A Future For Capitalism: Classical, Neoclassical and Keynesian Perspectives
Social workers can play a unique role in supporting current residents as they advocate for their position within municipalities like Gary. This support by social workers could take the form of traditional community organizing but could also take the form of direct participation within the structures created by public-private partnerships. For example, in the case of Gary, social workers might find themselves employed by the Maia Community Foundation.
Moreover, social workers could help generate additional programing ideas in response to the needs of their citizen-clients. Social workers indeed have a unique skill set that allows them to facilitate conversations among diverse or competing groups, understand and appreciate the multifaceted causes of inequality and injustice, and work with vulnerable populations to maintain their dignity and autonomy.
As cities continue to redevelop through public-private partnerships, the partnership between the city of Gary and MaiaCo, LLC provides a useful model for how these partnerships can be structured in a way that makes a blighted community a desirable location for new and existing businesses and residents to work, play, and live. The upside to fiscal challenges: Innovative partnerships between public and private sector. Journal of Applied Corporate Finance, 23 3 , Bierschenk, E.
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Gary partnership to focus on three locations. The Times of Northwest Indiana. Bierschecnk, E. Plan for Gary redevelopment moves forward. Caporaso, J. Theories of political economy. Carlson, C. Gary mayor eyes more demolition in Dolan, B. Lake county endorses attack on Gary blight. Glaeser, E. Growth: The death and life of cities. In Inman, R. Hackworth, J. The limits to market-based strategies for addressing land abandonment in shrinking American cities. Planning and Geography, 90, Indiana University.
Kee, J. E-SCADs or partners in service? Public Integrity, 14 2. Martin, L. Making sense of public-private partnerships P3s. Journal of Public Procurement, 16 2 , Tajeda, G. Gary awaits Maia Co. Gary backs development deal with unanimous vote. United States Census Bureau. Each approach, Keynesian and neoclassical, has its strengths and weaknesses. The short-term Keynesian model, built on the importance of aggregate demand as a cause of business cycles and a degree of wage and price rigidity, does a sound job of explaining many recessions and why cyclical unemployment rises and falls.
By focusing on the short-run adjustments of aggregate demand, Keynesian economics risks overlooking the long-term causes of economic growth or the natural rate of unemployment that exists even when the economy is producing at potential GDP. The neoclassical model, with its emphasis on aggregate supply, focuses on the underlying determinants of output and employment in markets, and thus tends to put more emphasis on economic growth and how labor markets work.
However, the neoclassical view is not especially helpful in explaining why unemployment moves up and down over short time horizons of a few years. Nor is the neoclassical model especially helpful when the economy is mired in an especially deep and long-lasting recession, like the Great Depression of the s. Keynesian economics tends to view inflation as a price that might sometimes be paid for lower unemployment; neoclassical economics tends to view inflation as a cost that offers no offsetting gains in terms of lower unemployment.
Macroeconomics cannot, however, be summed up as an argument between one group of economists who are pure Keynesians and another group who are pure neoclassicists. Instead, many mainstream economists believe both the Keynesian and neoclassical perspectives. Robert Solow , the Nobel laureate in economics in , described the dual approach in this way:. Many modern macroeconomists spend considerable time and energy trying to construct models that blend the most attractive aspects of the Keynesian and neoclassical approaches. It is possible to construct a somewhat complex mathematical model where aggregate demand and sticky wages and prices matter in the short run, but wages, prices, and aggregate supply adjust in the long run.
However, creating an overall model that encompasses both short-term Keynesian and long-term neoclassical models is not easy. Were the policies implemented to stabilize the economy and financial markets during the Great Recession effective? Many economists from both the Keynesian and neoclassical schools have found that they were, although to varying degrees. While landlords reaped a double reward from increases in output and prices as more and more land was brought into cultivation, the interests of the labourers, capitalists, and the economy generally deteriorated.
For Ricardo this trend amounted to a prescription for social, political and economic disaster. Not only did it possess the potential to produce continuous conflicts between the three main classes in society, but it also rewarded the class that contributed least to the creation of wealth, production, and economic growth.
