Neoclassical and The Political Economy

Neoclassical and the Political Economy

Neoclassical economic

Neoclassical economic theory (which is also associated with neoliberal political policies) is grounded in the rejection of the Marxian notion of exploitation and the promotion of the idea that the distribution of social resources produced by market exchanges is innately fair and just (when it is allowed to work "without friction.") Although neoclassical theory dominates the economics discipline it is actually a psychological theory: at the core of the theory is a specific reductionist theory of human decision making and rationality that is then applied to economic (and other) phenomena1 1. All human decision making is assumed to be driven by the pursuit of individual pleasure/happiness. This pleasure is defined, within the theory, as utility. Thus, the economic man (homo economicus) is a utility maximizer. Market exchanges are defined as simple trades between equally powerless economic men trying to maximize their individual pleasure. The wage labor relationship is such a market exchange. The wage is defined as equal to the value of the contribution of workers to the overall value of the commodity produced, such that workers are not cheated out of any “surplus value,” as defined within Marxian theory. Thus, neoclassical theory provides a clear alternative to the Marxian contention that workers are exploited by being cheated out of value that should rightly belong to them.

Labor Economics

Neo-classical economists view the labour market as similar to other markets in that the forces of supply and demand jointly determine price (in this case the wage rate) and quantity (in this case the number of people employed)2.

However, the labour market differs from other markets (like the markets for goods or the money market) in several ways. Perhaps the most important of these differences is the function of supply and demand in setting price and quantity. In markets for goods, if the price is high there is a tendency in the long run for more goods to be produced until the demand is satisfied. With labour, overall supply cannot effectively be manufactured because people have a limited amount of time in the day, and people are not manufactured. The income effect suggests a rise in overall wages will, in many situations, not result in more supply of labour: it may result in less supply of labour as workers take more time off to spend their increased wages. The substitution effect of a higher wage might cause people to work more, as the opportunity cost to work less is greater than it was prior to the increase3. While available empirical evidence is mixed, some analysts suggest the income and substitution effects cancel each other out, resulting in no supply increase. Within the overall labour market, particular segments are thought to be subject to more normal rules of supply and demand as workers are likely to change job types in response to differing wage rates.

The labour market also acts as a non-clearing market. Whereas most markets have a point of equilibrium without excess surplus or ...