Central Problem with Mainstream Economics - Essay Example

Central problem with mainstream economics Central problem with mainstream economics Mainstream economics Mainstream economics is widely accepted across various universities (Madrick 2014). It is highly associated with neoclassical economics in contrast with the heterodox approach. Thus, it focuses on the various ways of determining the prices, determining the prices of various goods and services in the markets as well as distribution of incomes in these markets through the process of supply and demands. This income distribution is mediated through maximization of utility which is often hypothesized by individuals who are income constrained and of profits that is constrained by costs through use of various available information and production factors that abide with the rational theory. There are various assumptions that are related to mainstream economics. One of them is the rational choice theory where individuals continually seek for the most cost effective means of achieving their desired goals with less reflection on the worthiness of the desired goal. The basic idea in here is individuals trying to maximize their benefits while at the same time reducing their costs. People decide on how they ought to act by making comparison of the resulting costs and benefits of their courses of action. Thus, the society in question develops a pattern of behavior in relation to these choices made. Another assumption is that of the representative agent. This refers to atypical decision maker of a given type for instance the typical firm or consumer. The notion behind this is that it is much easier to consider one typical decision maker rather than analyzing many of these different decisions (Nadeau 2009). However, economists ignore the representative agent when the differences occurring between individuals are central to the arising central point. The other assumption is that of rational expectation where the prediction of the future made by an agent of all economically relevant variables are not systematically wrong and the fact that all errors made are random. This shows that the expectations of the agents are the true statistical expected values. Much of the modeling of this modern economics explores the notion that other complicating factors have on various models. Here, individuals are viewed as units with a similar goal, which they are capable of maximizing through their rational behavior. The only difference arises in the specific objective geared towards maximization where individuals tend to maximize on their utility and firms tend to maximize on profits. There also exists a difference in the process of maximization where individuals tend to be constrained by some limited income or high commodity prices. Firms, on the other hand tend to be constrained by limited technology or unavailability of inputs (Madra 2007). Thus, such economists argue that no political action should be used to solve any sort of economic problem. Instead, the solution should come up from the intervention of maximization of available objectives and the constrains. This is the context that economic capitalism finds their justification. Thus, this mainstream economics consider the aggregate economy as the sum of the various agents who try to maximize all their utility or profit through exchange. Thus, they leave out the importance of entrepreneurs and change. Austrian school It is an economic school based on the methodological of individualism. The school has contributed to the subjective value theory, price theory marginalism, and the problem of economic calculation (Nadeau 2006). The subjective theory of value indicates that the value of a good is not determined by the good’s property, or labor required to produce the good but rather the importance that an individual places on the good for the achievement of their desired goals. These individuals tend to obtain various satisfaction levels from acquiring other additional goods. Such individuals will initially prioritize the goods they need the most. However, once the desire for the goods is prioritized to a certain level, they gain a relative importance for other goods. In a free market, there exists a level of competition between various individuals who seek to trade the goods they posses and the services that they can provide for other goods that they perceive as being of much higher values to them resulting into a set of prices emerging in the market equilibrium. Customers need to know the prices of goods in order to maximize the level of satisfaction that they can attain from it. However, according to mainstream economics, people decide on how to act by comparing the costs and the benefits of their various courses of action that they undertake (Basu 2010). Thus, choices of behaviors arise from these choices. In general, individuals tend to get the most useful products at the lowest possible cost. They compare the prices of similar products and settle for the lowest cost product, which provides the greatest level of reward. Thus, mainstream economics do not show the importance of change. As along as a certain product or service is continually providing the best reward, the individual will continue using the product or service for the longest time possible. If other products are introduced in the market providing the same or even better rewards but at a much higher price, such individuals refuse to change the products they use for others with a much higher price. As a result, mainstream economics disregard the importance of entrepreneurs. Since individuals are only interested in similar products that produce the best rewards at the lowest possible cost, other entrepreneurs fear to start a business in the region unless they come up with exact brand that the consumers desire, at exactly the same prices that the consumers get in the market. According to Austrian economics, marginalism is the theory of economics that explains the differences in value of various goods and services by referring to their secondary or their marginal utility (Frederic S. Lee 2012). For instance, diamond is more expensive than water due to the additional satisfaction derived from diamond compared to water. Water might have a greater total utility but diamond consists of a greater marginal utility. Marginality for any individual is in line with his or her endowment. Marginalism assumes that for any arising constrains, there is often an attainable state in the agent’s eyes. Thus, each increase is put into a previously unrealized use, which consists of a greater priority while a decrease results into an abandonment. Thus, buyers purchase lower quantities, while sellers offer high quantities when the prices of a commodity are high, with each seller willing to trade until the marginal value of the product exceeds that of the commodities that they are willing to trade. Mainstream economics state that individuals are continually willing to purchase more products that satisfy their need at the lowest possible cost. However, according