Keynesians and Marxians Keynesians vs.

Keynesians and Marxians

Keynesians vs. Marxist Economics and the Economy Today

The economy of today is changing rapidly and it can be debated that the old theories that applied to the economy of the early 20th century no longer apply. For the past 100 years, Keynesian and Marxian economic theories offered the best explanation and ability to predict the economy. However, that was before globalization, the information age, and the development of the service economy. The following will explore Keynesian economic and Marxian economics and examine these theories in relation to the economy of today.

Bring on the Keynesians

Keynesian economic theory was based on the work of 20th Century British economist John Keynes. The basis of Keynesian economics is the idea that private sector decision can lead to inefficiencies in the capital markets. Keynesians advocate responses by the public sector to stabilize the business cycle (Binder, 2002). In difficult times, Keynesians are hard at work, deciding actions to take with the central bank, monetary policy and fiscal policy.

Keynesians focus on the how the actions of individual affect the macro economy. Keynesians argue that in an economic downturn, the demand for goods is lowered, resulting in unemployment and losses in the gross output of the economy (Binder, 2002). The Keynesian response to such a condition would be to take measures to attempt to stimulate the economy by providing incentives for people to spend. These attempts to raise the confidence of the people are targeted towards affecting the decisions of the individuals, so that it will have an effect on the macroeconomic scene.

The Keynesian response to a depression is to stimulate the economy through a reduction in interest rates and government investment in the infrastructure. Government investment creates jobs, providing more money that can be used to stimulate the economy by the people. The key principle is that the initial investment starts a cascade of events that lead to overall economic growth (Binder, 2002). However, in practice, there are many variables that can affect the ability to Keynesian economics to promote economics growth. In its most basic form, Keynesian economics fails to account for many of these variables. It would be argued that Keynesian economics are too simplistic to be effective in a realistic sense.

Marxian Economics

Marxian economics theories are based on the writings of Karl Marx. Marxian economic theories differ from and do not depend on his political works. Marx argued that the most important aspect, and perhaps only justification for its existence, was that it stimulated the rapid growth and productivity. Marx felt that population growth tended to push wages to a subsistence level by providing an over-supply of labor. Marx placed a high degree of importance on the connection between population growth and subsistence level wages.

Marxian economics defines the value of a commodity differently than Keynesians. Marxian economics not only focuses on the price of a good, but also on its usefulness. The object has value in its usefulness and in its value in relation to other commodities. Marx also included the value of the human labor to produce the good in his equation. Marx considered useless items to have not value.

One of the more interesting concepts of Marxian economics is that Marx did not consider metallic money, such as gold or silver to have any value beyond the labor and materials used to produce the actual coin. However, he considered paper money to have no value on its own, unless it was backed by silver or gold. The production of goods can be calculated by using an equation that relies on the time value of labor. The amount of labor used to produce a product can be calculated using a simple econometric formula. The amount of time used to produce the product is considered in the value of the product.

Similarities and Differences between Theories

These brief descriptions of the Keynesian and Marxian economics provides insight into the principles behind them. Both of these theories are much more complex than they would at first seem from this brief overview. Keynesian economics attempts to explain and control the dynamic nature of commodity values using the principles of supply and demand. Marxian economics considers the value to a commodity to be fixed, as long as nothing happens to change its production methods.

According to Marxian economics technology decreases the value of a product because the human labor expended to produce it decreases. The Keynesian economist would see the decrease in labor as a means to increase the supply. Whether this increase in supply would decrease the value of a commodity depends on whether the supply outpaces demand or whether the demand for the product continues to increase in proportion to the increase in supply. Marxian economics creates a more predictable scenario, but one must question whether this is a realistic assessment of real value predictions.

Marxian economics is the basis for many econometric models. It produces predictable results that make it excellent for forecasting purposes. However, Marxians felt that capitalism was different from society and that capitalism would collapse under its own accord, given the right set of circumstances. Keynesians did not recognize a separation between capitalism and society.

Both Keynesian economics and Marxian economics are useful for the development of models to help predict the reactions of the market to various shocks. Keynesian and Marxian economics both attempt to explain why the market reacted after an event, but only the Keynesians will attempt to control the future of the market to some degree. Keynesian and Marxian economic theories focused on macroeconomics and the gross effects of individual actions on the whole.

Keynesians and Marxians in Today's Economy

The world in which Keynesian and Marxian theories were developed was a very different place than exists today. National economies were relatively isolated, with the exception of very large firms. The market was largely a manufactured goods market. It was believed that a high level of savings could reduce the national income and efforts were placed into the development of a society based on consumerism. The United States grew into one of the largest consumers of goods in the world.

When one applies both Marxian and Keynesian economics to the world today, one thing becomes apparent. Neither of these theories can take into account human nature and human reactions. According to Keynesian theory, stimulating the economy is as simple as giving people a few extra dollars to spend. Keynesians feel that people will react and go out to spend them, thus increasing demand. This demand will cause manufacturers to immediately react by increasing production and hiring more workers, thus increasing the size of the economy. However, it does not always work that way, as we recently saw with Bush's stimulus package. When a high degree of uncertainty exists in the economy, people tend to save their money instead of rushing out to spend. One of the key factors that influences the effectiveness of Keynesian style stimulus is the amount of uncertainty that exists in the minds of the people regarding the future.

Now there is a new term emerging in the business world that suggests that the days of Keynesian economics are a thing of the past. The term 'post-Keynesian economics" is being seen more frequently in literature (Lavoie & Macmillan, 2008). The introduction of this term suggests that Keynesian style tactics of attempting to control the economy are a thing of the past. These new theorists have modified Keynesian theory to include constraints such as competition, the financial environment and emphasizes the role of demand in determining the level of output in the country (Lavoie & Macmillan, 2008).

