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Georgy Valentinovich Plekhanov (1856–1918) entered the history of Russian
social thought as "the first Russian Marxist".
He was the first to organize a Marxist circle in St. Petersburg, and together
with Lenin he was the founder of the Russian Social Democratic Labor Party
(RSDLP). In his articles, Plekhanov deeply analyzed the socio-economic and political
state of Russia.
At first, he was a populist, then he supported the teachings of Marx, and later
he abandoned Marxism, believing that Russia was not ripe for a socialist revolution,
and that it was necessary to raise the cultural level of the population.
At the end of the 19th century "legal Marxism" appeared in Russia. What
distinguished it from ordinary Marxism was that its representatives legally expressed
their ideas in the press, i.e. these ideas were not fully Marxist.
They recognized Marx's ideas about the exploitation of workers under
capitalism, the aggravation of social conflicts and other contradictions of capitalism.
Yet in general, they assessed capitalism positively, believed that under capitalism
labor productivity grows rapidly, and that Russia suffers not from capitalism, but
from its insufficient development.
Pyotr Berngardovich Struve (1870–1944) — Russian politician, economist,
publicist, historian, philosopher.
At first, he adhered to the views of revolutionary Marxists, but then he moved
away from them, opposed autocracy for a bourgeois democratic republic.
Sergei Nikolaevich Bulgakov (1871–1944) — economist, philosopher,
Orthodox priest. He was a legal Marxist only in his youth.
Bulgakov develops the ideas of socialist Christianity, including an analysis of
the Christian attitude to economics and politics.
Mikhail Ivanovich Tugan-Baranovsky (1865–1919) — economist, historian,
publicist, public figure. He belonged to the legal Marxists, but differed from them in
the versatility and depth of his research.
Tugan-Baranovsky is the author of more than a hundred scientific works,
which were very diverse in their areas: they touched upon market theories and crises,
the theory of distribution, cooperation, marginal utility and much more.
Vladimir Ilyich Lenin (Ulyanov) (1870–1924) — revolutionary, political
figure, organizer of the October Revolution of 1917, creator of the first socialist state
in history.
Lenin continued Marx's work on the study of capitalism, analyzed modern
capitalism, the state of the economy in Russia, and outlined a plan for the transition
from capitalism to socialism.
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TOPIC 9. MARGINALISM. NEOCLASSICAL ECONOMIC THEORY
9.1. General characteristics of marginalism
In the 70s XIX century a trend appears in economic theory that differs
significantly from classical political economy and Marxism. It received the name
"marginalism" (from the French marginal — extreme).
The basis of the analysis of marginalists is marginal values: marginal utility,
marginal product, marginal income, marginal productivity, etc. According to
marginalists, it is these values that influence the course of all economic processes.
The main differences in the teachings of marginalism and the classical political
economy of Marxism are presented in table. 2.
Table 2
The main differences in the teachings of classics and marginalists
Position
Classics
Marginalists
Economic laws being
studied
Objective — independent
of the will and
consciousness of people
Subjective — depending
on psychology, behavior of
people
Main economic sector
Production
Consumption
Subject of economic
science
Relations between people
in the process of
production, distribution,
exchange and consumption
Relationship between
person and thing
Determining the value
and price of a product
Based on labor cost method
Based on marginal utility,
taking into account the
state of needs and the level
of their saturation
Level of Analysis
Economic processes on a
society-wide scale
The micro level is a closed
economy consisting of
consumer and product
Object of study
Product offer
Consumer demand
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9.2. Predecessors of marginalism:
J. von Thunen, A. Cournot, J. Dupuit, G. Gossen
Johann Heinrich von Thünen (1783–1850) was a German economist and one
of the early proponents of the ideas of marginalism.
In 1826, his book "The Isolated State in Relation to Agriculture and Political
Economy" was published. The main content of this work was to identify patterns in
the location of agricultural production.
Thunen came to the conclusion that the greatest income in agriculture can be
obtained when the marginal costs of factors of production (costs of labor, land,
capital necessary to produce an additional unit of output) are equal to the marginal
value of the product produced. Thus, Thunen laid the foundations for the theory of
marginal productivity.
Antoine Cournot (1801–1877) was a French mathematician and economist.
