Austrian and Post-Keynesian Criticisms of the Standard Neoclassical View of the Competitive Process - Essay Example

? Significance of Austrian and Post-Keynesian criticisms of the standard neo ical view of the competitive process Significance of Austrian and Post-Keynesian criticisms of the standard neoclassical view of the competitive process Competitive process is something which does not have a specific approach in the business economics. Different schools of thought have different views on it and even though they have a different idea about all the economical aspects, they always focus on the competitive process. Different schools of thought mean there are different philosophical aspects to the economical problems and on that basis they analyze those principles. From the very different theories about competitive process, neo-classical theory is the standard one which has been long criticized by the Austrian and Post-Keynesian perspectives on the view of competition process. The framework of these arguments is in the regard of competition in the business economics. Competition in business is a constituent which, along with others, combine together to form macroeconomics. When it is about Industrial economics, the main concern is the different approaches to the competitive process. However, there are two principle forms of competition and they are Perfect Competition and Oligopoly (Kirzner, 1997, p. 62). The perfect competition structure of the market is the key approach of the neoclassical theory of competition and on the other hand, the Austrian and Post-Keynesian theories emphasize on the importance of Oligopoly as greater in the modern economics. Being philosophically distant from one another, the neoclassic view had been under constant pressure throughout the years. As much as it is important to assess the criticisms, it is also important to assess the significance of those criticisms and their affects. According to the neoclassical viewpoint, competition is a state of equilibrium in an economy. This was the standard theory which was embodied by the Structure-Conduct-Performance (SCP) paradigm. This paradigm built a relationship to link the market structure and market conduct to the market performance. This also cultivates the optimization techniques and leads to equilibrium in the market. Market structure refers to the firm sizes and the number of firms, market conduct is the pricing strategies and advertising and the market performance is the measure of profits. These markets which are referred to in the neoclassical viewpoint are considered to be a group of optimizing individuals trading amongst each other at predetermined prices and are endowed with the means of production given (Henry, 2012, p. 321). The concept of competitive process in neoclassical view revolves around the utility optimization in an environment of Perfect Competition. Perfect Competition is where there is no market power exhibited by the firms and they act as the price takers. Thus, the extent of the market power indicated the competition in a particular market. The economists of this theory believe that the equilibrium is the point where the utility is maximized. Profit maximization is an example of this as it is a fundamental aspect of a firm within their market structure. Equilibrium, according to them, also provides the market clearing process to take place. As this theory has been providing a simple ideology for the functioning of the market under the Perfect Competition, there are many modern economists who have considered the real life situations and concluded that a number of other factors are also to be included to analyze the competitive process in the markets (Leask, Parnell, 2005, p. 469). There have been some theorists that have criticized the traditional approach over the time as modern aspects were introduced, and so alternative schools of thought were created. Two of these alternative schools are the Austrian and the Post-Keynesian theories. The Austrian school of thought is rooted from the work of Menger, Hayek and Mises. The approach was concerned with the significance of Subjectivism, Uncertainty and Entrepreneurship in the economic system. These ideas conflict the neoclassical theories. The second theory which is essential is the Post-Keynesian ideology which was formed much later than the neoclassical and Austrian theories. This theory shared many concepts of the Austrians as they believed in the importance of Uncertainty as an approach towards competition. But the comprehension of the view was comparatively different of both the theories (Hunt, 2002, p. 46). The Austrian school criticizes the unrealistic approach of the equilibrium in the competitive process by regarding it as simplification rather than the representation of reality. As the neoclassical theory also provides a mathematical logic and approach to the equilibrium, the Austrian school says that the mathematical approach cannot interpret the economic phenomenon. They also claimed that the empirical observation may never be successful in verifying the theory and they merely leave the economists’ interest in the logics of an event (Salvadori, Panico, 2006, p. 67). Equilibrium was also evaluated as having no point of time so it was stated by the neoclassical theorists that equilibrium is perceived as a timeless state. According to the Austrian economists, time is not meaningless and in fact without considering the time factor, the equilibrium concept is also meaningless. Furthermore, the Austrians also clearly criticized the approach that the market conditions are equilibrium at all the times. Thus, when the concept of equilibrium is wrongly used and understood, the theory itself becomes misleading and it does not fulfill the essentials of any competitive market. Austrian theorists also claim that since the neoclassical view works upon the calculations of mathematical equations, their agents are merely calculators. They assume that such a strict approach would not give rise to any entrepreneurial activity, and that is the main element of competition. Austrian school of thought disregards the theory that entrepreneurs manage the allocation of resources and make labor and capital hire decisions (Pressman, 2001, p. 18). Austrian theories emerged the entrepreneurial activities, significance of the government involvement in the modern economy, and the way the economy is operated is determined through the competition between the entrepreneurs. Generally, the Austrians argued that the model of perfect competition portrays the absence of all the competitive activities and thus, it is misleading in the competitive process. Economists of Austrian school highly criticized the concept of perfect competition on which the neoclassical school was based and thought that the competition is a process of rivalries. The “perfect” competition is the situation where every participant of the market does the same thing that everybody else does, and it seems to be pointless to achieve anything better than the other. The Post-Keynesian school retains some of the theories of the neoclassical school such as the use of