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POLITICAL ECONOMY vs. MARGINALIST ECONOMICS

This is my translation of a publication by Russian economist Vladislav I. Loskutov. The post deals with political economy and marginalist economics, their difference and compatibility.

Scientific circles tend to share a groundless opinion that classical political economy and marginalist economic theory (economics) are incompatible within the framework of the same science. The fallacy of this assumption can be easily established by comparing subjects of these scientific schools. The object of their research is the same, but subjects do differ.

When specifying the subject of their research, marginalists point to three main problems as their focus of interest:
· What goods and services must be produced and in what quantity?
· How should these goods and services be produced?
· For whom should these goods and services be produced?

According to the definition in a book by S. Fischer, R. Dornbusch and R. Schmalensee, «economics is a discipline that studies ways a society with scarce resources decides what, how and for whom it should produce.” [86, page 1]

The economic theory is consistent of micro- and macroeconomics, both of which, within the framework of the same discipline, have the following subjects. Microeconomics is “an element of economics, which deals with choices made by small economic units such as households, firms and governmental agencies... Macroeconomics is an element of economics, which deals with large-scale economic phenomena such as inflation, unemployment, and economic growth.” [15, page 8]
According to C. McConnell and S. Brue, “the subject of economics is in identifying effective ways to use scarce resources in the process of production of goods and services for satisfying material needs.” [47, page 27]. According to a definition by P. Samuelson and W. Nordhaus, economics – while being a combination of two disciplines: micro- and macroeconomics – is a science that studies how a society uses scarce resources for producing valuable goods and distributes them among various groups of people. “There is a great difference between macroeconomics, which studies the functioning of an economy as a whole, and microeconomics, which analyses behavior of separate economic elements like industries, firms and households” [102, page 5].

Marginalists’ acceptance of these questions as fundamental explains their theory’s inability to fathom the essence of social economic relations. In reality, how and for whom to produce is not the initial motive for individual economic behavior. In fact, an individual is concerned about his efficiency (implying minimum expenditure of his own labor and his own property) in satisfying his own constantly growing needs.

But the means, by which needs of a combined group of individuals are satisfied, depends on numerous internal/external and independent conditions. Identifying those conditions is in fact the most important task for a truly scientific economic theory based on historical facts and sociology rather than randomly selected criteria. In particular, history testifies that exchange of goods is far from being the only way of satisfying people’s needs. This goal is often achieved by other means of appropriation and redistribution, which can be implemented by various methods in the social struggle – from brutal violence to legitimate coercion.

Legitimate methods are commonly accepted as civilized. However, they are often stem from manipulation of laws, access of a particular social group to the government apparatus and public finance and respective protection of private interests at the public expense, monopolization of economically important information, behind-the-scene transactions and corruption. Whatever those methods might be, non-market relations within the system of distribution of social goods are its decisive element. The relations of commodity exchange play a secondary, auxiliary role in this system.

The narrowing of the subject of the economic theory down to “an efficient use of scarce resources in production of goods and services” is quite defective. History has shown that when resources are scarce, people are first of all mindful of where additional resources can be obtained, which often implies from whom they can be taken away. Only when obtaining resources by extensive means (i.e. by developing new lands or robbing neighbors) becomes impossible, people turn to the question of how rational is their use of existing resources.

The peculiarity of Marginalism is in its principled disdain for the evolutionary nature of economic relations and the transient nature of social systems. This places Marginalism on the same level with the dogmatic Marxism developed in the USSR. This type of dogmatism is probably what explains why Marxism was easily supplanted in Russia by Marginalism, which became the new governmental ideology in the country’s transition towards market economy.

In contrast to economics, which views the economy from the prism of market or commodity relations, political economy (both in its classical form as well as in its Marxist variation) concerns itself with the study of all economic relations. Therefore, as to the range of study, political economy correlates with economics “not as equal disciplines, but as a whole correlates with its part”, which allows us to define “economic theory” as “political economy with economics as its mathematical supplement” [66, page 21]. Mr. V.A. Biryukov is among economists who share the same view. He states that political economy and Marginalism “are not antagonistic and parallel, but are objectively complementary thus representing the same edifice of the general economic theory within the framework of the market economy. In other words, they are synthesizable!” [10, page 550. Italics added by the author].

