Other Schools of Thought: Marxian to Keynesian Economics PDF

# Other Schools of Thought: Marxian to Keynesian Economics Prepared by: Assoc. Prof. Karen Grace Valdez, Ph.D. Department of Business Economics College of Commerce and Business Administration University of Santo Tomas Espana, Manila ## Karl Marx * German philosopher, economist, sociologist, and...

# Other Schools of Thought: Marxian to Keynesian Economics Prepared by: Assoc. Prof. Karen Grace Valdez, Ph.D. Department of Business Economics College of Commerce and Business Administration University of Santo Tomas Espana, Manila ## Karl Marx * German philosopher, economist, sociologist, and revolutionary socialist * Co-authored the Communist Manifesto with Friedrich Engels * His ideas on class struggle and the overthrow of capitalism had a profound impact on social and political thought ### Key Concepts * **Historical Materialism:** Marx believed that history progresses through stages driven by economic changes and class struggles. The way which societies provide for their material needs conditions the totality of social relations, institutions and ideas * The "base" (economic structure) determines the "superstructure" (social, political, and cultural institutions). * **Class Conflict:** Society is divided into two main classes: The bourgeoisie (owners of the means of production) and the proletariat (workers) * The bourgeoisie exploits the proletariat, leading to class conflict and ultimately revolution. * **Alienation:** Under capitalism, workers are alienated from their labor, the product of their labor, and their fellow humans. * **Labor Theory of Value:** The value of a commodity is determined by the amount of labor required to produce it. * Profit is generated by exploiting the surplus value created by workers. * **Surplus Value:** The difference between the value of the labor a worker performs and the wages they receive. * **Capitalism's Inevitable Demise:** Marx believed that capitalism would eventually lead to its own downfall due to: * Increasing concentration of wealth and power in the hands of the bourgeoisie. * Immiseration of the proletariat. * Overproduction and economic crises. * **Socialism and Communism:** Marx envisioned a socialist society where the means of production would be owned and controlled by the workers * This would lead to a classless society where everyone would receive according to their needs and contribute according to their ability. ## Utilitarianism Utilitarianism is a moral philosophy that advocates for actions that maximize overall happiness or well-being. It has had a significant influence on economic thought, particularly in the areas of welfare economics and public policy. ### Key Principles * **Utility:** The principle of utility, which is the idea that actions should be evaluated based on their consequences for overall happiness or well-being. * **Greatest Happiness Principle:** The idea that actions are morally right insofar as they tend to promote the greatest happiness for the greatest number of people. * **Consequentialism:** The focus on the consequences of actions, rather than their intentions or motives. * **Impartiality:** The requirement that everyone's happiness should be considered equally. ## Founders and Contributions ### Jeremy Bentham (1748-1832) * **Felicific Calculus:** Bentham developed a method for measuring pleasure and pain, known as the felicific calculus, which could be used to evaluate the consequences of different actions. * **Social Reform:** Bentham was a social reformer who advocated for policies that would maximize the overall happiness of society, such as prison reform, animal rights, and women's rights. ### John Stuart Mill (1806-1873) * **Higher and Lower Pleasures:** Mill distinguished between higher and lower pleasures, arguing that higher pleasures, such as intellectual and moral pursuits, are more valuable than lower pleasures, such as physical gratification. * **Individual Liberty:** Mill was a strong advocate for individual liberty and believed that individuals should be free to pursue their own happiness, as long as it does not harm others. ## Marginalist School The Marginalist Revolution It marked a departure from the classical economists, particularly in its emphasis on **individual decision-making** and the role of **marginal utility** in determining economic behavior. The marginalist theory of value is based on the idea that the natural value of a good is determined by its subjective scarcity, or how much people want it relative to how much is available. ### Founders and Contributions ### William Stanley Jevons (1835-1882) 1. **Theory of Marginal Utility:** Jevons is credited with independently developing the concept of marginal utility. He argued that the value of a good is determined by its marginal utility, not its total utility. 