mathematical logics in the theories and optimization. They retained the theories of price stickiness and nominal rigidities. Thus the basis of their theories of price in the market are not set under auction conditions as the neoclassical theory, rather prices are administered by the firms by using the mark up rule which is based on full costs constrained by the price and monopoly power degree. Later theories also rejected the maximizing behavior because of the uncertainty faced by the firms and use of price elasticity of demand to measure the monopoly power (Rima, 2001, p. 553). Post-Keynesian theories also argue that the firm’s cost curves are not U-shaped. Their suggestion was that the marginal cost remains constant and the average cost per unit decreases. Furthermore, they criticized the neoclassical ideology of competition, just as all the other non neoclassical theories suggested, the perfect knowledge. The P-K theories emphasized on the uncertainty and considered power as the ultimate aim of the firm. P-K school of thought focused more on the institutional features which are the differentiation, trade union power in assessing the monopoly power and the sales promotion. However, the P-K economists’ views on the competition process were the way in which the firms competed for dominance and not just for the highest price and inelastic demand. Some of the criticisms are the same as Austrians but their reasons were different to argue. It is further important to assess the significance of these perspectives in order to understand clearly which school of thought covers most of the aspects of modern economics. The significance is provided according to the economic point of view purely. As it is understood that the neoclassical views on the competition process and the criticisms of the views which are followed, are an economics developed by a dialect way. These economic schools of thought tend to operate in a way where one of them develop a theory and the others criticize it to bring up their own which is better than the previous one. Every theorist is bust in criticizing the theory of the other and trying to be capable enough to cover up more variables. This is why, the theories put forward by the Austrian and P.K school of thought was important for the advancement of the economics (Steele, 2001, p. 160). Every theory has its own importance, like the Austrians talk about those phenomenons in their theory which are not covered by the neoclassical theorists. These theories are entrepreneurship, constitutional lack of knowledge and competition as a rivalry process. However, the Austrian’s views on competition are significant as it highlights the way in which a business gets into the state of competition and then the evolution over time. They are important as the neoclassical views only covered the perfect competition knowledge and assumed that the relevant facts were pre-discovered and there was no process of competition existing amongst the market participants. Furthermore, the Austrian theory is important as it tends to cover not only the fixed resources and preferences but also the factors that are yet to be discovered. And so, as it is mentioned, the Austrian views are more close to reality and the modern capitalist economies that explain competition. Neoclassical views saw the competition process as a tyrannical where the firms were supposed to act on the vow of commands. The Austrian theories had a severe impact on the neoclassical competition, and they eventually led to influential development of some new imperfect competition models. Development was immensely observed after the imperfect competition models and so the huge number of works done by the Austrians illustrates their significance on the neoclassical school (Hodgson, 1989, p. 250). It was later seen that the Austrian critiques were difficult to verify, so the P-K school of thought was developed fully in the empirical research and real assumptions. Thus, P-K theories gained an advantage of achieving economic aspects and in suggesting policies. It was seen as an important extension to the neoclassical view. As it was more modernized, it is seen as much more significant in emphasizing on the economic psychology where neoclassical beliefs said that psychological behavior was not a part of the economics. In an example, the P.K economists explained the role of advertisements which evolved around reality more than any other approach to the competition process as it also argued for the agent’s preferences. They were significant also because they boosted the empirical research further. Hence it is said that the P.K theory provided significant importance to the improvement of economics and the view on competition. This theory was more consistent to the real world and it related to realism more than the neoclassical and Austrian. This was also because it was a much more modern theory that was held out much later than the Austrian theory. P.K views on market competition have been convincing for many markets throughout such as United Kingdom. However, the significance of both the alternative schools of thought can be simplified to the simplest conclusion that both views force the traditional theorists to reassess the validity of the theories they proposed. Although the standard view (perfect competition) may be true, yet it holds little value when considering the real world situations (oligopoly) (Davidson, 1996, p. 500). In conclusion, it is evident that the criticisms made by the Austrian and the Post-Keynesians hold a very significant impact on the business economics and this impact is unquestionable. These criticisms were a rise to much advancement that was needed in the modern economics. In fact, the impact that they had were not only on the academics but also on the general knowledge for the public. These criticisms drove the extensions to the neoclassical theories and gave them a sense of realism. These criticisms are however, significant only until the neoclassical school finds a way to enhance their role and advance their models to come up to the level of the two alternative schools. Modern economics and realism are the key factors to be looked upon. References Kirzner IM. 1997. “Entrepreneurial discovery and the competitive market process: An Austrian approach” JSTOR, 35(1), pp. 60-85 Henry J. 2012. The Making of Neoclassical Economics. NY: Routledge Leask G., Parnell JA. 2005. “Integrating Strategic Groups and the Resource Based Perspective: Understanding the Competitive Process” Elsevier, 23(4), pp. 458-470 Hunt E. 2002. History of Economic Thought: A Critical Perspective. USA: M.E Sharpe Salvadori N., Panico C. 2006. Classical, Neoclassical And Keynesian Views on Growth And Distribution. UK: Edward Elgar Publishing. Pressman S. 2001. New Guide to Post-Keynesian Economics. NY: Routledge Rima I. 2001. Development of Economic Analysis. NY: Routledge Steele G. 2001. Keynes and Hayek: The Money Economy. NY: Routledge Hodgson G. 1989. “Institutional economic theory: the old versus the new.” Taylor & Francis, 1(3), pp. 249-269 Davidson P. 1996. “Reality and economic theory” JSTOR, 18(4), pp. 479-508 Read More