Contending Economic Theories: Differences Matter
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Published on November 24, 2012
This article originally appeared in The Montreal Review
"At a time when the world is in an economic tailspin, confusion over the 'dismal science' has never been more pronounced. By carefully describing neo-classical microeconomics and Keynesian macro-economics, and by juxtaposing both to Marxian economic theory, Richard Wolff and Stephen Resnick provide an essential guide for building a more just future."
--David Fasenfest, Wayne State University; editor, Critical Sociology
"Clear, comprehensive, and brimming with provocative insights, this new book by Richard Wolff and Stephen Resnick's book is a much-needed presentation of the three theories -- neoclassical, Keynesian, and Marxist -- that make up the contested terrain of contemporary economics. There is simply no other text that brings together the material assembled here. Throughout, the authors are sensitive to the causes and consequences of theoretical differences and demonstrate -- to teachers and students of economics, and to everyone else who wants to learn about economic debates in the world today -- that economic theories really do matter."
--David F. Ruccio, Professor of Economics, University of Notre Dame
Global capitalism's crisis since 2007 - its deepest since the 1930s - has had and will continue to have widespread and profound effects. It is transforming the world's economy, politics and culture. Economic theories, part of that culture, cannot escape challenge and change. Those theories are the lenses we use to see and understand the why and how of economies. They thus inform, for example, what we do about crises and their immense social costs. Much is at stake, for those economic actions help to change our history just as history changes our theories, and so on. Unlike many other economists, we believe that the realm of economic theory is now changing, once again, this time as a key effect of the current crisis.
Economic theories have always been multiple. Celebrants and critics of alternative economic theories have always contended in their efforts to shape economic analyses and policies. At modern capitalism's birth, the theoretical giants Adam Smith and David Ricardo extolled the new system for its superiority over the preceding feudal economic system. Their "classical" economics evolved into a "neoclassical economics" that likewise wove celebration into its theory of how capitalism worked. Yet shortly after Smith and Ricardo, dissent arose yielding its own contending and competing giant, Karl Marx. With his followers, he wove a critique of capitalism into a different economic theory.
Economics - as a field of knowledge and much like other social and natural sciences - encompasses alternative, contending ways of making sense of its object. That object, one or more economic systems, is a vast, complex mass of interacting processes and relationships. Different observers, students, and "knowers" will participate in and hence see the economic system differently. In other words, different theories of economics - much like different psychological, sociological, medical and other theories - will naturally arise from the different ways people live and interactively think and experience their lives.
To properly understand an economic system thus requires knowing and engaging the alternative theories of that object produced and disseminated by different knowers. The same applies to other social complexities: for example, the family. Suppose someone wished to understand a family living nearby and ascertained that the parents had two children with very different theories of the family's structure and dynamic. One believed the family to be nearly ideal, while the other believed it to be deeply flawed. To understand that family requires including an interrogation and comparison of both children's alternative theories of the family, their differing insights and conclusions. We would say the same about any object of thought such as a car, politician, religion, or restaurant. This process of knowing, making some sense of objects, is a daily activity. Consciously and more often unconsciously we interrogate alternative theories of the objects of thought that our lives present.
For the last 150 years, economists' and others' attempts to understand the complexity and mysteries of capitalism wrestled with its profound recurring crises, constant change, and global spread. Their attempts confronted alternative and often clashing theories with differing policy implications. The normative and positive aspects of those theories were always inextricably linked - although the epistemologically challenged among both celebrants and critics of capitalism imagined their work as pure analysis above systemic partisanship.
Two events in the first half of the twentieth century made the tasks of economic analysis and policy formation yet more daunting. The Russian revolution of 1917 based its "transition from capitalism to socialism" on a certain reading of Marx's economics. This split Marxian economics. One branch continued developing Marx's focus on analyzing capitalism in the interest of change to a different system. The other diverging branch became more a theory of and defense/advocacy for socialism and communism as defined by the system installed in the USSR.
The second event was capitalism's extreme crisis, the Great Depression of the 1930s. It split the celebratory, non-Marxian theory of capitalism into two warring camps: neoclassical and Keynesian. The former preferred minimal government regulation and interference to achieve the optimality it associated with private capitalism's workings, the interactions of its unfettered markets and private property. The latter, derived from the work of John Maynard Keynes, believed that only governmental intervention could secure capitalism's benefits, that is, save private capitalism from its extreme instabilities, inequalities, and the political threats thereby generated.