They were able to do this through, for example, the Corn Laws, which kept foreign grain out of Britain when prices for these basic foodstuffs were skyrocketing as a result of the Napoleonic wars and the bad harvests at home. Just how important grain was to Britain at the time can be confirmed by the fact that Ricardo used grain in general and corn in particular, rather than gold, silver, money or precious metals, to demonstrate how the British economy functioned, and how production and distribution were determined in his hypothetical economic model.
The reason for this is not difficult to detect. On the one hand, grain was the most important item in the diets both of the labouring class and of the livestock required for agricultural production. On the other hand, grain was the most important output in an economy still heavily dependent on agriculture, despite the fact that the industrial revolution was in full swing and was beginning to assume gigantic proportions. It was logical, then, for Ricardo to use grain to measure and assess the changes that were taking place in the British economy, as well as in prices, incomes, wages, profits, and rents.
The landlords were able to exploit this staple, turning the trade and consumption of grain to their advantage. They did this by imposing duties and a sliding scale on imports of foreign grain into Britain. The lower the foreign price for grain fell, the higher went the duty. Thus a floor was established that kept low-priced foreign grain permanently out of Britain and also kept domestic prices artificially high.
Just how onerous this was for the labouring class can be understood when it is realized that a bushel of wheat cost labourers in Britain twice their weekly wages. This became too much for the labouring class, the capitalists, and the classical economists to accept, particularly when the landlords were lobbying Parliament to raise the duty on foreign grain even higher in order to protect their stranglehold on the domestic market. At this point the capitalists rebelled, organized a powerful lobby, and flooded Parliament with more petitions than it had received on any other issue up to this time.
Unfortunately, it took another thirty-one years before the Corn Laws were repealed, in The first is his theory of comparative advantage and international trade, the second his theory of taxation. Even though Britain had an absolute advantage in the production of all products, it paid Britain to specialize in the production of products for which it had a comparative advantage and let other countries specialize in the production of products for which they had a comparative advantage.
In a global sense this would yield an international system where countries specialized in making and exporting products for which they had a comparative advantage, while importing products for which they had a comparative disadvantage. These were well-suited to the capitalist class in Britain, which tended to see international trade based on the law of comparative advantage as a powerful tool for increasing exports while simultaneously reducing the cost of imports. Given his commitment to economic and political liberalism, competition, laissez faire , and international trade, it is not surprising that he devoted a great deal of time and attention to this subject, and became one of the first economists to delve deeply into matters of fiscal policy and public finance.
What concerned Ricardo was not only the incidence of taxation who actually pays the taxes , but also how taxes affect the three main classes of society, and are shifted from one class to another and from one sector of the economy to another. For example, Ricardo felt that a tax on rent would fall largely on the landlord class and would not be shifted to other classes in society because the landlord class would not be able to increase the price of output at the margin of cultivation.
However, other taxes might fall on labourers, consumers or capitalists, depending on specific circumstances. For example, a tax on wages would tend to be borne by capitalists in the form of lower profits because wages were usually at or near the subsistence level and labourers simply could not afford to pay any higher taxes.
Taxes on output or land, however, would probably be shifted to labourers and consumers, in the form of higher prices for products. Unlike Smith, Malthus, and other economists who relied largely on general observation and the inductive method to make their case, Ricardo relied heavily on abstract theorizing and the deductive method to make his case. In so doing he set in motion a tradition that has steadily gathered momentum since his time, and has been used to great advantage by economists. While he had a highly successful career in finance and politics, and was involved in numerous political, commercial, agrarian and governmental affairs, he believed that it was necessary to search for economic solutions to economic problems, develop models that were predicated on economic considerations rather than other considerations, and draw conclusions that were economic in nature.
It was only after this rigorous economic process was completed that, Ricardo believed, the political, ethical, philosophical and social implications and consequences of actions and decisions should be taken into account. This conviction too has had a profound impact. It made economics the most important discipline in society, thrusting it into a powerful position in society and the political process. While Adam Smith played a crucial role in creating the theoretical and practical foundations for the economic age, it was Ricardo who carried the economic age into adulthood.
He did so by making economics the highly specialized discipline it is today, as well as an independent rather than dependent factor in society. It is for reasons such as these that Ricardo and Ricardian economics dominated economic thought and practice in Britain and elsewhere in Europe in the middle of the nineteenth century. Whereas Ricardo was pessimistic about the prospects confronting Britain, the rest of Europe, and humanity in general, Mill was more optimistic. However, he made many valuable contributions to the advancement of economics as a discipline through his attempts to consolidate and strengthen the classical tradition, and to place economics on a much firmer empirical and scientific foundation.
