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Marx’s Economic Analysis
Theory of Surplus Value
Marx’s theory of surplus value proposed that the surplus product (surplus value) remains in the whole social product (net national income) after the production classes (workers) received their compensation (wages) (Mendel n. p.). According to Marx in his theory of classes, it is the ruling class (capitalists and politicians) who appropriates the surplus value that can be found in three different forms: (a) unpaid surplus labor (slave mode of production); (b) goods directly used (product of surplus labor), and; (c) cash.
Fetishism of the Commodity
Created for commodity economies, commodity fetishism is the process that objectifies humans and their interrelationships through the production of commodities, which bare the stamps of the social character of human labor, and simultaneously create an exchange-value for the commodities (Kosoy and Corbera 1229). This value, therefore, has no connection with the physical properties of the commodities, but through the action of human labor, creating ‘fetishism.’ It follows that two main processes cause the appearance of fetishism in commodities. First is the creation of an exchange value, which makes the commodities marketable. Second is the creation of surplus value from the market price, which the capitalists appropriate. It is in the asymmetry of power, between the workers and the capitalists that, according to Marx, commodity fetishism rests and continue to perpetuate.
“Vulgar” Economy
The vulgar economy is the disparaging term that Karl Marx used to categorize the classic economic theories as possessing “divergent by-ways” that may be legitimately disregarded (Amin 16; Gafge 3); as furthering only the economic interests of the ruling class (Procacci 151). Procacci (152) described vulgar economics as representing economic thoughts that are “inevitably lethargic, tentative, and botched qualities of its accompanying intellectual environment.” In the current understanding, vulgar economy is the “single-minded focus” at “maximizing financial profitability” of one or more dominant capital usually in the short term, which may include the use of the “military and delinking capital from any system of human values” (Amin 16). It includes such social economic thoughts as social politics and social economics. According to Procacci, social economics and Physiocracy are essential doctrines in the political economy school of thought (Procacci 153). The history of Physiocracy is an example of theories labeled as vulgar economy came to eventual disuse (Editors, 2014). Originator Francois Quesnay founded this economic theory in France and Britain in the 17th century. It suffered decline in 1768. Its theory of wealth was even attacked by Adam Smith.
Classic Political and Marginalist (Neoclassical) Economics
Classical Political Economy
A few distinguishing features of classical political economy include the belief of free markets that naturally self-regulates towards equilibrium without governmental intervention; division of labor; individual economic liberty, and free trade (Stimson 151-168; Stimson 1-7).
One of the strengths of this economic theory rests in its proposed principle of the division of labor, which separates work to be performed into distinct and individualized tasks. This principle speeds up the production of goods through the use of specialization, putting people good in specific tasks to perform these tasks.
Another strength comes from its commitment to free trade, based on the belief that unregulated market allows individuals to own private property instead of monopolistic government restraints in mercantilism (Stimson 2).
A weakness in this theory ran in its prescription of equilibrium-oriented market behavior. Because market prices fluctuates with many factors including but not limited to the desired profit levels, which differ from one trader to another, it will be unlikely that the market will reach equilibrium towards a specific price or profit level.
Another weakness rests in the assumption that unrestricted individual economic liberty will result to maximum production cannot explain the fact that employees when provided total freedom to do what they want to do will not perform with the same intensity and level of production. Some will maximize the unrestricted freedom to create value and receive compensation from such work. However, some others will be content at producing small quantities of work and receive even less than enough income in exchange to their non-maximized labor.
Marginalist (Neoclassical) Economics
The marginalist (neoclassical) economics is distinguishable in two highly important characteristics: the marginal utility theory and a superior mathematical rigor (Hall et al 665). The marginal utility theory stated that individuals make choices at the margin; that is, the utility of the specific use of a good or a service where the individual would increase such use or abandoned in response to a given decrease. Categories found in this school of economic thought include rationality of all economic choices, atomism, and pareto-optimality, among others (Boldenman 203-204; Hoff and Stiglitz 389-390).
Perhaps the only apparent strength in the marginalist school of economic thought is its rigorous use of mathematical models in the description of its theories. Apart from that, there seems to be no other aspect in their theories that may be considered as providing strength to its overall theoretical argument. In fact, even its supposed ‘rigor’ in mathematical modeling had not been spared from valid criticisms (Hall et al 663-665).
On its weaknesses, many can be found. First, its basic economic model appears as a perpetual motion machine, which requires no inputs or limits, particularly with regards to energy use (Hall et al 665). Its value exchange model wherein households that rent labor, for instance, to a firm in exchange for wages assumed that energy and other inputs were constant and unneeded, which violates two laws in thermodynamics: first, that nothing happens in the world without energy conversion; and second, entropy production requires input of energy.
