Editor’s Introduction:

The Growing Failure of the

Neoclassical Paradigm in Economics
By Alberto Ruiz-Villaverde*

As López-Castellano (2012) explains, in the last third of the 19th

century, a new approach to economic analysis arose in several
European countries that focused on the notion of equilibrium
and the problems of optimal allocation of scarce resources while
avoiding historical and institutional aspects. Instead of focusing
on social relations, which originate in the production process, the
behavior of the individual was analyzed with respect to the goods
and services that satisfy his or her needs. Thereby, the “objective”
conception of value, built on costs of production, was abandoned
in favor of an explanation that started from individual psychology,
and, in particular, from the “subjective” perception of consumers.
Prices, reflecting the relative difficulty of production in the clas-
sical approach, became indicators of scarcity in the new orienta-
tion. Income distribution, an issue that in classical thought referred
to the social relations of production, the role of different social
classes, and their power relations, was reduced to a specific case
of the theory of prices. In short, political economy ceased to be a
social science and became a science of individual behavior.
This new approach, which was known as marginalism, offered
an alternative to Marx’s extension of classical political economy. It
contributed effectively to the interested forgetfulness regarding the
conflict of social classes. This was very visible when economic anal-
ysis transformed social classes into factors of production associated
with a price, presumably in terms of their productivity. “Getting rid
of the classical theory of value and of the classical explanation of

*Associate professor in political economy at the University of Granada (Spain). Head

of project PID-16-34: “How to Improve the Way We Teach Economics in the University:
A Critical Approach from the Contents” (2014–2018). E-mail: albertorv@ugr.es
American Journal of Economics and Sociology, Vol. 78, No. 1 (January, 2019).
DOI: 10.1111/ajes.12265
© 2019 American Journal of Economics and Sociology, Inc.
14 The American Journal of Economics and Sociology

the origin of profit by embarking on the path of marginalism was

the answer of the European bourgeoisie” (Lavoie 2014: 26). So at the
beginning of the 20th century, marginalism emerged as the dominant
economic paradigm. In those days, there was a clear convergence
between the new orthodoxy1 and the interests of the political and
industrial establishment.
With the depression of the 1930s, the inability of neoclassical eco-
nomics to understand and solve the problems of capitalist economies
became evident. The liberal recipes at this time—such as lowering
wages and eliminating labor insurance—were in direct contradiction
to reality and miles away from solving the problems. In fact, they
ended up aggravating them. Unemployment became widespread and
social unrest was increasingly unsustainable. Consequently, the social
situation forced the dissolution of traditional policies and spurred the
establishment of interventionist policies that began with the New Deal
program promoted by President Roosevelt in the early years of the
1930s. However, there was no theoretical framework that facilitated
the understanding of this performance and its legitimation. Keynes’s
General Theory, published in 1936, became that framework, revealing
the logic of these policies and legitimizing the need for them to be
applied.
At the end of the 1940s, there was intense academic concern ex-
pressed about the need for a textbook that could explain the Great
Depression as well as the economic policy measures that were used
to overcome it. Paul Samuelson came up with the key by introduc-
ing a chapter explaining the theory of national income determina-
tion, which later became known as “macroeconomics.” This allowed
Samuelson to initiate the message of the Keynesian revolution, a mes-
sage that in the 1940s was still quite novel and controversial. Basically,
the message held that capitalism was unstable, in particular due to the
volatility of investment spending, which had important repercussions
for income and employment levels. From this argument, based on the
cyclical behavior of economic activity, the concepts of the expendi-
ture multiplier and accelerator effects were introduced. This gave rise
to the study of economic policies, particularly fiscal policy, and the
discussion of their implications.
 Editor’s Introduction 15

Paul Samuelson proposed a novel formula in his textbook. He

managed to introduce a new economic approach, Keynesian macro-
economics, without disregarding neoclassical microeconomics, adopt-
ing a complementary approach between both branches of economic
theory.

In recent years 90 per cent of American economists have stopped being

“Keynesian economists” or “anti-Keynesian economists.” Instead they
have worked toward a synthesis of whatever is valuable in older econom-
ics and in modern theories of income determination. The result might
be called neo-classical economics and is accepted in its broad outlines
by all but about 5 per cent of extreme left wing and right wing writers.
(Samuelson 1997: 212)

