By Kamran Nayeri, Philosophers for Change, July 16, 2013
“...this policy of austerity affects people the world over. It’s really controversial and I think it’s really good to get more discussion about it. Economic policies impact the world in terms of people’s ability to have a job, a house, food on the table. It’s the human aspect of it that really drew me to economics. But bad economic policies can cause a lot of pain (my emphasis, Quartz, April 29, 2013).”
In a situation where working people have been fighting austerity measures in workplaces and in the streets, especially where it has been most brutal as in southern Europe, it is a serious mistake to believe and even propose that the reason for capitalist austerity is “bad economics” and not an offensive by the capitalist class and its governments and other institutions of capitalist power against the working people and counterpose “good economics” as a cure. The current capitalist austerity is part of a three-decade long campaign to improve the position of the capitalist class at the expense of the working people. The economists’ debate on the utility of expansionary monetary and fiscal policies and the timing of austerity measures has been a sideshow to how capitalist public policy has been forged and why.
In their response to Reinhart’s and Rogoff’s reaction to the Amherst paper, while calling the debate “useful” Pollin and Ash conclude:
“Responsible policy makers must balance the relative costs and benefits of austerity at a time when high unemployment is exacerbating rising inequality, and threatening the social fabric of advanced industrial democracies around the world (Pollin and Ash, The New York Times, April 29, 2013).”
Again, these authors propose that “good economics” will cure the economic ills of industrial capitalist countries. The warning about austerity “threatening the social fabric” of these societies clearly indicates that the authors are addressing the top decision makers in the United States capitalist government (or at least those the authors consider to be “responsible”).
It is notable that the economics department of the University of Massachusetts at Amherst is well-known for its heterodox teaching program, including its “Marxist economics” tract.
With politicians, economists and the mass media trumpeting the idea that economics and economists are decisive in the formation of “good public policy” it is no wonder that the public also believes that economics theory drives public policy and tend to support either the neoclassical or Keynesian views (see, Public Attitude About Macroeconomics in the United States, by Steven M. Fazzari, Stanley Feldman, Cindy D. Kam, and Steven S. Smith, April 2013) .The idea of an outsize influence of the economists is not a new one. For example, John Maynard Keynes characterized economists as socially most powerful:
“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back (my emphasis, Fusfeld, The Age of the Economist: The Development of Modern Economic Thought, p. i).”
Historically, the claim of an outsize influence for economics and economists can be traced back to the rise of capitalism (see, for example, writings of the eighteenth century conservative political philosopher Edmund Burke). It can be traced to a synergy between the capitalist system and the economics profession.
What Is Economics?
To understand how and why this notion has emerged it is necessary to ask what economics is and what economists do in the functioning of the capitalist system. We have already seen that the economists’ debate is typically about the proper maintenance of the capitalist system, not its replacement with a social system that can liberate us from the economic, social and ecological crisis it has created.
Similarly, the idea that somehow the “science of economics” can determine public policy belies the observable fact also noted by some prominent economists that public policy is formulated according to class interests not scientific findings (for a recent example see Paul Krugman’s “The 1 Percent’s Solution”). One does not need to be an expert to realize that public policy is not forged based on scientific studies. Take for example the critical case of global warming and catastrophic climate change. Two decades ago, the world renowned climatologist James Hansen testified in the U.S. Congress that human caused global warming and catastrophic climate change is a clear and present danger; a view that has come to enjoy almost universal support in the scientific community. Yet, there has been no effective policy to stop and reverse greenhouse emissions anywhere in the world. This lack of adequate policy response is because the influence of the coal, oil and gas industries in key capitalist countries. Therefore, the belief that economists have the key to proper public policy and social progress is a lie that disempowers working people whose self-organization and self-activity are the true means for radical social change and lasting solution for social and natural crises caused by the capitalist system.
How this state of affairs has come to dominate the public discourse is closely tied with the rise of economics an ideologically driven social science. Karl Marx summarized it best in his critique of Pierre-Joseph Proudhon’s What Is Property:
“Just as the economists are the scientific representatives of the bourgeois class, so the socialists and the Communists are the theoreticians of the proletarian class.” (Marx, The Poverty of Philosophy, Marx and Engels Collected Works, Volume 6, p. 177.)
There has been scant attention to this compact formulation either in terms of its characterization of the function of economics and the economists or the role played by socialists.
