Recent Developments in Non-neoclassical Economics

Stanley Bober

• Publisher: Routledge
• Year: 2019
• eBook ISBN: 9780429816796
• Topic: Business
• Subtopic: Business General
• Index: Business

First published in 1997, this volume was undertaken to provide a means to introduce new thinking in economics which have been considered a counter-revolution with regards to the core framework of economic analysis. Stanley Bober explores areas including the theory of household income, the role of prices, growth analysis and Keynesian economics. The book pays particular attention to the Kaldor-Pasinetti income distribution models as they relate to aggregate saving along with the Harrod-Domar macro-dynamic growth paths.

1 What is economics about?

What is now thoroughly ingrained and accorded universal acceptance (until quite recently) is the idea that the central concern of the study of economics is that of designing a mechanism to produce an optimum allocation of scarce resources. As economics textbooks are all too eager to point out, the decisions of economic units, whether we speak in terms of individual consumers, individual resource owners, business firms or indeed units of government, are all undertaken within the ‘unpleasant’ environment of scarcity; therefore, all economic decisions within the context of limited choices are viewed through a similar prism based on the concept of opportunity cost. Thus the study of economics is how best to make use of limited means in the pursuit of almost unlimited ends; or, to put the matter more formally, it is the study of the logic of how rational decisions can be made from among the competing alternatives. The overriding principle governing this logic is, to reiterate, that of opportunity cost which in well functioning markets is closely akin to money costs. Overall, the framework is one of choice under constraint, with the economic system being viewed essentially as an allocative mechanism.

It is within the framework of restriction that one chooses the option that maximally advances one’s own gain — a choice which we may label ‘economizing behavior’ to reflect the flip-side of the choice which involves the embodiment of least cost. But the taking of a decision involves a change in the allocation of the resource from the status-quo; therefore, decisions are marginal in nature since they involve the addition to or subtraction from an existing condition. Decision making that is carried out by means of marginal analysis means a process of making a choice between alternatives by considering small changes in the end outcome resulting from small changes in the combination of alternatives. When carried to its logical limit this kind of analysis deals with infinitesimal changes associated with a continuous function; thus, for a continuous total utility function, we can define the marginal utility as the rate of change in total utility with respect to the change in the independent variable. Should the total utility function not be continuous but defined for a discrete set of values of the independent variable, then the incremental change in the total utility corresponding to a unit change in the independent variable would be the discrete analog of the marginal utility.

This constant rearrangement as a result of this decision process is carried on within an exchange economy or what we may consider as a marginalist scheme of general equilibrium. It is a scheme by which the economic system find those prices (equilibrium prices) which bring about, via this exchange, the optimum allocation of the existing resources. This optimum is defined as that condition that results in individual economic units maximizing their utility with respect to the distribution of resources among them. Maximization under the constraint of scarcity would appear to be the very foundation of the discipline of economics.

This notion that the whole of economic analysis can be reduced to, as explained by, this principle of marginalism, i.e. the understanding of human behavior as a relationship between ends and scarce means which have alternative uses, is, it must be emphasized, a particular approach to economic reality. It is not the only approach, though one would think that it is, considering the way it has so thoroughly permeated economic reasoning. In recent years there has emerged a strong challenge to this orthodoxy that offers a replacement paradigm as the core of what economics is about. This different approach takes as its central focus that of a class relationship-production-distribution structure that has as its message the maintenance and over time the advancement of production levels; the primary concern here is with understanding the mechanism of economic growth and not, to reiterate, with the solution to the problem of optimum allocation of scarce goods. What is being asked of the discipline of economics is to return to its classical-Marxian roots; to put at the core the hallmark of what economics was all about at the very beginning. This means that coming to grips with such matters as the distribution of output, the determination of savings and investment, the mechanism of price determination must have as its starting point the socio-economic relations between individuals within a process of production. That is, that an analysis of an economy that is operating within a capitalist mode of production must explicitly treat the environment as one of a class society; where the output is produced by one class and is planned and directed by another class. Social relationships between ‘constituencies’ of the economy and the resulting distributional effects as well as pricing behavior, flow from the productive process and its inherent ‘class conflict’.

This starting point is to be juxtaposed with that which underlies the current orthodoxy of marginalism that sees the behavior of economic units within a framework of the causal relation between goods and the satisfaction of human needs. And thereby the starting point for marginalism becomes the psychological relation between individuals and finished goods. This conventional attitude leads to particular characterizations of economic analysis. For example, a theory of value is grounded in conditions of demand as represented by utility to consumers. Individuals and their wants are treated as the ultimate data of the analysis; they are the atoms of the essential process of exchange with the explanation of value to be found in the ‘behavior equations’ of these economic particles. This places price in the role of an allocating agent, hence telling us that commodities whose prices are positive are then by definition considered ‘scarce goods’; and these are the goods that are economically relevant. Individuals behaving in a rational self-serving (natural law) way will exchange the given final goods among themselves up to the point where the ratios of marginal utilities are equal to the corresponding ratio of prices.

