Lecture Notes: Classical and Marxist Theories of Change
Why and how does economic change occur? Is economic change essentially technological in nature, or does it either rely on or cause social and political change? Is it revolutionary or evolutionary? Gradual or sudden? Can it be explained as the result of a rational process? Is it convergent or divergent?
1. The Classical View
The classical economists saw change as a gradual process, and growth as primarily a function of capital accumulation. Thomas Malthus, for example, predicted that wages would always tend towards subsistence (a principle once known as the iron law of wages), because whenever a surplus was available, population would grow. He assumed that due to diminishing returns, output would generally increase at a slower rate than population (i.e., output would increase arithmetically while population grew geometrically), so per-capita output would fall, putting downward pressure on population through starvation. Capital and technology would only delay the inevitable, since any progress would lead to a surplus, only to lead to more population growth.
Building upon Malthus, David Ricardo predicted that the economy would eventually stagnate. As population increased, agricultural land would become more scarce and food more expensive. Though he assumed the iron law of wages held, scarce farmland would make subsistence more expensive. Factory owners would have to pay higher wages to cover higher food costs, their profits would fall, and their ability to invest in additional capital would fall. Landlords would get a larger share of the pie, but he thought that they would not invest in new capital, so growth would necessarily decline. Because of Ricardo and Malthus, economics used to be called the Dismal Science.
In essence, the classical view is characterized by the tendency toward equilibrium, and view this is shared by neoclassical economists. One example of a current application of this view is the problem of natural resource depletion. If we have clear property rights over a resource, we should never run out of it, since owners would manage the rate at which it was extracted. Using up the resource would lead to higher prices, which would reduce consumption and stimulate the search for alternative resources. In such a case, the rate of price increase would equal the discount rate of the tradeoff between the present and the future.
The neoclassical view is, of course, much more optimistic about continued growth than the classical economists were, and they focus more on improvements in human capital rather than on additions to physical capital and diminishing returns, but still the neoclassical view generally shares the view of gradual, equilibrating change. In the neoclassical model of growth, growth is a gradual result of investment in physical capital, technological progress resulting from the incentive to invest in research and development, improvements in human capital resulting from individual incentives to invest in skills and education, and improvements in efficiency resulting from efforts to increase profits. Market economies with clearly-defined property rights and a minimum of government intervention are best able to provide the best incentives that lead to economic growth. Neoclassical economists are also much more optimistic about the problem of population growth as well, since the decision to have children is understood to be a rational decision based on tradeoffs, not the product of uncontrollable breeding. As the opportunity cost of having children rises with an increasingly urbanized, industrial society in which both men and women may work, people may (and often do) choose to have fewer children. Furthermore, population pressures increase the incentive for doing things more efficiently.
Thus, international trade and finance is important to understanding the neoclassical view on economic growth. Governments of countries which engage in global competition are less likely to get away with government intervention, since markets punish countries with inefficient policies (e.g., capital flees countries with high taxation or unstable monetary policies). With free trade, governments not only are encouraged to follow less interventionist policies, but firms are encouraged to produce more efficiently, and economic growth occurs from specialization and exchange. An international division of labor leads to overall gains from trade that are shared among nations. The flow of goods, services, and capital between countries favors higher returns and lower costs, but as a result the forces of supply and demand tend to lead towards an equalization of prices, wages, interest rates, and policies across nations, and thus tends to lead towards increasing economic convergence.
2. The Marxist View
Karl Marx viewed economic change as a revolutionary process, and one which determined social and political structures. He was influenced by Georg Hegel's philosophy of the dialectic, describing all events as a struggle between opposites, between a thesis and its antithesis, resulting ultimately in a synthesis. Hegel, however, believed that reality was idealistic rather than materialistic, and this was challenged by the philosopher Ludwig Feuerbach. Marx saw history as determined by materialism and the struggle between socioeconomic classes. In the Marxian approach, known as historical materialism, productive forces (economics) such as technology, accumulated capital, and labor determine the relations of production (how the economy is organized), which in turn determines the superstructure (including the structure of society, art, religion, politics, and other formal and informal institutions). Weak productive forces might lead to a Feudal economy, for example, complete with a cultural, ideological, and religious framework sustaining the serf-lord relationship. Not only are economic forces primary in this view, but ideology, religion and culture are reflective of the productive forces rather than influential in changing them.