Biryukov wrote: “Our goal is to prove blood relations between neoclassical economics with Marx’s authentic political economy of capitalism!” [10, page 552]. And I cannot but agree. Prior to that, economics must be purged of its claims to be the original theoretical school and its most odious theoretical constructions based on speculative hypotheses, which have very little to do with the economic reality. Those include the indifference curves, the exchange value without a connection to value as well as property rights without a connection to economic relations of ownership.

The fundamental difference of classical Marxist political economy from economics is in its systemic approach, which allows analyzing not only internal interrelations of economic systems, but their relations with their surroundings. Even though systemic thinking was not typical of the 19th century, the dialectical method of classical marxism is, in essence, a prototype of the contemporary systemic method. As J. Schumpeter pointed out quite rightfully, the advantage of marxism before other scientific schools is in the “understanding of economic evolution as a process necessitated by the economic system itself.” [93, page 53].

By limiting the range of the economic theory down to the three questions (what, how and for whom to produce), we thus bring it down to the level of applied sciences of a technical, managerialist nature. Even since the times of Aristotle, it is accepted that “knowing the cause is essential for knowledge.” [6, page 283]. Therefore, in order for an economic theory to claim its fundamentality with a social and political essence, it must address the question of why production occurs within specific social relations. It must focus on the following tasks:
· Studying objective laws of economic systems’ development;
· Assessing efficiency of the existing systems of economic relations;
· Identifying ways to change existing economic relations in accordance with known objective laws as the economic system’s environment changes.

Classical Marxist political economy is capable to handle these tasks as well as many others in terms of people’s interaction in the process of their economic activity in an ever-changing natural and social environment.

The limitations typical of the marginalist theories should not serve as an excuse for criticism or disdain. They are quite within the frameworks of the general economic science, but only as applied theories. In terms of modern economic practices as well as macroeconomic management, they are of an unconditional scientific value. But they are mostly pointless for explaining laws of economic evolution, while the talk of an “enduring” nature of capital and commodity relations together with the identification of economy with market is simply absurd. It is impossible to agree with those who insist that neither primitive, slave-owning, feudal societies nor Soviet Russia in the period of military communism “in fact had any economy in the strict sense of this word”. Neither historical nor theoretical grounds can be found for the opinion that “economy occurs when production of economic goods is “managed” through price signals mechanisms, i.e. market price fluctuations, profit and loss dynamics”. The same is true for the statement that “the strict sense of the word implies that economy is synonymous not with production, but – market.” [33, page 45]

Human behavior in the economic sphere among others is determined not by market factors only, but by the entire range of needs as well as interests and objectives conditioned by them. Thus, purely market theories are incapable of giving a scientific explanation of people’s actual economic thinking and economic behavior, and all their explanations eventually turn out to be inconsistent. That is why economics is utterly unsuitable to account for fundamentals of economic phenomena. It is quite consistent as an applied science which teaches how businessmen and economic entities make effective decisions in conditions of scarce resources and opportunities. It is obvious that, for entrepreneurs and managers, this portion of the economic theory is an absolute must.

Thus, in the strict sense, economics is a science, which deals with entrepreneurial economy (i.e. economic relations of entrepreneurs among themselves and other people in conditions of developed commodity production) and views the economy and society as a whole from the standpoint of entrepreneurial interests, through the prism of entrepreneurial thinking. Microeconomics is more in line with this definition. However, it must be noted that the consumer behavior and attitudes towards expenditure of resources as described by microeconomics is typical of enterprise-minded individuals only. Macroeconomics meddles with spheres where non-market relations are quite common, if not predominant. It lacks consistency and is prone to eclecticism because it is designed provide market interpretation to non-market phenomena such state-monopolies and public sectors.

The political damage inflicted by economics to a democratic society rests in its undeclared objectives – it fails to analyze inconsistencies and deficiencies of the existing social-economic system, it fails to encourage development of the system and instead seeks the most rational adaption to it. This “science” is aimed at suppressing civic consciousness and instilling obedience to the dominant regime even if its collapse is imminent.

Vladislav I. Loskutov
Translated by Boris Anisimov

The Russian version can be found at http://www.loskutov.org/FET/chapt_1.htm.

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