By FRANCISCO TEIXEIRA*

The economy undergoes a cleansing process to sweep from its field of analysis everything that smells of class struggle

Introductory economics textbooks differ little or not at all from one another. The way they are presented does not always follow a rigid pattern. However, the content is always the same. In effect, they start from the assumption that resources are scarce, and then defend the idea that the market is the most efficient way to manage the use of goods and services.

But where does the idea that the market is the most efficient means of allocating and distributing resources come from? – From Adam Smith. In fact, this thinker, considered by many to be the father of Economics, assumes that man is a being of exchange. In the very first pages of his book, The wealth of nations, he defines man as an entity endowed with a natural inclination for exchange; it is inherent in his nature to exchange one thing for another.

To lend further reason to his concept of man, Adam Smith does not hesitate to resort to bizarre illustrations, such as the fact that “no one has ever seen a dog make a fair and deliberate exchange of one bone for another, with a second dog. No one has ever seen an animal giving to another, through natural gestures or cries: this is mine, this is yours, I am willing to exchange this for that” (SMITH.1985.p.49).

Now, if man is a being of exchange, it is natural that he can only fully realize himself in a market society. After all, for Adam Smith, exchange is the means by which each individual obtains the money to live. Man, he says, “at every moment needs the help and cooperation of great multitudes, and his whole life would hardly be enough to win the friendship of a few people. Man (…) is in almost constant need of the assistance of his fellow-men, and it is useless to expect this assistance merely from the benevolence of others. He will be more likely to obtain what he wants if he can interest the self-esteem of others in his favor, by showing them that it is to their advantage to do or give him what he needs. This is what every person does who proposes a bargain to another. Give me what I want, and you shall have this which you want—that is the meaning of every such offer; and it is in this way that we obtain from each other the great majority of the services we require. It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to our own interest. We appeal, not to their humanity, but to their self-esteem, and we never talk to them of our own wants, but of the advantages that will accrue to them” (SMITH. 1985. p. 50).

Exchange is, therefore, the means by which men satisfy their needs. They proceed in this way because the market is, par excellence, a natural institution. Therefore, any intervention aimed at regulating this institution is considered a threat to the freedom of individuals to decide how and where they should invest their capital. Hence Adam Smith's unconditional defense of market freedom for the development of nations.

For him, no commercial regulation can increase the quantity of labor in any society beyond what capital, that is, the free market, is able to maintain. Such regulation, he says, “can only divert part of that capital in a direction to which it would not otherwise have been directed; moreover, there is by no means any certainty that this artificial direction can bring more advantages to society than it would if things were to proceed spontaneously” (SMITH.1985.p.378).

After all, for the author of The wealth of nations, “each individual (…) is much better placed than any statesman or legislator to judge for himself what kind of national industry he can employ his capital in, and the produce of which is likely to attain the greatest value. The statesman who attempted to direct private individuals how they should employ their capital would not only burden himself with a highly unnecessary concern, but would also assume an authority which surely cannot be entrusted to any assembly or council, and which would nowhere be so dangerous as in the hands of a person with sufficient folly and presumption to imagine himself capable of exercising such authority” (SMITH, 1985, p. 380).

Market freedom is a necessary condition not only for the growth of nations, but also for the development of the world market. To quote David Ricardo, “in a perfectly free commercial system, each country naturally devotes its capital and labor to the activity that is most beneficial to it. This search for individual advantage is admirably associated with the universal good of the countries as a whole. By encouraging dedication to work, rewarding ingenuity and providing for the most effective use of the potentialities provided by nature, labor is distributed more efficiently and more economically, while, by the general increase in the volume of products, benefit is spread generally and the universal society of all nations of the civilized world is united by common bonds of interest and exchange” (RICARDO, 1985, p. 104).

That is not all. The thesis of market freedom, so ardently defended by these two giants of bourgeois Classical Political Economy, is based on the assumption that the value of goods and services is determined by quantum of labor necessary for its production. Therefore, profit can only be explained as a part of the work carried out by workers, appropriated free of charge by the owners of the means of production.

On this point, Adam Smith leaves no doubt. From the moment society is divided into classes whose interests diverge, he says, “the wealth or capital [which] has accumulated in the hands of private individuals,” some of these individuals, he continues, “will employ this capital in hiring industrious individuals, furnishing them with raw materials and subsistence, in order to obtain a profit by selling their labor, or by what their labor adds to the value of those materials. By exchanging the finished product for money or labor, or for other goods, besides what may be sufficient to pay the price of the materials and the wages of the laborers, something must result to pay the entrepreneur for the profits of his labor and the risk he assumes in undertaking this business.” In this case, the value that workers add to the materials is divided into two parts or components, the first paying the workers' wages, and the other paying the entrepreneur's profits for all the capital and wages that he advances to the business” (SMITH. 1985. p. 77-78).

