Political Economist

Part 1. Three main approaches to economic growth

Most advanced countries have experienced rapid economic growth measured in GDP per capita after the World War 2, especially after the 1960s. Regarding the causes or reasons for this economic growth, three different types of economists provided us with answers.

Firstly, neoclassical economists argue that the determinants of rapid economic growth in most advanced countries are availability of production factors such as capital and effective supply of labor and technological progress. According to the Solow model, which paved the foundations for modern ‘neoclassical synthesis’ of economic growth theory, the aggregate (output per capita) is the function of the combination of capital and labor, or the combination of capital and ‘effective supply of labor’ in its intensive form with ‘technical change.’ In other words, Solow and other neoclassical economists proclaims that economic growth can be attained through increases in capital accumulation with appropriate growth rate of the population which will constitute the labor supply.

With this kind of model, neoclassical economist was able to argue that economic growth can be achieved at a balanced growth path. Unlike previous Harrod-Domar’s unstable growth pattern, neoclassical theory presupposes that there would not be any turbulent business cycle and crisis. In their original perspective, there is no room for economic crisis or unstable growth pattern.

Thus if there is any such a kind of instability, this is easily attributed to the effects of exogenous factors such as state intervention, particular social institution. In this way, neoclassical economists described economic growth as a function of capital and labor based on their smooth possibility of substitution and argued smooth convergence to general equilibrium.

Unlike neoclassical economists, Keynesian economists admit the possibility of the lack of availability of labor supply. In their perspective, equilibrium condition, which can be summarized as a point where aggregate demand and aggregate supply meets, can only be achieved by accident. In most cases, capitalist economic growth is always accompanied by disequilibrium of demand and supply.

Based on this notion, and based on empirical observations of the 1930s’ Great Depression, Keynesian economists formulated the positive role of the government in enhancing aggregate demand/effective demand. By increasing government spending, an economy can achieve the increase in the effective demand, and this in turn leads to the increased level of consumption and investment, which constitute aggregate supply. This approach and its related policies adopted by the government resulted in real recovery of economic growth. Thus Keynesian economics was able to take a dominant position in modern macroeconomics.

Contrast to both neoclassical and Keynesian economists, classical Marxian political economy shows quite different visions of economic reality. Firstly, Marxian economics does not presuppose the lack of factor availability. The capitalist system itself produces endogenously the pool of labor supply. Marx himself called this pool of labor as ‘reserve army of labor’ which is determined by the capital accumulation process. Thus, if there is any kind of economic crisis, this is not due to the lack of labor supply. Instead, this economic crisis is originated from the capital accumulation process.

Another distinctive line between Marxian approach and both neoclassical and Keynesian theorists lies in its treatment of technical changes. As we already saw, neoclassical economists treated technical changes as neutral or exogenous variable which affects on the increase of ‘effective labor supply.’ In his original growth model, Solow regarded ‘technical change’ as various factors which influence the productivity of labor. Even though, he admitted the fact that the increase in the GDP, he left the determinants and directions of the technical changes unsolved. To use his own term, the ‘total factor productivity growth’ was not analyzed in his model.

Later neoclassical economists, admittedly, tried to incorporate the role of technical change in their growth model (‘endogenous growth model’). However, they still fail to explain why technological progress is made and how this progress is closely related to capital accumulation.

Unlike neoclassical economists, Marxian approach regards technical changes as necessary condition for capital accumulation and appropriation of the profit. According to Marx, individual capitals have to reduce the unit labor cost in order not to be defeated by competitions in capitalist market system. With the introduction of technical changes, capital can increase the labor productivity, and this in turn leads to increase in the amount of profit share for the capital. If profitability is the driving force of capital accumulation, and the capital accumulation is the unique source of economic growth, at least in capitalist economic system, the technical changes and any other types of factors which might affect the production process and organization of labor can be reduced or incorporated systematically into the profitability of capital.

In this way, Marxian theory explains the dynamics of economic growth, capital accumulation and the rate of technical changes. As already anticipated, economic crisis comes from profitability. Marx attributed this crisis of profitability to the intrinsic logic of capital accumulation.

Part 2. Three main theoretical approaches to unemployment

Unemployment rate, which is the ratio of the number of unemployed people to total number of active labor force, varies from countries to countries, from periods to periods.

With respect to the determinants of unemployment level, neoclassical economists have tried to argue that there is only one types of unemployment; natural rate of unemployment or voluntary unemployment. According to them, natural rate of unemployment is the concept which describes the rate necessary and natural for ‘search unemployment’ and ‘wait unemployment.’ Because market economy is in its equilibrium condition, full-employment is already presupposed in neoclassical economics. Thus, the term ‘natural rate of unemployment’ is the normal unemployment which occurs naturally under fully employed situations in order for finding a new job (search unemployment) and waiting for better wage terms (wait unemployment).

Thus, in principle, there is no room for excessive high unemployment level and historical changes in the rate of unemployment in neoclassical economics. If there is any sudden change in the natural rate of unemployment, this might be attributed to the adjustment process of an economy to an new equilibrium, or due to external factors such as excessive government spending, etc.

Unlike neoclassical economics, Keynesian economics admits the possibility that there may be high unemployment rate. In their perspective, the equilibrium condition of an economy is not automatic. Thus Keynesian economists argue that proper state intervention through fiscal and monetary policies is necessary in order to achieve effective demand. For them, high unemployment rate and historical change of the rates are good symptoms of economic disequilibria and thus the signal for necessary government policies.

However, both neoclassical and Keynesian economists share the belief of the existence of equilibrium in common. The only difference between them is the extent and time of adjustment, and the necessary means to achieve the general equilibrium. Contrast to these theories, Marxian theory regards the unemployment as a byproduct of capital accumulation. According to Marx, capital accumulation can only achieved through profit gain. Thus investment decisions of the firms and the saving rates are all dependent variables of profitability. In this connection, extraordinary increase in the level of unemployment and reduction of unemployment are all possible in capitalist economy. The points of these whole processes are that these phenomena are dependent on capitals’ profitability.

Secondly, technical change is also determined by profitability. In order to defeat competitors on the market competition, it is necessary for individual firms to introduce new technologies in their production process. This introduction might increase the unemployment rates. However, this can also result in the increased number of employees. In other words, technical change or the introduction of new technologies itself does not determine the level or rate of unemployment. Once again, the level of unemployment is determined not by technical change but by profit gain for capital.

In this connection, the treatment of technical change by neoclassical economists is radically different from Marxian approach. They attribute the rate of unemployment to the technical change in a given condition.

Finally, both neoclassical and Keynesian economists argue that unemployment is negatively related to inflation rate.