Guide The Foundations of Economics: History and Theory in the Analysis of Economic Reality

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Moreover, the capitalist mode of production is not limited to an isolated sphere in society but structures the latter in various ways. For example, through the process of commodification , social relations that were formerly untainted by market logic, are transformed into commercial relationships, relationships of exchange, and relationships of buying and selling.

MPE has the explicit aim to change the current state of economic and societal organization, with an emancipatory perspective to establish a more just society by overcoming capitalism. Although this school of thought is generally marginalized in economics faculties at large, it has gained renewed attention over the past decade. Moreover, new forms of protests and social movements, and intensifying social conflicts in the presence of crisis, have also created both a need and a challenge for radical academic analysis.

MPE perceives the economy as a continual process of transformation of nature and society by production. The mode of production is the historical form in which the two core dimensions of any economic organization of society are united. These two central elements are the productive forces — phenomena that enable production, like technology and infrastructure — and the relations of production , referring to the class-based organization of production, distribution and consumption in society.

Accordingly, MPE argues that the socio-economic character of different societies in history is characterized by the specific mode of production, like slavery, feudalism or capitalism. The historical configuration of productive forces and relations of production is a crucial point of departure for MPE. Particular emphasis is given to the analysis of class struggles and the different forms of exploitation of labour power, as well as to contradictions and crisis.

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Thus, the economy is not conceived as a neutral platform of exchange and cooperation, but as historical and political constitution primarily characterized by asymmetric power relations, ideology and social conflicts. The peculiar characteristic of commodities is their dual character — they exhibit both use value and exchange value. The capitalist mode of production is primarily defined by the neglect of the use value, while the exchange value — potentially translating into higher return on investments — is paramount.

Thus capitalist societies do not primarily produce for the needs of the population but for the sake of realizing a high exchange value — simply put, profit. MPE argues that this profit is rooted in the exploitation of labour power, more specifically the wage labourer. Capitalists only pay the workers the wage they need to reproduce their labour power even if workers generate a higher value. This surplus value is then appropriated by capitalists and then reinvested. The amassing of money as capital in the hands of the capitalist class is also defined as capital accumulation.

It presents the core dynamic of the capitalist mode of production and thus implies a structural imperative of the capitalist economy to grow. Yet, as was mentioned above, the capitalist mode of production is not free from contradictions and from an MPE perspective crisis play a prominent role as recurrent patterns in capitalist development. Generally speaking, crises emerge from various contradictions that exist in the basic constitution of the capitalist mode of production, but more specifically consist of a specific conjuncture of tendencies and triggers. Thus, each economic or financial crisis has links to the general contradictions of capital and to specific political, ideological and cultural circumstances.

Different lineages of MPE also stress the importance of different aspects of contradictions and many argue for multiple causation, including, for example, credit insufficiency, scarcities of or political difficulties with labour supply, resistance or inefficiencies in the labour process, excess capital and wages squeezing profits. Currently, many MPE scholars argue that the tendency of the over-accumulation of capital since the s is key to understanding the various financial and economic crises of the past decades throughout the globe. In this situation too much money capital is searching for profitable investment opportunities.

Since investments in financial assets have become increasingly profitable in the past decades, money capital is disproportionately subtracted from industrial production and employed as fictitious capital. This form of money capital is fictitious because it is without any material basis in commodities or productive activities. Although not generating any surplus value in the labour process, fictitious capital can reproduce itself M—M' through the representation of a claim on the realization of future surplus value.

A prime example for this process is the global financial crisis of — which was triggered by excessive derivatives trading fictitious capital in subprime mortgages. The central problem addressed by MPE is the exploitation of workers by capital, i. Thus, the unit of analysis is classes , not individuals and collective interests are determined within classes rather than between individuals.

This does not mean that individuals are unable to make their own choices. However, within a certain mode of production there are powerful material and social structures e. Hence, MPE does not propose a universalist view of humans as being necessarily competitive or collaborative but emphasizes the effects of the historically specific mode of production on the way humans behave.