This process is what Samuelson called “neo-classical synthesis

or neo-classical economics,” which appears for the first time in the
3rd edition of his textbook Economics. Unlike the “old” neoclassi-
cal economics, under this new approach full employment could not
be achieved through laissez faire; on the contrary, a correct use of
fiscal and monetary policies would be necessary. Thereby, certain
aspects of classical microeconomics returned to acquire relevance in
economic analysis.
The neoclassical synthesis became the dominant theoretical par-
adigm in economics for 20 years (from the 1950s to the 1970s). The
contributions of John Hicks, Franco Modigliani, James Tobin, Robert
Solow, and other economists fit quite naturally.2 This approach re-
mained valid throughout this period due to its remarkable success in
extrapolating its concepts and theories to reality; in other words, it
had good empirical support. In the 1970s, as a result of the phenom-
enon baptized as “stagflation,” a consequence of the rise in oil prices,
it lost all credibility. Again, the neoclassical paradigm in economics
failed to understand and solve the problems of capitalist economies.
Lucas and Sargent (1979) judged the economic predictions that had
been made from the neoclassical synthesis as “an econometric failure
on a large scale.”
Nowadays, mainstream economics is largely dominated by the
neoclassical synthesis, being largely Keynesian in macroeconomics
(through the interpretive filter of Paul Samuelson and John Hicks)
16 The American Journal of Economics and Sociology

and neoclassical in microeconomics. This fact is particularly visible

in the field of economics education, which influences the social and
political sphere. In the field of research a large number of programs in
economics compete in Lakatosian terms. As extensions of neoclassical
economics we can find the new neoclassical synthesis, neo-Keynes-
ian economics, new institutional economics, the new behavioral eco-
nomics, and neuro-economics. Likewise, there are a large number of
heterodox scientific research programs: post-Keynesian economics,
radical, Marxist, and Marxian political economy, institutional econom-
ics (old), feminist economics, ecological economics, social and hu-
manistic economics, and evolutionary political economy.
After the outbreak of the economic crisis of 2008, just a few (het-
erodox) economists were able to foresee and warn of the dangers
that were brewing in many countries. By contrast, many orthodox
economists claimed that everything was going well and there was no
reason to be worried. These events inevitably led to the resurgence of
older critical voices against neoclassical economics (and the way it is
taught in universities), such as post-autistic economics in France, the
pluralism-in-economics movement, and the Association for Heterodox
Economics, among others. Likewise, new voices and critical initia-
tives have emerged, such as the Economics Network, Rethinking
Economics, and Institute for New Economic Thinking. It has been
through these initiatives that, in the last eight years, scientific research
programs that compete with neoclassical economics are being reread
and restudied by a growing number of academics and economists. At
this point, it is interesting to ask ourselves: What characterizes neo-
classical economics? In which ways can heterodox research programs
be differentiated?
Marc Lavoie (2014: 11) argues that the neoclassical paradigm in
economics is formed by a series of essential elements (or metaphys-
ical beliefs) that characterize it. Axel Leijonhufvud (1976: 72) refers
to the same issue by pointing out that neoclassical economics can be
identified by common “generalities somewhat in the nature of cos-
mological beliefs.” It is convenient to succinctly detail some of them
in this introduction in order to better understand the different critical
contributions of this special issue.
 Editor’s Introduction 17

The Shifting Center of Gravity in Economic Analysis

The first essential element in neoclassical thought is the emphasis

on individual exchange as opposed to the social organization of the
production process. Introductory students are confronted with the
definition by Lionel Robbins (1932: 12–16) that economics is the sci-
ence that studies human behavior as a relationship between ends and
scarce means that have alternative uses. In this way, “scarcity” justifies
the analysis of supply and demand and gives “prices” a crucial role,
governs the behavior of the economy, authorizes neoclassical econ-
omists to attach great importance to the allocation of resources, and
explains why so many of them define the techniques of constrained
optimization as the epitome of neoclassical economics. In short, “scar-
city” is the quintessence of neoclassical economics.
In this way, neoclassical economics considers the production
phase of the economic process from a technical perspective. This
is through the study of certain mathematical production functions
that combine “factors of production,” mainly capital and labor. The
social relations that underlie the organization of production and the
latent conflicts between social classes are not studied. The analysis
of social classes and struggles is especially important in developing
an understanding of the nature of capitalism. Paradoxically, in the
context of neoclassical economics, this analysis is opportunistically
forgotten or avoided.

Instrumentalism

The second essential element in the neoclassical paradigm is “instru-

mentalism” as the dominant epistemology. This is in contrast to a
“realist” epistemology. Neoclassical economists make no effort to
raise realistic hypotheses. The axioms are chosen not because of their
possibility, but because of their ability “to allow precise predictions,
in particular when it can help to find and calculate the value of an
equilibrium position” (Lavoie 2014: 13).