2. **Mathematical Economics:** Jevons pioneered the use of mathematical methods in economics, particularly in the analysis of utility and demand. ### Carl Menger (1840-1921) 1. **Subjective Theory of Value:** Menger emphasized the subjective nature of value, arguing that the value of a good is determined by its marginal utility to the individual. 2. **Methodological Individualism:** Menger advocated for a methodological approach that focused on the actions and decisions of individuals, rather than on abstract social forces. ### Léon Walras (1834-1910) 1. **General Equilibrium Theory:** Walras developed a comprehensive model of general equilibrium, which showed how all markets in an economy are interconnected. He used a system of simultaneous equations to analyze the interactions between different markets. 2. **Mathematical Economics:**Walras, like Jevons, was a pioneer in the use of mathematical methods in economics. He used advanced mathematical techniques to analyze economic problems. ## Neoclassical Economics Neoclassical economics focuses on individual decision-making, market efficiency, and equilibrium. ### Key Concepts and Assumptions * **Rationality:** Neoclassical economics assumes that individuals are rational actors who make decisions to maximize their utility (satisfaction) or minimize their costs. * **Marginalism:** It emphasizes the importance of marginal analysis, focusing on the additional benefits and costs associated with small changes in economic variables. * **Market Equilibrium:** Neoclassical economists believe that competitive markets tend to move towards equilibrium, where supply and demand balance. * **Efficiency:** The theory posits that competitive markets are efficient, meaning they allocate resources optimally and maximize social welfare. ### Core Tenets 1. **Consumer Theory:** * **Utility Maximization:** Individuals aim to maximize their utility by allocating their income among different goods and services. * **Demand Curves:** Consumer demand curves are derived from individual utility functions, showing the relationship between price and quantity demanded. 2. **Producer Theory:** * **Profit Maximization:** Firms seek to maximize their profits by producing the quantity of output where marginal cost equals marginal revenue. * **Supply Curves:** Supply curves are derived from firms' production costs, showing the relationship between price and quantity supplied. * **Market Equilibrium:** * **Price Determination:** The interaction of supply and demand determines the equilibrium price and quantity in a market. * **Efficiency:** Competitive markets are efficient because they allocate resources to their highest-valued uses. ## Alfred Marshall: Pillar of Neoclassical Economics ### Key Contributions 1. **Supply and Demand analysis:** * **Intersection of Supply and Demand:** Marshall popularized the use of supply and demand curves to determine equilibrium price and quantity. * **Elasticity of Demand and Supply:** He introduced the concept of elasticity to measure the responsiveness of quantity demanded or supplied to changes in price. 2. **Time Periods in Economic Analysis:** * **Market Period, Short Run, and Long Run:** Marshall differentiated between these time periods to analyze how markets adjust to changes in supply and demand over time. * **Short-Run and Long-Run Costs:** He distinguished between fixed and variable costs and analyzed how they influence production decisions in the short and long run. 3. **Consumer and Producer Surplus:** * **Consumer Surplus:** Marshall defined consumer surplus as the difference between what consumers are willing to pay for a good and what they actually pay. * **Producer Surplus:** He also introduced the concept of producer surplus, which is the difference between what producers receive for a good and the minimum amount they would be willing to accept 4. **Marginal Utility and Marginal Cost:** * **Law of Diminishing Marginal Utility** Marshall explained how the marginal utility of a good decreases as consumption increases. * **Equimarginal Principle:** He applied this principle to consumer and producer behaviours, showing how individuals and firms allocate resources to maximize satisfaction or profit. 