Theory of Neoconomics (Basics)

Theory of Neoconomics (Basics)

I. The modern economy – an economy of division of labor. Accordingly, the development within the current economic paradigm depends upon division of labor, and is known as scientific and technical progress (STP). A prerequisite of this process is innovation – the appearance of both new products and new technologies which supersede the old ones. First attempts to formation and understanding of this model appeared in the XVII century in the works of early mercantilists. According to the model in its current state not even complete halt but even stagnation in development of new technologies or of better more productive division of labor is perceived in as a crisis. Simplification of the division of labor (its degradation), as, for example, it was in the Soviet Union in the 1990s is seen as an economic disaster.

It should be understood that despite of ideological differences the model (paradigm) of economic development, the system of division of labor, in the Soviet Union and the United States was one and the same. Socialism aspect of Soviet economy was only different in the system of redistribution of goods. This is clearly seen in how Soviet companies operated during Economic races (nuclear, space, defence) of the USSR and the United States in mid-twentieth century during the cold war.

II. Implementation of new technologies to increase productivity leads to increased the division of labor and inevitably leads to an increased risk during production time, which should be integrated into more and more complex production chain. If there are no mechanisms to reduce those risks, then at some point the keeping such complexity becomes impossible and the system goes into a stagnation and crisis.

Accordingly, as part of a closed economic system (that does not interact with the outside world), the “natural” increase in division of labor can only grow to a certain fixed level, thus further innovations no longer pay off, as monetary investments for research and development are greater than the profits a company can acquire from then, and scientific and technological progress initially slows down and then stops. This thesis was first formulated by Adam Smith in the second half of the XVIII century, and then this idea was further developed within Marxism in the late XIX – early XX Rosa Luxemburg.

III. Thus, the development within the paradigm of scientific and technological progress is only possible with use of mechanisms to reduce manufacturers’ risks. So far only three mechanisms to reduce the risks were invented: lines of credit to manufactures (risks partially transferred the banking system), the market expansion for the produced goods (reduced risks in the original manufacturer’s economic system), and consumer loans (risk reduction through redeployment between other participants in the economic process).

IV. Therefore, as the Earth’s resources by definition are limited, and all the mechanisms to reduce manufacturers’ risks is simply reassigning these resources within the economic system, the scientific and technological progresses are time-limited (due to resource limitation). As a consequence of this limitation, capitalism is finite. With socialism, the situation is more complicated, as, in theory, socialism is part of the “public economy” (not private property) can continue to progress without changing the paradigm of the socio-political model. However, so far socialism had failed facing opposition from capitalism as seen in competition between the United States and the Soviet Union.

V. Based on the previous thesis, the development of socialist theories, Marxism in particular, proceeded along two main ideological paths: the search for new evidence and signs of the end of capitalism and the ways to build post-capitalist society. The actual development of the above thesis of Adam Smith was only in the works of Rosa Luxemburg, after her death, the topic was almost completely abandoned. In the West, the “end of capitalism” was not acceptable, and in the Soviet Union and other socialist countries the topic was tabooed due to disagreements between Rosa Luxemburg and Vladimir Lenin.

VI. In the late nineteenth early twentieth centuries, the need to confront the Marxist thesis about the end of capitalism has led to the creation of an alternative economic science, affectionately called “economics” (“ekonomiksizm” is a proper Russian name). Its principal difference from the economics of Adam Smith and Karl Marx is the taboo on a categorical description of the issue of the end of capitalism. As described above, the thesis of Adam Smith was still here, only hidden behind new terminology of  ”ekonomiksizm”, which in contrast to the Smith’s and Marx’s economy, which is built from macroeconomics to microeconomics, is  built the other way around from micro- to macroeconomics.

VII. The economic consequences of limiting the increase of the division of labor in a closed economic system is the need to continue the expansion of its development. Inability to expand, sooner or later leads to a crisis of development, which is fundamentally different from the traditional cyclical crises (crises of overproduction), which are described in detail in the framework of economic theory (from the end of the XIX century – mainly Marxist) and “ekonomiksizm”. In our theory, we called the crisis as the fall of capital efficiency, as it is an external manifestation of the rapid drop in capability to replenish capital from its profit “naturally” (i.e., not by reallocating resources). The most important difference of this type of crisis is that it can only be stopped by substantially reducing risks of manufacturers, which is only possible through the expansion of the markets.

In 2000s studies of structural aspects of crises that occur due to a decrease in efficiency and the main differences from the cyclical crises were done primarily in the works of Mikhail Khazin (2000-2001). The studies were based upon the structural aspects of the current crisis in the United States. It is understood that the current crisis is a crisis of decreasing capital efficiency and this feature of the crisis made it possible to predict and describe the current economic crisis, which suggests that the application of neoconomics to the modern economic processes gives us a theory to understand the current crisis.

VIII. The need to extend the economic system to continue further development leads to the concept of “technological zones” – that is, a large self-contained system of division of labor, supporting the process of increasing division of labor due to the constant market expansion. The term “self-sufficient” in this context means that the interaction between the economic zones is much smaller than inside them and is not of critical importance. The principal feature of these zones is the process of technological unification,  which is why we gave them their name, “technological zones”. The initial theory of economic (technological) zones was developed in the 2000s, first of all, Oleg Grigoriev, but is still actively developing in today.