Not without reason, Adam Smith understands that wages depend “on the contract usually made between the two parties, whose interests, moreover, are by no means the same. The workers wish to earn as much as possible, the employers to pay as little as possible. The former seek to associate with each other to raise the wages of labour, the employers do the same to lower them. It is not difficult to foresee which of the two parties usually has the advantage in the dispute and in the power to force the other to agree to its own terms. The employers, being fewer in number, can associate with each other more easily; besides, the law authorizes or at least does not prohibit them, whereas for the workers it prohibits them. There are no Acts of Parliament which prohibit employers from agreeing to reduce wages; but there are many Acts of Parliament which prohibit associations to raise wages. In all these disputes, the employer is able to hold out much longer. A landowner, a farmer, or a merchant, even without employing a single worker, would generally be able to live for a year or two on the wealth he has already accumulated. On the contrary, many workers would not be able to survive a week, few would be able to survive a month, and hardly any would be able to survive a year, without employment. In the long run, the worker may be as necessary to his employer as the employer is to the worker; but this need is not so immediate” (SMITH. 1985. p. 92-93).

David Ricardo thinks no differently. His great merit was to have demonstrated that the value of the product is divided into two parts: profit and wage, which vary inversely, so that wages can only increase if there is a reduction in profits; these, in turn, can only increase if wages fall. It is no coincidence that he was accused of being a communist, of preaching discord between social classes.

From a historical perspective, classical political economy coincides with the period in which the class struggle was not yet fully developed. All this changes when the French and English bourgeoisies assume political power. “From that time on, the class struggle assumed, theoretically and practically, increasingly accentuated and threatening forms. It sounded the death knell of bourgeois scientific economy. It was no longer a question of whether this or that theorem was true, but whether it was useful or harmful, convenient or inconvenient for capital, whether it contravened police orders or not. The place of disinterested investigation was taken by hired swordsmen, and the bad conscience and the bad intentions of apologetics replaced impartial scientific investigation” (MARX (a). 2017. p. 86).

Since then, the economy has undergone a cleansing process to sweep from its field of analysis everything that smacks of class struggle. The idea that value is determined by the amount of labor gives way to the conception that the value of a good depends on the degree of its utility. With this, the theory of value-utility replaces labor as the sole factor in the production of wealth with a conception in which value is now determined by the combination of three distinct factors: labor, land, and capital.

It is the exile of social classes from the world of economics, which is now inhabited by individuals who act according to their choices, which are made under the imperative of two sovereign masters: pleasure and pain, as Jeremy Benthan would say. From now on, it is the individual, and no longer social classes, that is considered the basic unit of economic analysis. However, it is important to remember that this unity does not take the flesh-and-blood individual as a method of analysis, but rather a supposed homo economicus, as a representation of the two basic institutions of microeconomics: the consumer and the producer.

This is the world that awaits the economics student. A universe where there is no class struggle; no conflicts, because there are no employees and no bosses; it is a world, therefore, in which there are no unions; and there are no unions because it is the worker who decides how much he is willing to give up his leisure time in exchange for more work; it is a perfect world, so perfect that it only exists in the economist's head.

This world created by economics is not mere intellectual dilettantism. It has a function. It serves to judge how distant or close it is to concrete reality, to the reality inhabited by flesh-and-blood individuals. To make this judgment, economics assumes the hypothesis that resources are scarce. If resources are scarce, a choice must necessarily be made between two or more alternatives regarding how they should be managed. The decision between the various alternatives is up to the market, which is considered not only the best institution, but the only one capable of allocating and distributing society's resources in the most efficient way possible.

This is where the Introduction to Economics manuals start from, which are concerned with teaching how to manage society's resources more efficiently. To this end, such manuals generally start from the graphic representation of a production possibility curve, which places society in the dilemma of what to produce: more food or more weapons, for example.

The textbooks then present the circular flow of income to show that the economy depends on a flow of exchanges, where, on one side, there are families and, on the other, firms. Everything happens as if the firms had no owners, because in the universe of families are the owners of the factors of production, who live off the sale of their services to imaginary firms, which produce goods and services for the owners of the means of production (labor, capital and land), that is, for families. Not a word about how the owners of the land acquired their properties, nor how the owners of capital formed their assets.

From there, the manuals investigate how each factor of production (land, labor and capital) participates in the production of wealth and how each of them is remunerated. Take labor supply as an example, that is, the amount of labor that each worker is willing to offer to the market.