5. **Industrial Economics:** * **External Economies and Diseconomies:** Marshall analyzed how external factors, such as technological advancements or infrastructure, can affect the costs and efficiency of firms. ## Institutional Economics Institutional economics is a school of thought that emphasizes the role of institutions in shaping economic behavior and outcomes. Unlike neoclassical economics, which focuses on individual rationality and market efficiency, institutional economics highlights the importance of social, political, and cultural factors. ### Key Emphasis * **Institutions:** Institutional economists argue that institutions, such as laws, customs, and social norms, significantly influence economic behavior. * **Historical and Evolutionary Perspective:** They recognize the historical and evolutionary nature of economic systems and emphasize the role of time and change. * **Interdisciplinary Approach:** Institutional economists draw on insights from sociology, anthropology, and history to understand economic phenomena. * **Critical Analysis of Capitalism:** Many institutional economists are critical of the assumptions and limitations of neoclassical economics, particularly its focus on market efficiency and individual rationality. ## Thorstein Veblen (1857-1929) * **Conspicuous Consumption:** Veblen introduced the concept of conspicuous consumption, where individuals consume goods and services to display wealth and social status. * **Institutional Critique:** He criticized the capitalist system for its emphasis on pecuniary gain and its neglect of social and cultural values. * **Technological Change and Economic Evolution:** Veblen argued that technological innovation can lead to economic and social change, but it is often resisted by vested interests. ## Welfare Economics Welfare economics uses microeconomic techniques to evaluate the social desirability of economic policies. It aims to assess the impact of economic policies on social welfare, focusing on concepts such as efficiency, equity, and social justice. ### Key Concepts * **Social Welfare Function:** A mathematical function that ranks different social states according to their social desirability. * **Pareto Efficiency:** A state of allocation of resources where it is impossible to make one individual better off without making at least one another individual worse off. * **Economic Efficiency:** The optimal allocation of resources to maximize social welfare. * **Equity:** The fair distribution of resources and benefits among individuals. * **Market Failures:** Situations where markets fail to allocate resources efficiently, such as externalities, public goods, and imperfect competition. ## Vilfredo Pareto (1848-1923) * **Pareto Efficiency:** Pareto introduced the concept of Pareto efficiency, which is a fundamental concept in welfare economics. * **Social Welfare Function:** He also contributed to the development of social welfare functions, which are used to measure social welfare. ## Arthur Cecil Pigou (1877-1959) * **Welfare Economics:** Pigou's book "The Economics of Welfare" is a foundational text in welfare economics. * **Externalities:** He analyzed the concept of externalities, which are costs or benefits that affect parties not directly involved in a transaction. * **Pigouvian Taxes and Subsidies:** Pigou proposed using taxes and subsidies to correct market failures caused by externalities. ## Keynesian Economics Keynesian economics emphasizes the role of government intervention in stabilizing the economy. It challenges the classical economic view that free markets automatically adjust to achieve full employment. ### Key Emphases * **Aggregate Demand:** Keynesian economics focuses on aggregate demand as the primary driver of economic activity. * **Government Intervention:** Keynesians advocate for government intervention, particularly fiscal policy, to stimulate demand and stabilize the economy during recessions. * **Multiplier Effect:** A concept that suggests that an initial increase in spending can lead to a larger increase in overall economic activity. * **Sticky Prices and Wages:** Keynes argued that prices and wages are sticky, meaning they don't adjust quickly to changes in economic conditions, leading to periods of unemployment. ## John Maynard Keynes (1883-1946) * **The General Theory of Employment, Interest, and Money (1936)**: Keynes's magnum opus, this book challenged classical economic theory and provided a new framework for understanding economic fluctuations. * **Fiscal Policy:** Keynes advocated for government spending and tax cuts to stimulate demand during economic downturns. * **Monetary Policy:** He also recognized the role of monetary policy, particularly interest rate adjustments, in influencing economic activity. ### Key Emphases * **Fiscal Policy:** Government spending and taxation policies used to influence economic activity. * **Monetary Policy:** Central bank policies, such as interest rate adjustments and open market operations, used to control the money supply and influence economic activity. * **Demand-Side Economics:** The idea that economic growth is driven by increased demand for goods and services. * **Deficit Spending:** Government borrowing to finance spending, even if it leads to a budget deficit. Keynesian economics has been influential in shaping economic policy, particularly during the Great Depression and subsequent economic downturns. However, it has also been subject to criticism, especially from neoclassical economists who argue that government intervention can be inefficient and lead to unintended consequences.