In 1838 he published the work "Researches into the Mathematical Principles of
the Theory of Wealth". This was one of the first attempts to study economic
phenomena using mathematical methods.
Using mathematical models (equations and graphs), Cournot proved that a firm
achieves maximum profit when its marginal revenue (income received from an
additional unit of product sold) is equal to marginal cost (the cost of producing an
additional unit of product), and the marginal profit is zero.
Cournot was the first to introduce the concepts of demand function, elasticity
of demand, etc.
Jules Dupuit (1804–1866) — French engineer, economist, forerunner of
marginalism.
In 1844, he published an article "On the Measurement of the Utility of Public
Works", in which he proposed ways to determine the socio-economic efficiency
(usefulness) of various economic structures (roads, bridges, etc.).
Dupuit was the first to analyze consumer surplus, a key concept in welfare
economics.
Hermann Heinrich Gossen (1810–1858) — German economist, predecessor
of marginalism.
Author of the work "The Laws of Human Relations and the Rules of Human
Action Derived Therefrom" (1854), in which he tried to explain economic processes
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from the perspective of the idea of maximizing utility. Solving this problem, Gossen
formulated two laws:
1) the marginal utility of a good (the utility of an additional unit of a good)
decreases as the quantity of a given good increases;
2) rational consumption (optimal demand structure) is established when the
marginal utilities of all consumed goods are equal.
9.3. Austrian school of marginal utility:
C. Menger, E. von Böhm-Bawerk, F. von Wieser
Carl Menger (1840–1921) is the founder of the Austrian school of marginal utility.
Author of the works "Principles of Economics" (1871), "Investigations into the
Method of the Social Sciences with Special Reference to Economics" (1883), etc.
Eugen von Böhm-Bawerk (1851–1914) — Austrian economist and statesman.
Author of works: "Basic Principles of Economic Value" (1886), "Capital and
Interest" (1884–1889), etc.
Friedrich von Wieser (1851–1926) was an Austrian economist.
Author of works: "On the Origin and Principal Laws of Economic Value"
(1884), "Natural Value" (1889), "Social Economics" (1914), etc.
Böhm-Bawerk and Wieser were students and followers of K. Menger. All of
them taught at the University of Vienna in the department of political economy. The
works of these three scientists created a direction of economic thought called the
"Austrian school".
The main contributions of the Austrian school
The starting point of economic behavior is a person’s existing needs
(unsatisfied desires and aspirations). Things or actions that satisfy our needs are
called goods.
The labor theory of value is rejected and value is believed to be subjective.
Value is an individual's judgment of a good. Therefore, the same good can have
different values for different individuals. The necessary conditions for the possession
of a good with value are its usefulness for a given individual and its rarity.
All goods have general utility (abstract) and marginal (concrete utility
possessed by the last unit of the good). The value of a good is determined by its
marginal utility.
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For example, water has an extremely large abstract utility, but its supply is
large, and water is spent for different purposes: one jug for drinking, a second for
preparing dinner, a third for washing, a fourth for watering flowers, etc. Specific
quantities of water have virtually no value to humans, since water is available in
abundance. Specific quantities of diamonds or gold have a very high value, because
they are available in very limited quantities. In the desert, where a person’s life can
depend on one sip, the value of water for this person is higher than the value of gold.
The price is influenced by the specific utility. If there is a lot of water, its price
decreases. If there are few diamonds, their price is high.
Thus, the value of an item is determined by the utility of the last unit, i.e. the
unit that satisfies the smallest need. In other words, the value of a good is determined
by its marginal utility.
As the quantity of goods increases, total utility increases, but at a slower rate,
and marginal utility decreases.
Marginalists were divided into two directions:
- cardinalists proposed measuring utility in special units — utils;
- ordinalists believed that the degree of utility is determined by the consumer
by comparing goods and preferring one good to another.
9.4. Marginal ideas of W. Jevons, L. Walras
and V. Pareto on economic equilibrium
William Stanley Jevons (1835–1882) — English chemist, mathematician,
economist, representative of the mathematical school in economics.
Main works: "The Theory of Political Economy" (1871), "Principles of
Science" (1874).
Key ideas:
1. Buyers and sellers have complete information about the market.
2. All goods on the market are distributed in such a way as to provide
maximum benefit.