Within a certain mode of production, MPE historically has sought to isolate some tendencies and laws of motion in the economic, the social and the political spheres. In the capitalist mode of production, examples would be the increasing accumulation of capital and its concentration, as well as the recurring crises of capitalist production.

These laws of motion are thought to be ontologically real and some MPE scholars have argued that the laws determine the behaviour of societies. Some strands of MPE have however put emphasis on over-determination , highlighting that even though laws of motion can be discerned, their interconnectedness and multiplicity makes it more difficult to make accurate statements about the behaviour of human societies see also Methodology. Theorizing in the field of Critical Political Economy has emphasized the concept of hegemony , stressing the historical nature of processes of societal change and the constant struggle of ideas and movements the war of position in the words of Antonio Gramsci for temporal and spatial dominance.

According to these theorists the laws of societies and economies are more dependent on historical and cultural junctures, thus making a case against determining theorizing. A possible bridge between these two traditions is offered by critical realist theorists: they assume a real world, both in the natural and the social world, but this is subject to changes and actualizations that can originate in the actions of historical and spatially confined actors.

With Marx one could restate that:. Notwithstanding these theoretical differences, MPE theories do generally agree that the world is not made out of particulars that can be isolated for the purpose of analysis. Instead entities like classes, firms, states, and institutions exist within a context, which is essential to their existence.

By disaggregating these bigger components to their constituent part one cannot do justice to their real nature, since at each stratum or level of organization from subatomic particles to complex systems such as human societies there are emergent powers that are ontologically real in their own right Sayer , Also, MPE gives importance to dynamic processes like e. An important aspect of MPE is furthermore that Capital is not defined ontologically as a material asset like money, machinery, etc.

MPE theories do explicitly identify themselves as normative and performative and regard the positivist position of descriptive and value-free science as false and ideologically motivated. Hence, the goal of scientific analysis is to create knowledge that fosters the emancipation of those who are dominated and oppressed. According to Andrew Sayer, many proponents of critical social science of which MPE forms part conceive emancipation as proceeding in the following manner Sayer , :. As Sayer notes, there are, however, some problems with this linear progression from the scientific identification of problems towards the conclusions, particularly with respect to what constitutes emancipatory practice and which values and norms can be considered better than others, since they are backed by scientific evidence.

Secondly, he problematizes the new emergent interrelationships that might arise once a practice is replaced by another and hence emancipatory practice in one part of society might lead to repression in another. For example, Western women integrating into the paid workforce by contracting reproductive labour to women from the global south; and workers taking over a coal mine that otherwise would have to be closed might emancipate themselves but this can have negative repercussions on the environment or other communities inhabiting the area, as these may be negatively affected by pollution.

MPE theorizing that operates in the philosophical tradition of critical realism holds that the link between the real world and scientific inquiry is not straightforward. Strong constructivism, the view that the scientist makes the real world by coming up with conceptions or by self-referentially talking in ways that previous scientists have come up with, is also rejected.

Instead, the fallible nature of science as well as its theory-laden and standpoint-dependent character is acknowledged but still, judging whether the theory is good or bad is considered to be possible by reference to the real world. This means that social science research can be diverse, depending on the theory applied as well as the personal biography and biases e. Still, a judgement as to whether a particular piece of research draws valid conclusions is possible and as such objective statements about the causal mechanisms that were responsible for concrete social phenomena are feasible.

The test for what is a true statement in critical realism is however somewhat more complicated than in other traditions. Given the emphasis on causal mechanisms rather than on regularities and correlations, simple statistical testing will not suffice to establish the validity of a hypothesis. Instead, from the observational evidence, abstractions have to be made in order to check the validity of a supposed causal mechanism.

As such, for example, counterfactual case studies or thought experiments might have to be performed in order to check the explanatory power of a hypothesis. On the other hand, with regards to theory validation, there is great scepticism towards prediction.

