Question

In 2000 words comapre and contrast the views of two economic schools of thought the neo classics and marxians and discuss how relevant their ideas and theories are in todays world

Answer 1

The neoclassical method of deductive methodology, according to John Stuart Mill, is“ a complex subject matter like political economy can only be studied scientifically by means of the deductive method. Since so many causal factors influence economic phenomena, and experimentation is generally not possible, there is no way to employ the methods of induction directly”

In a reverse of the neoclassical approach of deductive methodology, Marxian economics preferred to study historical processes, through historical dialectic of materialism, or bourgeoisie class, or capitalist society. Marxism found that these brought broad pictures to understanding the construction of modern capitalism

Individuals Vs Classes

In contrast to neoclassical theory, Marxian economic analysis focuses on classes not individuals. Classes mean the proletariat as labour power which produces goods and services, and bourgeoisie as capitalists who own the means of production. Individuals according to neoclassical theory are the consumers and sellers who freely exchange their income and goods; in other words allocation in free market economies occurs via voluntary exchange among individuals

Both terminologies are still relevant these days, because presumably individuals according to neoclassical theory are consumers who have ultimate power in determination of prices. Classes in contemporary economy are also still relevant because these days labourers as working class have organised themselves and established and joined unions, syndicates and legal organisations to protect their rights and advocate their interests.

Utility Vs Value

In contrast to neoclassical theory, Marxist economics analyses production based on the labour theory of value and neoclassical analysis of exchange based on the theory of utility. Labour theory of value means the price of the goods or products is determined by the quantity or qualitative of labour power.

This utility theory and labour value theory are still relevant today, because both can be applied depending on how big the market and the firm are. However, if I as a consumer go to a large furniture retailer, the theory of utility can be applied because the seller who represents the big company provides various numbers of furniture with variable prices which can be compared for my satisfaction.  

Equilibrium Vs Underconsumption

According to neoclassical theory, general equilibrium means that prices for commodities and the factors of production will be determine by the balance of supply and demanded for that product. As mentioned before in Say’s Law, supply can generate its own demand. However, in contrast to Marxian economics, oversupply can generate underconsumption which means that if supply of goods runs out of consumers, the market can turn to failure.

According to Marshallian Cross, determination of price depends on the quantity of demand and supply; let us have a look the scissor theory, which has two characteristics; first, when price decline this normally provokes more consumers to buy, and when prices increase, this can induce firms to supply more quantity.

As reflected in the market these days, when prices decline this can provoke more consumers to buy and then when demand increases, suddenly the sellers shifted the prices and it requires more supply from the firms; then when firms increase the supply, prices will fall again. This phenomenon is a cycle each with its own movements. According to Marx this is an unstable economy because more supply can result in underconsumption and the market can face a downturn.   

Marginal Vs Structural

The neoclassical theory of marginal analysis originated from the David Ricardo theory of marginal principle which has been used for analysing rent, and this theory has been adopted as a doctrine for neoclassical economists broadly, taking for granted that all the factors are related. However, to apply the marginal principle Ricardo has introduced the principle of substitution in order to understand the relationship between labour and land.

In contrast to the neoclassical theory marginal analysis, Marxist structural analysis criticised capitalist the state which stays in power. In his manifesto communist Marx described the exploitation of the workers by the bourgeoisie, finding that the bourgeoisie keeps manipulating in order to maintain capitalist power.

The capitalist system as a tool of the state has created devices to protect their regimes, including institutions of the state such as the police, judicial system, universities and religions. Marxism strongly criticised these institutions which kept providing their blessing to the state, creating a ‘false consciousness’

Neoclassical theory has brought us an elegant theory of supply and demand which neoclassical economists believe will provide equilibrium of prices. The free exchange between consumers and buyers has indicated that prices are determined by the markets, and with the elaboration of deductive methodology, individual’s analysis, utility theory, equilibrium prices and marginal analysis, have given reasons for neoclassical economics to claim the consumer as the ultimate power in deciding the price.

Marxism on the other hand has provided a fundamental contribution to economic phenomena today. Through historical materialism, class analysis, labour theory of value, underconsumption, and structural analysis, all of these arguments and notions have been used for debates in the political economy arena today. For example, one Marxist theory that is still popular and has become a pioneer in market analysis is underconsumption theory, which believes that oversupply can result in market failure.