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Contending Economic Theories Contending Economic Theories: Neoclassical, Keynesian, and Marxian Richard D. Wolff and Stephen A. Resnick The MIT Press Cambridge, Massachusetts London, England © 2012 Massachusetts Institute of Technology All rights reserved. No part of this book may be reproduced in any form by any electronic or mechanical means (including photocopying, recording, or information storage and retrieval) without permission in writing from the publisher. MIT Press books may be purchased at special quantity discounts for business or sales promotional use. For information, please email [email protected] or write to Special Sales Department, The MIT Press, 55 Hayward Street, Cambridge, MA 02142. This book was set in Times Roman by Toppan Best-set Premedia Limited. Printed and bound in the United States of America. Library of Congress Cataloging-in-Publication Data Wolff, Richard D. Contending economic theories : neoclassical, Keynesian, and Marxian / Richard D. Wolff and Stephen A. Resnick. p. cm. Rev. ed. of: Economics : Marxian versus neoclassical. Baltimore : Johns Hopkins University Press, c1987. Includes bibliographical references and index. ISBN 978-0-262-01800-5 (hbk. : alk. paper) – ISBN 978-0-262-51783-6 (pbk. : alk. paper) 1. Comparative economics. 2. Economics. 3. Marxian economics. 4. Neoclassical school of economics. 5. Keynesian economics. 6. Schools of economics. I. Resnick, Stephen A. II. Wolff, Richard D. Economics. III. Title. HB90.W65 2012 330.15–dc23 2012004562 10 9 8 7 6 5 4 3 2 1 Contents Detailed Table of Contents vii To Our Readers xiii Acknowledgments xvi 1 Three Different Theories 1 2 Neoclassical Theory 51 3 Keynesian Theory 105 4 Marxian Theory 133 5 Late Neoclassical Theory 251 with Yahya M. Madra 6 Oscillations in Capitalism and among Economic Theories 311 7 The Importance of Theoretical Differences 347 Notes 379 References 383 Index 387 Detailed Table of Contents 1 Three Different Theories 1 1.1 This Book and Theories of Economics 1 1.1.1 Theories: Economic and Otherwise 4 1.1.2 Economic Theories in Disagreement 5 1.1.3 Are We All Economic Theorists? 6 1.2 Theories and Society 9 1.2.1 Changes in Europe and the Humanist Tradition 10 1.2.2 The New Economic Theories 12 1.2.3 Classical Political Economy 14 1.2.4 The History of Neoclassical Economics 14 1.2.5 The History of Keynesian Economics 16 1.2.6 Keynesian Theory 18 1.2.7 Return of Neoclassical Theory 21 1.2.8 Neoclassical and Keynesian Economics 23 1.3 The History of Marxian Economics 25 1.4 Comparing Different Economic Theories 33 1.4.1 Comparing Theories in General 33 1.4.2 The Logics of Different Theories 35 1.4.3 How Theoretical Differences Matter 36 1.5 An Introduction to the Three Theories 37 1.5.1 Entry Point, Objects, and Logic of Neoclassical Theory 37 1.5.2 Entry Point, Objects, and Logic of Keynesian Theory 40 1.5.3 Entry Point, Objects, and Logic of Marxian Theory 41 1.5.4 A Digression: Theories and Their Objects 43 1.5.5 The Logic of Marxian Theory 44 1.5.6 Communication among Neoclassical, Keynesian, and Marxian Economists 47 1.6 Conclusion 48 viii Detailed Table of Contents 2 Neoclassical Theory 51 2.1 The Neoclassical Tradition 51 2.1.1 Neoclassical Theory ’ s Contributions 52 2.1.2 Emergence of Neoclassical Theory after Adam Smith 53 2.1.3 Which Economic Theory Will We Present? 