In her lectures on economics to the German Social Democratic Party school (1907-1913), Rosa Luxemburg unpacked Marx’s formulation in some detail (see, “What is Economics,” in Rosa Luxemburg Speaks, New York Pathfinder Press, 1970). She explained that in the “natural economy” that preceded capitalist system, as in a feudal manor, all economic activities--production, distribution and exchange--were transparent to all. It was a small local economy governed by rules and custom. There was no need for a science to study, analyze and explain them. However, with the rise of the capitalist mode of production and its dominance--that is with the establishment of regional and national markets, and after 1870 the world market, economic activities operated according to the workings of the capitalist market where production, distribution and exchange are regulated by forces outside the control of and largely unknown to the participants. Economics as a science emerged to study, analyze and explain and help manage these economic activities.
The study of the history of economic thought traces this transformation from pre-capitalist “natural economies” to the capitalist market economy. The pre-industrial economic doctrines included mercantilism when Spain and Portugal were dominant colonial powers and foreign trade (mostly plunder in these cases) was seen as the key determinant of economic progress. Physiocracy became prominent in France where small-scale peasant holdings remained significant and agriculture was seen as the main driver of the wealth of nation. Classical political economy, in particular contributions from Adam Smith and David Ricardo, emerged in response to the process of the English Industrial Revolution. The labor theory of value that was posited by a number of early writers including John Locke was developed further by Smith and emerged in a systematic form in Ricardo. Thus, promotion of the interests of the rising capitalist class and analyzing and theorizing the dynamics of the capitalist mode of production went hand-in--hand. Marx’s characterization of classical political economy as “bourgeois science” is entirely accurate and incisive.
Socialism: Marx’s Paradigm Shift
Contrary to the established dogma, Karl Marx was not a “great economist” although his economic writings are indispensable for understanding the capitalist system and its dynamics and should be part of any history of economic thought. As Marx himself proclaimed, he was a socialist, “a theoretician of the proletarian class.” The fragmentization of Marx’s thought according to compartmentalized academic disciplines contradicts the unity of his thought and his philosophy of praxis that maintains the complex interaction of all such elements of social inquiry. In fact, in his critique of classical political economy (economics of his time), he showed how behind the “relationship of things” that are subject of these theories lies the relationship among people and social classes. Thus, his economic studies were integral to his overall intellectual endeavor that was deeply philosophical, historical and political with a goal of transcending class exploitation, oppression and alienation. Marx’s vision was not some improved version of the most developed capitalist economy run under workers’ management but socialist society organized through network of self-active and self-organized freely Associated Producers. Thus, Marx’s theory represented nothing less than a paradigmatic shift from the best bourgeois theorists of his time.
In his eulogy of Marx at his graveside, Engels considered historical materialism (also refer to as the materialist conception of history) and its specific application to the analysis of the capitalist mode of production, the labor theory of value that reveal surplus value as the source of capitalist profit, as Marx’s central discoveries. There lays the complex interaction of various fields of knowledge in Marx’s theory and method:
“Just as Darwin discovered the law of develop of organic nature, so Marx discovered the law of development of human society: the simple fact, hitherto concealed by an overgrowth of ideology, that mankind must first of all eat, drink, have shelter and clothing before it can pursue politics, science, art, religion, etc.; that therefore the production of the immediate material means, and consequently the degree of economic development attained by a given people or during a given epoch, form the foundation upon which the state institutions, the legal conceptions, art, and even the ideas on religion, of the people concerned have been evolved, and in the light which they must, therefore, be explained, instead of vice versa, as had hitherto been the case.
“But that is not all. Marx also discovered the special law of motion governing the present-day capitalist mode of production, and the bourgeois society that this mode of production has created. The discovery of surplus value suddenly threw light on the problem, in trying to solve which all previous investigations, of both bourgeois economists and socialist critics, have been groping in the dark (Engels, “Speech at the Burial of Karl Marx,” March 17, 1883)
Late in his life, Engels complained about a tendency among some followers of Marx to over-emphasize the economic focus of the historical materialist method. Thus, he wrote to Joseph Bloch on September 21-22, 1890:
“Marx and I are ourselves partly to blame for the fact that the younger people sometimes lay more stress on the economic side than is due to it. We had to emphasize the main principle vis-a-vis our adversaries, who denied it, and we had not always the time, the place or the opportunity to give their due to other factors involved in the interaction.” (Marx and Engels, Selected Correspondence, 1975, p. 394).
Engels expands further:
“...According to the materialist conception of history, the ultimately determining factor in history is the production and reproduction of real life. Neither Marx nor I have ever suggested more than this. Hence, if somebody twists this into saying that the economic factor is the only determining one, he transforms that proposition into a meaningless, abstract, absurd phrase. The economic situation is the basis, but the various elements of the superstructure--political forms of the class struggle and its results, such as constitutions established by victorious class after a successful battle, etc., juridical forms, and especially the reflections of all these real struggles in the brains of the participants, political, legal, philosophic theories, religious views and their further development into systems of dogmas--also exercise their influence upon the course of the historical struggles and in many cases determine their form in particular (ibid. pp. 394-395).