To demonstrate how labor supply is determined, Krugman and Wells first ask “how do people decide how much to work?” and then state that, in practice, “most people have limited control over their work schedules: either they take a job that involves working a set number of hours per week or they have no job at all.”. To understand the logic of labor supply, however, it is worth leaving realism aside for a moment and imagining an individual who can choose to work as many hours as he or she wants.” (KRUGMAN & WELLS. 2011, p. 458).

It can be seen, then, that Krugman and Wells feel no embarrassment in asking the reader to forget how things happen in real life: “How do they determine how much work workers are willing to offer to the market? Giving them the floor, they begin their investigation by asking “why would an individual (…) not work as many hours as possible? Because workers are human beings too and have other uses for their time. An hour spent at work is an hour that is not spent on other, presumably more pleasurable activities. Thus, the decision about how much work to offer involves a decision about the allocation of time: how many hours to devote to different activities” (KRUGMAN & WELLS. 2011, p. 458).

Next, they detail in more detail how the worker acts when offering more or less work to the market. Using the Principles of economics by Alfred Marshall, explain that “by working, people earn an income that they can use to buy goods. The more hours an individual works, the more goods he can buy. But this increase in purchasing power occurs at the expense of a reduction in leisure time, the time spent not working (…). And, although the purchased good generates utility, so does leisure. In fact, we can imagine leisure itself, as a normal good, that most people would like to consume more of when their income increases” (KRUGMAN & WELLS. 2011, p, 2011, p. 458).

Krugman and Wells assume that economic agents are rational, and as such, they are always considering the best choice to make, whether in purchasing a good or offering a service. In the latter case, they act in the same way as a rational consumer. How so?

Using a hypothetical example, these two authors imagine that a certain individual named Clive “likes leisure as much as the goods that money can buy. And suppose that his wage is $10 per hour. In deciding how many hours he wants to work, he has to compare the marginal utility of an additional hour of leisure with the additional utility he gets from $10 worth of goods. If $10 worth of goods adds more to his total utility than an hour of leisure, he can increase his total utility by giving up an hour of leisure in order to work an additional hour.”. If an extra hour of leisure adds to his total utility more than $10 of income, he can increase his total utility by working one hour less in order to gain one hour of leisure” (KRUGMAN & WELLS. 2011, p, 2011, p. 458).

What kind of world is this in which individuals have complete control over the length of their working day? Quite different from what Krugman and Wells demonstrate, the determination of the length of the working day has been presented, throughout the development of capitalist society, as a struggle over its limits, a struggle between the capitalist class and the working class. A struggle that is recorded in the annals of history with “letters of blood and fire”, to use Marx.

 How about returning now to the question of the relationship between scarcity and the market. Drawing once again on Krugman and Wells, these authors imagine what would happen if “you could transport an American from the colonial period to the present day (…). What would the time traveler find astonishing? (KRUGMAN & WELLS. 2011, p, 2011, p.2).

The answer is filled with a sense of pride for everything that the United States of America did to transform that colony into one of the richest countries in the world. This is what can be inferred when they state that “surely the most astonishing thing would be the prosperity of modern America – the range of goods and services that ordinary families can acquire. Looking at all this wealth, our transplanted colonist from the eighteenth century would ask: ‘How can I have a share of this?’ Or perhaps he would ask: ‘How can my society get a share of this?’” (KRUGMAN & WELLS. 2011, p. 2011).

It is not difficult to imagine what the answer might be. In the face of the time traveler’s astonishment, Krugman and Wells have no doubt that to get where they are, the United States needed “a well-functioning system for coordinating productive activities—the activities that create the goods and services that people want and that deliver them to those who want them. This is the kind of system we have in mind when we talk about the economy. And economic analysis is the study of economies, both at the level of the individual and of society as a whole” (Krugman & WELLS. 2011. p. 2011, p. 2).

The system that Krugman and Wells speak of could be none other than the market. It is no coincidence that they call this part of the text “The Invisible Hand,” a metaphor created by the father of economic liberalism, Adam Smith, to express that the market is, par excellence, the most efficient institution in the allocation of society’s resources. That is exactly what these authors want to express. It is true.

Right after the above quote, they state that "“Our economy must be doing something right, and the time traveler would like to congratulate whoever is responsible. But guess what? There is no one responsible. The United States has a market economy in which production and consumption are the result of decentralized decisions by businesses and individuals. There is no central authority telling people what to produce and where to transport it. Each individual producer does what he thinks is most profitable; each consumer buys what he chooses.” (KRUGMAN & WELLS. 2011. p 2011, p.2).

What are the implicit assumptions here? Firstly, the ideology that the market is the best, if not the only, institution capable of allocating society's resources in the most efficient way possible stands out. Secondly, there is the idea that the economy's resources are scarce.