Second, all parties in the economy behave rationally. This presumption of perfectly rational behavior cannot find factual support in reality. Human nature is subject to all influencing factors, and vulnerable in many, which cause people to make irrational choices (Investopedia, n. p.). Even in choices that favor self-interest, he or she many times makes irrational decisions.
Veblen’s Socioeconomic Analysis
The Theory of the Leisure Class
Veblen’s theory of the leisure class is a socioeconomic proposition that discriminates people based on the nature of occupation such classes may be allowed to perform in the community. The upper classes, as a whole referred to as the “leisure class,” are exempt from industrial employments as an “economic expression of their superior rank” (Naber 77). These non-industrial upper-class occupations roughly coincide with four general lines of work: “government, warfare, religious observance, and sports.” Those in the lower classes are prescribed to engage only in industrial occupations.
The context of this classification, however, demands a community existing in a predatory environmental condition. In such a community these classification becomes clearly magnified due to the inherent gravitation to the principle of the division of labor. Thus, in a predatory environment, members of the community who possess “manly” traits (e.g. stronger warring traits, better hunting prowess, and more effective community leadership reputation) will be assigned the honored position of the warrior and the hunter. The weaker members in the community, including weaker males, will be delegated to menial tasks, such as weaving and cooking of meals, which women usually fulfill. Such condition also inevitably leads to discrimination between genders with females relegated to stereotypical tasks like the males.
However, in a modern industrial community, this distinction usually no longer appears obvious. With wartime conditions inexistent, males are no longer regarded in a highly distinctive “leisure class.” Nonetheless, such cultural habits rarely disappear totally, expressing subtly and distinctively between white collar and blue collar jobs, or in the common deference towards high-level political positions such as that of the mayor, the governor, or the president.
Veblen’s Critique of Neoclassical Economics
Veblen found a lot to criticize about the neoclassical economics, which he referred to as the “new orthodoxy” (Naber 77). First, he found the marginalists accepting many, if not most, of the propositions of the classic (“orthodox”) economics, and added not much to push develop further the classic economic thoughts further except for a theory of distribution that initially appeared to logically support the classic economic thoughts and enhance the possibility of attaining a large measure of operational efficiency in the real world.
Second, the use of atomism as one of the four central tenets of neoclassical economics, to Veblen, attempted to pursue a rationale that had no essential or practical bearing in reality other than the internal dynamics of the atom itself (Naber 79). In short, the principles derived from atomism cannot be applied successfully in the actual market.
Third, the use of hedonistic calculus (by Bentham) as the mathematical model for rational behavior appeared in its purest application relevant to the 19th century, which for Veblen, had not be properly qualified or modified to be useful in analyzing the realities of the current century (Naber 79). The mathematical model used the calculus of pleasure and pain, which to Veblen, emphasized production when the current conditions already demands for the understanding of value exchange over production.
Fourth, the businessman prototype in the world of the neoclassical economics worked as a coordinator of the industrial process (Naber 80). However, as the business world gets globally complicated, Veblen’s businessman must, say, learn high finance instead of production management alone as in olden times, as he must deal also with investment bankers, not just technicians and engineers. For Veblen, under the current market condition, the perspective of the neoclassical economics will no longer fit and work as it may have worked before.
Cambridge Neoclassical (‘Marshallians’) Economic Thought
Alfred Marshall had been known to have perfected the tool of the theory of margin (Bhatia 382). He proposed that the role of margin lies in its ability to act as a fine and reliable indicator of the actions of an economic unit in the market under various relevant conditions. In this system, a firm operating under a perfect competition in the short term does not need its price (or average revenue) to equal its average cost. His rule prescribed that the marginal cost would be equal to the marginal revenue provided the average revenue will be greater than or equal to average cost.
In his theory of partial equilibrium, Marshall believed that total economy cannot be studied at the same time; but one economic unit or so at a time, and in isolation from the rest of the other factors or units in the economy (Bhatia 383). It involves holding off certain economic factors or units (e.g. price, labor, etc.) under the rationale of “others being equal,” while analyzing the initial sets of factors (e.g. supply and demand). As the initial factors had been understood very well, more economic factors are to be freed up from the “others being equal” category and integrated into the already analyzed factors in order to understand their dynamic relationships within the larger total economy. This method is followed until all economic factors have been analyzed and integrated into the growing understanding of the entire economy.