Post Keynesians rely on many of the Keynesian principles, but they have added constraints to make the theory more useful and able to take into account the many variables that affect the ability to Keynesians to control the economy. Marc's work emphasized the conditions that would promote reproduction and balanced demand. However, he neglected to work out the details of aggregate demand and money (Niggle, 2007). Keynesians and post-Keynesians add the factor of credit to the traditional Marxian approach (Niggle, 2007).

The GM crisis is one of the most striking examples of Keynesian and Marxist economic principles at work. For the past 50 years, global demand for automobiles has increased steadily and dramatically, which GM easily rode to become one of the biggest and most successful automakers in the world (Wolff, 2009). GM transcended national economic constraints to become a leader on the global market. One of the most interesting points of the crisis from a Keynesian perspective is that although the government is one of GMs biggest shareholders, President Obama refused to interfere with the post-bankruptcy board (Wolff, 2009). He further decided to quickly sell the government's shares to re-privatize the company (Wolff, 2009). Now let us look at some of the potential effects of this anti-Keynesian stance by the President.

Rather than stepping in to help preserve the jobs and demand for products created by those workers, President Obama has promised to back out of private sector decisions. There are many potential actions that could have been taken to help prevent the closing of GM and the job losses, plant closings, and economic catastrophe that is likely to occur as the once unstoppable giant collapses (Wolff, 2009).

The UAW won above subsistence level wages for GM employees, which should have theoretically had the same effect as an economic stimulus in the traditional Keynesian sense. However, rather than being rewarded with increased demand, GM workers found themselves displaced when the company decided to move production to countries where the workers did not attempt to cut into company profits by demanding fair wages. The company profited and these changes had little affect on demand. The world still demanded GM cars, regardless of where they were produced.

The impact of displaced workers should have created the affect of decreased demand according to both Keynesian and Marxian economics. However, when one takes a global perspective, it had little aggregate affect. The move did have an impact on the American economy, and an even greater affect on the communities where former GM plants were located, but these affects were only local. From the Marxian and Keynesian perspective, moving GM plants had little affect on the overall global macroeconomy.

This example demonstrates that the emergence of the global economy has had an equalizing effect on shocks to the economy of one particular nation. Keynesian and Marxian economic theories were more easily applied to national economies. The effects on national economies were more easily measured than the aggregate affect of these actions on the global economy. While displaced GM workers in the U.S. were big losers, unemployed workers in China, Brazil, and India benefited from the movement of GM. Now, we must measure the affects of a move on the global economy, rather than the impact on a single country. The new macroeconomy takes a more global perspective than the old model of macro and micro economies.

Marxian and Keynesian economics work best when they are applied in a vacuum. The new economy is filled with an almost endless multitude of substitutions. The market is filled with imitation products, often produced in once third world countries. There is also readily available substitute labor, often at a lower cost than local labor. The cost of moving a company overseas is often relatively cheap, when one considers the differences in labor costs. American workers cannot longer consider themselves an irreplaceable commodity. They can be replaced for the right price. The ability to readily replace workers with those that would work at a lower price is something that neither Keynes, nor Marx considered a possibility.

President Obama's abandonment of government intervention in the capital markets represents an abandonment of the principles upon which they were founded.

One of the most difficult aspects of Marxian and Keynesian economics is demonstrating that the theoretical predictions correlate to real-world affect. Supporters of both theories claimed for many years that correlations existed proving that their theory was valid. However, more recent studies have demonstrated that correlations are spurious and that they lose their predictive nature on these grounds (Kliman, 2008).

Direct foreign investment further complicates a Keynesian approach to the economy. Many countries are now choosing to grow with foreign savings. This scenario is a true test of the applicability of Keynesian economics to the current economic situation. Medium-income countries are capital poor and it is expected that account deficits due to foreign savings will increase consumption rather than the rate of capital accumulation and aggregate demand (Bresser-Pereira & Gala, 2008). This creates a scenario where the country must accumulate debt in order to consumer. Investment will not create growth in the country's own economy, but it will increase growth in the economy of a different country (Bresser-Pereira & Gala, 2008). A Keynesian approach would attempt to control this scenario by manipulating exchange rates to promote domestic investment and growth. However, when the players consist of countries with differing opinions.

Literature gives a strong indication that new models are being developed and that new methods of teaching them are emerging in academic circles (Harvey, 1007). Post Keynesian models and methods utilize many elements of the Keynesian model, but they have eliminated concepts such as a tendency towards full employment or balanced trade (Harvey, 2007). The perfect world or market equilibrium has been largely abandoned for a more realistic approach to the market and human reactions to it. Keynesian theory is not disappearing completely and it is still being taught as the theoretical basis for macroeconomics, but in actual practice, it is being replaced by a more realistic approach that places a greater emphasis on uncertainty and risk.

The current situation in the U.S. housing market is an excellent example of the failure of Keynesian policies and intervention. The Keynesian approach to the current housing slump approaches the problem from the standpoint that a national housing market exists and that adjusting the prime rate will an aggregate affect on the housing market as a whole. However, research has demonstrated that the housing market is highly segmented and that a different approach needs to be taken in modeling the housing market (Arestis & Karakitsos, 2008).

This is especially the case when one considers the impact of the sub-prime market on the overall housing market. Increasing numbers of foreclosures have increased the supply, which at the current time is outpacing demand. The slump in the U.S. housing market can be compared to the boom in the Spanish housing market of the early 2000s. Housing demand was the key driver of the boom, triggered by population growth, employment and an increase in per capita income (Esteban & Altuzarra, 2008). This is a key example that demonstrates that basic theoretical model proposed by Keynes still applies on a most basic level.