Contending Economic Theories

xivTo Our ReadersIn treating Keynesian economics in a separate chapter, we emphasizeKeynes’s notion of radical uncertainty as it impacts the individual businessinvestor and thereby provides an explanation for the business cycle. In showinghow Keynes’s structuralist economics displays an individualist (humanist)moment, we offer a new way too see the crucial similarities and differencesbetween the Keynesian and the contending neoclassical theoretical arguments.Readers of our earlier book also asked us to analyze recent extensionsand developments of neoclassical economics (around such topics as marketimperfections, information economics, new theories of equilibrium, behavioraleconomics, etc.). We treat these new developments in neoclassical economicsin a new chapter 5. With this chapter’s co-author, Yahya Madra, we raise afundamental question: Does this body of work break from the neoclassicaleconomic tradition? Is it a different paradigm in the sense we apply to bothKeynesian economics and Marxian economics? Chapter 5 extends our comparative approach to contested economic theories to answer this question.Based on our many years of teaching experience since the earlier book’s1987 publication and also on the changed conditions of contemporary economies (including the post 2007 global crisis), we have produced a thoroughlyrevised introduction chapter. It now foregrounds a central theme of this newbook: that the contesting theories and their relative social prominence are botheffects and causes of the social conditions in which they occur. Chapter 1presents a sustained historical examination of how various forms and paradigms of economic thinking react back upon the society out of which they areborn. We hope that this revised chapter will provide readers with a betterunderstanding of the complex social causes of these theories and why they andtheir differences matter so much to the lives of citizens.The many years of deepening hostilities between advocates of more andless government economic intervention led us to write an altogether newchapter 6. There we identify and discuss two interrelated kinds of oscillationsthat occur in society: (1) movements among the social predominance of oneversus another economic theory, and (2) movements among alternative formsof capitalist economies themselves. We show that capitalism always varies: itsshifting forms display more or less free markets; more or less private property;more or less personal freedoms. We also show why these kinds or forms ofcapitalism are different from socialism and communism. We hope this explanation will provide a new view of the major economic changes and conflictsacross the twentieth century and why they matter to those already underwayshaping the twenty-first century. Similarly we show that economic theoryalways varies and is always contested. It too oscillates from one to anotherapproach and then back again. Neoclassical gives way to Keynesian economics

To Our Readersxvand the latter to the neoclassical dominance again. Sometimes Marxismappears as the other in this movement between different theories. Chapter 6explores these oscillations in society and theory and their interconnections.This book also introduces readers to major new developments insideMarxian economics since the 1980s. These are integrated into the chapter 4’sfocus on what that paradigm of economics offers in comparison to the insightsproduced via neoclassical and Keynesian analytics. Chapter 4 assumes littleor no familiarity with the subject. It proceeds from first principles throughbasic analytics to various applications. Since the Marxian economics traditionincludes several distinct theories, we identify the particular theory that we havefound most convincing and that we therefore present here. However, in thischapter and throughout the book we also try to distinguish the Marxism wepresent from the more traditional or orthodox Marxism that arose after Marxdied and became dominant in the former USSR.Similarly the overviews of neoclassical economics in chapter 2 and Keynesian economics in chapter 3 offer respectively a basic grounding in neoclassicalmicro- and Keynesian macroeconomics. We treat both as distinct and oftencontested theories rather than presenting “economics” as reducible to a set ofneutral tools to solve economic problems in the so-called real world. Readerswill see how each theory differently constructs its economic world includingthose problems it recognizes as such and for which it finds unique policies andsolutions. These differences yield the debates over contested economics andpolicies (taxes, government spending, market controls, nationalizations ofproperty, etc.) that profoundly impact our lives.This new book is directed especially to readers interested in comparing andcontrasting different ways of understanding the economy and why those differences matter so profoundly. For college and university teaching purposes,the book serves both introductory and more advanced courses. As a supplementary reading, it can usefully accompany courses at all levels (includingintroductory economics) where instructors wish to introduce students to alternative approaches or merely to sharpen students’ grasp of neoclassical andKeynesian theories by comparing them with Marxian theory. Finally, forcourses across the social sciences generally, this book introduces economicsas a contested terrain struggling with its own disagreements and alternativevisions as do most other self-conscious disciplines. The book clearly dissentsfrom any notion of economics as a technical or mechanical profession.Throughout the book, but especially in the first, fourth, and seventh chapters, important philosophical issues are addressed as they pertain to a comparison of economic theories. Recent work in epistemology is briefly and summarilyraised to ground our method for comparing economic theories. We discuss

