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Neo-Classical
Economics Is Not “Neo”, But “Anti”-Classical
Kepa M. Ormazabal
(University of the Basque Country, Spain)
© Copyright 2003 Kepa M. Ormazabal
The “Neo” in the expression “Neo-Classical Economics” suggests that
today’s prevailing economics, the one that has become “autistic”, is a
continuation or a new edition of Classical Economics. I do not know when or why
this terminology was originated, but, wherever or however it was, it is
seriously misleading. Far from being a continuation of Classical Economics,
current “Neo-Classical” Economics is, in its fundamental features, definitely
“Anti-Classical”. It represents not
a continuation, but a radical break with Classical Economics. And not exactly
for the best, as I am going to argue.
What is Classical Economics? To cut a long story short, let me take Ricardo
as the representative of Classical Economics.
It is well known that the conception of value in exchange as labor lies at the heart of Ricardian
Economics. It is true that Ricardo found serious problems in establishing the
connection between value and labor, but this was
the basis upon which he purported to explain the workings of a capitalistic
economy. Ricardo had taken the idea from Smith, who had the same project and
who, also, found problems to bring it to fruition. For both economists, the
ultimate goal is to account for profit.
Profit is the name of the game in Classical Economics, simply because it is
understood to be the name of the game in a capitalistic economy. The question
about exchange value is raised because there is a previous question about the
nature of profit: what has to be
explained is profit, but profit is some kind of surplus value. Not surplus value in
use, but surplus value in exchange.
If we want to understand profit, Smith and Ricardo say, we must start by
understanding what value in exchange is, and, on this basis, we will be able to
understand what profit, surplus exchange value, is.
The “Neo-Classical” approach to value, on the contrary, starts from exchange, not from profit. “Neo-Classical” Economics
starts from the analysis of the concept
of exchange, that is, of exchange
as such. While Classical Economics focuses on surplus exchange value, “Neo-Classical” Economics focuses on exchange value. From this starting
point, it arrives at the hardly surprising conclusion that, from the
standpoint of pure exchange, the notion of surplus exchange value is irrational, a contradiction in terms.
Hence the shocking “Neo-Classical” thesis that competition annihilates profit. What this thesis actually means
is that exchange as such excludes
logically the idea of surplus exchange value. Despite the wording, the
thesis does not speak of competition and profit, but of exchange and surplus
exchange value
It is typical of “Neo-Classical” Economics to surreptitiously identify the
concepts of exchange and competition. This can be seen in
“Neo-Classical” microeconomics textbooks; the chapters on externalities and
related themes provide good examples of this confusion. For instance, we are
told, first, that an exchange of
money for the right to smoke among smokers and non-smokers may be
Pareto-optimum. Next, we are told that it has been shown that the competitive solution is
Pareto-optimum, that the outcome of a competitive
market for smoking has been shown to be Pareto-optimum. The underlying
idea is that a perfectly competitive capitalist economy does not differ in
its essentials from a barter economy in which the improvement of utility (and
not the endless accumulation of exchange value) is the end of exchange.
Competition, when it is perfect, annihilates profit and, thus, annihilates
surplus exchange value. What remains is exchange value as a temporary means
to use value, so that a truly competitive capitalistic economy becomes, in
the end, a barter economy in which the very notion of profit is totally out
of place.
While the focus of Classical Economics is to bring to light the nature of
surplus exchange value, “Neo-Classical” Economics starts from the basis that
there is no such thing as surplus exchange value. That this is best seen
under perfect competition does not imply that monopoly power gives rise to
any surplus value. On the contrary, it is a standard thesis in
“Neo-Classical” Economics that monopoly power, far from giving rise to any
surplus exchange value, gives rise to a redistribution
of an already existing exchange value to the monopolist, at the expense of
those who pay for the monopolized commodity a price higher than its value.
Accordingly, monopoly profit does not represent any surplus value, but a
transfer in which one party gains what the other party loses. Moreover; in
the end, all lose, because monopoly implies a deadweight loss which is a
burden for the economy as a whole. In the end, no matter whether competition
or monopoly prevail, “Neo-Classical Economics” sees, rightly, that the
analysis of exchange as such excludes the notion of surplus exchange value.
From this truth, it concludes that surplus value in exchange is irrational
and, therefore, that it does not exist, that profit is appearance of surplus
value without reality.