Furthermore, this attitude of considering prices as an ‘index of scarcity’ applies as well, in a more general system, to scarce resources used as means of production, e.g. capital and labor. While productive resources are exchanged in their own special markets guided by similar rational laws of maximizing behavior, the price outcome of these goods of a ‘higher order’ and, by imputation of resources generally, are determined from the goods of the ‘first order’, i.e. products sold to final consumers. Marginalists see the producing unit as a consumer of a different kind engaged in the process of exchange that fulfills a production goal rather than a utility goal; but the rational guidelines and maximization principles are equally applicable to both. Thus another characterization stemming from the orthodox construction is that one derives a theory of distribution, i.e. an explanation of the various category of income (wages, rents and profits) as incidental to the pricing process as determined by the conditions of exchange. It comes down to having one accept a theory of income distribution that is based upon a theory of value which results from natural law in the relation of man’s rational behavior to maximization considerations.

As this behavior is assumed general in all arenas of exchange, there is no need to particularize the explanation of the income to any unit of input, since all incomes flow from the same explanatory principle. Hence whatever the social or power relationship between people in the production activity, it has essentially nothing to do with the respective rewards that are afforded by the market process. It is important to stress that the neoclassical attitude considers the decisions to buy and sell as impelling and determining production; production is animated by and takes the form of an exchange process. If all action is based in exchange, and exchange involves transforming one property into another, then labor or work itself is part of an exchange or market process. The term ‘work’ is what one labels the hourly or daily consumption of what has been purchased by the producing unit — all income is then simply the result of an exchange of property.

It is then but a short step to seeing the relationship between the inputs as a harmonious one; each makes his distinct contribution to production and receives his appropriate reward. Whatever conflict emerges results from differences over which contributing factors should get more of the value they jointly create. There is then cooperation in the act of production and the struggle over distribution is merely the manifestation of an underlying community of interest to bring about a higher level of output. This ‘cooperative vision’ is at the heart of neoclassical distribution analysis; constituencies are to be considered on the same plane and rewards to not flow from what may be considered as a hierarchy class position traceable to the ownership or lack thereof of the means of production. It is telling that current theory talks in terms of non-descriptive factors of production without reference to the specificity of labor or, indeed, the ‘means of production’; and while one may use the term labor, it is simply a way to designate a factor. This is, of course, quite different from that ‘other’ challenging approach that draws its essential structure from the classical-Marxian scheme where we do not even find the term ‘factors of production’ in the economics vocabulary, and where there was not any consideration of placing the various categories of income on the same analytical level and dissolving any distinction between income from work and income from property. In the ‘modern’ agenda, such a distinction is returned to the forefront of analysis as it becomes fundamental to questions concerning capital accumulation and distribution of income. This non-neoclassical approach has taken on the umbrella title of post-Key nesian:neo-Ricardian economics under which one finds diverse routes leading away from the commonly accepted orthodoxy. We will, in this book, travel along some of them.

In this section we want to highlight additional differences so as to set the stage for the analysis of some of the principles of this non-marginalist economics; let us say of this ‘production approach’ to economic reality.

Consider the term ‘scarce goods’ in its original usage by the classicists and how it has come to be employed in current economic reasoning. There are goods (resources) whose availability is insufficient to meet the need for them. They may be commodities that are in demand as requirements for production, but they are inherently limited and must be taken as given either due to natural circumstances or perhaps due to peculiar skills that cannot be multiplied and enhanced. We can consider such goods as those of the ‘natural endowment type’. While these goods are not irrelevant, they are of little economic importance compared to the mass of goods that are exchanged which are commodities that are produced by other commodities and the application of labor. Let us refer to these latter goods as those of the ‘production type’.

With regard to goods of the endowment type, Ricardo had this to say:¹

There are some commodities, the value of which is determined by their scarcity alone. No labor can increase the quantity of such goods, and therefore their value cannot be lowered by an increased supply. Some rare statues and pictures, scarce books and coins, wines of a peculiar quality, which can be made only from grapes grown on a particular soil, of which there is a very limited quantity, are all of this description. Their value is wholly independent of the quantity of labor originally necessary to produce them, and varies with the varying wealth and inclinations of those who are desirous to possess them.

Going on to compare with goods of the production type, Ricardo observes:²

By far the greatest part of those goods which are the objects of desire are procured by labor and they may be multiplied, not in one country alone, but in many almost without any assignable limit, if we are disposed to bestow the labor necessary to obtain them.

Let us append in the modern vein; if we are disposed to bestow the labor and technology necessary to obtain them, continuing with Ricardo’s thinking:³

In speaking, then, of commodities, of their exchangeable value, and of the laws which regulate their relative prices, we mean always such commodities only as can be increased in quantity by the exertion of human industry, and on the production of which competition operates without restraint.

