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

Task Austrian and Post-Keynesian criticisms of the standard neo ical view of the competitive process Introduction The neo-classical view of the competitive process believes that the perfectly competitive approach it describes the essence of capitalist competition in the market. The attributes of the process are viewed as exceptional and typically arising from government intervention, which includes protection and nationalization. The criticism point out that the basic motivator of the capitalist process, competition, ensures that if any firm enjoys super-normal profits, rivals will soon enter to bid away those profits. They will succeed to undermine any temporally market dominance that the incumbent enjoys (Nolan, 2008, p. 66). The neo-classical approach emphasis the importance of competition in both Austrian and Post-Keynesian schools of thoughts; therefore, we will analysis different critics on different areas and then evaluate their view in order to understand their contribution on the standard neoclassical view of the competitive process. Compare and contrast the criticisms of Austrian and Post Keynesians schools The market demand According to Nolan (2008, p. 66), Post Keynesians school of thought has been criticized by many schools on the issue of economic policies of the evolution of power operating in the capitalism market. They argue that the changes in the strength of demand cause changes in the level of prices with the respect to costs. These changes tend to have a strong influence on the society propensity to save or to consume, and thereby changing the level of effective demand to make it correspond with the available supply (Ahiakpor, 2000). Thus, capitalism naturally initiates full employment level provided the income distribution adjustment is allowed to adjust itself in the economy. In the short run, some kind of Keynesian policies will be required but the process will be essentially governed by price flexibility relatively to wage costs. The post Keynesian believes that the changes in the strength of demand cause changes in the level of prices with the respect to costs (Parker, 2000). These changes lead to great influence on the consumer propensity to save or to consume, and thereby changing the level of effective demand to make it correspond with the available supply (Kirzner, 2000, p. 7-18). On the other hand, the Austrian school of thoughts has received criticism on the way they view the strength of demand. They argue that market participants who obtain more and more on accurate and complete perfect knowledge depend on potential demand and supply preferences (Kirzner, 1997, p. 12-34). At the market level, the attained level of equilibrium at all times has no time for enhancement and no available opportunities to grip because methodologically in post Keynesian competitive markets in terms of Marshallian supply and demand diagram do not explain the equilibrating tendencies in the markets, because it denies the operation of competition in disequilibrium. Austrians argue that market prices that consumers is willing to pay in the market, based on their expectations that they will have over or under estimated the actual influence that consumers have in the marker. Market competition Post Keynesian school had dissimilar view of competition equilibrium from the Austrian school where competition involves perfect competition with exceptional signs of rivalry. They viewed competition as dynamic rivalry among buyers or sellers, which is the character of the market process (Cowling, 1982, pp.45).Motta (2004, p. 108) indicates that those who object the equilibrium situation are not sure that the equilibrium forces are stronger than the disequilibrium forces, thus questioning the meaningfulness of any equilibrium concept. Austrian school attempted to explain real idea about the processes of market competition in a world of constant change. Kirzner (2000, p. 7-18) claims that the Austrians, unlike their Post Keynesian approach, emphasized imperfect knowledge, the significant role in determining time in all market decision and the conditions of market coordination through adjusting to changing circumstances. The post Keynesian does not agree with the learning process of Austrian school; however, it believes that market achieve coordination through expansion of monetary policy that brings equilibrium changes in the market (Kirzner, 2002). Conversely, Austrian school explains the ideas of the business cycle that deals with allocation of resources to the firms under competition. It helps them in making business decision on the revenue allocation that lead to increase in production under the same costs constraints (Motta, 2004, p. 108). Under full and complete equilibrium, the rate of interest was established through measurement, and determination of perfect conditions in the prevailing market that explains the economic situations. Austrian school describe the market prices has not merely exchange rate ratios but variable that can measure the changes that are occurring in the market, and that are affecting the buyers and sellers activities.(Cowling 1982, pp.45). Labor market According to Kirzner (1997, p. 12-34), Austrian approach on labor market emphasis on the role of knowledge to explains the market equilibrium process that involves inventive and profit-seeking entrepreneurs in obtaining better perfect information in disequilibrium condition. Austrian claims that division of labor works on direct product and information available is imperfect because they view it has way to increase the labor. Kirzner (2001) indicate that the Austrians value the speculation of division of labor and comparative advantage more than the issue of determining the relative prices in the market that is determined by the amount of capital and labor available to individuals and market (Possas and Fagundes, 1998). According to Kirzner (1997, p. 12-34), Austrian school of thought elaborates this distinction by criticizing post Keynesian in terms of its equilibrium traits and its methodological foundation. At the individual level, maximizing decision makers in labor market has no open-ended on full employment allocation their employment choices (Carlton & Perloff, 2005). On the other hand, The post Keynesian argument on the labor market is that