55 2.2 Market Values: The Analytics of Supply and Demand 55 2.2.1 The Determinants of Supply and Demand 58 2.2.2 Markets, Private Property, Conservatives, and Liberals 60 2.2.3 Preferences: Determining the Demand for Commodities 64 2.2.4 Preferences: Determining the Supply of Labor 73 2.2.5 Preferences and Scarcity: Determining the Demand for Labor 77 2.2.6 Determination of Wages and Commodity Demands 81 2.2.7 Preferences: Determining the Supply of Capital 83 2.2.8 Preferences and Scarcity: Determining the Demand for Capital 88 2.2.9 The Determination of Returns to Capital 89 2.2.10 Distribution of Income in Society: Returns to Capital and Labor 90 2.2.11 Preferences and Scarcity: Determining the Supply of Commodities 91 2.2.12 Demand and Supply Again: Determination of Prices 95 2.3 Effi ciency and Markets 97 2.3.1 Adam Smith ’ s “ Invisible Hand ” 97 2.3.2 Pareto Optimality 101 3 Keynesian Theory 105 3.1 The Challenge of Keynes 105 3.2 The Neoclassical Answer to Capitalist Recessions 108 3.3 The Keynesian Answer to Capitalist Recessions 115 3.4 Investment Behavior 122 3.5 Post-Keynesian Economics and Other Reactions to Keynes 125 3.6 Role of the State in Capitalist Society 129 Appendix: Rational Expectations 131 4 Marxian Theory 133 4.1 The Marxian Tradition and Its Theories 133 4.1.1 Marx ’ s Contributions 135 4.1.2 Marxism since Marx 138 4.1.3 Which Marxian Theory Will We Present? 140 Detailed Table of Contents ix 4.2 The Logical Structure of Marxian Theory 142 4.2.1 The Basic Concepts of Marxian Economics 142 4.2.2 Overdetermination and Process 143 4.2.3 Contradictions 147 4.2.4 Processes, Activities, and Relationships 148 4.2.5 A Theoretical Dilemma 149 4.2.6 Marxian Theory and Its Entry Point 150 4.2.7 The Class Process 152 4.3 The Marxian Concept of Class Elaborated 153 4.3.1 The Fundamental Class Process and Exploitation 154 4.3.2 The Subsumed Class Process 157 4.3.3 Different Forms of the Fundamental Class Process 160 4.3.4 Social Formations and Social Transitions 164 4.4 The Capitalist Fundamental Class Process and Commodities 165 4.4.1 Products, Markets, and Commodities 166 4.4.2 Commodity Values 167 4.4.3 Commodities and Fundamental Class Processes 168 4.4.4 Marx ’ s Labor Theory of Capitalist Commodity Values 169 4.4.5 Surplus Value of Capitalist Commodities 171 4.4.6 A Summary of Marxian Value Theory 172 4.5 Capitalists and Laborers 173 4.5.1 What Are Capitalists? 174 4.5.2 What Are Laborers? 176 4.5.3 Exploitation 177 4.5.4 Class Struggles 181 4.5.5 The Complexity of Industrial Capitalist Firms 182 4.5.6 Competition 185 4.5.7 Competition and the Accumulation of Capital 188 4.6 Capitalist Economies and Social Development 189 4.6.1 Growth of a Capitalist World Economy 189 4.6.2 Capitalism and Real Incomes 192 4.6.3 Cycles or Crises of Capitalist Economies 195 4.6.4 Cycles and Policy “ Solutions ” 200 4.7 Capitalist Subsumed Classes 203 4.7.1 Moneylenders and Subsumed Classes 203 4.7.2 Managers and Subsumed Classes 205 4.7.3 Merchants and Subsumed Classes 207 4.7.4 Other Capitalist Subsumed Classes 210 4.8 Class Positions and Individuals ’ Incomes 214 4.8.1 Class Processes and the Distribution of Income 214 4.8.2 Occupying Multiple Class and Nonclass Positions 216 x Detailed Table of Contents 4.9 The Complex Class Structure of Capitalist Firms 218 4.9.1 Class Analysis of Capitalist Firms 219 4.9.2 Capitalists and Corporate Boards of Directors 221 4.9.3 A Marxian Theory of Industrial Profi t 223 4.10 The Complex Class Structure of Other Social Sites 227 4.10.1 Class Analysis and Households 228 4.10.2 Class Analysis and the State 232 4.10.3 Class Analysis and International Relations 238 Appendix A: Why Does Marxian Theory Make Class Its Entry Point? 