Consider the problem of predicting the shots made by an expert billiard

player. It seems not at all unreasonable that excellent predictions would
be yielded by the hypothesis that the billiard player made his shots as
18 The American Journal of Economics and Sociology

if he knew the complicated mathematical formulas that would give the

optimum directions of travel, could estimate accurately by eye the angles,
etc., describing the location of the balls, could make lightning calcu-
lations from the formulas, and could then make the balls travel in the
direction indicated by the formulas. Our confidence in this hypothesis is
not based on the belief that billiard players, even expert ones, can or do
go through the process described; it derives rather from the belief that,
unless in some way or other they were capable of reaching essentially the
same result, they would not in fact be expert billiard players. (Friedman
1953: 12–13)

Neoclassical authors, using Friedman’s methodology of positive

economics, have developed a large number of economic models
in order to explain the socioeconomic reality based on unrealistic
foundations. Whether theoretical assumptions are realistic or not is
irrelevant for these economists. The relevant question is whether
predictions are accurate. There are several realistic characteristics
that are framed within a multitude of neoclassical models, but these
are auxiliary hypotheses of secondary importance. When neoclas-
sical authors make attempts at verification or refutation in applied
work, the basic hypotheses, such as diminishing returns or optimiz-
ing behavior, are never subject to refutation.

Methodological Individualism

The third distinctive element of the neoclassical paradigm refers to

“methodological individualism.” The basic unit of modeling is the
individual. This form of analysis always starts from the individual’s
behavior. All social institutions and collective phenomena are treated
as hypothetical abstractions, necessarily derived from the decisions
of individuals. Some heterodox authors argue that it is precisely from
this ontological vision that ideology can be established. Individuals,
despite being unique due to their different preferences, are consid-
ered equal in relation to the economy. There are no groups of indi-
viduals or social classes.
Two features differentiate the perspectives of orthodoxy (individ-
ualism) and heterodoxy (holism) in terms of the foundations of eco-
nomic analysis. From an orthodox perspective: “(i) only individuals
 Editor’s Introduction 19

have aims and interests (individualism); (ii) the individual behaves

in a way adequate to his aim, given his circumstances (rationality
principle); and, (iii) the social set-up is changeable as a result of the
individual’s action (institutional reform).” By contrast, from a hetero-
dox perspective: “(i) Society is the “whole,” which is more than its
parts (holism); (ii) society affects the individual’s aims (collectivism);
and, (iii) the social set-up influences and constrains the individual’s
behavior (institutional analysis)” (Agassi 1975: 244).

Full Rationality

All models developed under the umbrella of neoclassical econom-

ics start by assuming that agents are fully rational in their deci-
sion-making. Given some information (a set of alternatives), the
“economic man” has the ability to analyze this information, to per-
form all possible calculations, and to establish an order that allows
him to choose the best alternative that meets his interests. In other
words, “the rational man can always explain the choice of an alter-
native, from a given set, as an outcome of a process of deliberation
in which that outcome is indeed considered the best” (Rubinstein
1998: 7).
The dissatisfaction with the neoclassical paradigm in economics
and the attempts to replace the basic model of “economic man” with
alternative decision models are not new. Herbert Simon in the mid-
1950s inspired many proposals in this vein. Many economists have
attempted to model bounded rationality in economic literature since
then.
In spite of this growing dissatisfaction, practically all economic
models taught in universities start from this assumption of full ratio-
nality. In addition, many research models, such as in game theory,
also start from the same assumption. It is not easy to transcend this
approach. According to Rubinstein (1998: 3), three fundamental obsta-
cles need to be overcome: “(i) the construction of pertinent new the-
ories of choice; (ii) the refinement of the notion of choice. Decision
makers also make decisions about how and when to decide; and, (iii)
the transformation of the notion of equilibrium.”
20 The American Journal of Economics and Sociology

Unfettered Markets

As Lavoie (2014: 24) explains, a good number of neoclassical econo-

mists exhibit great confidence in the ability of unfettered markets to
deliver stability, full employment, and solutions to any economic or
social problem. The larger versions of neoclassical economics claim
that instability and unemployment can prevail only when government
distorts the functioning of markets. Those distortions are believed to
cause the price system to stop functioning as an effective information
system between consumers and producers, thereby preventing the
achievement of an equilibrium. Richard Werner (2005: 3) summarizes
the issue with great brilliance:

[The] key beliefs [of neoclassical economics] are that the pursuit of individ-
ual self-interest will lead to a better society, that government intervention
beyond the narrow maintenance of law and order should be minimized
if not eliminated and that the powers of unfettered markets should be
unleashed in virtually every part of society, at home and abroad. For this
purpose, structural reforms are recommended to deregulate, liberalize,
privatize and open up as many industries and aspects of the economy as
possible, as the beneficial forces of the invisible hand, if only allowed to
operate freely, would improve people’s lives, create wealth, produce pros-
perity and lead to maximum happiness.

