The Problems with Neo-Classical Economics
January 27, 2025 4 minutes • 669 words
Table of contents
The science of Economics was established as a consequence of the Mercantilism.
The Mongols had connected Europe with China, allowing merchants like Marco Polo to establish trade and become very wealthy.
But the Fall of Constantinople to the Muslims in 1453 ended the silk road and allowed Arab expansion to the East through the Straits of Malacca.
The Political Economy
The Europeans found a solution by sailing around Africa and South America to reach China and Indonesia.
This slowly reduced Arab power and wealth, and along with it Islam. But it also created a rise in greed and materialism both in the people and in the ruling class.
The more our capital cities become admirable, the more abandoned is the countryside, the more the roads crowd with beggars or highwaymen. Thus the State grows rich on the one hand, and feeble and depopulated on the other.
The mightiest monarchies, after having taken immense pains to enrich and depopulate themselves, fall at last a prey to some poor nation which invades it. Then growing opulent and weak in its turn, that nation is itself invaded and ruined by some other.
This promted 17th and 18th century writers to create the science of Political Economy as regulation against opportunistic merchants on one hand, and oppressive monarchs on the other, both of which sought only to enrich themselves without thinking of the consequences on the whole.
This led to rules such as competition (as opposed to guilds), contracts (as opposed to oaths), employment (as opposed to slavery), income taxes (as opposed to poll taxes), government investment in public infrastructure (as opposed to palaces), and so on.
These transferred more power to the people, allowing them to make economic decisions for themselves, letting them generate more wealth in their own way. This then increased wealth overall.
Neoclassical Economics
The French Revolution of 1789, however, further reduced the regulatory powers of governments allowing greed to grow in the private sector. This is best shown in the profit-maximization doctrine of the Marginal Revolution which led to Neoclassical Economics and the overthrow of the Political Economy.
Money Over Life
For example, the feudal lords switched to banking and trade, focusing on the money produced by the land, as cash crops, instead of the food that fed the people.
In Britain, this led to the Irish famine, prompting debates between Ricardo and Malthus. In India, this caused the Bengal Famine.
This pattern of maximizing profitable cash crops and minimizing unprofitable food crops continues to modern times in the famine in Hanoi, Vietnam in the 1940s and the Negros famine in the 1980s. Both were caused by planting sugar cash-crops instead of rice.
The Philippines strangely established rice tariffication in 2019 which puts rice on the same footing as a cash crop subject to market forces. As expected, this led to an increase in food prices, since rice is the base of all food.
This mistake in policy creates chronic malnourishment instead of famine. This then will make the population uncompetitive in the long run.
For the Philippines, a war with China will then be fatal as China will be able to embargo food imports. This does not happen to Ukraine which produces its own food abundantly.
Neoclassical Economics has merely transferred the oppressive power from governments to the markets themselves.
Nowadays, corporations can rise or fall by the mere whim of the markets. This is most evident in cryptocurrencies which can be pumped and dumped, making them totally unreliable as a basis for any economic system.
While the Trump administration embraces Mercantilism and Marginalism by creating trade wars and establishing cryptocurrencies, the rest of the world should take the opposite path and return to the forgotten principles of the Political or Classical Economy that sought to balance the different vested interests.