In and , for example, he wrote a series of Essays on Some Unsettled Questions of Political Economy that substantially broadened and deepened understanding of the law of comparative advantage advanced by Ricardo. Whereas Ricardo was content to state the law and emphasize its importance, Mill was interested in the ways in which the gains from international trade are shared and distributed among the various trading partners. This led him into such areas as the reciprocal demand for products; the way the terms of trade are determined between countries; the strength and elasticity of demand for international commodities and resources; the effect of tariffs on trading practices and the terms of trade; and how the adjustment mechanism works among countries involved in international trade.
Mill recognized that broadening and deepening understanding of the causes and consequences of production and distribution lay at the heart of classical economics. However, he believed that there are fundamental differences between the laws governing production and those governing distribution. The laws governing production are, in his view, fixed and immutable, because they derive largely from technical and physical factors such as the quantity and quality of land, the application of labour and capital to land, the skill and dexterity of workers, and the operation of the law of diminishing returns.
The Debate between Keynesian and Neoclassical Economics
The laws governing distribution, however, are very different. According to Mill, they are not fixed and immutable, but are socially and humanly determined, largely because they are based on such factors as values, value systems, and, especially, the ways in which institutions and societies decide to conduct and regulate their domestic and international affairs.
Educating labourers would allow society to break the vicious circle created by population growth, the propensity for the labouring class to have more children, the iron law of wages, and the tendency for wages to return to the subsistence level. If the labouring class could be educated to have smaller families when wealth was increased and economic growth took place, their wages would rise above the subsistence level, the pressure of their numbers upon subsistence would be reduced, and the wealth and well-being of all in society, and not just the landlord class, would be improved.
I cannot, therefore, regard the stationary state of capital and wealth with the unaffected aversion so generally manifested towards it by political economists of the old school. I am inclined to believe that it would be, on the whole, a very considerable improvement on our present condition. It is scarcely necessary to remark that a stationary condition of capital and population implies no stationary state of human improvement.
There would be as much scope as ever for all kinds of mental culture, and moral and social progress; as much room for improving the Art of Living, and much more likelihood of its being improved, when minds ceased to be engrossed by the art of getting on. Mill provided a way out, an escape from the relentless march of the Malthusian theory of population, the iron law of wages, and the Ricardian theory of rent. Rather than looking forward to a future of poverty, negativity, exploitation, and class tension, Mill was much more encouraging. Through foresight, planning, government involvement in the economy and markets, and, especially, the education of the labouring class, it would be possible to lift the mass of the population out of the economic and social doldrums, and achieve a realistic standard of living and a satisfactory way of life for all.
For the first time in more than fifty years, a ray of hope had appeared on the horizon. In fact, it was not emerging at all. Technological advances were outstripping the law of diminishing returns, and an international system was evolving that made it possible for Britain and other European countries to overcome their domestic economic deficiencies by drawing on resources, products, materials, and markets in other parts of the world, most notably Canada, the United States, South America, the Caribbean, Asia, Africa, Australia, and New Zealand.
While this was to have profound consequences for the evolution of the economic age and the development of the world system, especially through the division of the world into colonized and colonizing countries, dependence on technology to fuel economic growth, and the changing relationship between human beings and the natural environment, these consequences were not fully recognized at the time. They believed that economics should be based on history rather than theory, on historical analysis, empirical observation, actual experience, and induction rather than abstraction, theoretical analysis, model-building, and deduction.
What they strenuously objected to were the methods and techniques used to discover these laws. They believed that it was necessary to examine history in great detail before any such laws could be detected and formulated. This was particularly important in view of the fact that public and private policies were predicated on these laws.
The industrial revolution was in full swing, reaching its zenith by the middle of the nineteenth century. A much larger proportion of Britain's population was working in manufacturing than in agriculture, resulting in a rapidly burgeoning urban population, huge concentrations of labour and capital in very specific locations, a great deal of monotonous and tedious work, overcrowding, poverty, shanty towns, squalor, misery, and the factory system of production.