The aforementioned two branches of Marxism offer alternative understandings and critiques of capitalism and correspondingly different social agendas. One seeks Soviet-style collectivization of ownership in the means of production and central government planning instead of markets to distribute resources and products. The other focuses on how productive enterprises might be radically reorganized so that gross profits (Marx's surplus value) could be received and socially distributed by the workers who directly produced them as the basis for a new, post-capitalist economic system. The two branches of Marxism, like the contending neoclassical and Keynesian economics, yield very different economic policies.
Over the last half-century, neoclassical, Keynesian, and the two branches of Marxian economics have contested for hearts and minds. The Soviet version struggled with the other branch of Marxian economics much as neoclassical economics did with the Keynesian alternative. Sometimes, where permitted, three or even all four basic alternatives engaged in open debates and disputes. However, in most societies, debate was constricted. In the US, for example, Marxian economics was largely proscribed first after the Soviet revolution occurred and later under Cold War pressures. Constraints there have largely continued, save for the American style cultural- revolution from the middle 1960s to the early 1970s.
Arising to extricate the capitalist economy from the Great Depression and to protect it from the political opposition it provoked, Keynesian economics came to prevail from 1945 to the 1970s. Its champions sharply restricted neoclassical economics to a few universities and conservative circles. With Reagan and the reaction to the stagflation of the 1970s, the reverse restriction was enabled and enforced. Neoclassical economics and economists subordinated their Keynesian counterparts until the 2007 crisis hit.
The prevailing theory's proponents always justify its prevalence on the grounds that it "better fits the facts" or "better serves policy objectives." Proponents of neoclassical theory claim that their ideas better mirror basic human nature, marshaling supportive logic and facts. Proponents of Keynesian theory claim that theirs better reflects underlying structural laws of the economy using a different logic and different supporting data. Marxian theories' proponents often claim that their theory alone reflects or captures the nature or "laws of motion" of capitalism. They support their position with yet another logic and different data demonstrating capitalism's class exploitation and its connection to crisis.
The proponents of each theory usually justify the exclusion of alternative theories (from academic curricula, media exposure, and political discourse) on the grounds that those alternative theories are "wrong," have been replaced by "better" theory (theirs), and so on. Each theory's prevalence lasts usually until the next economic or social crisis explodes its absolutist claims to produce the best insights, accurate prediction, and the most effective policy.
The prevalence of Soviet Marxism vis-à-vis its Marxist alternative has declined since the collapse of the USSR. The prevalence of Keynesian economics lasted until the economic stagflation of the 1970s combined with fading memories of the Great Depression and fading commitments to the New Deal. Those conditions enabled the revival of neoclassical economics' dominance and its self-depiction as the correct theory leading to capitalist prosperity and growth. The current crisis has disrupted and challenged that dominance yet again, much as happened in the Great Depression 75 years earlier.
The ongoing crisis since 2007 has thus reopened the space for serious, engaged debate among alternative theories. For at least a while, they can be appreciated, studied, and usefully compared as alternative ways of seeing, living in, and perhaps moving beyond modern capitalism. The theories always posed different questions, stressed different dimensions, and reached correspondingly different conclusions. Perhaps a new generation can learn about them all, less with an eye to celebrate one and repress the others and more to draw useful insights and lessons from their diverse strengths. Our new book, Contending Economic Theories: Neoclassical, Keynesian and Marxian, facilitates that process by explaining, systematically and comparatively, how the major theories differ, the implications of their differences, and why those differences matter.
Today's economic crisis has reopened economics to debates that will continue and change the discipline yet again. Widespread impatience, opposition, and even rage now target capitalism's unequal wealth and income distributions, crisis, government bailouts chiefly for credit and stock markets, and then austerity programs to pay for the crisis and the bailouts. The prevalence of neoclassical economics is shaken and insecure relative to recent decades. Keynesian economics has found new champions and gained support. The same has happened to Marxian economics, but with this twist. Soviet Marxism continues to fade away while old and new Marxist alternatives rise.
Rising anti-capitalism now often displays skepticism about classical socialism - and, by association, Marxism. The socialisms exemplified by the perceived experiences of the USSR, Eastern Europe, China and so on do not attract the critics of capitalism as they once did. Something other than traditional capitalism or socialism is wanted increasingly.
The older alternatives have been tarnished and the theories celebrating them seem inadequate. Yet a way forward requires grasping and building on what is valuable and usable within today's contesting theories. Their alternative understandings of our economic past and present are indispensable raw material for fashioning a new economic system that can address the serious problems we face and attract the mass support needed for transition to such a new system.
In most societies, economic literacy encompassing the contending theories was neglected over recent decades in and by the one-sided curricula and particular theories prevalent in schools, media, business, and politics. We must now correct for that neglect. Hence our interest in providing interested readers with a systematic introduction and exploration of the major contending theories and their different consequences for our lives.
This article originally appeared in The Montreal Review
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