The Underlying Theory of Modern Orthodox Neoclassical Economics: Introduction - Part 1

NB. I here insert some draft material from my research on a critical comparison between Marx and modern orthodox neoclassical economics. This first piece of six acts as an introduction to the underlying theory of modern orthodox neoclassical economics: Walras's general equilibrium theory. As we shall see, in contrast to Marx who makes the social class structure of capitalism his theoretical focus, modern orthodox neoclassical economics in terms of its 'marginalist' origins aims to rid itself of any notion of social classes altogether so it can arrive at a 'pure theory' of the economy.

The theoretical basis of modern orthodox neoclassical economics is the general equilibrium theory of Léon Walras – as presented by him in the Elements of Pure Economics, or Theory of Social Wealth. This theory of Walras’s is essentially based on a ‘pure exchange’ model which does away with any ‘social class’ distinctions in order to construct a theory about the allocation of ‘given resources’ which meet ‘consumers’ demand’. Thus this theory, as I shall show, abstracts completely from the underlying social structure of a capitalist market economy in order to construct a ‘pure economic theory’ of it.

This theory of Walras’s is, as pointed out by Vivian Walsh and Harvey Gram in Classical and Neoclassical Theories of General Equilibrium: Historical Origins and Mathematical Structure (1980), concerned with the following central problem of ‘marginalist’ economics: how does the economic system of capitalism allocate within the general market ‘a set of given resources’ (Walsh and Gram, 1980: 123) in terms of land, labour and capital goods so as to meet ‘consumers’ demand’ for various goods and services? This particular problem about ‘resource allocation’ is thus concerned with, as pointed out by Vivian Walsh and Harvey Gram, ‘the phenomena of the market’ (1980: 10). As such, it differs from another type of allocation problem, which, as pointed out by Vivian Walsh and Harvey Gram, is found in the work of the ‘classical economists’ (1980: 9), viz., the physiocrats, Adam Smith, David Ricardo and Karl Marx. Here, the particular problem is about how the ‘social surplus’ of capitalist production is allocated between ‘capital accumulation’ and ‘luxury consumption’ (Walsh and Gram, 1980: 10), i.e., between using it for the purpose of accumulating more capital so there can be further economic growth and using it for the purpose of personal consumption on the part of capitalists. Consequently, this particular type of allocation problem focuses on what can be called the phenomena of capitalist production. So, as can be seen here, the general equilibrium theory of Walras is very much concerned with an allocation problem which is market-focused rather than production-based.

As pointed out by Vivian Walsh and Harvey Gram, this theory of Walras’s is developed by him on the basis of the two halves which make up the ‘marginalist’ or ‘neoclassical’ picture of the market economy of capitalism: William Stanley Jevons’s ‘mathematical’ theory of exchange (as presented by him in The Theory of Political Economy) and Carl Menger’s ‘non-mathematical’ theory of production (as presented by him in the Principles of Economics). Since this is so, it is worthwhile sketching out the basics of their respective theories.