The pain, suffering, and turmoil caused by this situation were captured by numerous novelists and authors writing at the time. As more and more products poured out of European factories, and as more and more technological inventions and innovations were introduced into the production process, the whole tenor of European life changed. These developments were reinforced by a more scientific view of life, as well as a quantitative rather than qualitative approach to development.
Not only did Darwin take a highly scientific and empirical approach to the human condition, largely by emphasizing the need to examine situations empirically and delve deeply into the facts of the matter, he also placed a great deal of emphasis on evolution, materialism, competition, and the need to adapt to constantly changing environmental conditions and ecological circumstances. Marx was not, of course, the first scholar to be concerned with the impact of the industrial revolution, and the rapid changes it induced in economic and social conditions, on the labouring class and on society in general.
Moreover, they were endeavouring to do something concrete and constructive about it in their research, writing, and political activities. With this came questioning of classical economics, as well as the reasons, motives, and objectives behind it. Was classical economics designed to uncover the laws governing economic behaviour and the nature of economic truth? Or was it designed to advance the interests of the rich and privileged classes of society, and to perpetuate the established order?
It was questions such as these that Marx, in his turn, set out to address.
Keynesian Economics and the Economy
This is because capital can be broken into two components, according to Marx: the raw materials used in production, which are given by nature, and the labour required to produce the capital. Marx followed in the classical tradition in another very fundamental respect by accepting the basic distinction the classical economists had made between production and distribution. However, Marx believed that it was necessary to analyze these two basic components of the capitalist system together rather than separately, since distribution affects production every bit as much as production affects distribution.
By the time Marx arrived on the scene the social costs of industrialization were proving to be very substantial, particularly for the labouring class.
The Debate between Keynesian and Neoclassical Economics
People were pouring into the newly established urban centres looking for work, social conditions were rapidly deteriorating, pollution was mounting, there was a great deal of poverty and unemployment, labour, particularly child labour, was being exploited unmercifully, and capital was replacing labour at a disturbing rate. This situation troubled Marx very deeply, and caused him to focus attention on who benefits the most and who the least from the creation of wealth within the capitalist mode of production.
On the one hand, there were the labourers, who had nothing to sell but their labour, despite the fact that they were the real creators of all value and wealth. On the other hand, there were the capitalists, who owned the machinery, the equipment, and, often, the land used by labourers in production. Although the capitalists produced very few products themselves, they had all the advantages in the production process, because they were able to exploit labourers who had nothing to sell but their labour.
Whereas it might take labourers two hours a day to produce their subsistence, for instance, they might end up working ten to twelve hours a day for capitalists because the capitalists possessed all the economic advantages. This made it possible for capitalists to compel labourers to work even longer hours to produce their means of subsistence.
His views on this subject were set out in Capital , his unfinished magnum opus. This may seem a rather curious conclusion, in view of the fact that capitalists were able to exploit labourers and extract surplus value from them, but it was consistent with the view of most of the classical economists, though they held it for entirely different reasons than Marx. According to Adam Smith, the rate of profits would fall because more and more competition would take place among capitalists, or manufacturers as Smith called them. According to Ricardo, the rate of profits fell because there was an inverse relationship between profits and wages, such that profits would fall as wages rose to cover increases in the cost of living.
Since, according to Marx, only variable capital generated surplus value, and since profits derive from variable capital rather than from fixed capital, the rate of profits must fall as more variable capital is added to the stock of fixed capital. Eventually, more and more pronounced dislocations, inequalities, and disruptions would take place. As the labouring class became more and more immiserated, there would be more and more unemployment, causing the industrial reserve army to grow. As a result, labourers would have less and less income to purchase the products produced by the capitalist system.
This could result in overproduction, underconsumption, and gluts in markets, just as Malthus had predicted, as well as more and more economic fluctuations and instability. This would heighten the conflicts and tensions between the capitalist class and the labouring class. One resulted from the fact that it was the labourers who were responsible for the creation of all value and wealth, but it was the capitalists who reaped the benefits. Another was due to the fact that the capitalists were able to receive surplus value and exploit labour while, at the same time, there was a tendency for the rate of profits to fall rather than rise in the capitalist system.