when wages augment too much, prices will rise pushing them back to the level where fixed level of investment is compatible with a full employment allocation of income between wages and profits (Nolan, 2008, p. 66). Conversely, if accumulation of the single product output were to rise too fast prices would fall relatively to wages raising the share of wages to the position required to attain full employment level. Post-Keynesian approach links process competition to investment decision making, so that the elements of effective demand and cyclical volatility are related to the cumulative processes in all forms of competition at the industry level. Ahiakpor (2000) indicate that the expansion of effective demand requires an extension of credit, and that generally involves the creation of money in the economy. Macroeconomic activities In the post Keynesian school of thought, money is created within the private sector to meet the needs of trade. Meanwhile, investment expenditure is seen to play a fundamental role in the determination of the level of effective demand (Ahiakpor, 2000). It is precisely this major role for effective demand in the monetary production economy in the determination of the level of economic activity that is denied Austrian school of thought. The approach rejects methodological individualism of the Austrian school of thought on that microeconomics argues that there has to be macroeconomics foundations of is macro-economic that there has also to be macroeconomics macro-economic foundations of (Stephen, 2008, p. 98). Post Keynesian argue that individuals make their own decisions on what to buy, how much labor to supply, but they do so in the context of sales efforts, the availability of credit, the level of aggregate demand and social norms. However, Maskus and Lahouel (2000), on Austrian school of thought argue that the relationship between individual preferences and decisions and the aggregate demand is simple. The post Keynesian respects the need for well-developed theories of individual action; therefore, the paradox of thrift and ineffectiveness of wage cuts restore full employment, result from the operation of misleading notion of composition. Cowling (1982, pp.45) claims that individual actions have unintended macroeconomic consequences that follows that methodological individualism, which assumes that knowledge of perfect competition is sufficient to construct macroeconomic outcomes; therefore, paradox of thrift reflect post Keynesian approach that investment, not saving , is the source of progress (Stephen 2008, p. 98). However, the Austrian school of thought argues that methodological individualism assumes imperfect knowledge in the market; thus, they believe that progress in live depends on the ability to save. The entrepreneurs’ issues According to Possas and Fagundes (1998), Post Keynesian Approach does not agree with the maximizing rule when analyzing entrepreneurs’ behavior in financial markets and regarding investment decisions. The post Keynesian saw economic problems existing within a social, institutional, and political setting, and in a world that is uncertain. Maskus and Lahouel (2000) claim that real world traits distort markets and mean that public policy is necessary to stabilize advanced capitalist economies. Kirzner (2001) indicates that post Keynesian put emphasize the radical uncertainty of the future; criticize the entrepreneurial discovery approach of Austrian school of thought. They held this cautious optimism because they believed that through social, and political means, and the dedication of individuals with high standards, the economic problem could be solved Stephen 2008, p. 98). Such optimism could not be gotten from the neoclassical model because built into its assumptions is the view that the economic problem is a law of nature revolving around scarcity and self interest. However, the Austrian school of thought has different view on the maximizing of entrepreneurs where they argue that entrepreneurial creates profit opportunities for other alert entrepreneurs to discover themselves in a free competitive market, thus pushing the market in the equilibrium direction. This is the essence of the competitive market process approach that is part of the modern according to Carlton and Perloff (2005). Austrian school of thought explains what happens in market economies dissimilarly from neoclassical general equilibrium model where market is always strictly at equilibrium phenomena. Instead, the Austrian school of thought explains how equilibrium phenomena works from initial non-equilibrium conditions that focuses on the role of knowledge and discovery in the market equilibration process. The Austrian school of thought also has significance in justifying pure entrepreneurial profit as discovered gains from entrepreneurial creation and discovery in the production area. For the Austrian approach, the economic success of a social system is not just in terms of achieving the equilibrium with some amount of efficiency, but also in terms of how rapidly and accurately we can recognize the disequilibrium. Say’s Law By shifting from closed economy to an open economy in a technological age, the theoretical and public policy issues change, the post Keynesian school of thought broke through the logic of says law in a closed economy and questioned the foundation of the Austrian school of thought (Stephen 2008, p. 98). Post Keynesians need to take that insights and extend it to an open economy by challenging the issue of comparative advantage. Conversely, Austrian school of thought view comparative advantage in an open economy similar to how they look at say’s law in a closed economy. According to Maskus and Lahouel (2000), Post Keynesians developed equilibrium reasoning on the possibilities of full employment under capitalism and developed pricing analysis, in which the mark up over prime cost is determined by imperfect competition. Maskus and Lahouel (2000) indicate that the post Keynesian emphasis on the real sector , especially the supply side, and quantity constraints, the emphasis implies that there is little concern on the role of nominal rate of interest as a connecting link between the real and monetary sectors; hence, invalidating the neo classical approach. On the other hand, Austrian school of thought generally favors a minimal