Standard Neoclassical View of the Competitive Process - Essay Example

Assess the Significance of Austrian and Post-Keynesian Criticisms of the Standard Neo ical View of the Competitive Process Table of Contents Table of Contents 2 Introduction 3 Competition Explained from the Viewpoints of Neo-Classical Economists, Austrian Economists and Post-Keynesian Economists 4 Neo-Classical Approach 4 Austrian Approach 5 Post-Keynesian Approach 6 Critiques 8 Conclusion 11 References 12 Introduction There are various approaches that proclaim different ideas about market competition process. In this regard there are basically three major approaches including Neo-classical, Austrian and Post-Keynesian schools of economics that describes ideas about the competition in a given economic context. Each of the aforesaid approaches affirms their own views and assumptions related with various states of economic competition aspects. It is worth mentioning that not all the aspects of these approaches are conflicting with each other; a certain extent of relationship and similarities between these approaches is identifiable. Contextually, neo-classical approach advocates on the existence of perfect competition and market equilibrium. On the other hand, Austrian approach ignores the assumption claimed by the neo-classical approach and emphasizes on claiming that there exists nothing static at the marketplace as the market itself is highly dynamic (Block & et. al., 2002). Similarly, Post-Keynesian approach also firmly rejects the assumption of neo-classical approach and further states that market is about uncertainty and firms at the market place are totally unaware of their future (Lee, 1986). Based on these understandings, the paper intends to identify and assess the various implications of these three approaches in a more elaborated form. Furthermore, the paper also attempts to compare and critique the neo-classical approach in the light of Austrian and Keynesian thoughts of economics. Competition Explained from the Viewpoints of Neo-Classical Economists, Austrian Economists and Post-Keynesian Economists Neo-Classical Approach Neo-Classical view of competition is based on the assumption of perfect competition economic conditions. The assumptions of perfect competition can be illustrated as the appropriate conditions which need to be present in the market place in order to ensure the existence of situations acclaiming a perfectly competitive industrial structure (Hunt & Morgan, 1995). Neo-Classical theory advocates the existence of large numbers of sellers in a relatively small market size offering homogeneous products to a significant range of consumers. Furthermore, the theory tends to ensure that all the participants at the market place possess a perfect knowledge of the commodity offered, including price and related costs of each good/service. The theory also intends to achieve the perfect mobility of factors of productions. As a result, during the existence of such conditions, both the producers and customers are in the position to influence the price of the commodities offered at the market place. It is worth mentioning that due to the presence of large numbers of producers in a relatively small sized market, firms are not in a position to influence the price of the commodities offered. Thus, firms in the perfectively competitive market tend to become passive in relation to the price of the commodities offered. In other words, firms’ behaviour in the perfectively competitive market tends to be similar to that of a price taker rather than the price maker. At the same time, firms operating in the perfectly competitive markets concentrate on the production of a certain level of output, aligning with the goal of profit maximization, which the firms intend to achieve at certain points, referred as equilibriums. In equilibrium points, price of the commodities offered equals with the marginal costs of the same product creating a situation of no profit and no loss. Thus, the state of perfect competition acclaimed by Neo-Classical theory facilitates the situation of static equilibrium at the market place (Tsoulfidis, 2011). Austrian Approach Austrian approach is often acclaimed to have originated in 1870s in Vienna. The approach argues that individual and value-based assumptions advocated by the approach are eligible to provide better explanation of various economic events at the marketplace. In addition, Austrian approach is often argued to have emerged due to the dissatisfactions existing in relation to the definition of market competition assumptions, rendered by the early theoretical concepts owing to the failure of these assumptions to properly depict the actual competition process. Based on the limitations of the previous explanations, the Austrian approach refers competition as a dynamic process (Lewin & Phelan, 2000). It emphasizes that the economic decisions responsible for generating entire economic phenomenon are essentially personal as well as unpredictable in nature. Simultaneously, the approach also argues that the government interventions and certain policy measures such as inflation control fiscal strategies often disrupt the highly dynamic and complex market process, consistently creating vicious results. Moreover, Austrian approach emphasizes on subjectivism, entrepreneurship and fundamental uncertainties as the key issues in understanding competition at the marketplace. Austrian approach further explains that anything which occurs at the marketplace is quite different from the mainstream general equilibrium theory presented by Neo-Classical economists. Hence, the approach rejects the assumption proposed by the mainstream theory which emphasizes on the