Still another was due to the fact that, as more and more capital accumulated, the incentive to accumulate capital and increase production was reduced.
For Marx, all these factors, and others, would eventually lead to more and more pronounced and erratic disruptions, depressions, and crises in the capitalist system. While international development, imperialism, and colonialism might postpone the collapse of capitalism for a time, they could not postpone it indefinitely. The workers would then abolish the capitalist system and introduce communism. In this state of affairs society and production would be controlled by labourers rather than by capitalists, and would evolve in a manner consistent with the interests and needs of the labouring class rather than the capitalist class.
Marx laid the philosophical and historical foundations for the economic age, just as Adam Smith created the theoretical and practical foundations for it. However, these terms have come to be associated with Marx and Marxism in particular. According to Marx, the economic base consists of the material conditions of life and the attendant mode of production in a given society. The arts, ethics, education, religion, philosophy, politics, spirituality and the like form in their turn the superstructure, which depends on the productive base for its existence.
In The German Ideology , an early philosophical polemic rather than economic analysis, he and Engels boldly asserted that Gardiner, p. Morality, religion, metaphysics, and other ideologies, and their corresponding forms of consciousness Life is not determined by consciousness, but consciousness by life. The first premise of all human history is, of course, the existence of living human individuals.
The first fact to be established, therefore, is the physical constitution of these individuals and their consequent relation to the rest of Nature Men can be distinguished from animals by consciousness, by religion, or anything one likes. They themselves begin to distinguish themselves from animals as soon as they begin to produce their means of subsistence, a step which is determined by their physical constitution What individuals are, therefore, depends on the material conditions of their production This conception of history, therefore, rests on the exposition of the real process of production, starting from the simple material production of life From this starting point, it explains all the different theoretical productions and forms of consciousness, religion, philosophy, ethics, etc.
In the social production which men carry on they enter into definite relations that are indispensable and independent of their will; these relations of production correspond to a definite stage of development of their material powers of production.
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The totality of these relations of production constitutes the economic structure of society—the real foundation, on which legal and political superstructures arise, and to which definite forms of social consciousness correspond. The mode of production of material life determines the general character of the social, political and spiritual processes of life.
It is an ideology based on the conviction that economics and economies should be made the centrepiece of society, and the principal preoccupation of individual, institutional, municipal, regional, national and international development. Its power emanates from its claim to universal validity in space and time, as well as the fact that people desperately need an interpretation of the past in order to comprehend the present and confront the future.
While Marxian economics has taken different forms and directions in different countries and parts of the world, the powerful effect it has had on the world as a whole can be confirmed by the fact that throughout the better part of the twentieth century the entire world was divided along capitalist and communist or, at least in theory and rhetoric, Marxist and non-Marxist lines. Cole, and H. Wells, all members of the Fabian Society, became deeply committed to the creation of labour unions, the nationalization of key industries, the creation of public enterprises, and the establishment of public utilities to counteract or thwart the advance of Marxism, Marxian economics, and communism.
Eventually, however, the entire world became divided along capitalist and communist lines. There are many reasons for this, including the triumph of capitalism and democracy; the inability of communism and Marxian economics to deliver the Utopian promise of a classless society with proletarian rule; and, especially, the ability of capitalist countries and capitalism to improve standards of living for labourers as well as capitalists.
Through the economic interpretation of history Marx plunged the world fully and forcefully into the economic age. This is perhaps understandable in view of the fact that Marx was living at a time when the industrial revolution was at its zenith, and everything was assuming a highly economic and materialistic orientation. In that sense, he reflected the spirit of the age, rather than creating it. Under these circumstances it is easy to understand how and why the economic interpretation of history gripped the entire world. Its importance lay in the fact that, as more and more emphasis was placed on economics, economies, and markets, by Marxists and non-Marxists alike, economists became less interested in the inherent value or worth of everything, as had been the case for the classical economists as well as for Marx, and more interested in the prices that were paid for goods, services, land, labour, capital, and the like.
If economists could be successful in unlocking the secret of price, the basic code of the economic system could be broken, and everything would fall naturally and logically into place. It is impossible to understand the world we are living in today without doing so. While economists continued to be interested in questions related to the production and distribution of wealth, a new set of questions was beginning to occupy their minds in the last part of the nineteenth century.
