Economics is a broad and always developing subject, and there have been many schools of economic thought over the years. Today we'll be looking at two prominent schools that are relevant for modern economists, Marxian and neoclassical economics, to see how they differ and why they both continue to be of interest despite their many differences.

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History of the theories

Marxian economics is, as the name suggests, a school of thought based on the work of Karl Marx. During the 1800s Marx wrote extensively in the area of political philosophy looking at labour and the economy, and particularly focused on the power dynamics between workers and the ruling class. This work was a reaction against the classical view of economics developed by theorists such as Adam Smith, an early pro-free market theorist who believed the invisible hand of the market would benefit society.

The Marxian approach to economics rejects this framework and instead considers the construction of value within a capitalist society. Marx was especially concerned with the rights of workers, who create value through their labour but do not gain the full rewards from this value. Instead, labour is exploited by members of the ruling class for their own interest. Unlike Smith, who believed in a laissez-faire approach to economics and argued that the market would eventually correct any unjust imbalances, Marx argued that capitalist society is specifically structured in order to extract value from the working class by means of labour for the benefit of the ruling class, and that this exploitation is not a bug that will eventually be worked out but an essential feature of capitalism.

By contrast, neoclassical economics emphasises individual rationality and the maximisation of profit and is one of the primary models of economics used by those in the field today. The approach was developed throughout the 1800s but was not named until 1900, when Thorstein Veblen wrote an article discussing various schools of economics. The essential principle of neoclassical economics is that every individual will attempt to maximise their personal satisfaction through the means that are available to them – in a capitalist society, that will be primarily through the gaining and spending of money – and that individuals will make informed judgements about economic decisions which can be understood rationally.

This individualised approach to economics was new and coincided with the emergence of both psychology and sociology, which suggested that individual behaviour could be understood as rational and that it was informed by the particular needs and desires of the person in question. Individual differences were being studied for the first time in Western post-Enlightenment culture, paving the way for a theory of economics which used concepts of rationality and individual preferences.

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Key players in the fields

The most prominent figure in the history of Marxian economics is Karl Marx, obviously enough. His contemporary, the philosopher Friedrich Engels, was also a formative influence on the economic critiques of capitalism, contributing to Marx's books. Another key figure from just before their time is Georg Hegel, a philosopher whose method of dialectics was used by Marx to understand the relation of society and individuals.

However, Marxian economics is not merely a historical field. Modern-day thinkers still make use of Marxist insights to understand economics. This approach tends to create some confusion, as the public tends to assume that anyone discussing Marxian economics is themselves a Marxist, and that Marxism is synonymous with communism – and a totalitarian communism at that. In fact, Marxian economics is a tool used by many economists who may or may not consider themselves politically Marxist as a way to understand economics under capitalism. An important related school of thought was the neo-Marxian economists who came to prominence in the 1970s and 1980s, particularly those writing in the journal Monthly Review, who used techniques of neoclassical economics such as game theory and mathematical modelling to examine Marxist concepts of exploitation or conflict between classes.

Neoclassical economics developed from the classical economics of the 18th and 19th centuries, including the work of Smith, which underwent a period known as the marginal revolution. Around the late 1800s, economic theorists began to examine concepts of utility and marginalism, referring respectively to the measuring of worth or value on an individual basis and the discrepancy between the values of the same goods or service to different individuals. This approach was influenced by philosophy also, and in particular by Jeremy Bentham's concept of utilitarianism which sought to maximise the happiness of as many people as possible. The ideas of what created happiness for any particular person – which came to be described in the concept of utility – was important for both ethical and economic theories.

After this initial period of development of neoclassical thought, the school was refined in the 1930s by two key figures, Joan Robinson and Edward H. Chamberlin, who introduced the concept of imperfect competition. This describes certain situations in which the free market is not optimised, for example due to one company holding a monopoly. Further refinements to the school were made through the 1970s with the development of econometrics, a field which applied statistical models to economics, which was used to measure the changes in the price of goods and services. This lead to the formation of the field of macroeconomics, which studied economic systems as a whole. Eventually, neoclassical microeconomics and Keynesian macroeconomics were brought together to form the dominant paradigm in economics today.

Key differences in outlook

Marxian economics is to some extent based more in politics than in economics, in that it is a critique of our capitalist political system as well as our economic system. It has an emphasis on ethics and human rights, with concerns of fairness, justice, and equality. This has lead to a situation in which critics of Marxian economics, such as Ladislaus von Bortkiewicz, often focus on the problems with Marx's labour theory of value and argue that his theories are internally inconsistent – which is widely accepted by both sides as an accurate criticism. Pro-Marxist writers, however, respond that the details of the theories are not important – it is the moral imperative to correct power imbalances in society which is the real point of the approach. In this way, Marxist approaches generally are more based in ethics than in economics. However, even today the concept of power differentials between the individual and societal forces are used in understanding issues such how individuals interact with credit markets when constrained by their financial situations. Marx's work can be seen as an early precursor to microeconomics, with his theories anticipating questions that would later be answered through mathematics.

Neoclassical economics, on the other hand, is more based in the principals of mathematics and is the major influence on the field we traditionally think of as economics. With the rise of econometrics, modern economic theories seek to explain the choices of individuals and the way that these choices affect and are affected by society more broadly. There is, therefore, less concern with moral questions of “ought”, and more focus on a descriptive understanding of “is”. However, the framework of an individual as a rational actor who makes choices to maximise their utility is in tension with the modern understanding of psychology, in which individuals frequently do not act purely rationally but are strongly swayed in their actions by the norms around them. A critique of the neoclassical approach is therefore that despite its claims to objectivity through mathematical analysis, it is in fact just as much of a theoretical tool as Marxian economics.

In conclusion

Despite their many differences, both Marxian and neoclassical economics are powerful theoretical tools for understanding the ways in which individuals interact with each other, power structures in society, and financial systems. While neoclassical economics is undoubtedly the major theoretical force in the study of economics today, there are still important insights from Marxian economics which can be used to explain various phenomena that are observed in society.