role for the state where markets economies are seen as efficient and are thought to lead to the greatest possible goods for the citizens. Post Keynesians criticize the Austrian school of thought view because they saw the state as an integral part of economic activity and a positive force that could be used to improve overall economic performance (Motta, 2004, p. 108). Similarities of the two schools of thought criticism Austrian and post Keynesian school of thought have different views about on their criticism of the neoclassical competition process but they share at the same time similar approach in various areas. For instance, both Austrian and Post Keynesian schools of thoughts embraced the same ideas of disparity between investment and full employment savings, though Austrian school demonstrate over investing and Post Keynesian argue that the investment are underway in the economy (Stephen 2008, p. 98). Their argument explains why the discrepancy does not change by applying different rise mechanism, but argue that the cause is due to the price and interest rate that are established in misplaced market. The two approaches emphasis on the issue of division of labor, they argue that each individual has problems in solving coordination problems and they handle it in different method (Kirzner, 2001). Post-Keynesian criticize the insignificant of the division of labor because the efficiency and skills obtained are acquired from the development of the firm; thus, the division of idea is perfect. Post Keynesians criticism on uncertainty makes business firms unwilling to invest that result in low levels of employment in the economy and that requires government intervention by use of different policies to solve the problem (Kirzner, 2002). Austrian economists approach on the state institutions must be established that enable business firms to prosper and to build up capital and lead to economic expansion; hence no problem of employment. According to Possas and Fagundes (1998), Post Keynesian idea on the individual behavior is not due to rational decision concerning maximizing utility among available choices. They argue that individuals know their preference in order to determine the utility that will enable determination of choices and maximize the available possibilities (Kirzner, 2001). The Austrian approach argues that individual behavior is determined maximization of utility; the economy may be able to increase total utility through economic policies that change habits through policies that keep people from making decisions that do not really increase their living standards. Both the Austrians and Post Keynesians stress on the issue of entrepreneurship in an explanation of economic phenomena, the Post Keynesian argument appears to be irrelevant, it maintain the idea of action without sincerely considering the impact for that action (Earl, 1995). Establishing action without tangible idea about the consequences of the action makes the post Keynesians school value because they lack ideas to support their claims. The insufficient of the entrepreneurial idea in the Post Keynesian approach lead to the establishment of uncertainty in economic life without any market solution (Parker, 2000). Therefore, dealing with this extensive uncertainty becomes the significant move of the Post Keynesian policy to resolve the problem in the competitive market (Kirzner, 2002). Meanwhile, Austrian approach view the market process in similar way and entrepreneurial discovery are emphasized; therefore, the idea is the same as that of post Keynesian. Conclusion Standard neoclassical view of the competitive process has various similarities and the difference between Austrian and Post-Keynesian criticisms on the equilibrium action of the market and its competition condition (Parker, 2000). It has insufficient explanation about the imaginative and inventive forces of the market equilibrium conditions that makes the two approaches to have more strength on the market equilibrium than the neoclassical. The post Keynesian criticism although, does not emphasis on the competitive process like the Austrian it does not agree with the maximizing rule when explaining entrepreneurs’ behavior in financial markets and concerning investment decisions (Earl, 1995). Therefore, post Keynesian saw economic problems existing within a social, institutional, and political setting, and in a world that is uncertain. Finally, the Austria critics plays a major role on explaining how equilibrium condition works from disequilibrium conditions that focuses on the significant of knowledge and discovery in the market equilibration process. List of References Ahiakpor, CW 2000, “Israel Kirzner on Supply and Demand,” Ideas on Liberty, Vol. 50, No. 7, pp. 5-17. Carlton, D & Perloff, J 2005, Modern Industrial Organization, Addison Wesley Press, United Kingdom. Cowling, K 1982, Monopoly Capitalism, London and Basingstoke: The Macmillan Press, New York. Earl, P1995, Microeconomics for Business and Marketing: Lectures, Cases and Worked Essays, Elgar Publishing, United Kingdom. Kirzner, (1997), Entrepreneurial Discovery and the Competitive Market Process: An Austrian Approach, Journal of Economic Literature, Vol.35, PP. 12-34. Kirzner, IM 2000, “A Puzzle and Its Solution: Rejoinder to Professor Ahiakpor.” Ideas on Liberty, Vol. 50, No. 7, pp. 7-18. Kirzner, IM 2001, “Creativity and/or Alertness: A Reconsideration of the Schumpeterian Entrepreneur,” Review of Austrian Economics, Vol.11, pp. 5-17. Kirzner, IM 2002, the Driving Force of the Market: Essays in Austrian Economics, Routledge, New York. Maskus, K &Lahouel, M 2000, ‘Competition Policy and Intellectual Property Rights in Developing Countries’, World Economy, Vol. 5, PP. 595-611. Motta, M 2004, Competition Policy: Theory and Practice, Cambridge University Press, New York Nolan, P 2008, Capitalism and Freedom: The Contradictory Character of Globalization, Anthem Press, New York. Parker, D 2000, ‘the Competition Act 1998: Change and Continuity in UK Competition Policy’, the Journal of Business Law, Vol. 6, PP. 283-302. Possas, M & Fagundes, J 1998, “Competition, Strategic Behavior and Antitrust Policy: the Journal of Business Law, Vol. 52, no.1, PP. 111-143. Stephen, P D 2008, the uncertain foundations of post Keynesian economics: essays in exploration, Routledge, New York. Read More