existence of equilibrium phenomenon at each and every instant of market trend alteration signifying competition (Kirzner, 1997). The approach further argued that there exist no perfect competitions at the marketplace. As stated earlier, Austrian approach considers entrepreneurship to be the most significant aspect involved in understanding the competition process at the marketplace. Accordingly, the approach encompasses understanding the actions of entrepreneurs and the highly dynamic circumstances in which they function. In relation to this, the approach states that all entrepreneurs at the market seek for new opportunities for mutual gain. Furthermore, the approach regards competition as a vital aspect that requires entrepreneurs to offer goods at variable price along with different quantities in order to discover buyers’ preferences and thereby obtain a degree of sustainable competitive advantages. Consequently, the approach firmly states that competition at the market leads towards innovations and progress by motivating the market players to develop as more preferred by customers than other existing firms (Butler, 2010). Post-Keynesian Approach Historically, the foundation of Post Keynesian approach was formulated by Keynes and his colleagues. Post Keynesian approach significantly differs in its views from the Austrian approach which advocates, competition at the marketplace is largely determined through dominance. Moreover, the approach argues that it is not an easy task for the firms to establish their dominance at the marketplace. However, firms operating at the marketplace have to deal with uncertainty in the course of establishing dominance. It further argues that oligopoly structure and monopoly are the forms of competitive situation that leads towards the functioning of the market. It is worth mentioning that this particular approach focuses more on rendering an explanation of market characteristics rather than predicting about the market conditions. However, the post Keynesian approach also firmly admits the probability of imperfect competition can lead to a situation of monopoly (Arestis, 1996). Thus, the approach argued that there exist no free entry of new firms in a competitive market and the power to determine the prices of products are concentrated within the few firms dominating the industry (Schonerwald da Silva, 2007). Post Keynesian approach also argues against the assumption claimed by the mainstream theory which advocates the existence of perfect competition and equality of price with marginal costs. Additionally, the approach postulates that profits of different firms are not equal due to the differences in the price decisions. At the same time, Post Keynesian views the aspect of uncertainty as a critical phenomenon that facilitates firms to explore opportunities at the market place with greater competency. Furthermore, the approach firmly admits that when there is a positive uncertainty, entrepreneurs can efficiently use the profit opportunity over the mistake of another player in the same market (Davis, 2010). Critiques Austrian school of economics firmly argues that competitive equilibrium model was initially framed to simplify the existence of competition in an economy, rather than depicting reality. In its later implications, Austrian school emphasized on addressing those questions which Neo-Classical model failed to properly address and depict. However, from a critical point of view, it can be stated that Austrian through to economics was nothing more than an appreciative theory, supporting the formal theory of industry competition. For instance, Neo-classical theories assumed that every participant at the market place have perfect knowledge regarding the commodities offered. On the contrary, Austrian approach states that concept of perfect knowledge is unrealistic and inconsistent in the practical scenario. Furthermore, Austrian approach also criticises Neo-Classical theories emphasizing on the fact that the knowledge at the market place is based on the probabilities and there exists nothing absolute like perfect knowledge (Boettlke, 1996). Focusing on these variations, Austrian approach has often been perceived as totally different from the assumptions presented through the Neo-Classical theory. The Austrian approach of competition advocated that there is no such state of equilibrium as proclaimed by the Neo-Classical theory of competition. Furthermore, it argued that economy is a dynamic state of disequilibrium where things are constantly changing. Moreover, the Austrian approach emphasized that economy is not static and often unforeseen opportunities tend to arise for exploitation. Hence, unlike the ideas of Neo-Classical theories, Austrian approach presents a quite distinctive explanation to industry competition. For instance, the Neo-Classical theory emphasizes on the efficiencies of the firms to predict the trends persisting within the industry, while the Austrian approach focuses on understanding the behaviour of the individual entrepreneurs for effectively analysing the competitive market. Moreover, Austrian approach is concerned with the aspects of subjectivism and entrepreneurship. In addition, Austrian approach considers competition dynamic process and often relates market trends as a consequence of various decisions made by customers and entrepreneurs. It states that entrepreneurs identify the new information regarding customer preferences and act upon meeting those preferences which further gives rise to competition. On the other hand, Neo-Classical theories are claimed to be largely misleading by the Austrian approach, where the later regards entrepreneurs as one of the critical aspects of competition