What Is Neoclassical Economics? by Morgan Jamie

Author:Morgan, Jamie
Language: eng
Format: epub
ISBN: 9781317334514
Publisher: Taylor & Francis (CAM)
Published: 2016-07-20T16:00:00+00:00

Classical political economy and vulgar economy

Piero Sraffa (1925, 1926) showed the inconsistencies of Marshall’s partial equilibrium analysis. In economics we are typically not concerned with infinitesimal increments. Thus, the marginalist method of focusing on marginal changes of a given factor, while assuming everything else is constant, is misguided. In particular, Sraffa showed that it is not reasonable to assume that supply and demand curves are independent, although his critique can be applied to marginal analysis in general – see Martins (2013) for a discussion with reference to Sraffa’s unpublished manuscripts.

Sraffa (1960) defines ‘classical political economy’ according to Marx’s original definition, which is very different from the definition of classical political economy adopted afterwards by Marshall, Veblen and Keynes. Marx (and Sraffa) used the term classical political economy in order to designate the approach of authors like William Petty, Richard Cantillon, François Quesnay, Adam Smith and David Ricardo, an approach which runs from the late seventeenth century to the early nineteenth century. Marx distinguishes this group of classical economists from the group he called ‘vulgar’ economists, which includes such economists as Thomas Robert Malthus, John Stuart Mill, William Nassau Senior, John Elliot Cairnes and most of the nineteenth-century economists often designated as ‘Ricardian’ economists (who, according to Marx, were not really following Ricardo’s classical approach, but rather ‘vulgarising’ it).

Marx argues that the classical economists were concerned with the underlying causes of value, which are found in the objective process of production. The classical authors focused on objective entities when measuring cost, such as labour time, or the quantity of land which is necessary to sustain a labourer who engages in a certain quantity of working time. The ‘vulgar’ economists from Malthus to Cairnes, in contrast, can be identified as those who, instead of looking at the underlying causes of value, focused on superficial phenomena, like supply and demand, and adopted a subjective conception of cost, which makes it difficult to compare costs that cannot be objectively measured.

The emphasis on subjective aspects is connected to the use of supply and demand as the ultimate determinants of value. In order to achieve a conception where supply and demand are ultimate and independent forces, the vulgar economists conceptualised supply and demand as forces driven by subjective desires, which are exogenously given. For the classical authors, in contrast, effective demand was not an independent or exogenous force, since it was defined with reference to the natural price, which in turn depends upon the objective conditions of production (and hence Marx preferred to use the term ‘prices of production’, rather than ‘natural prices’), and consists in the cost of production, which includes wages, profits and rent.

The classical claim that prices tend to the cost of production presupposes that there is no full employment. If demand exceeds supply, the market price exceeds the natural price (that is, the cost of production). But since labour is available for further production (that is, there is no full employment of labour), more goods can be produced in order to satisfy existing demand and prices return to the cost of production, as Ricardo argued.

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