It is clear that for the classicists the notion of scarcity followed ‘accepted’ usage and was relegated to goods of the endowment type which are not augmentable given the desire for them. Their price is wholly reflective of demand as evidenced by the market process. One can formulate a pure exchange model from which equilibrium or utility maximization prices can be extracted. Certainly, then, the marginalist notion holds in the ‘narrow’ in that goods that have positive prices are scarce goods; but it does not hold in the ‘general’ attitude which proclaims that scarce goods are those goods that have positive prices.

The classical approach never considered designating goods of the production type as ‘scarce’. Hence, their value while subject to the influence of exchange cannot be wholly dependent on it. Indeed, these goods are seen to be producible ‘almost without limit’ and their value must fundamentally reflect what we might consider as the inherent ‘difficulty’ in bringing them into being and is thus determined on the basis of their costs of production. It bears re-emphasizing that the classicists do not use the term scarcity as reflecting the availability of goods generally, but use the term simply as a prerequisite for defining economic goods by virtue of the costs involved in their production. Thus, in fact, one should not construct a pure exchange model that purports to develop a theory of relative prices independent of the ‘mechanism’ of production. The principles which explain prices must be in terms of man’s activities and relations within the act of production and not within the act of exchange; the analysis should be based on the characteristics of reproducibility rather than that of scarcity.

Consider the following telling observation by Professor Luigi Pasinetti,⁴ concerning the apparent ‘overlooking’ of the Ricardian distinction between scarce commodities and produced commodities:

The process through which this has happened is itself very interesting. Economic goods have positive prices. Now, within a pure exchange model, the only goods that have positive prices are the ‘scarce’ goods. The marginalists have therefore turned things upside down and defined the scarce goods as those goods that have positive prices. But this procedure, though justified in a pure exchange model, is illegitimate in general. All the produced commodities do have positive prices, and yet they are not ‘scarce’ in the classical sense of the word. But the marginalists did not go back to check their definitions. The consequence has been that they went on to (illegitimately) apply to produced goods the conclusions of their theories about scarce goods. For the marginalists, all economic goods have become scarce — not because they really are scarce but simply because they have been called so.

Has it not been promulgated that maximization is the very foundation of the subject of economics, and that economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses? Well, one does not deny that economics is about this, but the current and expanding critical inquiry denies that optimization within the exchange environment is all that it is about. Indeed, optimization may be considered a minor issue easily solvable, and far from the whole of economic reality.

Marginalists may well respond by claiming that scarce (economic) goods are really what they are and not what they are called, because the basis for them is found in the limited resources given by nature. Man’s productive capability is limited by the material resources that are essentially given to him so that the notion of ‘unlimited production’ even if applicable to any one good cannot be applied generally. Thus society in an overall way is always facing a limited set of possibilities.

However, this seemingly plausible attitude which is currently at the core does, I believe, prevent an adequate understanding of real world economics. What the analysis has to be built around is the constant and increasingly accelerated pace of technology that has been freeing society from its bounds of nature. For example, that traditional agricultural sector used by text authors as an example of a ‘competitive sector’ and to demonstrate how returns to production are constrained by nature, is now a very minor part of society, and it is so because technology has freed-up production to the point where is most of the world populations are unburdened from the threat of hunger and starvation. And where these difficulties persist it is the result of internal strife and a lack of political will to form a cohesive society such that modern know-how can be applied.

One comes across the idea that the law of diminishing returns (the basis for the traditional cost curve configuration) reflects a constraint imposed by nature. For if the laws were not valid, it would possible to produce all the required foodstuff on currently cultivated land or for that matter in a ‘flowerpot’. And the argument for this constrained limit is that if it were not so, then why does society resort to less fertile land over time as it seems to increase production; it would make no sense to do so if all can be gotten from what society is currently doing.

But this illustration of how man is constrained is itself a victim of a very limited view. The application of increased knowledge regarding planting techniques, seed development and the reclamation of non-fertile land does away with appreciable differences in growing capability so that one brings into production additional land of somewhat equal fertility as needed. A decision may be made to apply know-how to less fertile land in order to enhance its capability and bring it up to par rather than to apply further technology on currently used land to bolster its productivity even further. Certainly, though, one should not realistically think in terms of fixation of fertility or productive capability formed by natural limits — if the flowerpot is too small to absorb the new developments we can fabricate a larger one if we turn the ‘lab’ towards that end. Textbooks consider the law of diminishing returns to be as famous as the law of gravit...

Table of contents

• Cover
• Half Title
• Dedication
• Title Page
• Copyright Page
• Table of Contents
• Preface
• Acknowledgements
• 1 What is Economics About?
• 2 Theory of Household Demand
• 3 The Distribution of Income
• 4 An Alternative Approach
• 5 Introduction to Growth Analysis
• 6 The Role of Prices and Their Formation
• 7 An Overall View
• 8 Money and Keynesian Economics
• 9 End Thoughts