By contrast, among heterodox economists, there is a firm com-

mitment to the participation of the government in the economy, but
there is a diversity of approaches. For instance, following Joseph
Schumpeter, the dynamism conveyed by entrepreneurship in capital-
ism is recognized and believed by post-Keynesian economists to be
the key quality that opposes static allocation efficiency. Thus, reck-
lessly relying on markets is questioned. For this group of economists,
instability is created by highly flexible prices, and they therefore
believe that state regulation is required at both the micro and macro
levels. Government intervention imposes fewer costs than unregu-
lated capitalism. Marxists believe that the capitalist mode of produc-
tion, given its internal contradictions, after a time collides with its
historical limits. So they defend moving to a more socially viable
mode of production.
 Editor’s Introduction 21

The articles that form this issue have, broadly speaking, adopted
two premises: on the one hand, the development of a critical ap-
proach has been sought with respect to the neoclassical paradigm
in economics as a whole or to some of its anomalies; and, on the
other hand, authors have been encouraged to move from their critical
approaches to discussions of real situations in order to explore how
mainstream thought in economics affects society in both general and
critical perspectives.
What follows in the second half of this introduction is a brief sum-
mary of each of the articles that appear in this issue. The aim is to
provide sufficient information to help readers determine which arti-
cles will be most helpful to read in full.

Articles in This Issue

Frank Stilwell
From Economics to Political Economy:
Contradictions, Challenge and Change

As a toolkit for understanding, steering, or improving the real world,

mainstream economics is demonstrably deficient. The global finan-
cial crisis brought these concerns out from the academic realm into
the broader public domain. However, 10 years later, it is clear that
the storm was weathered without fundamental change to mainstream
thought and practices. There is more public skepticism about the eco-
nomics profession but not fundamental change in what economists
do.
Underpinning and motivating an increasingly assertive movement
for change are three central beliefs: (1) that the economics profession
is dominated by a neoclassical orthodoxy that is generally unhelpful
for understanding “what is going on out there”; (2) that better alterna-
tives exist; and (3) that building on those alternatives can help to un-
derstand and change a world bedeviled by economic problems such
as economic instability, inequality, and unsustainability.
A pluralist approach recognizes that each of these heterodox
views may provide important insights and deserve a hearing. In prac-
tice, teachers normally need to be selective in a time-constrained
22 The American Journal of Economics and Sociology

curriculum and, more generally, pluralism can be limited to schools of

thought that share a common concern to elucidate the “reality” of the
modern world economy largely organized on capitalist principles. The
implication is that pluralism can produce “interim truths” that enrich
our understanding of the world in which we live and enhance the
possibility of changing it for the better.
The advocacy of heterodoxy and pluralism can also usefully em-
brace a multidisciplinary approach. There are many opportunities for
heterodox economists to work with practitioners of cognate social
sciences, engaging in mutual-learning relationship with subjects like
geography, sociology, politics, or history. It is the heterodox econ-
omists’ commitment to interdisciplinary studies that is the basis for
building these partnerships.
Challenging mainstream economics can also be helped by using
the term political economy. This signals a common concern to under-
stand the economy in historical, social, and political context. Most of
the heterodox currents of thought share the view that understanding
the economy requires focus on cooperation and conflict, contradic-
tion and change. Analyzing these features contributes to understand-
ing the continuously evolving economy and society. Explicit reference
to the political in political economy is also significant: political econ-
omists do not simply want to understand the world; they also want to
change it for the better.
Making progress with the political economy project challenges eco-
nomics education, especially in universities. It is there that the repro-
duction of orthodoxy occurs. However, while reform is an intrinsically
worthy aim, it is frustratingly difficult to realize in practice because
mainstream economists usually resist genuine pluralism. Seeking to
establish a separate institutional base for teaching and research in
political economy, as has been achieved at the University of Sydney,
is a fruitful alternative but requires sustained student-staff activism.
Hybrid strategies involving more direct engagement with interdisci-
plinary connections also warrant consideration.
The political economy project cannot properly be an exclusively
academic concern. It also requires engagement with nonspecialist
audiences, thereby broadening debate on political economic issues
of public importance. The challenge for dissidents in the economics
 Editor’s Introduction 23

profession is to extend the critique and broaden the influence of an

alternative political economic paradigm—among students, cognate
social scientists, and people more broadly engaged in political eco-
nomic discourse and public policy.

