Neoclassical economics, which remains the prevailing orthodoxy, emerged in the late nineteenth century as apologetics in the context of rising working-class opposition to capitalism. Classical political economy had not provided defenders of the system with a comparable apologetic. Not only had it partly informed Marx’s analysis of capitalism but there were socialist movements drawing on interpretations of Ricardo’s labor theory of value. Class was central to the understanding of capitalism in both classical political economy and Marx, and no attempt had been made to conceal the class antagonisms inherent in the system. The neoclassical economists, with transparent intent, sought to change all this. Ever since, they have worked hard to deny or obfuscate any aspect of capitalism that might be damaging to this apologetic project. Three theoretical insights in the history of economic thought seem particularly relevant in this respect.
1. Profit Reflects Ownership, Not Productive Contribution
One idea threatening to orthodoxy is Marx’s identification of living labor as the sole source of surplus value (profit). In Marx’s theory, surplus labor is appropriated by the capitalist class, which includes capitalists and rentiers.
The significance of this is not that workers miss out on receiving all the value they create. What matters for living standards is the production of use values (real wealth), and these are produced not only by living labor but also by machines (dead labor), animals, and nature. The entire output of commodities is not solely due to the efforts of workers, so there is no suggestion that they are entitled to the entire output of the production process. (See, for example, the opening to Marx’s Critique of the Gotha Program.)
The significance, rather, is that the capitalists’ appropriation of – and control over – the social surplus, in the form of surplus value, is due solely to their ownership of society’s means of production (the product of dead labor) and their private ownership and control of natural resources. Their claim over the social surplus is not due to any productive contribution they themselves make.
Marx’s insight exposes capitalism as an undemocratic system of dependency. The majority, who lack access to means of production, are dependent on capitalists or capitalist governments for an opportunity to sell their labor power in exchange for a wage.
It is an indication of how mystified the process has become when welfare recipients can be widely derided by an ignorant public as succumbing to a culture of dependency. It reveals an unawareness that the entire system is one of dependency for almost everybody. Workers and their families are at the mercy of capitalists and capitalist governments for whatever employment or welfare crumbs come their way.
Denial of the real source of surplus value no doubt motivated the orthodoxy’s attempt to explain income distribution in marginalist terms on the basis of relative factor prices. As is well known, this claim was discredited in the capital debates, an episode that the orthodoxy has tried hard to erase from history ever since.
It may seem strange today, but the capital debates played out in the most prominent journals, with Paul Samuelson, the leading neoclassical of his generation, ultimately conceding. The timing of this embarrassment for the orthodoxy seems interesting, to say the least, in view of the introduction, shortly after, of the pseudo Nobel Prize in economics, soon to be followed by the closing of ranks in academic hiring, and the refusal, from that point on, to publish heterodox work in the leading – neoclassical-controlled – journals. (For a polemical take on this history, see Nobel-nomics).
The most fundamental implication of the capital debates is that there is no basis for persisting with the fiction that income distribution is determined by ‘marginal productivity’. This is consistent with Marx’s position that profit reflects property rights predicated on the separation of workers – forcibly, initially, in most cases – from the means of production.
2. Capitalist Economies are Demand Constrained
The Keynesian or Kaleckian principle of effective demand may not seem quite such a hindrance to the orthodoxy’s designs, but the motivation for its denial – at least in the long run – is still easy enough to perceive.
Recognition that a capitalist economy, under normal circumstances, is demand constrained would rule out the apologetic notion of a deregulated market economy’s automatic tendency to full employment. In the neoclassical long run, this is meant to occur irrespective of demand or monetary factors via wage, price and interest-rate adjustments. Associated with this claim is the implication that a market economy tends to deliver equal opportunity for all.
In light of the Keynesian revolution, neoclassical economists adapted their position, distinguishing a ‘short run’, in which demand matters, from a long run in which it supposedly doesn’t. They clung to the position that full employment would be delivered eventually, irrespective of demand or money.
This position, however, also hinges on arguments that were discredited in the capital debates. The orthodox claim amounts to viewing the macroeconomic outcome as predetermined, guaranteed through the operation of a price mechanism that will supposedly adjust aggregate demand to whatever potential output happens to be, reflecting real factors such as productivity, endowments, and preferences.
The claim is baseless. There is simply no reason to expect aggregate output to respond to relative price movements in a systematic way, and no such general tendency has been established in theory.
3. Money Matters, Including in the Long Run
Even more beyond the pale for the apologists is the audacity of those who subject money and the monetary system to scrutiny, whether it be the endogeneity of money or the implications of monetary sovereignty. (See here for an example of this taboo in operation.)
Money endogeneity refers to the capacity of private banks to determine the ‘money supply’ (usually defined, in this context, as demand deposits plus currency) as well as the essentially passive, accommodating role of the central bank. The latter can attempt to influence ‘money demand’ and the expansion of private credit indirectly through its choice of interest rate but cannot directly control the quantity of money in circulation.
An implication of this, in a deregulated environment, is that money expansion and contraction occur on the whims of capitalists and speculators, through their demand for loans, mediated by the risk-return assessments of the private bankers. The orthodoxy is not in any hurry to call attention to this aspect of the current institutional framework.
At the same time, a key implication of currency sovereignty is that the central bank can set the rate of interest as a matter of policy and government is in a position, if it so chooses, to enable activity of whatever kind is deemed appropriate, irrespective of the attitudes of private market participants and the invisible bond vigilantes.
This, for a different reason, is not something the orthodoxy wishes to highlight, because it is potentially a game changer. It makes full employment alongside low, stable inflation easily achievable through appropriate fiscal policy. But more disconcertingly for apologists, it makes possible any form of activity – including not-for-profit, not-for-growth, or communist – that society, through democratic means, might deem desirable.
This potential for democratized money is probably what has motivated attempts to put governments in a fiscal straitjacket, through the gold standard, Bretton Woods, currency boards, and the European common currency. It also motivates the currency issuer, in federal systems, giving non-sovereign states responsibilities that are disproportionate to their revenue-raising capacities and then deliberately restricting fiscal transfers.