Recently, some students walked-out from the lecture of the exceedingly famous economist, Greg Mankiw, who teaches EC10, Introduction to (neoclassical!) Economics at Harvard University. He is, perhaps, more known for his best-selling textbooks. This post was drafted for a different purpose almost a year ago. However, given the relevance of the essay/post, I decided to publish it here.
“Students, economics is divided into microeconomics and macroeconomics,” says the professor. This classification dominates economics teaching at all levels – from schools to post graduate studies. What is not mentioned is that, this classification is a characteristic of a particular kind of economics – neoclassical economics. The introductory chapters of microeconomics textbooks teach us that there are two kinds of economics, namely, positive economics and normative economics. With this distinction students are led to believe that microeconomics is objective, scientific and apolitical. Such arbitrary and artificial characterization, I argue, is an important way in which neoclassical economics perpetuates its dominance both in academia and in the arena of policy making. However, the “politics” of microeconomics comes to the fore when one closely examines its history. This essay will closely examine the concepts of factors of production and marginal product.
The so-called objective and scientific microeconomics treats all factors of production (land, labour and capital) on an equal footing. In particular, the roles of labour and capital are depicted as symmetrical. No mention is made of their particular social and historical characteristics. Land, as we know, cannot be treated on par with labour in any unique way. At this juncture, let us recall the objective of economic theory and policy – to improve the conditions of human life. However, such a human-centric objective must not be taken to imply complete disregard for animals or for the environment. Given this, what is the rationale for employing the concept of factors of production in economic analysis? One wonders whether it is to depoliticize economic theory. The earlier economists (classical economists and Marx) had employed the concept of social classes to understand the working of the economy. In their analysis, society was divided into landowners, workers and entrepreneurs. This division was necessary to develop a theory of income distribution. That is, it is the division of the society into ‘social classes’ or ‘factors’ which provides the foundation on which the theory of income distribution is erected. In the former structure, landowners received rents, workers earned wages which were often at subsistence level and entrepreneurs received profits. Whereas, according to microeconomic theory, the rewards accruing to the factors of production are as follows: land earns rents; labour earns wages; capital earns interest and entrepreneur/organization earns profits. In the latter case, one notices that a distinction has been made between the “agent” and the “factor” of production. Notwithstanding this, the apparent objectivity of microeconomic theory crumbles and arbitrariness enters once we ask: what are the units for measuring capital? Land, as we know, can be measured in hectares, acres, square feet, etc. Similarly, labour can be measured in head count, man hours, man days, etc. But, how is capital measured? In fact, even before posing this question, we need to ask: what is capital? Why is capital, which is produced by labour acting on raw materials, considered a a factor of production? There appears to be no clear reason or rationale behind this. It seems that such an arbitrary concept was introduced to remove “politics” and “conflicts” from economic theory. Even the nomenclature “factors of production” appear significantly distanced from society vis-a-vis that of social classes, which was conceptualised taking into account the conflicts, especially over the means of production, prevalent in the society. Employment of “factors of production” in economic analysis presented a harmonious view of the society as opposed to the conflicts in income distribution which was pointed out by the classical economists.
Next, we briefly discuss the role of the concept of marginal product in microeconomics. In simple language, marginal product measures the contribution of one unit of the factor of production to the production process. Marginal productivity theory is a widely taught concept in graduate programs in economics and business. It is this concept which links factors of production to a theory of income distribution in neoclassical economics. Clearly distinguished “factors” of production is a prerequisite for the theory of marginal productivity. As pointed out in the previous paragraph, the owners of means of production do not find any explicit mention. Microeconomics teaches us that, in conditions of perfect competition, labour and capital get (monetary) rewards in proportion to their contribution to the production process. In other words, wages paid to labour equals marginal product of labour and interest paid to capital equals marginal product of capital. But, note that marginal product can only be computed by considering ‘potential change’, which is computed with the aid of differential calculus. What we do not pay adequate attention to, is that the origins of marginal analysis are to be found in the differential rent theory of Ricardo. Land, owing to technological constraints generated output at a diminishing rate as more and more labour and machinery were applied. This was because of the characteristics particular to land. Neoclassical economists extended this notion of diminishing marginal returns in land to other “factors of production” such as labour and capital. Such a generalisation has been shown to be inadequate on logical and historical grounds. Today, microeconomics textbooks and microeconomics professors hardly mention the historical origins of marginal productivity theory.
Neoclassical economics, as we have seen, misguides economic policy making by projecting a harmonious view of the society, comprising financiers, rentiers, entrepreneurs, wage labourers, salaried workers, etc. This is mainly done through the conceptual apparatus of “factors of production”. The idea of symmetry is introduced through this manoeuvre. Neoclassical economics also teaches students that a state of perfect competition is desirable because each “factor of production” will get what they deserve (their marginal product) as incomes. This, as indicated above, is a misinformed generalization of the rent theory of Ricardo. In fact, through the theoretical apparatuses of factors of production and marginal productivity theory, neoclassical economics tries to be objective, scientific and apolitical. However, as this essay has shown, most concepts of neoclassical economics have been devised in order to mask the conflicts and politics involved in economic phenomena.