Dante A. Urbina and Alberto Ruiz-Villaverde

A Critical Review of Homo Economicus
from Five Approaches

The notion of homo economicus has been under heated discussion

for decades among economists. This occurs not only among econo-
mists but also scholars from other social sciences such as psychology,
sociology, anthropology, history, and political science. This is not sur-
prising, as neoclassical economics is based and structured around the
notion of homo economicus. The theory of consumer choice (utility
maximization), the theory of the firm (profit maximization), differ-
ent market structures, and welfare theorems—practically all aspects
of economic theory or at least microeconomic theory—directly or
indirectly require the assumption that agents act in accordance with
the homo economicus scheme. As pointed out by Barnes (1988: 477),
this notion provides neoclassical economics with a “methodological
agenda” which involves “reducing the complexity of economic events
at any time or place to the universal trait of rational choice making; a
trait that, because of its determinist nature, is easily represented in a
formal model.”
The notion of homo economicus, which is intensively used in
neoclassical economics, is much more specific and restrictive than
that used originally in classical economics. It is this notion that is
more relevant to review, given its importance in the foundation and
structure of mainstream economics. The authors detail the main
features that define and delimit the notion of homo economicus
in the neoclassical conception: (i) individualism; (ii) optimizing
behavior; (iii) full rationality; (iv) universality; and (v) exogenous
preferences.
Once the neoclassical notion of homo economicus is well defined,
a critical review from all five economic approaches is conducted. The
established order goes from the particular to the more general. As a
24 The American Journal of Economics and Sociology

result of this critical review, the main conclusion to be reached is that

the scheme of homo economicus is clearly inadequate and deficient.
However, despite its inadequacies, it remains one of the fundamental
pillars of the neoclassical paradigm in economics, which allows us
to ask the question: Why have we not yet overcome this paradigm?
The answer is that the notion of homo economicus constitutes a the-
oretical base for the moral and ideological legitimation of our whole
economic system. Hence, when individuals behave in a rational and
self-interested manner, this thesis claims there is an “invisible hand”
that procures the common good. From this standpoint, if individuals
are rational, it is possible to assume that the whole system is rational.
Thus, under these behavioral circumstances, a general competitive
equilibrium is achieved in free markets, which means the resources
of society are being used in the most efficient way possible. This
removes any possibility of ethical or moral consideration regard-
ing self-interested behaviors. It allows us to unconsciously assume
Bernard Mandeville’s moral tradition in which private vices become
public benefits.

Brendan Markey-Towler
The New Microeconomics: A Psychological,
Institutional, and Evolutionary Paradigm
with Neoclassical Economics as a Special Case

This article argues that a new psychological, institutional, and evo-

lutionary microeconomics must arise that can account for a broader
range of socioeconomic behavior than can currently be accounted for
by neoclassical economics. This new perspective will treat neoclassi-
cal economics as a special case while advancing our understanding of
the determinants of behavior in a coherent and integrated manner, a
problem with which neoclassical economics struggles. The result will
be a new pluralistic paradigm in microeconomics that is coherent,
integrated, and formalizable, and therefore intellectually competitive
with neoclassical economics.
Neoclassical economics is considered as a research program and its
core—the theory of rational choice—offers insights into the determi-
nation of socioeconomic behavior, which is understood to arise from
 Editor’s Introduction 25

substitution between rival incentive structures. Econometric evidence,

evidence from policy experiments, and evidence from behavioral
economics are then considered, each of which suggests that there
are more determinants of socioeconomic behavior than neoclassical
economics is able to explain. A new psychological paradigm for mi-
croeconomics is introduced that builds on the work of Peter Earl and
can serve as a basis for an institutional-evolutionary perspective on
socioeconomic systems.
This perspective views the mind as a network structure within and
upon which the psychological process operates to transform the so-
cioeconomic environment into behavior. The insights of neoclassical
economics are preserved as a special case where a state of substitut-
ability can be said to exist between two courses of action. Meanwhile,
a range of other insights on the determination of socioeconomic be-
havior are integrated within explanations of behavior in ubiquitous
cases where a state of substitutability does not exist. When behavior
cannot be changed as a result of substitution between rival incentive
structures, socioeconomic environments must be framed in particular
ways. There must be persuasion and learning in order for behavioral
change to be induced. Behavioral economics, psychology, and sociol-
ogy have much to say about this process. This perspective may serve
as the basis for an institutional-evolutionary perspective on socioeco-
nomic systems in which the widely accepted rules of interaction are
originated, selected, and retained as institutions by a process of social
evolution.
This is not merely of theoretical interest, and a variety of practical
contexts are considered in which this new paradigm offers insight
into microeconomic policy and strategy, specifically in privatization
and competition policy, climate policy, industrial strategy, and social
engineering. If we apply the theory assuming that a state of substitut-
ability exists between various courses of action, the result will be an
incomplete analysis of the problem, and an incomplete solution will
likely be introduced. This new pluralistic paradigm in microeconom-
ics is therefore not only intellectually competitive with neoclassical
economics, it is also of deep practical importance.
26 The American Journal of Economics and Sociology

