The trajectory of mainstream economics can be understood in terms of how the discipline historically responded to moments of crises by attempting to “theoretically fix” the understandings related to five core “questions” of capitalist political economy – namely land, trade, labour, state, and legal-institutional framework. This involved legitimising improvements in land that led to the dispossession and the destruction of the commons, justifying free trade based on comparative advantage as opposed to mercantilist state intervention, reducing labour to a factor of production that was supposedly rewarded based on its marginal productivity and hence not being exploited, legitimising state intervention to stabilise capitalism and developing a legal-institutional framework to protect markets from popular democratic pressures. These “theoretical fixes” served to ideologically legitimise, preserve, and perpetuate the core content of capitalist social relations even as it corresponded with the modification of the surface-level appearances of capitalism.

The history of mainstream economics is closely tied to the history of capitalist development. However, the discipline of economics attempts to obscure this relationship, mostly by asserting its value-neutrality through a positivist approach. Despite criticisms, mainstream economics continues to retain its core postulates by reasserting the naturality and inevitability of capitalist social relations by dismissing questions of political economy. The outsized influence of economics in policymaking necessitates consistent critique and engagement with the assumptions and implications of mainstream economic theories and models. There is a wealth of literature that critiques different aspects of mainstream economics from different perspectives (see Chang 2015; Fine and Milonakis 2008; Kvangraven and Kesar 2021; Lee 2009; Mezzadri 2020; Reinert, Ghosh & Kattel 2016; Selwyn 2016). This essay contributes to this rich tradition of critique and argues that the trajectory of mainstream economics can be understood in terms of five core “questions” – namely land, trade, labour, state, and legal-institutional framework.

While these are not mutually exclusive questions and economic thought did not evolve in a linear trajectory, I argue that the discipline of economics responded to moments of crises by attempting to “fix” the existing theoretical approaches that underpinned the prevalent understandings of capitalist political economy. These “theoretical fixes” served to ideologically legitimise, preserve, and perpetuate the core content of capitalist social relations even as it corresponded with the modification of the surface-level appearances of capitalism.

But since the logic of capital expands to all realms of society and leads to new contradictions that cannot be permanently overcome (Harvey 2014), new problems inevitably arise for economics as a discipline. Highlighting how these questions were fixed in mainstream economics provides a better perspective on how to challenge its supposed value-neutrality as well as its dominance in academia and policymaking. The purpose of this essay is not to provide a linear historical account of the evolution of economic thought, but to historicise economic theories by situating them in their political-economic context, which helps make better sense of why mainstream economics evolved the way it did.

The land question

Land played a central role in the capitalist transition and continues to remain integral to contemporary accumulation (D’Costa and Chakraborty 2017). The classical liberals wrestled with the question of how to organise land reserves as capital was getting globalised through colonialism. Locke “fixed” this question through his labour theory of property which argues that land gets improved and hence creates value upon the application of labour (“as much land as a man tills, plants, improves, cultivates, and can use the product of, so much is his property.” [Locke 1690, 1980: 21]).

Thus, Lockean theory posited that private ownership of land even if concentrated in the hands of a few is much better than the “wastelands” that are left unattended or held under common ownership (Whitehead 2010). This justified not just capitalist landlordism in England but also settler-colonialism. North America with its vast reserves of land and natural resources epitomized the Lockean state of nature that needed improvement. In effect, this legitimised the dispossession and genocide of indigenous people (the primitive accumulation of capital) whose ways of living were not compatible with the emerging capitalist law of value. The Lockean theory of property rights underpins the modernisation paradigm that continue to structure mainstream development discourse – where the protection of private property rights at all costs is equated with developmental progress.

