical view has two conclusions that are vitally important for economic policy.
Under the classical view, the economy has only brief and temporary lapses from full
employment and full utilization of capacity. There will be no long and sustained recessions
or depressions, and qualified workers can quickly find work at the going market wage.

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The second surprising element of the Classical view is that aggregate demand policies
cannot influence the level of unemployment and real output. Rather, monetary and fiscal
policies can affect only the economy’s price level, along with the composition of the real
GDP.

At the heart of the classical view is the belief that prices and wages are flexible and that
wage- price flexibility provides a self correcting mechanism that quickly restores full
employment. This approach is very much alive in the writings of today’s new classical
school.

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 Opponents and leading critics
The relation of the individual to the state has from the beginning been a chief point of
dispute in economic thought. The social philosophy of the physiocrats and Adam Smith, on
the whole, was founded on individualism and laissez faire. It was based upon the
assumption that the economic interests of individuals and nations are materially the same.
One of the earliest attacks upon their systems centered upon this idea. It is interesting,
however, to observe that several different points of view were taken by those who
opposed that philosophy, some rejecting it in part, others in its entirety.

Critics of classical school of thought can be classified into individualistic critics,

nationalistic critics and socialistic critics. This can be schematically represented as follows:

CRITICS

Individualistic critics Socialistic critics

Nationalistic critics

This article focuses on Socialistic critics, particularly Marx.

Marx was the most powerful critique of capitalism. Millions of people still consider Marxism
as a religion which promises “paradise on this side of the grave”. All modern socialist
writings make use of Marxian terminology.

As a scientist and materialist, Marx did not understand classes as purely subjective (in
other words, groups of people who consciously identified with one another). He sought to

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define classes in terms of objective criteria, such as their access to resources — that is,
whether or not a group owns the means of production. For Marx:

“The history of all hitherto existing society is the history of class

struggles.”

Marx argued that capitalism, like previous socioeconomic systems, will inevitably produce
internal tensions which will lead to its destruction. Just as capitalism replaced feudalism,
he believed socialism will, in its turn, replace capitalism, and lead to a stateless, classless
society called pure communism. This would emerge after a transitional period called the
"dictatorship of the proletariat": a period sometimes referred to as the "workers
state" or "workers' democracy"
Marx, as a materialist, understood that the categories of political economy were a product
of historical development and specifically of the historical development of the social
relations of production. This point must be emphasised if only because of the attack
launched by Althusser and others against this conception, which we believe to be at the
very centre of Marxism. Marx at all times insists upon the objectivity of the categories of
the science: ‘They are socially valid and therefore objective thought forms’, he writes.
Marx was here stressing a vital point – namely, that science always necessarily develops
through definite forms outside the individual consciousness. Men always start with certain
definite aims and motives and the leading figures of political economy were, in this
respect, no exception. But the history of political economy cannot be reduced to a review
of the conscious aims and motives of its leading representatives. Science develops always
under determined historical conditions in that it must always commence its work in and
through the categories which have been historically handed down to it, categories which
reflect the work of all previous thinkers in the field.

Marx attacked the political economists precisely because they took the categories of their
science uncritically. His charge of ahistoricism meant essentially this: the political
economists accepted the available concepts as fixed and unalterable. Political economy
took its categories for granted precisely because it did not know the historical process
through which they had been created. It was unable to reproduce this real process in
thought and therefore saw in the categories of bourgeois political economy the expression
of the essence of bourgeois production. In short, it fell under the illusion that the relations
of modern economy not only appeared according to the categories of political economy,
but that these relations really were as they appeared. There are 3 important aspects of
Marxian political economy:

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 • Dialectical materialism

• Economic interpretation of history

• Political economy based on labour theory of value

The following figure depicts the approach of Karl Marx:

THESIS ANTITHE SYNTHE

According to Adam
Marx, Classical economics was partisan.
Karl It was only a biased account of
Keynes
reality. Money is money as long as capitalism arrives.

• Dialectical materialism

There are two types of systems of enquiry in philosophy:

1. Idealism
2. Materialism

Dialectics is an ancient method of argument. Even Greek philosophers made use of

method of dialectics. In this method there is advancement as a result of collision of
opposites. Generally ideas develop through negation of negation. Dialectics operate in the
physical world also.

• Economic interpretation of History:

The material conditions of production determine the economic, social, political, legal and
cultural aspects of society. In a famous statement, Marx said, “It is not consciousness
of men that determines their social existence but on the contrary it is the social
existence that determines their consciousness.”

• Political economy

Karl Marx rejects say’s law of market. According to him, the law will apply as long as there
is pre-capitalist society. In such a society the transaction will be like this:

C-M-C
Where C-> commodity
M->money

Commodities are exchanged for money and money is exchanged for commodity. In
capitalism, the transaction is as follows:

M-C-M’

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Here money becomes capital. There is one commodity in the world in the case of which
the use value can become exchange value. That is labour.

Summary
Marxian economics has been built upon by many others, beginning almost at the moment
of Marx's death. The Marxian value theory is fundamental for much of mathematical
economics, econometrics and macroeconomic models such as those pioneered
by Leontief and now commonly used for forecasting purposes. Some economists draw on,
or have drawn on, Marxian economics together with other theoretical perspectives, in
an eclectic manner, or in order to synthesize them. Those who refer to non-mainstream,
or heterodox, economics as a single entity often include Marxian economics within it.

Adherents consider Marx's economic theories to be the basis of a viable analytic

framework, and an alternative to more conventional neoclassical economics. However,
Marxian economics do not lean entirely upon the works of Marx and other widely known
Marxists; they draw from a range of Marxist and non-Marxist sources.

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References
• History of economic thought – Lewis H. Haney

• http://homepage.newschool.edu/het//schools/marxian.htm

• http://en.wikipedia.org/wiki/Karl_Marx#Marx.27s_thought

• http://en.wikipedia.org/wiki/Marxian_economics#Marx.27s_response_to_cl

assical_economics