As for the ideological defense of the market that these authors make, it is obvious when they state that “production and consumption are the result of decentralized decisions”, decisions of a market economy. In fact, in the following paragraph they assert that “the alternative to a market economy is a command economy. The Soviet Union, they say, is proof of what they say.

There, while so-called real socialism lasted, things did not “work very well.” This proves, they would certainly say, that Adam Smith was right, for whom the economy progresses over time to the extent that individuals are free to apply their capital as they wish, without interference from any power that decides for them how they should employ their capital.

Does this mean, then, that the State plays no role in the functioning of the economy? If this question were addressed to Krugman and Wells, they would say that the State is important for maintaining the stability of the currency and promoting countercyclical policies. Going beyond that would mean that State intervention would be interfering in market activities, in the private sector.

The role of the State becomes clearer when we move to a more concrete level of abstraction, that is, when we move from microeconomic analysis to macroeconomic analysis of the Economy. It was John Maynard Keynes who promoted this change in analysis when, in 1936, he published his best-known, although not widely read, work, General theory of employment, interest and money. With this title, Keynes announces that he gave his theory “the name General Theory, to say that its main concern is with the behavior of the “economic system as a whole – with the total income, with the total profit, with the total volume of production, with the total level of employment, with the total investment and with the total savings, rather than with the income, profit, volume of production, level of employment, investment and savings of particular branches of industry, firms or individuals”.

Keynes then highlights the errors that were committed by microeconomic analyses “in extending to the system as a whole the conclusions that had been correctly reached with regard to a part of that system taken in isolation” (KEYNES.1985.p.10).

In other words, in the same passage in which Keynes presents the general objective of his thesis, he warns the reader not to repeat the same mistake made by classical economists,[I] that infer from isolated, micro cases, consequences for thinking about the economy as a whole. There is no way to deduce the macro from the micro, says Keynes.

This warning from Keynes should be taught to economics students, who do not realize the vast difference between microeconomic analysis and macroeconomic analysis. Unfortunately, this does not happen. Nor could it, because students leave the introductory classes with the idea that “economic analysis is the study of economies, both at the level of the individual and of society as a whole,” as Krugman and Wells understand it.

Keynes' General Theory can be presented, albeit in an extremely crude form, to be in accordance with the Macroeconomics Manuals, as a closed economy with no government, where the general income of the economy can be expressed as follows:

Y = C + I, where C is the consumption function and I, the investments

Now, if C = a + bY, then aggregate consumption depends on the level of income. Therefore, consumption can only increase with the growth of investments. These grow with the expenditures made by the capitalist class.

And what about the State? How does the General Theory explain the relationship between this institution and the economy? In Chapter 24 of his theory, Keynes shows the importance that the State plays in determining investments, since the aggregate income of the economy depends on the decisions of capitalists to expand the productive capacity of their companies. Such decisions depend on the expectations of capitalists regarding the expected profit from their new investments.

If the expected profit is greater than the costs involved in raising funds to cover investment expenses, then investment will increase and with its growth, income and overall employment in the economy will increase. In other words, if the rate of return on investment is greater than the rate of investment to obtain funds, capitalists will feel motivated to invest. On the other hand, if expectations are adverse, capitalists will not feel encouraged to invest.

This is where the presence of the State becomes necessary, whose function is to reduce the instability of the economy through a “system of taxation, partly by fixing the rate of interest and partly, perhaps, by resorting to other measures”. However, Keynes then warns, there is “no evident reason to justify a State Socialism covering the greater part of the economic life of the nation. It is not the ownership of the means of production that it is convenient for the State to assume. If the State is capable of determining the aggregate amount of resources destined to increase these means and the basic rate of remuneration to their holders, it will have done its part” (KEYNES.1985, p.256).

Finally, Keynes teaches that it is spending that determines the economy's income level, and that it is up to the State to create a macroeconomic environment favorable to investments.

But if spending is what determines economic growth and employment, why is reducing public spending the first thing governments implement, supposedly to create an environment favorable to investment? Isn't that a contradiction? – Of course it is, but to understand it, we need to analyze, more slowly, the relationship between economics and politics, something that we cannot discuss now.

*Francisco Teixeira He is a professor at the Regional University of Cariri (URCA) and a retired professor at the State University of Ceará (UECE). Author, among other books, of Thinking with Marx (Essays) [https://amzn.to/4cGbd26]

Lecture given for the Department of Economics, at the Regional University of Cariri (URCA), as the inaugural class of the second semester of 2024.

Note

[I] By classical economics Keynes means what he judges of followers of David Ricardo, such as J.S. Mill, Marshall and Pigou.

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