$48 PARTIV: THE CRITIQUE OF CAPITALISM Conclusion arism provides insight into how cooperation and confit coexist within the capitalist economy. It emphasises the economy interently contradictnry character, Wotkers and ‘capitalists have to cooperate to win thei daly bead (and cake), Dut there is afundamertal | confit of interest, anifertindetrbutonal struggles and esis tendencies In seeking to derelop an analysis ofthese conditions, Marxist politcal economy presents us with some parila distinctive propositions: + profs come om the expatation of labour + rowth comesfiom the accumulation of pital : one the Market + change comes fom dass struggle. ‘This interpretation of capitalism is as contentious today as it was when it was frst Aeveloped: Mars just wil not Ue down. Altheug his ideas were formulated in an early phase of capitalist development, they continue to have striking resonance today. Indeed, as long as capitalism exists, Marxism is bound to be a mafor reference point for the analysis ofits contradictions. Equally predictably, the Mant interpretation of capitalism ishotly contested bbythose with stake in maintaining the existing economic system. The Ideology of Neoclassical Economics KEY POINTS Sse Ue Man ot et clr eee 18 Free-market Economics ... 150 Heitor (at | oC faethe : 20 Firms “00.5 | 21. Market Structures... “22 Distribution * a eet 23. Economic Welfare and Neoliberalisin ...Free-market conomics IT] Why study neoclassical economics? What were the origins of tis infantil schoo! of economic thought? What support does this typeof economic theory give toneolberaism today? ‘hee ismch eet cpa han marks, Teed pope gta dss ‘isontp, come ces underaen by te tate and icv ele-at tophaied by the defn of the capitalist economy Chapter. Howe oma outers, fou on markets Cra orton coon he eo at ordre are than cena ben eda thoy. epee ome the tema’ They eset the coon eas fitconneed and seegotrg tutes inih pean ser esynercntathe ned forbtanl goerent resin * ‘Neoclassical economic theory has been particularly influential in the past three decades as aews of apg the economy end te econ non of green eas Inne othe soc ees, frm fener npr, rag How pia todo procter undetermined tebe under eth coe nd aslo The market rules ‘Why ae mavets hed in such high regard by mainsream economists? The short answers because eyare thought to permit ntunly advantageous exchanger and ensue the efficent allocation ofecoomic resources. Mates allow consaersto hop around fo what sus them best, at price they ean afford, Producers seek to sity those consumer demands: those vino goods are not favoured by consumer wil go out of busines. Theres comin and ‘no nterventon by third parties to disruptor impede the transactions between sleinerested ‘yer and sellers. From this erapecive, in the wore of one textbook autho, Markets are thermos effective aswel a the most deocatic mode of economic organisation that has yet ‘een developed" (CHAPTER 18: FREE-MARKET ECONOMICS ‘Underlying this faith in markets are two related assumptions: the desirability of private property and the undesirablty ofa substantial role for the state in economic affairs. These ate the hallmarks of free-market ideology. Private property is favoured because its the basis, of the individual interests and incentives that drive a market economy. Collectively ovmed and managed property is held to be less conducive to the development of markets Siialy, ' substantial role for government in the economy is held to constitute an unwarranted Interveation, likely to ‘distort’ patterns of resource allocation, The institutions of the state generally cannot know what serves individuals interests as wel as the individuals do ‘themselves. Because the collective wellbeing of society is no more tien the sum of individual el: being, it is best to leave individuals to organise ther own transactions inthe economic mazketplace. variation on this theme emphasises the dyramic character of the market ast principal ‘virtue, According to this view, markets encourage innovation and risk aking, while pealising failure. A world of rugged individualism provides the necessary incentives for economic progress. Thus, the strength ofthe market economy is not that it necesarly produces an licen allocation of resources at anytime, but that it s conducive to change and growth. ‘This view of the market, significantly different from the view of the market a an equilibrium. mechanism, derives from the Austrian school of economic thought, most notably the work of ‘rederik von Hayek (1899-1992), one ofthe most controversial winners ofthe Nobel Prize in Economic Sciences What it shares with neoclassical theory isa strong belie in the market ‘economy a the best ofall pocsble