Astrid Agenjo-Calderón and Lina Gálvez-Muñoz

Feminist Economics: Theoretical and Political Dimensions

Feminist economics (FE) is a school of economic thought and politi-

cal action that gained important visibility during the 1990s, although
its origins can be dated back to the mid-19th century. Currently, FE is
defined in the plural, as a cross between various economic (Marxist,
institutionalist, post-Keynesian) and feminist (liberal, Marxist, radical,
ecofeminist) orientations. They have a common interest in 1) expand-
ing the notion of economy to focus on the processes of social provi-
sioning, 2) understanding gender as a central category of economic
analysis, and 3) encouraging social transformation. FE is also a politi-
cal practice that aims to improve the functioning of the economic sys-
tem so that all people have access to a dignified life under conditions
of equity. FE not only poses an alternative horizon but also offers
concrete political proposals of more immediate scope.
This article presents a general systematization of these theoretical
and political dimensions, particularly focused on the critique of the
neoclassical paradigm and its political correlates. The article begins
with a brief tour of the origins and evolution of FE as a current of
thought and action and then deepens its theoretical and political di-
mensions separately. Regarding theory, the article criticizes neoclassi-
cal assumptions, such as the logic of self-interest, the figure of homo
economicus, and the myth of free choice. The focus is on the neo-
classical treatment of gender in terms of the “new economics of the
family” and the theory of human capital. Those premises are based
on a universalist methodology that would simply “add women and
stir,” without questioning the androcentric biases implicit in neoclas-
sical discourse. Likewise, the article develops some of the specific
contributions of FE, specifically the extension of economic theory to
unpaid care in homes and other life-sustaining work, where economic
success is valued for the impact on human well-being. In this vision,
gender is not understood as another variable, but as a lens that allows
us to observe the heteropatriarchal dimensions of the economic sys-
tem and economic theory.
Regarding the political dimension, FE responds to the implications
of the neoliberal model on economic policy and the impact this has
 Editor’s Introduction 27

on gender inequality. The FE critique is combined with the approach

of different proposals of feminist action in facing the global ecological
emergency, structural adjustment policies and austerity, the privatiza-
tion and commodification of intimate life (affections, sex, biological
reproduction, and care), the intensification of trade liberalization, and
the possibilities of economic autonomy for women. Finally, some
of the pending challenges for feminism and feminist economics are
outlined.

Fernando López-Castellano and Fernando García-Quero

The Euro System as a Laboratory for Neoliberalism:
The Case of Spain

Since the 1970s, neoliberalism has evolved from ideology to political

agenda to public policy to constitutional rule. This process of change
has been possible due to the endorsement of an ahistorical theory
that legitimizes technocratic despotism, financial deregulation, labor
precarization, and the purging of constitutional politics. This profound
transformation of social and legal relations under the “euro system” is
analyzed. The specific focus is the regressive emergence from the “cri-
sis” in Spain. Although Spain is a peripheral country in the European
Union, its experience shows how problems in contemporary Europe
are a direct consequence of the neoliberal vision. Their solution will
depend on the capacity of the member states to reestablish the project
to create a socialist Europe that strengthens institutional democracy
and develops universal systems of social protection.
The authors assert that neoliberalism is a utopian concept that has
become a political agenda. The process of building the “euro sys-
tem” has been a political and economic stage on which to realize
the neoliberal vision. Neoliberal constitutionalism involves purging
democratic control from the constitutions of member states. These
neoliberal constitutions erode the competencies of states and remove
the main decisions on economic policy from popular sovereignty.
Technocratic bodies, such as the European Central Bank (ECB) and
the European Commission, dictate policies, but they are not demo-
cratically elected institutions. They grant themselves the powers of the
state and limit the power of member states, officially and materially.
28 The American Journal of Economics and Sociology

But these centralized institutions have no democratic legitimacy be-

cause they were not created constitutionally.
The current crisis is the result of the transformation of the capitalist
system during the last quarter of the 20th century, sustained by the
expansion of financial markets and the theoretical legitimation of neo-
classical economics. This transformation from a capitalism based on
productive wealth into a capitalism based on speculative wealth, to-
gether with policies of deregulation and liberalization of capital flows,
is closely related to the increase in inequality, the loss of social rights,
and an increase in poverty.
From the perspective of economic thought, a political economy is
necessary that takes into account the financial, economic, political,
and ideological dimensions of public deficits and public debt. The
transformation of the capitalist system and the growing dissatisfaction
with neoclassical economics forces a retrieval of the most valuable
of the traditions of 1) political economy from Marx’s critical work,
2) the historical school, and 3) the “old” institutionalism. The dom-
inant economic theory, despite its formalism, is incapable of secur-
ing necessary changes in economic and social structures. In order to
understand the transformations taking place, the authors propose an
institutional theory of political economy that is critical of neoclassical
economics and conceives of the economy in historical, social, and
political context.
The study of economics requires a redefinition of its purpose, an
enlargement of its boundaries, and the promotion of methodological
expansion. Economy and society are dynamic and complex systems
that change and are sustained in complex social interrelations of dom-
ination, conflict, and cooperation, in which natural resources, tech-
nology, culture, institutions, power, property, ethics, and collective
action are continually defining the contexts in which individuals and
social groups take decisions that affect the context and the individ-
uals themselves. Understanding how these structures work and the
relationships between them would help to guide collective behavior
towards activities with a high degree of social return and with positive
effects on people’s welfare.
 Editor’s Introduction 29

