Towards a Marxian Economics: Chap. 1/32

The problem with developing a Marxian Economics arises from the fact that Karl Marx did not intend to develop, nor did he develop, an approach to economics distinguishable from the neoclassical approach sweeping across Europe in the 1860s. What distinguished Marx’s approach to economics from, say, the approach of William Stanley Javons was that (1) Marx did not find it necessary to identify an independent variable, such as the public good, for example, to off-set the market; and (2) Marx held that since all values arose from socially and historically specific circumstances that were subject to change, recognizing and accounting for these changes could be, and needed to be made a part of economic thinking.

In place of an argument that this holds true, I take a standard neoclassical economic textbook — in this case Paul Krugman’s and Robin Wells’ Principles of Economics — and work through the text on Marxian grounds. My aim is not to cover all that Krugman and Wells write, nor all that Marx might have replied. My aim instead is to show that what distinguishes Marxian economic theory is not the principles of economics per se, but is the rigorous social and historical critique with which these principles needed to be supplemented.

The first chapter of Krugman and Wells’ Principles is divided into three subsections: (1) Individual Choice; (2) Interaction; (3) Economy-Wide Interactions. Krugman and Wells find that individuals need to make choices (a) because they cannot have everything; and (b) because resources are scarce. Because individuals do not have unlimited means to acquire everything they might want, they must weight their possible choices differentially. “The real cost of an item is its opportunity cost; what you must give up in order to get it.” This gives rise to the notion of a “trade-off,” when individuals compare a range of possible choices. Individuals will make the choice, say Krugman and Wells, that optimizes their marginal benefit. Individuals can be induced to make one choice over another through incentives.

Insofar as everyone does not have everything, individuals need to trade in order to obtain what they want in exchange for what they have. Because there are gains from trade, individuals will specialize in what they are willing to trade for what they want from others. In a close economy, where all individuals together produce what all individuals might want, an economy achieves equilibrium when everyone has made choices that reflect their opportunity costs and all individuals have concluded trades that maximize their marginal benefits; or, “when no individual would be better of taking a different action.” A market is judged “efficient” when it reduces the costs of reaching equilibrium to a minimum and when it maximizes the benefits of reaching equilibrium.

To these principles Krugman and Wells add two additional principles that appear to require independent variables: “equity” and “welfare.”

Equity is described as “fairness”; welfare invites us to consider “externalities,” costs external to the transactions between buyers and sellers.

We will return to these two independent variables.

When individuals exchange goods, they exchange the values of those goods to the parties of the exchange. Absent coercion, these values are necessarily equivalent. “One person’s spending is another person’s income.” This means that should the aggregate income of a market increases, but the volume of goods does not, this will increase the prices of the goods, but not the volume. If, by contrast, the aggregate income of a market decreases, but the volume of goods does not, this will decrease the prices of the goods, but not the volume. If income remains constant, but the volume of goods increases, this will decrease the prices of the goods; if the income remains constant, but the volume of goods decreases, this will increase the prices of the goods. Insofar as individuals invest in the production of goods at different moments, and insofar as incomes, the volume of goods, and prices only adjust to one another in the long run, it is virtually inevitable that individuals will invest in goods that later lose value, that individuals will accept a wage that loses value over time, and that more goods may be produced at a given cost than buyers at a later time are willing to shoulder.

Krugman and Wells therefore introduce a third independent variable: government intervention in markets: in the form of spending, taxes, and monetary supply.

How might Marx respond to Krugman and Wells’ text?

First, Marx would point out that choices are always socially and historically specific. Moreover, since the values of goods in any market are determined in aggregate, the trade-offs individuals must bear in mind are never and can never be static. Value often strikes individuals as a mechanism of their own personal, individual, desire. Yet, in economic terms, value is a market-wide social substance; a product of all of the decisions of individuals throughout the market. But this means, second, that marginal benefit is also never actually a private evaluation, since any individual’s maximization of their marginal benefit shapes the values of goods of individuals and the maximization of their marginal benefit. Equilibrium is then a supra-individual social form that holds for individual in particular, but everyone in general. It follows that an economy can be in equilibrium even when many individuals have not maximized their marginal benefit; or, put differently, even when what they take to be their marginal benefit has been determined by the choices of all other individuals within the market.

Marx would also point out that equity, in any rigorously mathematical sense, would apply only to the aggregate, not to individuals within the aggregate. Only if all individuals enjoyed the exact same resources, and only if these resources were regularly “reset,” could we say that equity applied individually. In reality, value in the abstract is always exactly equal to itself. Once it becomes a measure of goods, by definition these goods are differentially valued.

But, for this reason, Marx would also question the independent status of social or public welfare. If the private exchange does not actually generate the greatest good — efficient equilibria — then by what measure will this good be measured?

And, so the third independent variable: government. Is the government truly an independent variable? Imagine a government that owes no individual or party anything. Why would it act in one way and not another? Presumably it would in that case act according to some independent set of guidelines or rules. But why this set of guidelines or rules? Why not another? In the real world, governments are always composed by individuals who serve constituencies. Their service has a price. That price and its products are marginally related. Even where an agent or agency is “independent,” it is statutorily bound by rules and laws that are political.

But, finally, Marx would point out that marginalism only holds in societies where social relations are mediated by commodity production and exchange; where, that is, the values relating all things, all people, and all actions to one another are not independent. In societies where social relations are mediated by other kinds of values, things, people, and actions enjoy independence and therefore are either subject to custom and tradition or must be renegotiated again and again at each meeting.

So, for example, in the high Middle Ages in Europe, wages and prices were negotiated publicly among clergy, nobility, trades, and crown. Marginal values did not exist. In that case, the neoclassical economic model does not hold.

That said, and with these provisos, Marx would have little else to dispute with Krugman and Wells.

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