worl, These pro-market economic theories have signifeant echoes of social Darwinism, ‘emphasising as they do the struggle for existence and survival of the ittet in producing a healthy society. Modem economists generally eschew any explicit connection with hese social ‘brinciples, which were popular century ago and most clearly expounded by Herbert Spencer (1820-1903). The implicit connection is stil there, though. Because markets—in theory, at \east—reward enterprise and weed out inefficiency, mainstream economists continue to hold ‘hem in high regard. By emphasising those features, neoclassical theory Links up with what Daniel Fusfeld calls ‘the flkioe of individualism Tetinks up with neeliberal beliefs favouring fee enterprise and freedom of choice, and opposing ‘politically motivate’ interventions in economic affairs. As such, neoclassical economics san intiguing blend of technical analysis and ideology. The origins of neoclassical economics ‘Neoclassical theory originated in the 1870s when scholars, working independently in different counties, laid the foundations fora neve paradigm of economic analysis. The most prominent ‘among them were the English economist Wiliam Stanley Jevone (1835-82), the Austrian economist Carl Menger (1840-1921), and the Swiss economist Leon Walras (1834-1910). Earir inthe nineteenth century, David Ricardo had steered economic analysis towards more abstract reasoning, paving the way for the theoretical model building of erthodex economics.= PARTY: THE IDEOLOGY OF THE MARKET ‘The neoclassical economists took this model building further, narrowing the broad-ranging concerns of clasicalpoltcal economy toa formal analysis of individual economic behaviour and the functioning of markets MengerandJevors simultaneously developed thebasicprineples ofmarginal analysis, still the core ofthe neoclassical method today. Marginalism emphasises smal adjustments, such as the adjustments a consumer might make in deciding which combinations of commodities ‘might yield most pleasure, ‘Lite more of this and alittle Les ofthat’, or‘alittle more ofthat and alte lee ofthis. This incrementalism in individual choices is presented asthe essence of economic decision-making. Rational consumers, one may surmise, wil shift their spending ‘between coramodities until the wily, or satisfaction, given by eachis equalised atthe margin, ‘Jevons also posted thatthe utility gained fom consuming extra units of exch commodity ‘would diminish as more of it were consumed, This is the basic principle of eiminishing marginal utility: the more you have of something, it is implied, the less eatra satisfaction results fom having alte more oft. So, commodities that are abundant in supply generally command lower prices; consumers, experiencing diminishing marginal utility ae reluctant ‘to pay much for additional units, Searce commodities, on the other hand, are expensive, not necessarily because of the amount oflabour that has one into their production, but becanse ‘they yield higher utility at the margin Hence, diamonds are more highly priced than wate, notwithstanding the fact thatthe latter is of greater importanceto life. alr developed aview ofthe economy as a whole that showed how consumers decisions {ntetock with producers decisions, Changes in consumers’ purchasing patterns, twesargued, ‘would change the prices ofthe goods and thereby change the amount of each that would be supplied in the market. Thus a web of intricate relationships would ensure thatthe pattern of production would continuously adjust to the pattern of demand. Walras represented this interdependence ina mathematical model of the equilibrium conditions for an economy with ‘numerous producers and coneumer.Iformsthebasis of whats known s general equilibrium theory. ‘These were powerful theoretical innovations Clasical explanations of value, emphasising the role of labour, were challenged and, according to the neoclassical economists, refuted. Utility replaced labour values. As Menger put it, ‘The value of goods arises from their relationship to our needs, and is not inherent in the goods themselves, With changes inthis relationship, vale arises and disappears. Concern with analysing the total economic surplus was also jettisoned, along with the labour theory of value. Only individuals are considered to have surpluses, and there are ofa psychological kind, arising when the utility derived from a commodity ic over and above what the consumer had to pay for that commodity. The social ‘perspective changes accordingly. The previous political economic concems about classes, their competing interests, and the conditions for social progress—characterstic of both Maras andthe classical political economists’ analyses—have no pace in these new theories. Insteag, the spotight shifts to the behaviour of individuals and competitive markets, and to Dhow consumers’ demand infiences prices andthe allocation of resources. (CHAPTER 18:FREE-MARKET ECONOMICS [A synthesis of these ideas, and further extensions and practieal applications, was provided by Alfred Marshall (1842-1924). His Principles of Economics, frst published in 1890, ‘was the standard economics textbookin the first few decades of the twentieth century. Even today, iti possible to come across economists who claim that pretty much all worthwhile ‘economic reasoning can be found in Marshall's text. Marshal's work was certainly significant achievement. It blended the central concepts of marginal analysi with enduring ideas from classical political economy, and added some more practical concerns aboutindusry and trade, and introduced (mainly in footnotes) a distinctive form of diagrammatic representation that has been widely used in orthodox economic analysis ever sinc. was not blind tothe social problems that accompanied capitalist economic development in his time. However, dhs interest in social reform was secondary tothe development of an economic theory that was, in exsence, a sophisticated exposition of the self-adjusting mechanisms operating in a competitive market economy. LSA) ALFRED MARSHALL (1842-1924) Aled Marshall was Professor of Economics at the University of Cambridge in the Unted Kingdom xing 2 period when that university was renowned {or its Victorian piety and temperance. nhisinaugeral lecture in 1865, Marshall sot himself the tasks: to ‘tregthen the scientific authority of economics, to ign it withthe Victorian eral and paitesl mood, and todkew thobest Cambridge mento the subject During the 23 years he eccunied the chair he energetically pureued theso goals, and did so with considerable success, ‘As. 8 mathematician, Marshall thought thet ceonomos would have greeter potential for elentiic How do neoclassical theorists analyse consumer behaviour? Does this give us a useful guide to the behaviour of consumers in practice? ‘Theorthodox economic theory ofmarkets pays considerable attention to consumer behaviour, ‘This should come atl suprise, Markets are focal points for te interaction between buyers andsellers. The sellersnormallyake the rst move, bringing to the market what they havefor sale, Butthey wil havewasted ther timeand effort ifconsumersdonot buy Those sellerswould ‘then disappear from the market, ts bereplaced by others whose goods have characteristics and ‘rice more tothe consumes’ Ling. The story becomes ttle more complicated when retail, stores act as intermediate instittions between the buyers and the producers ofthe goods. I becomes more complicated stil when the preferences and behaviour of the consumers are shaped by processes of commercial advertising and other forms of demand management, Neoclassical economists adopt a very distinctive approach tothe analysis of consumer ‘behaviour. They build particular models based on assumptions about utility maximisation, ‘consumer rationality, and consumer sovereianty. This chapter exoloes this modeling process and these assumption, raising qestions about the relationship between the theory andthe practical proceses of consumer choice. In what sense, ifany, are consumers rational? Is it sensible to regard consumers as tue most powerful actors inthe econome drama? Ifthey are not the most powerful actors, whe s? Consumer rationality t's start with ome introspection. If ou ask yourself whether your decisions are ation canyoufee confident abou ving a car answer? Few otas woud wlingly admit to recurrent imation even ifwe concede that we sometines make l-nfrmed or unwise choices that ve subsequently regret. Oar consumption decison ace ace in point. Tey may vary fom the impulsive to the habitual, bt both extremes may be justified as suiting our personalPART V. THE IDEOLOGY OF THE MARKET ‘circumstances, needs, and desires. We do not usvally like to admit to being manipulated by ‘sales promotion. Ofcourse, we see and hear the commercials, but we generally prefer to feel ourselves sufficiently selective, critical, and maybe just downright cynical about them. ‘The claim to consumer rationality implies a cleat yardstick by which we can measure the effectiveness of our actions. Does rationality imply something about the process by which we make choices; collecting information about athe available products for example? How much ‘of tis information isi rational to collect, given that the information-gathering process itself may be costtyortime-consuming? Or does rationality only imply something about the outcome ‘of choice—the absence of regret, ora