3. The consumer's goal is to get maximum pleasure with minimum costs. This
goal will be achieved when the consumer distributes his income in such a way that
the final degrees of utility (marginal utility) of all purchased goods are equal.
Leon Walras (1834–1910) — Swiss economist, representative of the
mathematical economics movement, also belongs to the Lausanne school of
economics (worked at the University of Lausanne).
Main work: "Elements of Pure Economics" (1874).
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Walras is considered the founder of the modern theory of macroeconomic
modeling under conditions of perfect competition. Using mathematical models, he
tried to find the conditions for equilibrium and stability of the economic system.
Walras believed that the market mechanism equalizes supply and demand through
prices by "groping".
The general economic equilibrium system is shown in Fig. 2.
Figure 2. General economic equilibrium system
The model assumes that all economic entities are divided into two groups:
owners of factors of production (labor, land, capital) — households — and
entrepreneurs. Households spend their entire income and have no savings. The prices
of production factors are equal to the costs of enterprises, which are equal to the
income of enterprises from the sale of goods, which in turn are equal to household
expenses on goods and services. The equilibrium state of markets means that the
demand and supply of production factors are equal, the goods market has a stable
price, which is equal to the costs of their production, which are equal to the prices of
production factors.
Resource
Market
Enterprises,
firms
Households
Market of goods
and services
benefits
goods and services
expenses
revenues
revenues
expenses
factors of production
resources
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It is clear that Walras's model is abstract and conventional. However, it served
as an impetus for the creation of other more accurate equilibrium models.
Vilfredo Pareto (1848–1923) — Italian economist, successor of the Lausanne
school of marginalism.
Main works: "Cours D'Economique Politique (Course of Political Economy)"
(1898), "Manual of Political Economy" (1906), "The Mind and Society (Treatise on
General Sociology)" (1916).
Pareto continues Walras's theory of general equilibrium, but at the same time
criticizes it.
Pareto introduced the concepts of "consumer behavior" and "indifference
curves" into economics. In addition, he is the author of the famous "Pareto optimum".
The optimal state of the market, according to Pareto ("Pareto optimum"), in
which maximum social utility is achieved, is an equilibrium state when no one can
improve his position without worsening the position of someone else.
Pareto also believed that the differentiation of incomes of the population is a
consequence of the uneven distribution of human abilities. The imperfection of social
conditions was not taken into account.
9.5. Neoclassical economic theory as the completion
of the "margin revolution":
teachings of A. Marshall and J.B. Clark
Alfred Marshall (1842–1924) — English economist, representative of the
neoclassical school of economics, founder of "economics" (pure economic theory),
expert of the English government.
His major book, "Principles of Economics" (1890), was the main textbook of
economic theory in the US and UK for many years.
Marshall tried to combine two theories: the subjective theory of marginal
utility and the objective theory of determining value through production costs.
He believed that value is the relationship between two things in exchange; it is
determined by the interaction of supply and demand. Demand is based on utility that
decreases as the need is saturated.
Marshall studied the concepts of "demand", "elasticity of demand", "supply",
"elasticity of supply".
The interaction of supply and demand ("Marshall cross") leads to the formation
of an equilibrium price. Marshall concluded that in the short-term period the
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equilibrium price is influenced to a greater extent by demand, and in the long-term
period — by production costs and supply.
Marshall believes that arguing about what is more important in the formation
of a market price — supply or demand — is the same as arguing about whether the
top or bottom blade of scissors (the famous "Marshall scissors") cuts a sheet of paper.
John Bates Clark (1847–1938) — American economist, representative of
marginalism.
Main works: "The Philosophy of Wealth" (1886), "The Distribution of Wealth:
A Theory of Wages, Interest and Profits" (1899).
Clark proposed abandoning the division of economic science into production,
distribution, exchange and consumption, since society is in constant motion and it is
impossible to record these stages.
In economic science, Clark considered the main thing to be the study of wealth:
its universal distribution, its use in static and dynamic conditions.
Clark adhered to the theory of marginal utility, which he slightly modified: he
believed that the utility of a product consists of elements — a "bundle of utilities",
and the value of a product is determined by the sum of the marginal utilities of all
these properties separately ("a bundle of properties").
Clark proposed the law of marginal productivity: in production there is a
diminishing productivity of labor and capital; an increase in one of the factors, while
the unchanged remaining factors entail a decreasing growth of production.