IX. Analysis of the economic history of the last two centuries, from the point of view of development of technological zones began in the 2000s and continues to this day. Briefly it can be described as follows:

> End of the XVIII century – formation of the first technological zone, the British Empire. At this time, the zone had to have at least 30 millions of consumer of its goods and services;

> Beginning of the XIX century – failure to create a second zone, on the basis of newly formed French Republic. Causes of the attempt were the French Revolution and the Napoleonic Wars. Since Napoleon’s defeat at Waterloo, France had become firmly established in the British technological zone;

> The middle of the XIX century – the first successful project “catch-up” – the appearance of a second technological zone, the German Empire. Up until XX century, Russian Empire was also part of this zone;

> The end of the XIX century – the emergence of technological zones on the basis of the United States, by the end of the century the United States becomes the world’s largest industrial power. The minimum number of consumers for this zone grows up to 50-80 million;

> The end of XIX (after Marx’s death) and beginning of XX century – the first crisis of the capital efficiency (so far, only in the western hemisphere). Its consequences are the financial crisis in the U.S. 1907-08, the “first” Great Depression, the emergence of the U.S. Federal Reserve, the First World War;

> The beginning of the twentieth century – the emergence of the Japanese technology zone, the failure to create a technology zone on the basis of the Russian Empire because of problems with the peasant population which does not want to “fit in” the market;

> 1917-1928 years – The Great October Socialist Revolution, the development of a plan to establish Soviet technology zone on the basis of the USSR. Successful (after the failure of Stolypin reforms) experience of including peasant population to the market. The minimum size of the market technology zone is more than 100 million people;

> 1929-39 – the second crisis of the decrease in capital efficiency, the beginning of the “second” Great Depression, completion of the last, the fifth, Soviet technology zone;

> 1939-45 – World War II, the disappearance of three technological zones: Japanese and German (their territory was divided between the winners) and the British (voluntarily became part of the American technological zone);

> 1945-60 (for the Soviets), 1945-1970 (for the Americans) – the years of active development of the resource available for new markets, the minimum market size becomes 250-300 million;

> 1960-61 – the beginning of the fall of the Soviet capital efficiency its technological zone. In connection with the planned nature of the economy has developed very slowly at zero growth of the USSR was not released until the beginning of the 80s;

> 1971 – the beginning of capital crisis in the American technological zone (August 15, 1971 – the second in the twentieth century default of the US economy). This crisis develops very fast in the mid-70s; the U.S. economy is steadily failing against the Soviet Union’s still growing economy;

> The end of the 70s – the development of the U.S. temporary solution (at the expense of further deterioration) to overcome the crisis through a “virtual” expansion of credit markets by stimulating demand from existing customers. In the process of implementation, this solution became known as “Reaganomics.” The growth of a critical mass of consumers in the technological zone becomes 500-800 million;

> China’s refusal to build its own technological zones, Chinese adopted a policy to stimulate the economy through technological integration into the American zone;

> 1981-1991. – The next stage of scientific and technological progress happened in the United States on the basis of “Reaganomics” (known as the “information revolution”) and helped to win the “war of the two systems” (similar to a third world war), to destroy the Soviet technological zone and last opportunity to expand its markets, this time around the entire globe ;

> 2000 – the beginning of a new crisis, the decrease of the capital efficiency;

> Fall 2008 – Termination of the last instrument of “Reaganomics”, the decrease of the Federal interest rate, the transition of crisis in its “acute” stage.

X. As a result of “Reaganomics”, structural imbalances in the world economy (which coincides today with the American technology zone) economy and particularly in the United States have grown to enormous sizes, first of all we are talking about non-compliance of real disposable income of households of their expenditures(that is, the standard of living). As long as the income and expenses do not reach a relative equilibrium, the crisis will continue and the expenditures should continue to fall to approximately 30-35% for the global economy, to approximately 50% for the European Union and to approximately 55-60% for the United States.

XI. Reduction of income from the point of view of labor division corresponds to the reduction in the number of consumers, and therefore division of labor should be reduced. Today, the real income of households in the United States decreased the level of the early ’60s, and the income is likely to decrease even more due to the ongoing crisis. In fact, this means that the optimum level should go down to support the world’s population of about 500-800 million people.

XII. Since the current infrastructure of division of labor (in the first place – financial) is built for the global markets, as the demand in produced goods falls, the infrastructure  will become unprofitable (in fact, this has already happened, most of the international financial institutions and nations live only at the expense of currency emission). This means that the to keep economy functional the world would have to split into new “technological zones” that are likely to be created on the basis of a single monetary policy. Today the closest representations of such zones are represented as “currency zones” in literature dedicated to geopolitics.

Theoretically, in the course of the crisis and post-crisis recovery, not all currency areas could form a full-fledged “technological zones”.

XIII. If a new model of economic development, alternative to scientific and technological progress, will not be developed in the near future, we are likely to experience repetition of many events of the twentieth century, that is, a competition for the markets of new “technological zones”, that is for the possibility for further development, which will inevitably lead to a conflict. However, this process will begin only after more or less independent zones will be established – that is 20-30 years after the end of “acute” stage of the crisis and achieving the minimum values ​​of aggregate demand.

XIV. From the point of view of bringing in a new economic theory, it should be noted that our theory, called “neoconomics” primarily built on the primacy of the division of labor and, consequently, its key concepts that define its difference from the other theory is “technological zone”, ” crisis falling efficiency of capital” and “structural crisis “.

Тranslated by Anton Toukaev. All rights reserved.
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