Engels’ warnings notwithstanding, Marxists after Marx went on to develop what has come to pass as “Marxian economics” (for a history of Marxian economics see M.C. Howard and J. E. King, A History of Marxian Economics, volume 1, 1989, volume 2, 1992) and other such specialized field of inquiry often at the risk of neglecting or sidelining other factors important to radical social change.
Now, the academic debate on austerity policy between Reinhart-Rogoff and their detractors is essentially between neoclassical and Keynesian economists. These schools of economics emerged about 1870 and in the 1930s respectively.
The neoclassical school of economics (the label was probably coined by Thorstein Veblen) that emerged about 1870 resolved the contradiction between science and ideology in classical political economy in favor of the latter. It did so by developing ideologically driven notions in classical political economy while discarding its key objective and scientific elements. William Stanley Jevons (English), Karl Menger (Austrian) and Leon Walras (French) independently developed theoretical notions that are credited with establishing neoclassical economics.
The starting point for these economists was a subjective theory of value instead of the objective (cost of production) theory of classical political economy. They argued that the value of a commodity or service is determined by its marginal utility, that is, satisfaction derived by the consumer from the last unit purchased of the commodity or service. From the theory of marginal utility demand schedules for each commodity/service market could be derived and together with supply schedules would determine market equilibrium price. Walras argued that the entire economic system, including production of capital goods and raw materials, were driven by consumer decisions and spending. Left to themselves, markets ensure consumer satisfaction and economic stability as the whole system automatically adjusted to match production to demand.
Soon, John Bates Clark (American) and Phillip Henry Wicksteed (Swedish) developed the marginal productivity theory as the neoclassical theory of income distribution according to which wages, profit and rent were paid according to the contribution of last unit of their input. Thus, wages due to workers are paid to them no less and no more than their contribution. The same applied to profits and rents. Thus, economic justice was served in the capitalist market economy.
Neoclassical economists have claimed it represents a scientific advance, a claim that is accepted by some sophisticated historians of economic thought (see, for example, Fusfeld 1966, p. 82). However, the claim is based not on neoclassical theory’s use of the scientific method; rather on its adoption of the language of mathematics and deductive reasoning. The theory rests on a set of simplifying assumptions about “economic agents” and their behavior and highly idealized characterization of the market. From these, it is possible to derive theories of market price formation, income distribution, market equilibrium, etc. Thus, the neoclassical theory seems to be internally consistent (although it is not; see, for example, the Cambridge capital controversy). However, it is easy to see that contrary to physical sciences neoclassical assumptions are idealistic abstractions that have little basis in reality. Thus, violations of neoclassical assumptions and their implied results have led to important criticisms of neoclassical theory from within this tradition of which I will discuss Keynesianism in the next section.
For our purpose it is sufficient to note that neoclassical economics arose in part in response to the rise of the labor movement in Western Europe and the considerable influence of socialism within it. Intellectually, it was influenced by the philosophy of individualism, laissez faire and philosophical utilitarianism of Jeremy Bentham and John Stuart Mill. The neoclassical theorists replaced the study of the capitalist system as a recently emerging mode of production with a “market economy” model that is ahistorical. With their emphasis on the market, the nexus of the theory moved away from production in classical political economy to the sphere of exchange. They dropped any mention of socioeconomic classes and made ahistorical, atomized, hedonistic economic agents the focus of their theorizing. They replaced objective theories of value (including labor theories of value of Ricardo and Marx) as the underlying center of gravity for fluctuating market prices in favor of a subjective value theory operationalized in an idealized perfectly competitive market. The marginal productivity theory provided “theoretical” fig leaf for capitalist exploitation of labor. Finally, they argued that the capitalist system will result in optimal employment of resources, social welfare and stability. Thus, their advocacy for laissez faire.
The neoclassical theory of full employment embodied the Say’s Law according to which savings find their way to investment through money markets. If savings exceeds investment a drop in interest rate would quickly move more savings into investment and vice versa. Thus, savings and investment tend to be in equilibrium. If this equilibrium happens at relatively high price and wage levels resulting in less than full employment wages would fall brining down the price level with them until full employment is achieved.