to Austrian economics, individuals demand for a product or service tend to increase when the price is low. However, once the demand increases, the supply of the products also increase thus heightening the prices of the goods and the services provided (Harvey & Garnett 2008). This in turn tends to decrease the demand of the products and services and the cycle continues. Traders on the other hand, tend to conduct trade until the marginal value of what they are willing to sell of exceeds that of the products that they would be willing to trade. Thus, most entrepreneurs will fear to venture into the market especially if there is a possibility of market saturation. The mainstream economics do not consider this importance of entrepreneurs. Their main starting point is that people are defined as units with a certain common goal of maximization through rational behavior. The only difference arising is that the specific maximization objective differs together with the constrains that are faced in the process of maximization. In addition, the key features of the Austrian approach include rationality, equilibrium, method, and the equilibration. Rationality indicates that every human being wishes to move from an undesired state to his or her desired state in life. The notion of rationality contrasts the maximization of a certain objective function. This is subjected to a set of various identified constrains. Equilibrium indicates that market processes are often affected by various distributing elements of nature and various human actions. The constantly changing constellation of the economic phenomena gives rise to some sort of chronic disequilibrium. Equilibration, on the other hand, indicates that the process of entrepreneurial discovery with learning is often central to the perspective of the Austrian economics (Boettke 2010). The uncertainty of future holds varying surprises for individuals including the unpredictable nature of various choices of human acts and the incomplete knowledge about the varying natural phenomena. The prevailing levels of disequilibrium often give profitable opportunities to alert entrepreneurs, consumers and other producers. When a competition arises over the scarce resources that are available in the society, is a move towards equilibrium. Mainstream economics dismiss the Austrian methods and use statistical methods to model economic behaviors. However, according to Austrian economics, this process is insufficient to analyze economic behaviors and even evaluate varying economic theories (Paul 2008). Austrians use the method of dualism where knowledge has two realms called nature and human thought plus action. Statistical methods are too complex for treatment using statistical methods since human beings are not passive neither are they non-adaptive (Ucbasaran 2008). That is why mainstream economics do not see the importance of entrepreneurs. Moreover, it is evident that human action can only be undertaken by individual actors. Only individuals have ends and they can only attain them at an individual level. The actions of each individual are often guided by a given subjective evaluation regarding economic goods, which are place, person, and circumstance specific. Due to this, Austrians view economics as an effective tool to understand how individuals cooperate and also compete in the process of meeting their varying needs, allocating resources and finding ways of enhancing a peaceful prosperity. Unlike in mainstream economics, Austrians view entrepreneurship as an important tool for economic development. It is therefore evident that the central problem arising in mainstream economics is that they lack the importance of entrepreneurs and change. The fact that they consumers undertake rational decisions in making their purchases indicates that individual consumers are only interested in purchasing goods and services that provide the best reward at the lowest possible cost (Koppl 2008). Moreover, use of statistical methods is not appropriate in the case of human beings since human beings are often not passive and are non-adaptive. The Austrian heterodox approach addresses this problem perfectly. First, in the explanation of economic phenomena, individuals have to go back to the actions of individuals. It is not allowed for groups to act except through the actions of their individual members (Boettke 2012). As a result, if an individual entrepreneur wishes to embark in a given market, they can do so if they find the market in question suitable for them. They do not have to rely on what others in the market or what mainstream economics lays its importance. If such entrepreneurs find that they can maximize on their profits in a given market, nothing should constrain them (Rodrik 2007). Moreover, Austrian economics recommend that in the explanation of various economic phenomena, it is important that we go back to judgments and various choices that are made by individuals based on what the knowledge they posses and their expectations concerning external developments and the consequences of their intended actions (Keynes, 2006). The Austrian economics also indicates that the subjective valuations of various goods and services often determine the demand for them to enable their prices to be influenced by consumers. In addition, the costs which producers and other economic actors are able calculate reflect the alternative opportunities that have to be undergone (Reader 2013). Since the productive services are often employed for a single purpose, all the other uses have to be sacrificed. Thus, only if individuals are given their full freedom is it possible for them to secure their political and also moral freedom. Restrictions made the economic freedom often lead to an extension of various coercive activities of the state in question into the respective political domain. This is capable of undermining and destroying the crucial individual liberties, which the capitalist individuals were able to attain back in the nineteenth century (Tabb 2009). The Austrian economics recognizes that change is inevitable in the economy and entrepreneurship is the key to that change. Bibliography Boettke, P. J. 2010. Handbook on contemporary Austrian economics. Cheltenham ; Northampton, Mass: Edward Elgar. Boettke, P. J. 2012. Living economics : yesterday, today, and tomorrow. Oakland, Calif: Independent Institute . Frederic S. Lee, M. L. 2012. In Defense of Post-Keynesian and Heterodox Economics. Business & Economics , 1-263. Harvey, J. T., & Garnett, R. F. 2008. Future directions for heterodox economics. Michigan: University of Michigan Press. Keynes, J. M. 2006. General Theory Of Employment , Interest And Money. New York: Atlantic Publishers & Dist,. Koppl, R. 2008. Explorations in Austrian economics. Bingley, UK: Emerald. Madra, Y. M. 2007. Late Neoclassical Economics. New York: ProQuest. Madrick, J. G. 2014. Seven bad ideas : how mainstream economists have damaged America and the world. New York: Alfred A. Knopf. Nadeau, R. 2006. 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