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This is because, in over-determined and evolving open-systems conditions, for mechanisms to work as theorized they might change during the process and hence new mechanisms might emerge. MPE neither works deductively nor inductively but assumes that there are multiple causalities and thus multiple ways of undertaking research. These depend on the situation, for example, the particular point of capitalist development. A central element of Marxist analysis is dialectics. Dialectics claims to transcend the classical logic of direct causation and linear relationships and replaces it with a dynamic understanding of processes as well as with different categories that would sometimes be considered to be contradictory in classical terms.

An example of dialectical reasoning is given in Figure 1 Sayer , , where simple and abstract concepts are combined with the complex, specific and contingent characteristics of a concrete situation.

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Since a lot of research in MPE often makes reference to abstract concepts such as financialized capitalism or accumulation regimes, these conceptualizations have to be meaningful and justified by having analytical value rather than being ad hoc. As such, statements attributing causal powers to the service sector e. As to whether the theoretical perspective or the research object drive research within MPE, historically the theoretical perspective has been more important. Thus, the object e.

For those working in the tradition of critical realism, this reliance on methods is however somewhat less pronounced, since critical realism claims that different layers or strata are ontologically existent and hence have to be identified by different branches of science. Marxist political economists have the explicit aims to first critique and second transform society.

It can be conceived as performative and reflexive. Thus, it is not only the aim to describe, but to transform society. The role of critique is central to this. This emancipatory perspective aims at a more just society that combats dominance, exploitation and inequality, and hence aims to radically reform or overcome capitalism.

Emancipation does not only concern inequality in terms of income, property or alienation, but also concerns gendered or racial dominance. Income and wealth distribution are structurally unequally due to the capital—labour relations. Yet, although distributional equality and capital are incompatible, different capitalist phases were characterized by different degrees of inequality. Rather, it suggests tackling inequality at its roots. Thus, worker-control initiatives, solidarity economies and communitarian and cooperative structures of production are frequently promoted, because they alter the very conditions of productions which are foundational to existing inequalities see also Harvey , — For instance, in the aftermath of the financial crisis, the concept of the Commons — the communal organization and use of goods and resources — was highly debated within social movements see e.

Federici The Commons are considered as a way to encounter consequences of alienation, land grabbing, property and income inequality and the marketization of life and knowledge and build on movements especially from Latin America. Like the Commons, most of these ambitions are not political goals set in party platforms, but rather are formulated as claims by various social movements or put into praxis by existing alternatives. Perhaps one of the most extensive practical alternatives in this sense is the autonomous region controlled by the Zapatistas in Southern Mexico.

The capitalist structure of production — in which the organization and type of economic activity is determined by the holders of capital by separating workers from the decisions how to put their productive energy into use — contributes to a psychological condition in which workers are deprived of the meaning of their labour and reduced to nothing more than an instrument in the production process. This dire condition, alongside the tendency to create poverty and huge inequalities in spite of the huge potentials of production unlocked by capitalism, provides amongst others a rationale for the Marxist argument that capitalism is something that has to be overcome.

In the past decades, MPE has contributed to a large body of literature studying such diverse topics as the class constitution and socio-economic consequences of neoliberal globalization, the financialization of the world economy, the power of transnational capital, and the potential for post-capitalist formations in the convergence of various crisis moments. To map all of these debates and insights would go far beyond the ambitions of this section.

Instead, a short review of the narrative linking convergent crisis, left strategy and transformation towards post-neoliberal or even post-capitalist societies will be further explored, because these themes are mirrored in almost all of the current MPE debates see contributions and special issues in the journals listed below. The advent of the US subprime crisis in —, which quickly evolved into a financial and economic crisis for most of the world economy, signalled a comeback of Marxian analysis and critique of capitalism.