Marx saw capitalism as an economic system defined by the exploitation of the working class (proletariat) by the capitalist class (bourgeoisie) through the latter's ownership of the means of production, alienating labor from its product. He predicted that capitalism's own contradictions would lead to a revolution destroying it. Chief among these was the prediction that competition among capitalists would drive them to accumulate more capital, and drive profits down. Marx believed that all value comes from labor, and thus all profit is the surplus value not paid to workers. As capitalists accumulate capital to stay competitive, they use relatively less labor and must therefore exploit that labor at higher rates. Increased rates of exploitation, combined with cycles of overproduction and underconsumption, will ultimately push the proletariat to the wall, until they gain class consciousness, unite, and revolt against the capitalist system.
It is important to understand that Marx saw capitalism as a necessary step on the road to socialism and eventually communism. Capitalism was, in his view, an engine of progress because it promoted rapid capital accumulation, which would continue until scarcity was eliminated. However, he also saw it as very wasteful, because it produced unnecessary products as capitalists competed for customers, and because competition forced bankrupt firms to shut their doors, leaving their productive capital assets unused by society. Factories stood empty, machines rusted in the corner, and unemployed workers sat home.
The dialectical process is that as productive forces change, contradictions between productive forces and the relations of production emerge and accumulate. Eventually, this leads to qualitative (sudden and noticeable) change over a relatively short period of time, much like an earthquake suddenly releases forces that have been accumulating for years, causing revolutionary change of the economic system. Like the Yin and Yang of Chinese Daoist (or Taoist) philosophy, each economic system (thesis) carries inside it the seeds of its own opposite (antithesis), and therefore of its own destruction. Marx thus saw societies advancing according to a predetermined pattern -- Primitive Communism to a Slave Economy to Feudalism to Capitalism to Socialism to Communism and the end of history -- in a grinding historical process impervious to the actions of the actions of individuals. Reforms of any sort which attempt to change aspects of a system without changing its inner nature are doomed to failure.
Not all followers of Marx agreed, however. Lenin believed that a revolutionary vanguard could speed up history, and Mao believed that thought determined productive forces and that intermediate economic steps could be skipped. Revisionists such as Bernstein, Tugan-Baranovsky, and Kautsky believed that capitalism would not inevitably destroy itself but could be reformed, that the working class might gain a balance of power through unions and democracy, and that socialism would not happen automatically but would instead require a conscious choice, and "enlightened work."
International trade in the Marxist-Leninist framework is not based on mutual gains from trade. Instead, owners of capital are constantly seeking new workers to exploit, and any gains from trade they receive are offset by losses from those who have been exploited and alienated from the fruits of their labor. In essence, trade is a zero-sum game rather than a win-win game. Capitalists use international trade and investment as a way of forcing different groups of labor to compete with each other, and are thus able to keep wages low and their profits up. As a result, socialist economies tend to minimize international trade, and use it for purposes of meeting administrative shortfalls rather than achieving mutually-beneficial gains from trade.
Finally, it is important to understand that Marx saw economies as coherent
systems in which all the parts fit together. Though the capitalist
system had internal contradictions that would ultimately doom it, hybrid
systems were doomed to fail more quickly because the pieces would not work
together. This sort of systems thinking is common in comparative
economic systems, and not only by those who sympathized with Marx.
The Hungarian economist Janos Kornai, for example, is arguably one
of the best thinkers alive on the workings of the socialist system and
one of its harshest critics. He argues the socialist system is based
on: 1) unchallenged control by a Marxist-Leninist party advocating
the elimination of capitalism and a transition towards communism, which
extends its control to 2) a predominance of state ownership of the means
of production in order to eliminate capitalist relations of production,
leading to 3) a predominance of bureaucratic administration of state firms,
through centralized planning and management, and the use of administrative
pricing to eliminate the dictates of the market, leading to 4) individual
responses to the incentives of this system, ultimately causing 5) observable
and inescapable economic phenomena of the socialist system (e.g., the shortage
economy). Kornai is very skeptical of efforts to create market socialism,
for example, because of the inherent conflict between state ownership,
private markets, and individual incentives.