xviTo Our Readersverification and validity to address the important problem necessarily posedby such comparative endeavors—namely how to assess and decide amongthe competing claims and analyses offered by different economic theories.Consistent with the book’s method throughout, we explain that theoreticaldifferences in economics are matched by theoretical differences within philosophy, including the epistemological issue of how to decide among alternative theories.This book’s particular method of comparing and contrasting differenteconomic theories is a useful analytical tool to compare still other forms ofthinking. What we describe here as each theory’s distinguishing entry-pointconcepts, logic, produced objects, and social consequences are generally applicable indices of difference among theories. Readers are presented with aconcrete examination of particular economic theories in terms of how theydiffer from alternative theories.In conclusion, this book offers two interdependent formulations that arenot, to our knowledge, available elsewhere. First, it presents economics as adiscipline in a format of sustained comparison of alternative theories. Modernprinciples of discourse analysis are applied to the confrontation amongMarxian, neoclassical, and Keynesian economic theories. The distinguishingfeatures of these theories are examined in juxtaposition as a method of teaching economics. Second, a Marxian theory is developed systematically, rigorously, and comparatively from its first principles and assumptions through itsformal analytics to some of its distinctive applications to social analysis.AcknowledgmentsWe wish to thank three individuals who helped us to prepare this revisededition. Alex Coram, a political scientist at the University of Western Australiawho often writes on economics especially social choice theory and gametheory, read the introductory, neoclassical, and Keynesian chapters and offeredextensive comments and criticisms. David Ruccio, an economist at the University of Notre Dame who writes extensively in political economy and postmodern economics, urged us to produce a newer and better version of ourearlier text. We thank both of them for their comments and support.Special thanks go to our co-author of chapter 5. Yahya Madra is an economist at Gettysburg College and currently at Boǧaziçi University, Istanbul,Turkey. Yahya helped produce what we think is a unique presentation of “lateneoclassical theory” not found elsewhere. Chapter 5 systematically examinesrecent developments in neoclassical theory to show how they respond to criti-

To Our Readersxviicisms of that theory and how they extend that theory to new topics in economics and beyond. Neoclassical theory’s lively evolution can be read and evaluatedin this chapter. We also thank Yahya for his help and guidance in preparingcomments on post-Keynesian economics found in chapter 3.We also wish to express our appreciation to the many teaching assistantswho worked with us over the years and to the thousands of students in ourintroductory micro, macro, and Marxian economics courses. Their reactionsto the ideas contained in this book helped to shape it. Finally, we are veryaware of the complex overdetermination that shapes our work and want torecognize the profound influences of our spouses and children.

1Three Different Theories1.1 This Book and Theories of EconomicsThis book contrasts three very different and clashing kinds of economics. Oneis usually called neoclassical (or micro) economics, another Keynesian (ormacro), and the third Marxism. Each is a distinct way of understanding howeconomies work and how they interact with the larger societies around them.In other words, these are three different theories about the economic part ofsociety. This book introduces you to all three and to their differences sincethey compete for our attention as well as shape today’s actions of governments,enterprises, unions, and others. In short, these different theories impact ourlives in basic ways.We wrote this book partly because students need to know that there is moreto economics than just neoclassical and Keynesian theories. Students deserveto know not only how neoclassical and Keynesian theories differ from oneanother but how both differ from Marxism. We hope that learning from andabout these contending theories will undermine tendencies to dismiss, repress,or even demonize whichever of them are not popular at any particular moment.Most important, we want to show how understandings based on one theoryversus the others will lead individuals, families, enterprises, governments, andsocieties in very different directions. Right at the start we provide an exampleto illustrate this important point. It responds to the question: What might beat stake in and for our lives in adopting one as opposed to another economictheory?Consider any society whose economy is structured by private ownership ofenterprises and private markets. The presence of these two institutions isusually referred to as capitalism. Whatever else can be said about capitalism,in actuality it exhibits a profound economic instability or unevenness. Timesof economic expansion give way to periods of decline out of which emergeresumed intervals of expansion. Simply put: capitalism displays those ups anddowns that economists, politicians, journalists, and others call its businesscycles.

