I am in Amherst, Massachusetts, teaching a two-week course to union activists enrolled in an MA program in Labor Studies. The class is bright and eager to learn how our economic system works. These students will go back to their unions and help spread the word, hopefully raising the consciousness of the members and building a stronger labor movement. One of the things we do in the class is compare the mainstream (or neoclassical) and the radical (or Marxist) theories of how capitalist economies operate. I thought that perhaps readers of this blog might be interested in this, especially those who have not been able to study this matter as much as they might have liked. I wrote a book in 2002 titled Naming the System: Inequality and Work in the Global Economy. Chapter Five looks at mainstream economics and Chapter Six explores radical economics. I am going to place these chapters on this blog. Below I have pasted (with some editing) the first part of Chapter Five. Later I’ll post the remainder and then Chapter Six. Comments are encouraged.
What Must Be Explained?
The last two chapters have highlighted certain features of contemporary global capitalism. At least four of these characteristics stand out. First, the capitalist world economy is divided into a relatively few rich countries and a large number of poor countries. Why is this so? In addition, the gap between the per capita incomes of the two groups of countries has shown no sign of diminishing over a long period of time, and, in fact, has risen for perhaps over 100 years and certainly since 1980. Why is this so?
Second, there is great inequality in wealth, income, and various social indicators among individuals, households, and families within every capitalist country. Again, these inequalities show no sign of disappearing. Why is this so? Not only are there significant overall inequalities, but throughout the capitalist world, women and racial and ethnic minorities are over-represented at the bottoms of the various distributions: more likely to be without wealth, unemployed, poor, and sick. Why is this so?
Third, capitalist economies are frequently plagued by unemployment and underemployment. In the poor countries these are epidemic and have been for a long time. In both rich and poor countries, economic crises are recurring events, driving up the rates of unemployment and underemployment, sometimes with catastrophic results. Why are these things so?
Fourth, the overwhelming majority of workers in the capitalist world perform work which is physically or mentally debilitating, often both. Unskilled work, informal employment, child labor, sweatshops—these are the lots in life for most people. What is more, work is often insecure, unsafe and unhealthy, and only nominally free. Why are these things so?
In a word, why has more than three hundred years of capitalism raised the world’s output to what would not so long ago been unimaginable heights and fostered truly astonishing technological advances yet left more than two billion persons subsisting at the dawn of the twenty-first century on less than two dollars a day?
In this chapter, we will look at the answers to these questions given by mainstream or neoclassical economics. The neoclassical theory enjoys the allegiance of most professional economists, whose training in graduate school was steeped in this theory. It is the economic theory presented in nearly all introductory textbooks, so it is the only theory to which nearly all college students (and elementary and secondary students if they are taught any economics) are exposed.
Strictly speaking, neoclassical economics originated in Europe and England in the 1870s and was developed in part as a response to the radical economics of Karl Marx and Frederick Engels and the working class movements that this new school of economics was inspiring. However, the neoclassical economists drew much inspiration, as did Marx, from an earlier group of economists sometimes called the classical economists. This earlier group includes such great economists as Adam Smith and David Ricardo. I am lumping together in what follows all those aspects of classical and neoclassical economics that today form the corpus of the standard economic wisdom. This is a bit of a disservice to Smith, Ricardo, and all of their predecessors and progenitors who saw matters more clearly and realistically than do modern neoclassical economists.
In neoclassical economics, the individual is the primary unit of analysis. Society is seen as the sum of the individuals in it; social outcomes are the result of the decisions made by individuals. Economics is then conceived as the study of the individual decision maker. Neoclassical economics is basically the “science” of choice-making. Of course, we are talking about the choices made in the economic aspects of life. Since economic choices are primarily market choices, neoclassical economists study the choices that the participants in the market make. Neoclassical economists have also examined individual behavior outside the market—inside a business firm or inside a family, for example, but the analysis generally presumes that the individuals inside the firm or family act as if they were operating in markets.
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