The trade question

Capitalist trade was fuelled by both market competition and colonialism, and classical political economists rose to the defence of the emerging industrial order. As the physiocrats grappled with the questions of value-creation by agricultural labour, Adam Smith advocated for a greater division of labour that he believed to have spurred productivity in the pin factories of his time. Smith defended free trade orchestrated by a nascent capitalist class as opposed to the excessive involvement of the mercantilist state and aristocratic privilege. Though Smith was apprehensive of the adverse effects of the division of labour on the human intellect and argued for the public provision of education for all (Thomas 2018), his idyllic account ignored both the violence of capitalist origins (Marx 1976 (1867): 873-77) and the necessity of centralised state intervention to create capitalist markets (Polanyi 2001 (1944): 146-47)

David Ricardo’s comparative advantage theory continues to have a much more decisive impact in structuring international macroeconomics, for example, through the Heckscher-Ohlin model. A country has a comparative advantage if it can produce a commodity at a lower cost than other countries – focusing on comparative costs thus leads to more gains from trade and hence, development. But this not only ignores how global development was structured by imperialism (Patnaik & Patnaik 2016) but is also at odds with how actually industrialised economies benefited from active state intervention. This is not just true of Ricardo’s own examples – English cloth and Portuguese wine were both outcomes of capital-state relationships (Peet and Hartwick 2015: 48-49) but late industrialisation was steered by the developmental state that defied comparative advantage and market signals (Chang in Lin & Chang 2009). 

The logic of comparative advantage continues to underpin the developmental idea that labour must be cheap in labour-surplus economies – this forms the basis of “sweatshop economics” that justifies the deprivation faced by workers in labour-intensive sectors like garment production (Mezzadri 2020). Nevertheless, classical political economists who were trying to understand the emerging capitalist social formation wrestled with the questions of value and distribution, the social relations of production, and the tendencies of crisis and stagnation in capitalism. Smith and Ricardo advocated for a labour theory of value, and Marx insisted that we pay attention to the historical specificity of the emergence of the capitalist value form (see Chambers 2018). The question of labour becomes important in this context.

The labour question

Militant trade unions in alliance with a vibrant socialist movement highlighted how capitalist profit is built on the exploitation of immiserated workers. This compelled mainstream economists to address and theoretically fixthe question of labour through marginalist models. Mathematical formalism was used to delineate the market economy as a sphere insulated from larger socio-political questions: under neoclassical economics, the economy was all about the allocative efficiency of factors of production in contrast to classical political economy’s focus on classes and distribution. Allocative efficiency was to be achieved in correspondence with the marginal productivity theorem – where each factor received a return corresponding to their marginal contribution to production that was to be derived using differential calculus.[i]

The neoclassical model of production and distribution was riven with measurement problems as highlighted by the Cambridge capital controversy. Moreover, treating capital and labour as perfectly substitutable factors of production justified the existing distribution of returns as natural market outcomes – this effectively erased the prospects of accounting for class struggle in the economic model (Dobb 1973: 172). Additionally, the neoclassical model ignores how pre-existing social differentiation shapes market outcomes and thus cannot account for inequalities within the labour market. Moreover, if an equilibrium of allocative efficiency was achieved through the market (which itself was coordinated by utility maximising actors), then there is neither scope for regulatory intervention nor prospects for social change as it does not improve total utility (Clarke 1991: 150).

In effect, the marginalists in contrast to classicals refuted the validity of the labour theory of value (value instead corresponded with subjective utility) and dismissed exploitation (as returns to labour and capital were based on marginal productivity), but just like classicals, accepted capitalist social relations and market outcomes as a natural development. Economics got redefined as the study of preferences and utility maximisation of individuals (the reference point here was the “male breadwinner”) given scarce resources and unlimited wants – while the social construction of these microeconomic variables was completely ignored. Mathematical formalism assumed that the real world was an aberration from the neoclassical model and that expanding the market would lead to general equilibrium. But this untrammelled faith in market self-regulation faced a crisis during the 1930s, which necessitated a state-led response.

The state question

While the market liberals argued for less intervention during the great depression, Keynesianism argued for state-led counter-cyclical deficit spending to spur aggregate demand in the economy.  Public expenditure will have a multiplier effect that will lead to a virtuous cycle reinvigorating private consumption and private investment. This was not a mainstream idea, but it became the dominant economic paradigm largely because the threat of socialism and the harms of fascism demanded that economists reinvent the idea of state intervention.