2Chapter 1The three theories differ in their understandings of the causes, solutions,and the very nature of those cycles. Their differences matter in shaping ourlives. We can show this by considering, first, the neoclassical and Keynesiantheories and how they view capitalist economies. For both theories, capitalismis—to use a metaphor—a truly wonderful machine. For all its faults, includingits uneven motion, it nonetheless remains the best of all comparable machines.Both theories affirm (and usually presume) that capitalism alone can deliverto humans the maximum wealth they are capable of producing. And it deliversthis economic bounty on the basis of a profound political right: producers andconsumers are free to act in their own individual economic interest. As perAdam Smith’s famous “invisible hand,” an economy with private property,markets, and freely acting, self-interested buyers and sellers of everything willyield the best economy delivering the most wealth possible (as if a benevolentGod Himself were running everything).From the critical perspective of these two theories, the other possible economic systems that have occurred in human history—including the feudal,slave, individual producer, socialist, and communist—just cannot deliver thesame standard of living and/or political freedom. Yet alongside capitalism’swonders, both theories also recognize certain flaws.Periodically this magical machine runs too fast, then too slow: it cycles.Consequently individuals suffer from illusions of more wealth (as prices ofeverything rise in periods of inflation) or the reality of less wealth (whenunemployment and production cutbacks rise in a recession). Worse, prolongedinflationary or recessionary periods may pose greater risks for society: misallocated or wasted resources, social anger, personal alienation, and politicalunrest. Out of frustration and desperation, people may turn against capitalismand seek an alternative, noncapitalist way to organize their economy. Acrossthe twentieth century, socialism and communism presented—usually in theterms of Marxist economics—the principle alternatives to capitalism, as solutions for its dysfunctional instability. Neoclassical and Keynesian economicsresponded by insisting that when compared to capitalism, socialism and communism were economic systems producing less wealth and less individualfreedoms. However, both neoclassical and Keynesian economics had to dealwith capitalism’s instability, its recurring cycles, especially when they weredeep (affected millions negatively) and lasted long times, such as the severerecessionary downturn that began in 2007.The neoclassical and Keynesian theories disagree about how to deal withcapitalist cycles. For the neoclassical view and its proponents, the proposedfix for capitalism’s instabilities is very simple: leave the machine alone so thatit can and will correct itself. The central idea is that the economy-as-machinecontains a mechanism that, if allowed to work, will correct periods of inflation

Three Different Theories3and recession. That self-correcting mechanism is the private, competitivemarket.The direction in which neoclassical theory points is clear for its followers:very little or even no “outside” (meaning by the state) intervention is necessaryto manage (regulate) capitalism’s cycles. The market economy will bestmanage itself if left to its own devices. No matter how well intentioned, external (i.e., state) interventions aimed at managing the economy—for example,by regulating market transactions—will only undermine the market system’sotherwise successful self-corrective properties. Believers in the neoclassicaltheory insist on these points: (1) deregulate markets, (2) always extend existingand create new markets to handle economic problems that arise, and (3) bewarethe heavy, counterproductive hand of the interventionist state (when it doesanything other than to protect free markets).In direct contrast, believers in Keynesian economics and its policy recommendations want the state to keep a watchful eye on markets, to maintainreadiness to intervene to manage the inevitable market imperfections andfailures that generate cycles. The Keynesians believe that if not for state intervention, market imperfections, imbalances, and the resulting business cyclescould persist too long and cut too deep. For them, the neoclassicists’ selfcorrecting mechanism just does not work as those free-marketers claim orworks far too slowly to be of much practical use. Without state intervention,the Keynesians argue, the continued presence either of prolonged inflation orrecession could push suffering and frightened citizens to seek the socialist orcommunist alternatives that both neoclassical and Keynesian theorists reject.Notice the dramatic difference between the two understandings of thestate’s role in responding to economic crises and, more generally, to all economic problems. Keynesians look more to the state for the solution to the upsand down in the capitalist economy. They favor state programs to deal withpersistent poverty, issues of health care, education, and retirement. In contrast,neoclassical economists prefer the private decisions of individuals and businesses reacting to and taking advantage of market incentives as better meansto solve similar problems and issues.In fact the difference between them is even more complex and interesting,for it reflects deeper oppositions between the two theories’ ways of linkingindividuals (as component parts of society) to society as a whole. We willhave more to say on this important opposition, for it will help us explain whyneoclassical and Keynesian theories differ about how an economy works andwhat citizens should do when it doesn’t work so well. Even at this point,however, we can begin to understand how these two theories might impact ourlives differently, though both advocate capitalism as the preferred economicarrangement.

4Chapter 1Different from both neoclassical and Keynesian theories, Marxian economics connects capitalism’s cycles and their heavy social costs to another of theeconomy’s components, namely its class structure. Marxian theory is profoundly critical of capitalism because of its class structure and what it sees asthe effects of that class structure, including capitalist cycles. Dealing effectively with capitalism’s crises, Marxists argue, requires changing its classstructure. If capitalism’s class structure remains unchanged, they say, thenneither more government economic intervention (Keynesian) nor less (neoclassical) will overcome cycles. Marxists point out that countless politicalleaders influenced by those two theories over the last seventy-five years havepromised that their policies will prevent future economic crises in capitalisteconomies, but that promise has not yet been kept.As this book will make clear, the Marxian theory goes further in its critiqueof capitalism. Even in periods when capitalist economies function relativelysmoothly, without inflation or recession,

1.1 This Book and Theories of Economics 1 1.1.1 Theories: Economic and Otherwise 4 1.1.2 Economic Theories in Disagreement 5 1.1.3 Are WAll e Economic Theorists? 6 1.2 Theories and Society 9 1.2.1 Changes in Europe and the Hum