Perhaps the biggest and first fundamental search for alternatives in the aftermath of the financial crisis was the Occupy Movement. Many MPE scholars claim that this crisis may represent a large or structural crisis for capitalism, potentially changing the structure of the world economy for the upcoming decades. In this context, an increasing strand of interdisciplinary research has broadened the debate by highlighting that the crisis is not limited to finance or the economy, but is best understood as multiple crises , including the climate and environmental crisis, a crisis of representative democracy and global governance, and a crisis of social reproduction.

Ultimately, the convergence of these crisis dynamics calls for a fundamental transformation of the social organization of global production, distribution and consumption. In this regard, current contributions intensely debate strategies, and the strengths and weaknesses of transformative politics and social movements in the face of the crisis. Debates about post-capitalism , new forms of socialism or communism have been prominent in recent years. To what extent these debates will translate into effective social change will depend much on the configuration of the balance of forces in society — and not on the speed and scope of academic debate.

Yet, the latter can offer an interesting starting point for students to fundamentally rethink society and social change, not the least reason why many economics students have become interested in understanding and employing MPE see e. Barkin ; Harvey ; Rethinking Marxism MPE, like most other academic paradigms, has experienced different waves of renovation, reception and magnitude over the past years for an overview of Western Marxism see also Anderson While the first generations were almost exclusively political activists, party strategists and academics, at the same time MPE institutionalized strongly as an academic paradigm with less party affiliation in the US and Europe during the Cold War — especially in the s and s.

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From utopian socialism to classical or orthodox Marxism, from Neo- or Post-Marxism to Analytical Marxism and Critical Political Economy, a wide range of historical and contemporary perspectives have been associated with MPE. In an attempt to provide a typology, Stephan Resnick and Richard Wolff have classified these perspectives into the following six broad categories. Property theories emphasize the unequal distribution of wealth and ownership of the means of production.

Class conflict, exploitation and other dynamics inside the capitalist system arise as a consequence of the distribution of property. Soon, the support of wealthy interests — including the Volker Fund, Relm Foundation, General Electric and DuPont — enabled more meetings, networks and academic work. These resources were soon used to create a new breed of "knowledge professional" located within the new institutional form of the modern think tank — politically partisan and focused on strategic influence as well as policy development.

Journalists then provided the means by which neoliberal ideas could enter wider circulation. By the early s, the neoliberal counter-orthodoxy had organised into a transatlantic network. Its members were well-resourced and mobilised, influencing elite groups, political parties and individuals, seeking out and assimilating allied concepts, and fashioning narratives to appeal to political needs. In doing so, they soon led the critique of the incumbent paradigm as it began to falter in the s. By the late s, this network and its ideas had increasingly populated political parties and government institutions, developing strong networks of individuals that spanned important sectional interests.

This ecosystem created the intellectual conditions for change, ensuring that the neoliberal movement was prepared to capitalise on crisis. The policy impotence of the incumbent post-war paradigm gave the movement its chance. In the end, successive crises both intellectually and politically delegitimised the post-war consensus. But it was the elections of right-wing political parties under Thatcher and Reagan that enabled the political displacement of the post-war paradigm in practice.

Explicitly influenced by neoliberal networks, the Republican and Conservative governments of the s gradually introduced policies of deregulation, privatisation, tax reductions and labour market "flexibility", radically changing the political economy of the US and UK, and eventually, by wider transmission, that of most other Western nations. Meanwhile, changes to the economic curriculum in universities and the adoption of neoliberal assumptions across the field of economic understanding and practice had a deep socio-cultural effect, entrenching the idea that economic and political freedoms can be equated and elevating deregulated markets as the only efficient mechanism for allocating resources.

A crucial result was the acceptance by previously oppositional parties of key aspects of the neoliberal consensus. Consequently, by the end of the s, even the elections of more left-leaning governments did not alter some of the fundamental tenets of either ideas or policy. The shift in economic thinking has often been seen as less pronounced in continental Europe than in the US and UK.