Xabier Arrizabalo-Montoro, Mario del Rosal,

and F. Javier Murillo-Arroyo
The Debate on Pension Systems:
The Paradigmatic Cases of Chile and Spain

The problem of pensions is revealed with two antagonistic case stud-

ies within the capitalist economy. On the one hand, in Spain, a public
system of intergenerational solidarity that was achieved by the work-
ing class over decades of struggle constitutes a pillar of social security.
This type of system shields a part of the total income generated in the
form of wages. Hence it has been placed in the crosshairs of capital
after the crisis of profitability of the 1970s. This explains why it has
been subjected to a series of regressive reforms against the interests
of workers during the last decades, a process in which the European
Union has assumed a growing role.
On the other hand, the pension system in Chile shows the con-
sequences of privatization. The Pinochet dictatorship liquidated the
previous public pension system and abruptly imposed a model that
is still maintained, which was based on individual capitalization and
private management. To this end, private financial entities, called pen-
sion fund administrators (AFP), implement the system for a profit.
Any mechanism of solidarity and any possible guarantee of a decent
pension are denied. The Chilean case represents a paradigmatic case
of the destruction of social security.
The analysis of both cases is based on a theoretical framework of
the critique of political economy, thus opposing the current main-
stream in economics. The current approach, due its methodological
individualism, prevents understanding of economic phenomena, in
particular of pensions, since they are rooted in the existence of social
classes with opposing interests in a capitalist society. Public pension
systems are inherently shaped by conflict between labor and capital
because a pension represents the primary form of wage deferment,
which constitutes a drag on profitability. Therefore, attacks on public
pensions have been central to the strategy of devaluing labor.
The difference in the pension systems of the two nations is en-
capsulated in one simple comparison: in Spain, pensions provide an
average of 79 percent of the last wage (before retirement): in Chile,
30 The American Journal of Economics and Sociology

pension benefits are only 33 percent of the last wage for male work-
ers and 25 percent for female workers. The dismantling of the public
system in Chile has forced a significant fraction of the population into
poverty. For its part, the Spanish system continues to represent an
important redistributive instrument. However, the transformations it
has undergone in recent years have placed the retired population in
a position of increasing vulnerability. Is Chile the symbol of what lies
ahead for Europe?

Jose María Martín-Martín, María S. Ostos-Rey,

and Jose A. Salinas-Fernández
Why Regulation is Needed in Emerging Markets
in the Tourism Sector

Currently, new economists are trained in neoclassical economics.

Moreover, its body of ideas directly inspires the economic policies of
Western countries. The theses defended by neoclassical economics
are usually based on assumptions that have little to do with reality,
which is why they are considered useless when attempting to solve
real socioeconomic problems.
One feature of the market for tourist services can be used to test
the neoclassical idea that markets reach an optimal equilibrium auto-
matically if public authorities do not intervene with regulations. The
authors analyze the market that currently exists for the intermediation
of tourist accommodations online through websites such as AirBnB.
Because this market was only recently created, it is still largely unreg-
ulated. This kind of intermediation has experienced an expansion in
the past few years, a situation that has generated a lot of controversy
surrounding the sharing economy. A number of impacts have arisen
from the increased use of private homes and apartments as tourist
accommodations, such as a rise in the rental prices that local residents
must pay for long-term accommodation in tourist neighborhoods.
Residents also complain of disturbances caused by tourists in resi-
dential neighborhoods. Finally, hotels have complained that the shar-
ing economy causes unfair competition since shared-unit owners do
not have to comply with the same regulations as hotels. Neoclassical
economists attempt to describe the way in which different sectors of
 Editor’s Introduction 31

