The three schools of thought on how capitalist economies work within a given society can be broken down into three categories: Keynesian economics, Classical/Neoclassical, and Marxian. Keynesian being a form of structuralism where individual’s behavior is a result of how the economy operates. Classical/Neoclassical being a form of humanism where what happens in an economy is always a result of individuals actions. Marxian is based on class relations that divide society into two groups; one that owns means of production and another without ownership.
Keynesianism is a capitalist theory explaining how individuals react to economic changes. “Keynesian theory analyzes and presents (1) the rules and laws that give the economy its overall structure and (2) the ways in which that structure essentially governs the activities of producers, consumers, and other individual economic actors” (Contending Economic Theories, 19). This theory revolves around how much spending the government allows them to spend. How much they consume and how much they save. For example, when we get our paycheck, we set aside money for essentials, free spending, and savings.
Also, firms follow rules when setting prices for profit. Individuals spending, pricing, and other economic behavior is based off of rules in the economy’s structure. Once all the rules are specified, the theory shows how they shape and connect representing the economy. Keynesians believe that more savings than spending causes the economy to crumble. They relate the Great Depression to this theory. Private savings trumped what investors wanted to borrow which resulted in falling expenditures. This resulted in reduced incomes which led to even fewer expenditures spiraling into a depression. Keynesians believe a set of measures implemented by government can stimulate the economy. Increasing the supply of money can have a positive effect on the economy because it will increase spending which will stimulate the economy. They try to shift incomes to those who are eager to spend it. In the Commanding Heights video, Keynes believed once the markets start to fail, government needs to step in to help the economy.
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Classical/Neoclassic economics is the theory that market solves everything and that any government manipulation will only bring bad results. In the Commanding Heights video, Fredrich Hayek believed government interference would be a threat to freedom and when in trouble the market will fix itself without government interference. They believe that individuals actions can produce a better life for themselves. These individuals will achieve the most wealth through their unique contributions to productions and their desires for consumption. For “economic utopia: buying, selling, working, saving…” to be achieved, “society must (1) endow and protect each individual with the full freedom to act in his or her own self-interest and (2) establish the institutional framework (competitive markets and private property) that guarantees that freedom” (15). Neoclassical economics says that a good or service often has value that goes above and beyond its input costs.
They believe that consumers have a perceived value of a product that affects its price and demand whereas classical economics believes that a product’s value is derived as the cost of materials plus labor. Competition leads to efficient resources within an economy which establishes market equilibrium between supply and demand. Neoclassical economics believe that the value of a product is determined by consumer perception. What happened during the 2008 financial crisis? Economists were blinded by false data leading them to believe there was no risk or uncertainty. They were wrong and led to the housing market crash of 2008.
Marxian economics is different than both Neoclassical and Keynesian. It defines class relations as some people work for others while obtaining nothing in return. One group owns the means of the production while the other does not. Marxian economics believes that the capitalists acquired the means of production and are exploit workers with it. They make profits from not working which is unreasonable. Marxian economics believes that neither human nature nor structural laws cause economic events.
Marxian theory believes capitalism is a destructive economic system that exploits labor and makes a gap between capitalists and the workers. That’s why Marxian economics prefers to move on rather than attempt to fix or regulate capitalism. The theory pushes towards awareness of choices and alternative class structures. Profits of the capitalists are not consumed, and they are reinvested until they are no longer profitable. This is when crises emerge because capitalists get aggressive and greedy in search of other markets to invest in. The workers have the responsibility to overthrow the capitalists and take over their means of production. In result, all profits will be distributed amongst them, without paying a return to the owners.
To conclude, Keynesian economics and Neoclassical economics are similar in the sense that they both believe capitalism is the best option. Capitalism alone can deliver humans maximum wealth. Self-interested buyers and sellers of everything will produce the most wealth. They differed where Keynesian economics believed that the capitalist cycle needs government intervention and Neoclassical believes government is a threat to freedom. Finally, Marxian economics differs from both by relating capitalism’s cycle costs to class structure. They believe that neither government intervention or not will not overcome cycles. Also, that capitalism exploits workers creating a capitalist against workers system.