But it has nevertheless been significant, particularly in Germany, with the Wendepapier reform paper and the election of Helmut Kohl precipitating a neoliberal turn. It is also vital to recognise that neoliberal governments and policies were sustained by powerful economic interests. It is not a coincidence that deregulation, privatisation, tax reductions and labour market flexibility benefit large corporations, financial firms and wealthy individuals.

Their support for such policies is manifested both politically, in extensive lobbying activities, and in donations to the neoliberal ecosystem. For example, the Atlas Network today provides international support and coordination for around think tanks in over 90 countries, with many now working to discredit the scientific consensus on anthropogenic climate change.

New Keynesian Economics

By the s, the conservative governments of the s had all been defeated. New centre-left governments made significant changes to the economic policies of their predecessors. Yet each retained key elements of the neoliberal consensus. Indeed, it has been widely argued — despite their own claims that they were following a new, "Third Way" approach — that the policies of the social democratic governments of the late s and s were essentially continuations of the neoliberal project.

There is not space here to adjudicate opposing claims about specific governments. But at an analytical level, it may be helpful to introduce the concept of a "modified paradigm". It is hard to sustain the claim, for example, that New Labour was simply a Thatcherite government in disguise. In fundamental respects, it broke with the conservative consensus.

Public spending was dramatically increased to pay for the policy priority of improving public services. Major changes were also made in areas such as climate change and energy policy. Yet many key features of the neoliberal consensus remained. Privatisations were continued and further developed as outsourcing of public sector functions. The regulatory agenda in financial services and other business sectors was left unchanged.

There were no reversals of laws placing burdens on trade unions or promoting the "flexible" labour market. Until a significant shift that began after the financial crisis, direct interventions in private sector investment through a more active industrial strategy were eschewed. This is why it may make sense to speak of Third Way governments as executing a "modified" version of the neoliberal paradigm rather than simply continuing the same one they inherited. The idea of modification allows for the fact that change can and does occur in the nature of a paradigm without resulting in its complete replacement.

Of course, the dividing line between modification and replacement can always be contested. To what extent do today's economic and political conditions offer parallels with previous shifts? We can use the schematic from above to examine both similarities and differences. It is not hard to show that the neoliberal consensus — albeit in a modified form — has remained dominant in public discourse and policymaking in most developed countries since the early s. Contrary to many people's expectations, it largely survived the financial crash, with the short period of Keynesian stimulus in the immediate aftermath of the crash in quickly replaced by austerity policies.

These have been based on the orthodox view that public borrowing and spending are not appropriate instruments to ameliorate recession when public debt is high. While there has been some reform of banking regulation to reduce systemic risk, there has been little wider reform of the financial sector. In most countries, economic policy has failed to deal with continuing weaknesses in productivity, earnings and investment since the crisis.

Given the scale of the crash and the slowness of recovery, the lack of economic policy innovation over the last decade is testament to the endurance of the neoliberal consensus. There can be little doubt that the financial crash of constituted a shock to the global economy on a similar scale to the Wall Street Crash of and the oil price hikes of In , output fell in 34 out of 37 advanced economies, and the global economy as a whole went into recession for the first time since the Second World War.

The resulting economic crisis has continued well beyond the initial events and, indeed, it continues a decade later. Most developed countries have experienced a rise of populist political parties seeking to channel dissatisfaction with the economic status quo. There have been both right-wing and left-wing manifestations, from Podemos to Trump. There has even been a revolt of the centre, in the form of Emmanuel Macron. While these movements differ in their degree of electoral success, they have stimulated a debate on the adverse impacts of globalisation and contemporary capitalism.

If the economic shocks and crises of the last decade are the precursors to a shift in the politico-economic paradigm, it is clear that we are in its earliest stages. In most countries, mainstream economic policy has not yet undergone any significant change, and there is little consensus on what, if anything, ought to replace it. However, there are some signs of an emerging transition, at several levels. First, debate in the economic policy community, both among academics and in international institutions and think tanks, has begun to change.