the economy reach an equilibrium and avoid conflict, but that method
lacks the ability to describe actual situations such as the one that has
developed in peer-to-peer (P2P) tourist markets.
Far from reaching an economic and social optimum, the P2P mar-
ket for exchange of accommodations has caused problems in related
markets, such as the hotel sector and residential properties market. It
has also alienated various social groups. Many studies indicate that
this kind of platform is the reason for the increasing popular rejection
of tourism, even in countries that are greatly dependent upon this ac-
tivity. This situation makes it necessary to reflect on whether markets
can operate on their own in a context of limited regulation, let alone
reach a social or economic optimum. Neoclassical analysis, which
is based on the supply-demand interaction, takes into consideration
only price equilibria and is too limited to address real problems. It
is more useful to analyze a market in terms of the particular effects
it has on the interests of stakeholders—the groups involved in the
activity. In light of the possibility of opting for self-regulation, the au-
thors propose a comprehensive analysis of the characteristics of each
collective involved in order to regulate in line with their interests.
Without regulation, this sector will continue to be subject to ongoing
conflicts. The neoclassical model, by means of equilibrium formulae,
is not able to build a proper framework to encapsulate heterogeneous
conflicts, roles, and impacts, greatly limiting its analytic power. This
fact makes it unwise, and even dangerous, to rely on this theoretical
body of knowledge to design public policies.

Xabier Arrizabalo, Patricia Pinto, and Lucía Vicent

Historical Significance of Labor’s Increased Precariousness
in Germany, the United Kingdom, and Spain

The condition of labor is becoming more precarious, even in the

most advanced economies. This article addresses the historical signif-
icance of this phenomenon in three countries: Germany, the United
Kingdom, and Spain. The authors show why it can lead to confusion if
one believes the situation is self-explanatory or that a mere empirical
description will suffice.
32 The American Journal of Economics and Sociology

For any complex social phenomenon, a theory is required to ex-

plain it. The mainstream approach in economics is sterile. It is based
on methodological individualism, which serves the interests of those
who defend the status quo. The authors offer instead a critique of
political economy as their methodology. The fundamentals are es-
sentially Marxist, which put at the center the laws that govern the
process of capitalist accumulation and its contradictions. Within the
framework of these laws, it is possible to understand the phenom-
enon of labor exploitation, which is characteristic of any capitalist
economy. Exploitation is not a term of moral blame. It is a term that
merely describes the tendency by which capital extracts a surplus
from labor and is thus the basis of profitability. When capital falters
during a financial crisis, labor exploitation becomes more intensive
and extensive as a means of sustaining the capitalist system. In this
way, capitalism destroys itself by diminishing the power of labor to
sustain the system.
The authors analyze precariousness in three European econo-
mies, highlighting the place that the European Union occupies as
the conduit of International Monetary Fund guidelines. Germany, the
United Kingdom, and Spain have different productive structures in
the European Union and the global economy, but they share labor
precariousness as one of the most noteworthy features of their recent
trajectory. This article addresses some of the main forms that precari-
ousness takes in each of these economies:

• “minijobs” in Germany, which are part-time jobs with a maxi-

mum wage of 450 euros per month, with little social protection,
and which constitute already a quarter of the contracts and affect
one-sixth of the workforce;
• “zero hours contracts” in the United Kingdom, which do not
ensure any workload or wage but sometimes require employ-
ment exclusivity, even as the lack of definition in these contracts
aggravates the vulnerability of workers;
• “false self-employment” in Spain, which means work with a social
wage content that lacks legal formalization and corresponding
rights, together with fraudulent internship and training contracts
that also promote labor precariousness.
 Editor’s Introduction 33

On the basis of the integration of the theoretical and empirical anal-

yses, the authors draw several conclusions about labor precarization
and all its implications. It goes beyond the increase of exploitation
that precariousness supposes and raises the discussion about its his-
torical meaning around the notions of overexploitation and destruc-
tion of productive forces. All of this is framed within the context of
the world economy, with its particular concretions in each case, but
always linked to the current demands of capitalist accumulation.

Notes

1. “Veblen (1900) coined the term in the last installment of a three-

part essay on “The Preconceptions of Economic Science” published in the
Quarterly Journal of Economics in 1899 and 1900 (Aspromourgos 1986). It
was at this time that Alfred Marshall elevated economic theory to the highest
level and founded the new economic orthodoxy. Alfred Marshall is one of the
most important economists who created contemporary economics. He syn-
thesized the classical economic approach based on production and costs with
the new theory of marginal utility and the concept of subjective utility. That
was the “Marshallian synthesis.” In this way, Marshall was one of the main
founders of the so-called neoclassical school of economics and formalized,
among other achievements, the concept of elasticity, the theory of the firm,
and the analysis of welfare economics.
2. Joan Robinson confronted the American Keynesians of the neoclassi-
cal synthesis calling them “bastard Keynesians.” Turner (1990) explained that
bastard Keynesians had “artificially restored” Say’s law through the employ-
ment policy against which the Keynesian revolution was raised. The authentic
Keynesian message held that, during a depression, a lowering of wages (to
achieve the appropriate real-wage rate equilibrium) would be counterproduc-
tive and could aggravate the situation.

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