In Classical Economics, on the contrary, the end of exchange, (and of
production, which forms a unity with exchange) is not the improvement of
utility, but the transformation of commodities into money for the sake of
profit, that is, the accumulation of wealth in the shape of exchange value,
money, for the sake of accumulation itself. For the Classical tradition, the
concept of price is only indirectly related to utility, and it is primarily
related to profit; in other words: price is not a means to improve utility,
but a means to surplus value, to the accumulation of capital for its own
sake.
The “Neo-Classical” contention that competition annihilates profit amounts to
saying that the notion of price as derived from the analysis of exchange as
such is the only notion of price that makes sense in economic analysis. This
view is decidedly at odds with reality, the observation of which shows that
the name of the game in the economic system in which we live is profit and
the growth of capital. Confronted with this conflict, does “Neo-Classical”
Economics conclude that something is wrong with its theoretical conceptions?
Surprisingly enough, it does not; it chooses, instead, to put the blame on abstraction. Science requires
abstraction, says the standard “Neo-Classical” apology, but abstraction,
sadly, involves leaving aside real properties, and, in the end, a loss in
realism. “Neo-Classical” Economics, we are told, is a very scientific endeavor, which implies that it flies high and,
therefore, that it is “highly abstract”. The seeming disagreement between
theory and reality does not show that the theory is false, but that it is
abstract.
As we all know, abstraction is an operation of thought; where there is
abstraction, there is thought. But where there is thought, there is
knowledge. Being an operation of thought, abstraction is, therefore, a mode
of knowledge, that is, an operation of thought whereby we get to know
something about reality, something that empirical observation does not reveal
to us. The “Neo-Classical” view that abstraction involves, in the end, a loss
in realism implies that abstraction involves a loss in knowledge and, in the
end, that abstraction is a mode of non-knowledge. In my opinion, this is a
mistaken notion of abstraction that leads to the paradoxical view that
abstraction is not an operation of thought whereby we know something real
about reality, but an operation whereby we ignore something real about
reality. Abstraction separates us from reality, instead of getting us closer
to it. Autism?
Looked at from Classical Economics, the problem with the “Neo-Classical”
conceptions of value and profit is not that they are “highly abstract”, but
to the contrary, namely, that they are “lowly abstract”, which is why they
lead us to deny the evidence. “Neo-Classical” Economics makes things still worse
by trying to make up for its lack of abstraction by focusing on the formality
of the quantitative relationships among economic phenomena. These, truly, are
real determinations of economic reality, but accidental determinations. It is
a significant fact that the separation between theory and reality has
steadily increased as the so-called Mathematical Economics has grown.
Mathematics, far from being an aid to shed light and to promote rigor and
scientific dialogue, has sunk economics into schizophrenia and scholasticism.
The last culprit in this sad story is the old noble science of mathematics;
the villain is the lack of theoretical abstraction that disguises its
weakness under the cloak of the formal language of mathematics.
In Classical Economics, “high abstraction” does not lead to the employment of
the term “competition” as equivalent to “exchange”, or to saying that, in
developed capitalistic economies, profit is annihilated. A competitive
economy is not one in which surplus value has been annihilated. Competition
is not the process whereby profit (surplus value) is annihilated, but the
process whereby profit is uniformly distributed
among the capitals of the economy, so that the profit rate is the same for
any capital investment. This is the Ricardian
conception of competition. Ricardo never thought that competition annihilated
profit, and never claimed that his theories were at variance with facts in so
far as they were highly abstract. This is not to mean, in any way, that
economics has ended with Ricardo, but all the contrary.
More perhaps than in other times in its history, economics today
needs a fresh framework to understand the economic problems of our age, some
of which are very pressing and of decisive relevance for our lives. Let us
begin our search for such a new framework by not confusing the Classical
tradition, in which we may find a lot to learn, with the “Anti”, not
“Neo”-Classical tradition that has led economics to its current state of
stagnation.
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CITATION
Kepa M. Ormazabal, “Neo-Classical Economics Is Not “Neo”, But
“Anti”-Classical”,
post-autistic economics review, issue no. 22, 24 November 2003, article 5, http://www.paecon.net/PAEReview/issue22/Ormazabal22.htm
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