in an economy. Furthermore, the Austrian approach criticises the Neo-Classical explanations on industry competition on the basis that the later provides lesser space for entrepreneurs to perform their activities to control price and quantity. Austrian approach is more concerned with logic and sequential process for formulating prices at the market place. Austrian approach firmly rejects the arguments placed by Neo-Classical theories which proclaim that equilibrium price can be the result arising from market rivalry (Block & et. al., 2002). In the similar context, Post-Keynesian approach can be observed to acquire certain characteristics of Neo-Classical theories such as the utilization of complicated mathematics. However, Post Keynesian theory strongly argues against few of the assumptions proclaimed by the Neo-Classical approach which implies the idea of equilibrium. Rather than focusing on the implications of equilibrium, the post-Keynesian approach identifies that economic agents involved in various actions, driven towards profit maximization, are responsible for determining the entire process in a particular economic atmosphere. Accordingly, the Post Keynesian approach states that these agents tend to make decisions and are involved in the planning of uncertain future actions in order to sustain in the competitive market. Furthermore, unlike Neo-Classical theories, which imply that prices at the marketplace are determined by auction conditions, the Post Keynesian advocates that prices at the marketplace are managed by certain leading firms utilizing mark-up rule on full average costs to large-sized markets (Schonerwald da Silva, 2007). In addition, Post-Keynesian approach also strongly admits that firms costs are not curve shaped; instead, the theory claimed that marginal costs are stable while on the contrary average costs per unit keeps on diminishing (Lee, 1986). Furthermore, Neo-Classical theory considers the model of perfect competition to be a vital component of modern economic atmosphere; while, on the contrary, the Post-Keynesian approach considers oligopoly to be an important aspect in the modern economic circumstance. Contrast to the Neo-Classical theories, the Post-Keynesian approach firmly believes the market to be unknown and uncertain and considers the same to be the vital determinants of competition at the marketplace. Simultaneously, Post-Keynesian approach implies that prices are more often determined by dominant firms present at the marketplace for accomplishing their specific goals, opposing the theory advocated by the Neo-Classical economists which implies that prices are set on the basis of market conditions. In other words, the Post-Keynesian approach argues that prices at the market place are determined by the firms and not by any other market force (Melmies, 2009). Conclusion The three approaches of economics, namely Neo-Classical, Austrian and Post Keynesian, intend to provide the best understanding of competitive process in their own unique way. However, it should be noted that both Austrian and Post Keynesian approaches have evolved as an alternative approach due to the dissatisfaction arising from the assumptions claimed by Neo-Classical approaches. Consequently, both Austrian and Post-Keynesian approaches firmly reject many of the assumptions claimed by the Neo-Classical approach. Responsively, both the approaches criticised the assumptions considered by the Neo-Classical approach which claims that perfect competition and equilibrium are the vital aspects determining the competitive process at the market place. On the other hand, Austrian approach considers entrepreneurs’ actions to be critical aspects that can be related with the competitive process. At the same time, Post-Keynesian approach views firms’ power and dominance as a determinant of competitive process. Thus, the both alternative approaches (Austrian and Post Keynesian) postulate theories and assumptions from a practical viewpoint which were not as simple and elegant as prescribed by the Neo-Classical approach. References Arestis, P., 1996. Post Keynesian Economics: Towards Coherence. Cambridge Journal of Economics vol. 20, pp. 111-135. Block, W. & et. al., 2002. Austrian Economics, Neoclassical Economics, Marketing, and Finance. The Quarterly Journal of Austrian Economics, vol. 5, no. 2, pp. 51-66. Boettke, P. J., 1996. What Is Wrong With Neo-Classical Economics. New York University, pp. 1-19. Butler, E., 2010. Austrian Economics a Primer. Adam Smith Research Trust, pp. 1-128. Davis, J. B., 2010. Uncertainty and Identity: A Post Keynesian Approach. Erasmus Journal for Philosophy and Economics, vol. 3, iss. 1, pp. 33-49. Hunt, S. D. & Morgan, R. M., 1995. The Comparative Advantage Theory of Competition. Journal of Marketing, vol. 59, pp. 1-15. Kirzner, I. M., 1997. Entrepreneurial Discovery and the Competitive Market Process: An Austrian Approach. Journal of Economic Literature, vol. 35, iss. 1, pp. 60-85. Lewin, P. & Phelan, S. E., 2000. An Austrian Theory of the Firm. Review of Austrian Economics, vol. 13, pp. 59-79. Lee, E., 1986. Post Keynesian View of Average Direct Costs: A Critical Evaluation of the Theory and the Empirical Evidence. Journal of Post Keynesian Economics, vol. 8, no. 3, p. 400-424. Melmies, J., 2009. Post Keynesian Price Theory, Imperfect Competition and the Institutionalise Connection. European Network on the Economics of the Firm, pp. 1-20. Schonerwald da Silva, C. E., 2007. The theory of Imperfect Competition: Review of the Post-Keynesian Contribution. University of Utah, vol. 18, no. 2, pp. 38-53. Tsoulfidis, L., 2011. Classical vs. Neoclassical Conceptions of Competition. University of Macedonia, no. 11, pp. 1-28. Read More