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The Contemporary Scene of Economics

Economics was never the same after Keynes, although neoclassicism did reassert itself by reinterpreting Keynes and introducing variables into his "model", which his interpreters never imagined he would have deliberately left out. Time and space do not permit us, however, to trace these developments further. Nothing has happened since Keynes which could compare in significance with the advent of classicism, the rise of Marginalism, the Marxian critique and the Neoclassical synthesis. We will turn now for a brief look at the present state of the art. Three distinct strands can be noted:

  1. Mainstream economics which assimilated Keynesian contributions into neoclassicism by adding macroeconomic theory, including macroeconomic theories of value and distribution centered around rational choice, demand and supply, competition of various types and the equilibria and optima resulting from the market process.
  2. Revival of the historical and institutional or, to put them together, an evolutionary methodology. It advocates a holistic approach and openness to ideas and methods from other disciplines such as sociology and political science. Instead of merely focusing on '“what is", evolutionists ask "how" did the economy get there and "where" it is leading us, has drawn attention to a number of formative factors conventional economics fails to consider, "power" being the most prominent among them. The postwar period witnessed a great spurt in literature on growth and development, analyzing the causes of under-development and exploring possible strategies of development. This brought historical and sociological considerations to the fore and exposed the limitations and weaknesses of abstract economic laws. Myrdal's Asian Drama is one of the best examples of this trend. Development economics has strengthened the case for mechanisms other than the market to get things done. The state has to play a crucial role in this process.
  3. The Marxist critique of capitalism also took a more positive shape in writings of authors like Baran and Sweezy. Aimed with new concepts like that of "potential surplus" they pointed out the costs that growth through free enterprise capitalism entailed, thus joining hands with Veblen who had earlier exposed the predatory nature of competition. The Marxists did not show much of a success, however, in constructing a theory of rational organization of productive forces in a socialist society, not to speak of a distinct theory of economic behavior relevant to a socialist society. An important by-product of their efforts was, however, the almost universal acceptance for the realistic view that market and plan were complementary and economic analysis defied a dogmatic approach.

The radical economists are also important as far as their critique of neoclassical economics is concerned, but thus far they failed to evolve a viable alternative. Mainstream economics' concentration on small marginal changes and shifts within a capitalist system prevented it from a meaningful analysis of production and distribution which often required consideration of large qualitative changes. It also failed to take into account the actual socioeconomic determinants of productivity and excluded important social and political variables from its analysis. It had no method to deal with the negative costs outside the market system such as pollution and depletion of resources. These and numerous other criticisms are impressive enough to shake one's faith in the received doctrines and methods, but the question is, where do we go from here?

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Though our review has been critical, two centuries of economic theorizing did add something to man's insight into his economic life and his ability to manage it for good or bad. One can lose sight of the complex reality only to his peril, but it does help to be able to grasp certain uniformities and long term trends, which can be discussed despite the complex variety and vicissitudes. The supply-demand analysis is one such example. Focusing on the margin to trace the consequences of changes in economic variables is a useful technique in itself, only if one learns to discard it when the changes are out of the ordinary. The concept of equilibrium also helps understanding provided one does not attach any ethical significance to it and remembers the "other things" assumed to be given. Many other examples can be cited, especially when the contemporary, often moderate and more qualified, versions of economic doctrines are considered.

We have already noted that one of the key drawbacks of the market is that it "does not provide within itself any defensible income distribution." "The integration of distribution as an explanatory variable in the theoretical framework of economics has to be accomplished on both (a) positive analytical and (b) normative grounds.” Since "the organizing principles of economic system guided by exchange values are incompatible with the requirements of the ecological system and the satisfaction of basic human needs.” a broader approach to economic problems is called for. This leads Kapp to observe that "The new task of economics would be to elucidate the manner in which collectively determined social goals and objectives could be attained in the most effective and socially least costly manner.” Collective determination of social goals" raises, however, an epistemological problem. The contention that the market translates individual preferences into social goals has been demonstrated to be untenable. That the democratic process can do so still begs the question whether individuals always know what to prefer. Furthermore choice involves both preferences and opportunities how to broaden and equalize the opportunities for every one brings the whole issue of social goals back.

Economics in its Western tradition never considered the possibility of referring to some sources higher than human preferences for arriving at social goals. All schools of economics accepts self-interest and pursuit of material progress as the norm despite weak efforts to discuss altruistic behavior and quality of life that involved non-material dimensions. That self-interest and pursuit of material progress alone are not in harmony with the human situation, is a realization calling for exploring the possibilities of changing the current attitudes which are largely the creation of Western sensate culture in which economics has been a major contributor.

To sum up, economics matured as an independent discipline in the West in a cultural milieu which idolized material prosperity and accepted self-interest as the normal human motivation. It extolled individualism and disfavored state intervention in economic affairs. Though the need of some state action is now admitted, attention is still focused on the theory of rational choice and the market is regarded as the main mechanism for translating individual preferences, into the how or why of which economics does not enquire, into social solutions of production, distribution and consumption. Mathematical techniques are employed to study functional relation between macro and micro economic variables. There is a strong bias against any variables, which cannot be handled mathematically. Non-economic factors are generally excluded from analysis. Behavioral laws and functional relations should, in the context of minimization of costs or maximization of returns, constitute the core of economic theory. This core is surrounded by studies relating to Monetary and Fiscal Policy, Distribution, Growth and Development, Labor and Organization, International economic relations, etc., which admit of ends and policy options. Using the concepts and tools perfected in the theoretical analysis these studies also admit of control and planning situations and tend to incorporate sociological and historical material. Most of the differences in their approach to current problems between mainstream economics in its conservative (Friedmanian) and liberal (Samuelsonian) traditions on the one hand and the Radical and Marxist economics on the other, relate to these areas. They do not disagree on such basic assumptions as the primacy of self-interest or supremacy of material progress, or the capacity of man to know what is good for himself.


Source: Dr. Muhammad Nejatullah Siddiqi, Economics An Islamic Approach. Republished with permission.