Foremost among these was the question of price determination. This triggered a series of initiatives aimed at understanding how the economy and the market function in fact, how individuals and institutions behave, how prices are determined in different types of markets, and, especially, how economic systems and markets allocate scarce resources among competing wants through the vehicle of prices.
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Those theories were predicated largely on the supply side of the economy and the market, particularly on the amounts of labour embodied or congealed in production and production costs. Yet economists were becoming aware that there were many situations where these were not the main factors in determining prices.
While the historical economists referred to earlier had not been successful in their attempts to root economics in history and the inductive method, rather than abstract theory and the deductive method, perhaps they were successful in compelling economists to achieve a reasonable measure of consistency between abstract theories and historical and contemporary realities. If abstract theories did not mesh with historical and contemporary realities, then it was the abstract theories that had to be changed.
Surely it was the fact that people were paying prices for products, and that products were selling for prices in the market, that bore little or no relationship to the amount of labour embodied or congealed in production, production costs, and the supply side of the economy.click
2. Evolution of the Economic Age
In struggling to find answers to this problem, economists shifted attention from labour, production costs, and the supply side of the economy to utility, marginal utility, and the demand side of the economy. Prices might bear little or no relationship to the amount of labour embodied in them, but instead reflected the demand for products. While this observation may appear straightforward and sensible in retrospect, it was revolutionary at the time.
It transformed the entire nature of economics as a discipline, and produced the marginal revolution. What makes their contributions to the founding of the marginal school of economics and neoclassical economics particularly fascinating is that they worked in comparative isolation from one another, but nevertheless came to very similar conclusions. While each had his own specific ideas and views on a variety of economic matters, they all believed that utility in general, and marginal utility in particular, were the main determinants of price, value, production, distribution, and exchange.
This caused the focus in economics to shift abruptly. Whereas the focus of the classical economists and of Marx had been on macroeconomic questions of production, distribution, wealth creation, and economic growth, the focus of the neoclassical economists was on microeconomic questions of prices, markets, scarcity, resource allocation, and individual and corporate behaviour in markets. Jevons was well-suited to the task.
He had a strong background in economics, mathematics, science, logic, and statistics, and was steeped in the Utilitarian ideas that were still influential in Britain in his youth he was born in and died in According to Jevons, people will pay more for products than the amount of labour embodied in them and the cost of producing them if the demand for these products is high, and a great deal of utility or satisfaction is derived from purchasing and consuming them.
In fact, generally speaking, the greater the utility or satisfaction, the higher the price that people are willing to pay. Conversely, the less the utility or satisfaction, the lower the price that people are willing to pay. Just as beauty is in the eye of the beholder, so the most important factor in determining prices, in Jevons's view, is how much satisfaction or utility individuals get from the products they want, purchase, consume, and possess.
His views on these matters were set out in his Theory of Political Economy , which appeared in Whereas the classical economists and Marx had largely ignored utility and marginal utility as factors in price and value though Adam Smith had paid a certain amount of attention to these questions , Jevons made utility and marginal utility the centrepieces of his entire theory of price determination. Generally speaking, the value or price of a product is determined by the amount of utility or satisfaction people derive from it.
As more and more of a product is offered and consumed, however, the utility that people derive from each successive unit will generally fall because there will be less utility or satisfaction derived from each additional unit. This was the crucial factor for Jevons. While utility is an extremely important factor in determining value and price, it is marginal utility that is the most important factor, since it shows how individuals will react as additional units of a product are offered and consumed.
This caused Jevons to conclude as summarized by Spiegel, p. Food generally provides a great deal of utility or satisfaction, particularly if people are hungry and there is not a lot of food available. As a result, people will usually pay high prices for the initial amounts of food they consume, prices that may be well above the actual cost of producing the food or the amount of labour embodied or congealed in its production.
As more and more food is consumed, however, the amount of satisfaction or utility derived from each additional unit will decrease. People will be willing to pay less for each additional unit. Eventually a point will be reached where the consumption of additional units of food yields no satisfaction or utility whatsoever. In other words, marginal utility for most products falls progressively as additional units of a product are consumed. After a certain point is reached disutility or dissatisfaction could set in as additional units are consumed.
This is the essence of the neoclassical theory of demand, and therefore of price.