perceptible increase in personal happiness, for example? ‘These are not easy questions to answer. Neoclassical economists often seek to cut through this complexity, saying that only ‘revealed preferences’ matter, Thus, when a consumer is faced with a choice between alternative products with different prices, we can observe her or his behaviour and infer the relevant preference ordering. However, if this process of choosing isto be regarded as tational, then some general goal-achievement process must be involved. For this purpose, neoclassical economists have posited the goal of utility maximisation. While it is conceded that consumers have varying personalities and preferences, they are assumed to pursue a ‘uniform objective: the greatest utility (or satisfaction) thats attainable with ther disposable ‘income. Rationality implies seeking and achieving that goal. At first sight, it seems 2 reasonable, if rather general, proposition. It implies that considerations of self-interest ‘dominate all other influences in the consumption process. It implies that consumers have sufficient self-awareness to know which goods and services best suit thelr own needs and desves, It implies purposive action, The problem is that this assumption of utility maximisation may involve circular reasoning. Anything that consumers do maximises their utility: otherwise they wouldn't do st Consuming addictive drugs, for instance, may be deemed to satisfy one person's particular needs. Making impulsive consumer decisions rather than carefully considered ones may be interpreted as utility-maximising behaviour for someone who places a high premium on the ‘time spent making choices or on the thril ofa spontaneous and risky decision. Each of us has different preferences, So, itis difficult to establish that any particular pattern of choice are ‘not self-interested and rational for the people concerned. Utility maximisation starts to look likea tautology: a proposition that cannot be refuted, and which therefore has no placein any enquiry purporting to be scientific. ‘Notwithstanding these concerns, the utlity maximisation postulate has a central place ‘in neoclassical theory. It offers a theory of the consumer to represent the behaviour ofall consumers. In this way, Homo economicu, the universal rational economic person, is born. Modelling consumer choice Box 19.1 shows the formal process of modeling the consumption detsons of a utility maximising individual. It considers the simplest case of choice between two commodities. ‘Theconsuneris deemed toe nan imaginary stuation where theraejust wo eames; CHAPTER 1: CONSUMERS. ‘mourexample, bread and wine. tis the sortof situation depicted inthe following stanza fom ‘The Rubeiyat by Persian astronomer-poet Omar Fhayyar: ‘A book of verses underneath the bough Aloaf of bread, aug ofwine and thou Beside me singing inthe wilderness Oh wilderness were paradise enough? ‘THE NEOCLASSICAL THEORY OF CONSUMER CHOICE The essential festures of neoclassical consumer theory, nthe simplest case of a consumer facing 2 choice between two commesities (say, broad and wine), ean be summarised as falows, Assumed objective ‘The consurnar socks to maximise hi or her uty Given knowiedge of + the consumer income + theprioes ofthe commeditioe + the consumer's tit funtion which shows how hier her wkity depends onthe {quantities of bread and wine consumed. Deduce “The consumer elects tho optimal conrotity combination such thet marginal sty of breed _ rice of bread rrorginalutity of wine price of wine The marginal uty ofa commodity is the acitional utility the coneumer derives from consurringone are unit oft By consuming products eo that th relative marginal tities ‘ar eq4 to thir rolativ prices, the consumer maximises tity, SS ‘What balance between the to commodities—bread and wine—wil the consumer select? the consumers income is limited, her or his choice will epend on each product's relative prices and their expected contribution tothe consumer's satisfaction, This latter aspect can De represented in terms of utility function, showing the extent to which different quantities ofthe two commodities contribute to the consurmer’s total satisfaction. iit isa function of (or depends upon) consumption. Tus, the utility function denotes the functional elationship ‘between the consumer's utlityand the quantity ofread and wine consumed. If the consumer has al the relevant information (that is, income, commodity prices, and the characteristics of his or her own utility function), the best selection may be deduced. This optimal combination of the two commodities is that at which the ratio of ‘marginal utilities for bread and wine equals the ratio of their prices, ax shown in Box 19.