For example, with a constant amount of capital, each additional worker hired
will produce less and less output. Hence, the worker’s salary should be determined by
the lower limit of productivity, i.e. productivity of the last worker.
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SECTION 3. ECONOMIC TEACHINGS OF THE ERA
OF THE REGULATED (SOCIALLY ORIENTED) MARKET ECONOMY
TOPIC 10. KEYNESIANISM
10.1. Economic teachings of J.M. Keynes
Since the 70s XIX centuries until the 30s XX centuries in the economic science
of the West, the microeconomic approach prevailed, from the standpoint of which
equilibrium was always achieved in the market. But since 1825, crises occurred every
10–11 years, and in 1929 the "Great Depression" began in the most developed
capitalist countries the law of the market suffered a complete collapse.
Faith in the automaticity of the market was lost. Another economic theory was
required, the theory of anti-crisis development.
In 1936, the book "The General Theory of Employment, Interest, and Money"
appeared, which put forward a new approach to economic analysis. The author of this
book is:
John Maynard Keynes (1883–1946) — English economist, founder of the
Keynesian trend in economic theory, creator of the theory of macroeconomics.
Keynes was born into the family of a famous economist, a teacher of
economics and philosophy at the University of Cambridge, and grew up in a
university teaching environment from childhood. Graduated from Cambridge College
and University. He showed extraordinary abilities in the field of economics and
mathematics.
He worked in the civil service, taught at the university, was engaged in
research work, and scientific journalism. He was an expert in finance. He was the
first of the British academic economists to be appointed Lord.
Keynes was married to Russian ballerina Lydia Lopukhova.
Keynes was not only a theorist, but also a very successful businessman: he
made a large fortune by playing on the stock and trading exchanges.
Main works: "The Economic Consequences of the Peace" (1919), "A Tract on
Monetary Reform" (1923), "The End of Laissez-Faire" (1926), "A Treatise on
Money" (1931), "The General Theory of Employment, Interest and Money" (1936).
Keynes was a student of A. Marshall, but not his follower. He went further in a
different direction:
1. Keynes took macroeconomics as his main model.
2. Keynes associated all the actions of people in the market with the "basic
psychological law" of people’s behavior in the economy: people tend to increase
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consumption, but to a lesser extent compared to the growth of their income, i.e. the
propensity to save prevails over the propensity to consume.
3. One of Keynes's key ideas is effective demand. In his opinion, demand (the
population's need for consumer goods and firms' need for means of production)
chronically lags behind production (due to people's propensity to save). Therefore,
the state must maintain it at such an "effective" level that would ensure economic
development and full employment.
To do this, it is necessary to stimulate investment (investment of capital in
production): encourage loans (through the abundance of money in the country and the
possibility of borrowing it at a low interest rate) and allow moderate inflation (rising
prices attract entrepreneurs).
Such stimulation will lead to favorable consequences: businessmen willingly
take out loans, invest money in production, hire workers, pay them wages, as a result,
unemployment is reduced and demand becomes "effective" (high). The economy is
growing.
4. The concept of the multiplier.
Multiplier from the Latin "multiplicator". The multiplier multiplies, increases
demand as a result of the impact of investment on income growth.
The multiplier is a coefficient expressing the relationship between the increase
in income and the increase in the volume of investment that causes this increase. For
example, in the 80s in the USA it was equal to 2.5, i.e. an increase in investment by
1 % caused an increase in national income by 2.5 %.
5. Keynes proposed a model of government regulatory measures in the
economy: redistribution of a part of the national income through the state budget, the
use of fiscal and credit instruments to stabilize the economy, government measures to
expand employment through the organization of public works, the development of
public and mixed ownership to obtain funds and use them for economic growth.
10.2. Theories of Keynes' followers
From the second half of the 1930s Keynes's teaching is becoming widespread
in economic theory and practice. A new direction of economic thought has
emerged — Keynesianism — a set of various concepts based on Keynes' theory.
Among the followers of Keynes, several directions can be distinguished:
1. Neo-Keynesianism.
Formed in the late 1940s–1950s. Its representatives (Alvin Hansen,
Roy Harrod, Evsey Domar, John Hicks, etc.) focused their attention on the
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