Thus, the Keynesian model’s greatest contribution is to legitimise the macroeconomic interventions of the capitalist state; this provided a theoretical fix to questions about both instability and inefficiencies of capitalism.[ii] Business cycles were to be tamed by state regulation and cyclical unemployment was to be addressed through public investment – Keynes was the answer to all apparent contradictions of capitalism. The post-war economic order helped realise the capitalist welfare state in the global north, but this did not overcome the internal social differentiations based on gender, race, and ethnicity (see Harvey 2014: 164-184). In fact, New-Deal era housing policies explicitly promoted segregation through redlining by extending mortgages only to white families thereby accentuating racial inequality (Rothstein 2021).  These issues of exclusion persisted in the international order as well – despite the prominence of the Latin American feminists, pan-Africanists like Du Bois, and environmentalism in transnational networks and the ILO’s Philadelphia Declaration, the Bretton Woods conference marginalised the concerns of gender, race and the environment (Helleiner 2022).

Keynesian models are intrinsically based on a commitment to the territorial logic of the nation-state and a class compromise within these borders. For Keynes, this meant a defence of the interests of the British state that was facing a crisis of hegemony during the Bretton Woods negotiations for a post-war global order. But this also meant – as Patnaik (2017) argues in her study on profit-inflation and Bengal famine – that even though Keynes was a liberal humanist, his policies served the interests of British imperialism and had disastrous effects in colonies. Moreover, North-Atlantic Keynesianism cannot be divorced from its connection with war-related spending (the warfare-welfare nexus) and the subsequent boom that led to the prison-industrial complex (Gilmore 1999). Nevertheless, the Keynesian imagination served as fodder for national-developmental projects in both advanced capitalist countries and postcolonial developing economies, but even the limited gains of a section of the working class from this class compromise were only a temporary achievement.

The legal-institutional question

As regulated capitalism collapsed due to a crisis of profitability in the 1970s and capital re-subordinated labour, a host of economic ideas justified the emerging neoliberal social order and discredited Keynesian-style government intervention.[iii] Milton Friedman posited that monetary policy was more instrumental in shaping inflation and business cycles, and hence public investment had to be reined in. Governments were expected to abandon full employment goals and implement austerity measures so that private investment does not get crowded out (for a critique of this argument, see Patnaik 2017).

James Buchanan argued that the government and bureaucrats cannot be trusted as they act to further their own interests and engage in rent-seeking (for a critical account of Buchanan’s influence on neoliberalism and democracy, see MacLean 2018). Supply-side interventions – most notably through tax deductions – became the preferred way to attract private investment. The Laffer Curve (named after Arthur Laffer, who is closely associated with Donald Trump) advocated for reducing taxes to optimise revenue collection, which was used to justify unreasonable corporate tax cuts. As capitalism financialised and informationalised, Eugene Fama posited through the efficient market hypothesis that stock prices are accurate representations of their fundamentals and that maximisation of the shareholder value of the firm was the best way to enhance societal well-being (Davis & Kim 2015).  

This motley crew of economic ideas broadly called for redefining state regulation to benefit capital, but also provided a theoretical fix to the question of democracy under global capitalism (see Brown 2015). Neoliberals like Hayek, Friedman, and Buchanan were committed to protecting democratic rights broadly defined as the protection of the rule of law that safeguards individual liberties against state intervention. But they were apprehensive of expanding democracy beyond this definition and argued for placing constitutional limits on legislative authority so that popular pressure cannot upend the market order. This included basic reforms like minimum wage hikes, which mainstream economists propagated would cause unemployment – Buchanan said that arguing for the opposite is akin to physicists arguing that water runs uphill (The Wall Street Journal 1996).

As Slobodian (2018) argues, the neoliberals were anxious about the democratisation brought about by trade union action in the global north and decolonisation in the global south. But instead of resorting to naked market fundamentalism, they envisioned a world where markets were encased by a legal-institutional order that did not violate the rights of capital (Slobodian 2018).  The human rights of property owners were to be protected against the threat posed by the passions of the masses (Whyte 2019). Thus, the economic arguments for central bank independence and rules-based monetary policy, supply side interventions, subordinating the welfare state in the name of financial restraint, and financial market efficiency in principle laid the framework of a legal-institutional order designed to fix the threat that bottom-up democratic forces posed against capital. This has given rise to the “anti-state state” (Gilmore 2011) – where the repressive apparatus of the state has grown while welfare systems remain systematically underfunded.