Moreover, Marshall’s theory of savings holds that future needs (as opposed to abstinence) motivates man to save money (Bhatia 388). Being so, he will continue to save money even under conditions of negative interest rate. The theory proposed that interest is the reward of waiting not of abstinence, which allowed the theory to explain the motivation of wealthy individuals in relation to savings. He explained that wealthy individuals rarely find it needed to save on the basis of abstinence as they are wealthy enough to support their current needs without having to experience abstinence. The theory also contends that the rate of savings is directly related to the rate of interest; the higher the interest rate, the higher will be the rate of savings.
In his theory of exchange, equilibrium received no normative meaning but merely as indicative of the balancing of opposing forces in the market (i.e., equilibrium price means the amounts offered and supplied had balanced) (Bhatia 388). Three factors affect the concept of supply: type of market; cost of production; and time element. The theory offers only an understanding of the relationship between buyers and sellers of a specific commodity at a time, and primarily in a sufficiently competitive market. It has no concept of “perfect competition.” If the period is short, the supply is limited to the stores at hand; if the period is longer, the supply will be influenced, more or less, by the cost of producing the commodity; and if the period is very long, this cost will be influenced, more or less, by the cost of producing the labor and the material things required for producing the commodity (Bhatia 389).
In terms of the time factor, Marshall divides the market into three parts, based on functional grounds. The day-to-day market period has supply limited by the stores at hand. The demand has a stronger influence in determining the market price. The suppliers tend to offer more out of their current stock for sale as a higher quoted price. In the short-term market, the supply can be increased with the existing plant and other arrangements. Supply follows an increasing price as it obeys the law of diminishing returns. As demand increases, a rise occurs both in price and supply up to the limit of existing productive capacity. In the long-term, two possibilities appear: diminishing returns and constant and increasing returns. Under constant returns, the price is elastic.
His theory of distribution mainly refers to the distribution of the national income (Bhatia 393); but without covering macro shares of wages, rent, interest and profit. Human beings can produce more than what they personally needs, as a result of man’s increasing power over nature. The theory focuses on the rate of returns. Theoretical confusions, though, failed to add much to the theory of enterprise and profits.
The theory of welfare, Marshall’s greatest legacy in the field of economics, provides a groundwork for latter welfare economics (Bhatia 399). (His greatest contribution, though, was the rehabilitation his economic thoughts performed on the current economic theory before the public mind when he synthesized economic theories and laws with socio-ethical concepts.) Marshall noted certain realities in relation to the welfare of workers in business establishments. First, that private employers will unlikely find it beneficial to spend on education and training of workers and their children, apparently as a factor of negative or decreased profit.
Second, that private employers will find it hard to see that ‘higher’ wages results to greater profitability on account of greater efficiency of highly motivated labor. Apparently, adequate evidence on the connection between high wage and high motivation had not been established to justify the notion.
Marshall’s theoretical framework enabled significant advancement in economic studies and refinements in the later years. Followers in this school of thought included Henry Roy F. Harrod of New College at Oxford University (England, UK), Joan Violet Robinson of Girton College at Cambridge University (England, UK), Edward Hastings Chamberlin of Harvard University (Cambridge, Massachusetts, USA), Theodore Otte Yntema of the University of Illinois (Champaign-Urbana, Illinois, USA), and J.K. Mehta of the University of Allahabad (Uttar Pradesh, India), who abandoned the classical notion of perfect competition.
Chamberlain and Robinson further explored marginal analysis under the Marshallian tradition. In fact, both made extensive use of geometrical patterns, which Marshall would have preferred but could not provide. They also made use of geometrical techniques, which later inspired ignited a great interest in geometrics as an integrated element in economic literature and classroom instructions.
Paul Sweezy of the United States and R.L. Hall and C.J. Hitch of England came up with the theory of kinky demand curve in order to understand the behavior of a product under an oligopolistic market based on the current price (Bhatia 408). They also later developed the ‘full-cost principle’ in addition to ‘mark-up price’ well-recognized at that time.
Precursory theorists that helped Marshall develop his economic thought, and thus in an indirect manner important contributor to the Marshallian neoclassical economic thought, include Philip H. Wicksteed who contributed significantly in the tradition of marginalism and known to have developed variants of the marginal productivity theory of distribution (Bhatia 402).
Works Cited
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Kosoy, N. and E. Corbera. “Payments for Ecosystem Services as Commodity Fetishism.”
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Procacci, G. “Social Economy and the Government of Poverty. In: G. Burchell, C. Gordon & P. Miller, eds. The Foucault Effect: Studies in Governmentality. Chicago, IL: The University of
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