242 Appendix B: The “ Transformation Problem ” 243 Appendix C: Capitalist Competition 246 Appendix D: Rising Exploitation with Rising Real Wages 250 5 Late Neoclassical Theory 251 with Yahya M. Madra 5.1 Introduction: Why This Chapter? 251 5.1.1 Criticisms and Their Consequences 252 5.1.2 The Responses: An Overview 255 5.2 Theories of Market Imperfections 258 5.2.1 Externalities and Ways of Managing Them 259 5.2.2 Forms of Imperfect Competition 266 5.2.3 Transaction Costs and Economic Organization 274 5.2.4 Information Failures and Missing Markets 277 5.3 New Theories of Human Behavior 279 5.3.1 Theories of Motivational Diversity 283 5.3.2 Theories of Bounded Rationality 287 5.3.3 Behavioral Economics 288 5.4 New Theories of Equilibrium 292 5.4.1 Different Notions of Equilibrium in the Neoclassical Tradition 294 5.4.2 Nash Equilibrium and Classical Game Theory 297 5.4.3 Evolutionary Stability and Evolutionary Game Theory 304 5.5 Conclusion 308 6 Oscillations in Capitalism and among Economic Theories 311 6.1 Capitalism Has Always Been Changing 311 6.1.1 Instabilities and Capitalism 312 6.1.2 Capitalism and Economic Theories 314 6.1.3 How Economic Crises Infl uenced Economic Theories 315 6.2 Oscillations of Economy and Oscillations of Theory 320 6.2.1 Classical Political Economy and Marxism 320 Detailed Table of Contents xi 6.2.2 Neoclassical Economics 327 6.2.3 Neoclassical versus Marxian 329 6.2.4 Keynesian Economics 331 6.3 Two Modern Oscillations: The 1970s and the Crisis That Began in 2007 336 6.3.1 Three Collapses: State Intervention, Keynesianism, and Orthodox Marxism 336 6.3.2 From State- to Private-Capitalism: The Starkest Case 338 6.3.3 Back to State Intervention 341 7 The Importance of Theoretical Differences 347 7.1 Marxian versus Keynesian versus Neoclassical Theory 347 7.1.1 Different Points of Entry 347 7.1.2 Different Logics 348 7.1.3 Different Objects of Analysis 351 7.1.4 Different Theories of Value 352 7.2 Analytical Consequences of Contending Theories 352 7.2.1 Income Distribution: The Neoclassical View 353 7.2.2 Capitalism: The Neoclassical View 355 7.2.3 Poverty: The Neoclassical View 356 7.2.4 Income Distribution: The Marxian View 357 7.2.5 Income Distribution: The Keynesian View 359 7.2.6 Different Explanations of the Returns to Capitalists 360 7.3 Political Consequences of Contending Theories 362 7.3.1 Political Conditions Shape Theories 364 7.3.2 Struggles among Theories and Theorists 365 7.4 Which Theory Do We Choose? 366 7.4.1 Choosing Theories Because of Their Consequences 368 7.4.2 Choosing Theories Based on an Absolute Standard 371 7.4.3 Empiricism 372 7.4.4 Rationalism 373 7.4.5 Choosing Economic Theories and Choosing Epistemologies 374 7.4.6 A Final Thought 377 Notes 379 References 383 Index 387 To Our Readers Our previous and far less ambitious version of this book, Economics: Marxian versus Neoclassical was well-received and quite widely used in colleges and universities since its publication in 1987.
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