Modern economics is more pluralist than it was a generation ago. In recent years, the Nobel Memorial Prize in Economic Sciences has frequently been awarded to practitioners working outside the neoliberal orthodoxy. In the English-speaking world, many of the most prominent economists contributing to public debate, such as Dani Rodrik and Mariana Mazzucato, are trenchant critics of neoliberal theory and policy.

This is much less true, however, in other countries, notably Germany — though even here recent surveys of economists have shown a significant shift towards a less orthodox view. Yet at the same time, it is clear that no overarching "alternative" paradigm has yet emerged. While many prominent economists today share a critique of neoliberal orthodoxy, there has been little effort to articulate a shared alternative view which might incorporate and bind together elements of the new pluralism. This is partly because there are significant differences of approach between different kinds of heterodox academic economists.

The neo-Keynesian tradition disagrees with the free-market objectives and principles of neoliberalism but has an understanding of economic theory and policy that is otherwise recognisably mainstream. Others, including those drawing from complexity theory or ecological economics, for example, seek a more radical reappraisal of economic theory. Second, there is increasing interest in a significant shift in approach to policy within mainstream economic institutions. Three of the major international leaders in economic thought and practice — the OECD, the World Bank and the World Economic Forum — espouse a narrative of "sustainable, inclusive growth", based on an acceptance that the neoliberal model has generated both rising inequality and unsustainable environmental damage.

At present, it would be hard to say that the consensus has gone beyond an acceptance of the failures of the dominant model and agreement on a set of broader objectives for economic policy, but the OECD "New Approaches to Economic Challenges" initiative is now seeking a more coherent theoretical and policy response.

The UK is now perhaps the country furthest advanced in this field. It has a number of think tanks and campaigning organisations more or less explicitly committed to the idea of a paradigm shift.

Philanthropic foundations, including the Friends Provident Charitable Foundation, support projects promoting economic systems change. There is an active student movement, Rethinking Economics, campaigning for a reform of economic teaching, and an alternative economics curriculum, CORE, which is gaining considerable attention. The third level is that of political parties and governments.

Here it is hard to discern any significant paradigmatic transition in progress. Macron's economic reforms are an attempt to modify the neoliberal orthodoxy. In Germany, neither the SPD nor the Greens have established a coherent alternative economic platform — arguably one of the reasons for their relatively poor showings in the general election. In the US, the Democratic Party remains split between the largely orthodox centrism of its Clintonite wing and the radical yet incomplete economic programme of Bernie Sanders.

It is arguably only the UK Labour Party that has committed to a radical break from neoliberalism and has a chance of winning power. The parallels between present economic conditions and those in the two periods of the 20th century when major paradigm shifts occurred are striking. History does not repeat itself, as Mark Twain supposedly said, but it often rhymes. There is certainly no guarantee that we will see a paradigm shift in economic thought and policy in the coming years.

But the evidence that major reform is required is powerful, and there are clearly dynamics in academic economics, within economic institutions and in civil society tending in that direction. For those who would welcome change, the present moment offers both opportunity and challenge. Our analysis in this section is based on A. Stirling , L. Laybourn-Langton : Time for a New Paradigm? We use it here as a conveniently descriptive term to characterise the dominant set of "free market" theories, values and policies.

For more on the uses of the term "neoliberalism", see O. Hartwich , R. Fricke : Altes Einheitsdenken oder neue Vielfalt? Glyn ed. Jacobs , M. Mazzucato eds. Fricke , op. Economic theory , Financial crisis , Governance , Neoliberalism , Orthodoxy. Show all results. Politico-economic paradigms Modern economic history can be roughly split into different eras in which certain sets of ideas have dominated politics and policy.

Characterising the shift to the neoliberal paradigm Similar patterns of change can be observed in both of the politico-economic paradigm shifts which occurred in the 20th century.