The Great Depression proved this central claim of the neoclassical theory wrong and begged for an alternative explanation. John Maynard Keynes was the economist positioned best to offer such an explanation. To be sure, there were other economists whose ideas contributed to Keynes‘ theory, including Knut Wicksell (Swedish) and Dennis H. Robertson (English). Michał Kalecki, a socialist Polish economist, developed a similar theory concurrently. However, Keynes who came from the English elite and was educated in ethics and neoclassical economics proved best positioned and most effective and his theory detailed in The General Theory of Employment, Interest and Money (1936) won immediate recognition.
Keynes argued that in a mature capitalist economy unless savings are channelled back into the stream of spending, total spending would decline, resulting in unemployment and stagnation. Further, a fall in total spending caused by reduced investment would reduce incomes, that in turn would cause savings to decline until the desire to save was brought into balance with the desire to invest. At that point savings withdrawn from the income stream would be equaled by offsetting investment expenditures, and the decline in total spending would stop. However, this new equilibrium could well be established at a depression level unless the central bank and the state intervened through expansionary monetary and fiscal policies. The central bank should lower interest rate and pursue “easy money” policies to encourage borrowing, spending, and investment. More importantly, for the mid-1930s United States, Keynes advocated a large public works program financed by borrowing.
While the older economists were hesitant to embrace Keynes’ revision of the neoclassical macroeconomics, the younger economists embraced it. John Hicks and Paul Samuelson are credited with merging Keynesian macroeconomic theory with neoclassical microeconomics to develop neoclassical synthesis that came to dominate the economic profession.
There is no dispute that Keynes’ contribution was central for an understanding of macroeconomics of Great Depression. However, historians of economic thought differ on assessment of Keynes’ criticism of neoclassical theory. Some (e.g. Fusfeld 1966, chapter 9) present Keynes’ critique as radical break with the neoclassical theory. However, I think E. K. Hunt is closer to the truth when he writes:
“He (Keynes) wanted to drop the assumption of automaticity of the market in order to save capitalism from self-destruction. But he wanted to keep the faith in the marginal productivity theory of distribution and the faith in the allocative efficiency of the market. He wanted the government to intervene as little as possible into capitalists’ quest for profit, and then only to avert disaster. However, he did mention as an aside that he personally preferred a less extreme degree of inequality in the distribution of wealth and income (but here again we may repeat that universal dictum of utilitarianism--pushpin is as good as poetry)." (E. K. Hunt, 1979, p. 395)
It is also notable the expansionary policies Keynes recommended were partly in place before his book was published as concessions to the rising labor militancy. For example, in the U.S. Wisconsin became the first state to institute unemployment compensation in 1932 (25% of all workers in the U.S. and 37% of non-farm workers were unemployed in the U.S. in 1932) and by 1937 the Supreme Court upheld unemployment insurance as constitutional. Roosevelt signed Social Security into law in 1935. The American capitalist system was in danger. Thus, Keynes’ theory and policy recommendations were not only intellectually but also politically appealing to the policy elite including in the economics profession.
Until the 1970s, Keynesians were prominent part of the economic profession. The 1973-75 world recession marked the end of the Golden Age of capitalism and revealed a secular crisis of profitability. Britain under Margaret Thatcher and United States under Ronald Reagan led the capitalist offensive at home and abroad and instituted the neoliberal era that revived neoclassical orthodoxy as its intellectual fig leaf.
Marginalized, some academic Keynesians have joined other economists from the schools of economic thought who have been marginalized by the orthodoxy such as the institutionalists, neo-Ricardians, and the Marxists to resist the neoclassical exclusionary policies in the economics profession. In the United States, Union for Radical Political Economics that emerged as the result of the radicalizations of the 1960s and early 1970s became a locus of such economists.
Theories about society, in particular the capitalist society, are designed to answer particular questions. Whether it is to understand and maintain the capitalist system or to understand it in order to overcome and transcend it matter in what questions are asked and how these are answered. I have argued that economics is neither an objective science nor capable of providing a lasting solution to the contradictions of the capitalist economy and society.
I have also argued that Marx’s critique of classical political economy and the capitalist mode of production is a specific application of his materialist conception of history and that it aims to serve self-activity and self-organization of working people that have the potential of developing into a society of freely Associated Producers, a socialist society. Marx’s theory replaces the bourgeois notion of Homo economicus with the ideal of socialist women and men. This theoretical transcendence was made possible with a change of paradigms.
From this point of view, the labor and socialist movement confront the austerity debate of the economists with a demand for “jobs for all” and a set of immediate and transitional demands that would favor increased self-activity and self-organization of the working people. This approach is fundamentally different from the Keynesian view that reducing unemployment through monetary and fiscal expansionary policies is good for the economy. Marx’s view will supplant the capitalist economy.
