Economic theories attempt to make us understand how economies work. They shape different responses to economic cycles. Neoclassical, Keynesian, and Marxian theories contradict each other in basic ways, for eg. adopting neoclassical theory would lead to no government intervention in regards to the capitalist economy, whereas Keynesian theory would lead to a more state interventionist policy with regards to the same capitalist and economy and Marxian theory would require to alter the economy’s class structure to move beyond capitalism. The transformation in Europe led to feudalism being replaced by capitalism. This was a new change in society that brought about a change in theories, including economic theories, which had a powerful impact on Europe.
“Humanism” the change that accompanied the renaissance and the emergence of capital focused on the individual as the essential cause of society. The classical school of economics shifted its focus during and after the 1870s towards a microeconomics theoretical foundation that viewed economic events as results of decisions reached by self individuals and firms. It came to be known as neoclassical economics. Smith rejected the idea of a powerful state, i.e. the autocratic feudal kings of Europe, and believed that if capitalism as a system was properly organised and was unhampered by external interventions then such self-seeking individuals will derive the greatest possible wealth depending on their contributions to production and desire for consumption.
The great depression across the 1930s which took over western Europe and capitalist economies shook neoclassical economics to its roots. Neoclassical economists had no explanation to offer regarding the depression, nor did they have many solutions. The theory which believed that doing nothing would repair and correct the capitalist mechanism seemed ineffective to the common masses and the worsening depression signalled broken capitalist machinery. Only Germany and USSR had solutions to the great depression in Europe, however, these solutions were accompanied by fascism in Germany and Communism in USSR. John Keynes published General Theory of Employment, Interest, and Money (1936) in which he offered a new policy for the state. In fear that the depression would drive the masses towards Germany or USSR, the Roosevelt administration in the US moved towards Keynesian Economics which called for more state intervention to save American capitalism from itself. Contrary to neoclassical economists, state spendings became crucial to maintain full employment and growth. Attitudes towards the state’s role in individuals’ lives gained importance and it was looked up to the state to maintain fair and humane capitalism with reduced economic inequalities. With the help of Keynesian Theory the modern ‘welfare stare’ arrived in the US, there was a shift from humanism to structuralism. During the 1970s and early 1980s, businesses and conservative spokespersons blamed the state’s intervention which curbed individual freedom to generate growth in wealth. There was a return of neoclassical economy which included spurts of economic growth, however, there was also a deepened sense of economic inequality.
Marxian Economics focuses on the capitalist economic system. Marx emphasised class as a common feature of fading feudalism and rising capitalism. When he talked about classes he meant the two opposing groups, i.e. the surplus producers (wage labour/proletariat) and surplus appropriators (lords/capitalist). Marxist theory explored the economic and social consequences of change in the form of class process from feudalism to capitalism. He envisioned a society where there was the abolishment of exploitation. He attached the name of communism to this society.
Aishwarya Says:
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