Neoclassical Twist #1: Distribution
For the classicals (in this, at least, we can include Marx), political economic analysis must be founded in society’s relations of production, exchange, and consumption. Of course, thinkers like Smith, Ricardo and Thomas Malthus (perhaps the most famous classical political economists) did not understand their analyses as specific to their historical and geographical context, but assumed their logical universality. They took nineteenth-century England as the historical and geographical centre of the world, and thus they thought they were not writing about just any old place, but about a “modern” set of economic relations that was clearly the direction in which history was headed. This is what Marx meant when he said that classical political economy was formulated as if everyone was, or at least acted like, a petit-bourgeois Brit: in one translator’s rendition, an “English shopkeeper.”
Universalized or not, social relations are the classical basics. Despite the wide range of policy goals classical political economists advocated, all their analysis was oriented toward developing a theory of distribution between the various classes involved in production (labour, capital, and landlords). The point was to explain who gets what and how much, in contrast to “neoclassical” economics. Figuring out what determined prices was a secondary concern.
Perhaps the most important steps in the transition from classical to neoclassical political economy lie in what is sometimes called the “Jevonian revolution.” Although named after William Stanley Jevons, the term in fact describes a shift in economic reason to which many contributed. The Jevonian revolution definitively ended the hold of “who gets what,” class-based analysis in orthodox economics, and instead consecrated the individual “consumer” as the unit of analysis. Like most mainstream economists to this day, he treated individuals and their preferences as ultimate data, neither produced by nor dependent upon anything but each person’s subjective and autonomous decisions regarding what they needed and what made them happy. This change is crucial, especially because it shifted how “who gets what” was understood. In the classical analysis, the distributional question is answered by what each class contributes to production. Labourers get wages, capitalists get profit, and landlords get rent. Even Marx, who felt that capital managed to get its share by “using” the commodity labour-power, understood distribution as determined by socially dominant definitions of each factor’s relative contribution—the amounts received are relative to the (capitalist) value of their “input.”13
In contrast, Jevons said the answer to the distribution question is not determined in production, but in exchange, by prices that reflect individually “given” preferences. Different individuals (forget about classes) get what they can pay for. And what they can pay for is determined by the price of what they want, which is in turn a function of how much there is, and how badly they and others want it. The market, not social relations (like property), determines distribution, and in an entirely objective, “natural” manner. This is a radical change. On this account, the market “decides” without a “decider”; it makes no promises, and it cares nothing for “justice” or what a particular contribution “deserves.” This means distribution is a secondary concern, worked out after price formation, which is a function of supply and demand (and obviously therefore the ability to pay).
It impossible to underplay how important this change turned out to be for life in modern, capitalist societies. The neoclassical doctrine is basically a bald claim that distribution is somehow not a function of, or really even affected by, social power and property relations. Instead, we are told, who gets what is determined outside those processes, in the neutral, apolitical, and un-manipulatable field of the market. This is a critical step toward the idea that “the market” is “natural” and “disinterested”—the principal, maybe the only, basis upon which the word “market” can be paired with the word “free.”
Neoclassical Twist #2: Value
The shift from classical to neoclassical political economy dramatically reconfigured the dominant understanding of value, in a manner very different from Marx’s distinctive critique. Classical economists like Smith and Ricardo held to the labour theory of value we discussed above, the one many people associate with Marx (who granted it a great deal of ideological force, but saw that as why it was necessary to abolish it). Their theory was that things have value in proportion to the amount of labour that goes into producing them. If something takes a lot of time, effort, and skill to produce, or if no one wants to do it, it will cost a lot; if it can be cooked up in a jiffy by anyone, it will be cheap. They did not posit some naïve labour-time price calculation, of course, but argued that labour value describes something like an average, and it will vary by time and place. They also understood that if something is relatively easy to produce, but producing it requires tools that are labour-intensive to produce, then the “total” labour involved will be reflected in a higher value.
Beginning with Samuel Bailey in the mid-nineteenth century, and Jevons a little later, political economists rejected this “substantive” theory of value (i.e., labour is the “stuff” of value). Just as Jevons transformed the theory of distribution in an individualized “consumer” manner, they argued instead that value is not determined “objectively” by stuff-amounts, but “subjectively,” by individuals’ tastes and preferences. If people want a lot of it, and want it badly, it has a lot of value, and its price—the expression of value—will be relatively high, and higher still if there is little of it to go around. This idea—that abstract, uncoordinated, decentralized forces of supply and demand determine the value or price of a commodity—is the foundation of modern mainstream economic analysis. When modern orthodox economists talk about the theory of value, they mean the theory of price determination.14
All this depends upon an understanding of the individual, with his or her given tastes and talents, as the atomic unit of human life. This idea is the foundation of the common sense that informs contemporary economic understanding, the basis upon which modern economic institutions and policy are considered legitimate and logical. It is no exaggeration, I think, to say that although you don’t hear people walking around talking about value and distribution, these theories are the logic behind the form capitalist institutions take. The idea that the distribution of socially valuable assets, resources, and so forth is a product of individuals pursuing their subjective self-interest, in combination with Smith’s “invisible hand,” leads easily to the normative proposition that unrestricted individual pursuit of self-interest produces, almost despite itself, optimal collective well-being.
These ideas helped justify a social philosophy called utilitarianism, which originated in the mid-eighteenth century, and whose last bastion is modern economics, where it continues to exercise a mind-numbing stranglehold in the form of “welfare economics.” Utilitarianism explains all human action as a motivated by the quest for pleasure and the flight from pain. Consequently, it proposes perhaps the simplest theory of human welfare imaginable for both individual and the community. It works like this: people act rationally when they maximize their self-interest or “utility” (given certain constraints, like how much money they have). Since those interests are subjectively determined, whatever you are doing, it is probably a utility-maximizing choice. The corollary, of course, is that the community is merely a set of individuals making these calculating choices, and community “welfare” is measurable only by the maxim “the more utility, the better.” Because utility is experienced entirely at an individual level, no distributional or fairness problem arises. If you add pleasure, even if only for individuals who already have a lot of it, it’s all good. You are not “taking