Let’s recall Marx’s argument with Proudhon:
“Just as economists are the scientific representatives of the bourgeois class, so the socialists and the Communists are the theoreticians of the proletarian class. So long as the proletariat is not sufficiently developed to constitute itself as a class, and consequently so long as the very struggle of the proletariat with the bourgeoisie has not yet assumed a political character, and the productive forces are not yet sufficiently developed to in the bosom of the bourgeoisie itself to enable us to catch a glimpse of the material conditions necessary for the emancipation of the proletariat and for the formation of the new society, these theoreticians are merely utopians who, to meet the wants of the oppressed classes, improvise systems and go in search of regenerating science. But in the measure that history moves forward , and with it the struggle of the proletariat assumes clearer outlines, they no longer need to seek science in their minds; they have only to take note of what is happening before their eyes and to become its mouthpiece. So long as they look for the science and merely make systems, so long as they are at the beginning of the struggle, they see in poverty nothing but poverty, without seeing in it the revolutionary, subversive side, which will overthrow the old society. From the moment they see this side, science, which is produced by the historical movement and associating itself consciously with it, has ceased to be doctrinaire and has become revolutionary (Marx, The Poverty of Philosophy, 1847, Marx and Engels Collected Works, Vol. 6, pp. 177-78).”
In Part 2, I will argue that just as Marx adopted a new paradigm to critique political economy and the capitalist society we need to adopt an ecocentric, indeed a universe-centric view of human society and its relation to nature and consider whether and how Marx’s theory helps in the development of the ecological socialist movement.
Engels, Frederick. “Speech at the Burial of Marx,” March 17, 1883.
--------------------., “Letter to Joseph Bloch,” Marx and Engels, Selected Correspondence, 1975, p. 394.
Fazzari, Steven M., Stanley Feldman, Cindy D. Kam, and Steven S. Smith. “Public Attitudes About Macroeconomic Policy in the U.S.” Paper prepared for the annual meeting of the Midwest Political Science Association, Chicago, April 11-14, 2013.
Fusfeld, Daniel. The Age of the Economist: The Development of Modern Economic Thought,” Glenview: Michigan: Scott, Foresman and Company, 1966.
Herndon, Thomas, Michael Ash and Robert Pollin. “Does Public Debt Consistently Stifle Economic Growth: A Critique of Reinhart and Rogoff,” Political Economy Research Institute, Working Paper Series, University of Massachusetts, Amherst, April 2013.
Howard, M.C. and J. E. King. A History of Marxian Economics, Volume 1, 1883-1929. Princeton, New Jersey: Princeton University Press, 1989.
---------------------------------. A History of Marxian Economics, Volume 2, 1929-1990. Princeton, New Jersey: Princeton University Press, 1992.
Hunt, E. K. History of Economic Thought: A Critical Survey. Belmont, California: Wadsworth Publishing Company, Inc., 1979.
Krugman, Paul, “The 1 Percent’s Solution,” The New York Times, April, 25, 2013.
Luxemburg, Rosa. Rosa Luxemburg Speaks. New York: Pathfinder Press, 1970.
Marx, Karl. Poverty of Philosophy. Marx and Engels Collected Works, Volume 6, Moscow: International Publishers, 1976 (1847).
Pasha, Shaheen, “The grad student who exposed Reinhart and Rogoff: They still can’t get their facts straight,: Quartz, April 29, 2013.
Pollin, Robert and Michael Ash. “Debt, Growth and the Austerity Debate,” The New York Times, April 25, 2013.
Reinhart, Carmen M. and Kenneth S. Rogoff. “Growth in a Time of Debt,” American Economic Review: Papers and Proceedings 100, May 2010, pp. 573-578.
2 In Marx’s theory, the capitalist market takes hold only when the capitalist mode of production becomes dominant. In his theory of value and distribution, prices of production serve as the basis for the formation of a uniform rate of profit in an economy.
3 Reasons for the rise of Marxian economics include the following. Marx himself devoted a substantial part of his life to the study of classical political economy and left much of his ambitious writing project incomplete. This encouraged the notion that the study of capitalist economy is paramount and that it is Marxist to “complete” Marx’s project. After the death of Engels the study of “Marxian economics” was largely in the hands of the theoreticians of the Second International and as it became a reformist current when many of its leaders supported “their own government” in the First World War, economics became a practical necessity for its reformist goals. Likewise, the rise of Stalinism in the Soviet Union pursuing “socialism in one country” focused on economic development and industrialization, again promoting an interest in economics. At the same time, with stifling of intellectual and creative work in the Soviet Union socialist minded academic economists in Europe, North America, and Japan pursued Marxian economics as a subfield in the economics departments that still survives in relatively few universities.