Emerging questions

Despite the 2008 financial crisis and the ongoing Covid pandemic, neoliberal capitalism has proven to be surprisingly resilient. Mainstream economics has still retained its core postulates, even as it has expanded into studying irrational behaviour of individuals and incorporating Randomised Control Trials into studying poverty (for a critique, see Reddy 2012). Even models of “imperfect competition” gained relevance through comparisons with idealised perfect competition, thereby ignoring the real conflict inherent to capitalism (Shaikh 2016).

But a concatenation of different crises (what is now dubbed the polycrisis) is posing new challenges for economic thinking. For instance, environmental degeneration is seen as a market externality, for which the market-efficient solution is that environmental costs should be priced and traded among producers to incentivise the transition away from fossil fuels.  In contrast, there is a growing demand for a green new deal involving public investment in cleaner energies at a scale similar to what was done in the 20^th century for establishing fossil-fuel based infrastructure. But this necessitates a shift beyond the neoliberal world order.

The global capitalist slowdown has also posed political questions that economics can no longer ignore. The rise of global authoritarian capitalism has highlighted the disjuncture between neoliberal political philosophy (as professed) and neoliberal political economy (as practiced). This also highlights how the state-market binary is not useful to understand contemporary capitalism. While neoliberals argue for market-oriented reforms against government failures, interventionists argue for public regulation to safeguard against market failures. Both camps miss how the state and market are dialectically intertwined, and how state intervention can only mitigate but not eliminate the crises tendencies of capital. That these effects are compounded in the global south where industrialisation and formal employment is not the norm necessitates a paradigm shift beyond the core tenets of mainstream economics in academia and policy-thinking. The growing demand to decolonise and diversify economics holds immense promise in this regard (Kvangraven & Kesar 2021).

Concluding remarks

This essay emphasised that certain intellectual turning points in economics were theoretical fixes that corresponded with political-economic shifts in capitalism.  This involved legitimising improvements in land that led to the dispossession and the destruction of the commons, justifying free trade based on comparative advantage as opposed to mercantilist state intervention, reducing labour to a factor of production that was supposedly rewarded based on its marginal productivity and hence not being exploited, legitimising state intervention to stabilise capitalism and developing a legal-institutional framework to protect markets from popular democratic pressures. This is not to say that all mainstream economists were dishonest and corrupt, but that the disciplinary postulates as well as the knowledge produced through the reconstruction of the core neoclassical models have served as an ideological justification of capitalism in its various forms.

By disregarding historical particularities, obfuscating relations of exploitation and domination, and naturalising social inequalities inherent in the market economy, mainstream economics education bolsters false consciousness regarding the workings of the world. If the principles of economics aligns with the requirements of the dominant social order, the various challenges to it from inside and outside the economy will be restricted to the margins. A situated history of the evolution of economic thought that pays attention to the political-economic shifts in society can thus demystify the discipline’s self-proclaimed value-neutrality and show how deviation from its core postulates is imperative in the context of a stagnant economies, rising social inequalities, and a political and environmental crisis. This necessitates a comprehensive shift in economic thinking that recognises that knowledge is shaped by power relations and that the capitalist order is neither natural nor eternal.

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[i] The concept of marginal product has no basis in reality even at the firm-level – a unit of a particular factor of production cannot be increased while holding other units constant (Moseley 2015: 107)

[ii] In reality, state intervention is not an anathema to any capitalist market. Neoliberals use this to distinguish themselves from laissez-faire economists (see Friedman 1951).

[iii] The antecedents of neoliberal economic governance can be seen during the inter-war period – this included not just international economic institutions “meddling” in domestic affairs of nation-states. (Martin 2022), but also economists advocating for austerity, especially in fascist Italy (Mattei 2017). ]

Aabid Firdausi (aabidfms@gmail.com) is a PhD student in the Department of Sociology at Johns Hopkins University. He tweets at @_aabid_.

Acknowledgement: The author thanks Alex M Thomas and Upasana Goswami for their comments. A preliminary version of this essay was presented at the Department of Economics, University of Kerala.

Photo: London School of Economics and Political Science