The fall of communism symbolized the triumph of capitalism and free market over protectionist economics. Resultantly, the world has experienced the concepts of free trade and free government pushed as the most effective means of combating and alleviating poverty, disease, and various plights suffered in greatest numbers in the least developed parts of the world. In terms of economic prosperity, the United Nations classifies the world into two categories: the developed world, which includes the industrialized countries of Western Europe, the United States, Japan, Canada etc. The rest, where four fifths of the world’s population resides, is known as the developing world. Neoclassical economics has become so institutionalized and embedded into our way of thinking that countries are defined as being either a ‘Least Developed Country’ (LDC) or a ‘Developed Country’ before it is viewed in terms of culture, components of its economy, or its existing political institutions. Among the loudest cheerleaders of the globalized system of capitalism are the neoclassical economists. In neoclassical economics,
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“The Great Depression, like most other periods of severe unemployment,” wrote American economist Milton Friedman, “was produced by government mismanagement rather than by any inherent instability of the private economy.” Friedman’s early career was defined by his support of the Keynesian principles that embraced large-scale government intervention through spending in order to stimulate a depressive economy. The Keynesian Revolution enjoyed success in the aftermath of the Great Depression and World War II where governments around the world circulated money into their economies by investing in rebuilding infrastructure and boosting employment. As the economic growth the world enjoyed from the Keynesian fiscal policies melted into an environment of stagflation of the 1970s (which involves low growth and high inflation), Friedman began to investigate the flaws in the Keynesian philosophy of dealing with economics. His epiphany set the groundwork for the development of a new branch of neoclassical economics: monetarism. “It is common to distinguish necessaries, comforts, and luxuries,” wrote influential economist Alfred Marshall. “The first class including all things required to meet wants which must be satisfied, while the latter consist of things that meet wants of a less urgent character.” Marshall’s discernment between the various dimensions of the material economy – the influence of price, distinguishing human needs and wants, the utility of goods and services – allowed him to become not only an architect of neoclassical economics, but it allowed him to transform economics as a whole. For Alfred Marshall, immature economics had resulted in mass exploitation, plenty of poverty, and unequal distribution of wealth. This revealed much about the deficiencies in the study of economics as much as it did about its implementation: In his influential 1890 text The Principles of Economics, Marshall wrote about his urge to develop economics because “the study of the causes of poverty is the study of the causes of the degradation of a large part of mankind.” To understand economics required not only a moral dimension to be assigned to it, but it also required studying the political economy and social landscape of communities. Although his drive was based on the inequality around him, Alfred Marshall was not a Marxist theorist in which he condemned the struggle between The triumph of capitalism and the free market society was altogether unsurprising for neoclassical economists. The reason for this is because the individualistic and independent element of the free market best complements their views on human nature. On the whole, individuals are rational in always viewing situations with self-interest. As a result, humans are continuously looking for ways to maximize their profits or satisfaction in their daily life, while minimizing their losses. This competitive and maximum utility characteristic in people makes a market that stresses the importance of advantage and individualism the most effective way in channeling their nature while insuring the opportunity of satisfying this human need. However, in addition to individuals and institutions attempting to maximize their self-interest in absolute terms, neoclassical economists view a large part of the equation is maximizing individual self-interest in relative terms too. Neoclassical economics sought to make economics a more grounded study by incorporating elements of mathematics, biology, politics, and social science to make it more relatable to the common worker engaged in the market. When looking at relative advantage in the market, The concept of marginal utility arose as rejection of the labor theory of value that had previously been espoused by neoclassical economists. Economists such as Adam Smith taught that the classical labor theory of value argued that the value – or utility – of a commodity was determined by three important factors that went into a product’s creation: the amount of labor that went into producing it, the effort required of the labor, and/or the amount of labor expected of others in exchange of the product. With the turn of the 19th century, this economic theory was challenged by other schools of thought that believed that there were many ignored factors that determined the utility of a product, mainly the marginal utility theorists. “The difficulty lies not in the new ideas, but in escaping from the old ones,” wrote British economist John Maynard Keynes in his 1935 text The General Theory of Employment, Interest and Money. “As these old ideas ramify, for those brought up as most of us have been, into every corner of our minds.” Keynes was a maverick economist. The popular school of economic thought in the early 20th century stressed the importance of the micro level and private sector of economics in influencing the public and macro level institutions of the economy. The popular thought was that because humans were rational in their pursuit to maximize their commodities and satisfaction, the free market would remain efficient and operate properly because it offered the best opportunity for individuals to create an economy that could insure maximum utility. In the wake of an economic collapse during the Great Depression, John Keynes launched what would be known as an economic “Keynesian Revolution” that stressed the importance of the mixed economy: one that valued the neoclassical importance of the micro level, with the need for accountability and stability protected by the macro level. The story of the rise of Keynesian economics is fascinating. From the late 19th century onwards, neoclassical economics theory dominated the mainstream discourse of macro and microeconomics. Under the assumption that humans are rationale and their decisions are rooted in efforts to maximize the utility of their purchasing power, neoclassical economics theory stressed the importance of microeconomics influence on macro level markets. Heavily reliant on mathematical models and statistics, neoclassical economics theory asserted that a free market and a focus on individualistic methodology offered reliable foundations by which to navigate and forecast maximum utility in a marketplace. Yet, neoclassical economists’ belief in the fixed behaviors of individuals desire to maximize profit in their daily life has felt increased scrutiny as the global economy has shown itself to be more The creators of neoclassical economics differentiated from other schools of economics in their understanding of what determines the utility of a commodity in the market. At the height of the Industrial Revolution, the market place was understood in terms of classical economic theory. In his text The Wealth of Nations, Adam Smith explained that the labour theory of value ruled that the value of a product was linked to the “the toil and trouble of acquiring it.” The value of an item was determined by the costs and effort invested in producing it. As the intensification of industrialization started settling down, a new breed of economists began to interpret what influenced value from a different perspective. Neoclassical economists started moving away from classical economists views of the market from the macro-level, and diverted more attention to the micro-level. For the creators of neoclassical economics, the most important determiner of utility of a product was not in any concrete value in and of itself, but value was mainly determined by consumer’s own perception. |
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