9 Pages   |   2,266 Words

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

Table of Contents
Introduction. 3
The Competitive Process. 3
The Neo-Classical Approach. 4
The Post- Keynesian Approach. 4
The Austrian School of Thought. 5
Austrian and Post-Keynesian Criticisms of the Standard Neoclassical View of the Competitive Process. 5
Criticism on “Uncertainty” and “Entrepreneurship”. 6
Criticism due to Superficial Explanation of “Firm”. 6
Criticism due to the Absence of Scientific Methods in the Competitive Market. 7
Conclusion. 8
References. 9
  Economics is a very vast field of social science. Economics tends to explain different phenomenon related to analyzing and describing modes of production, consumption and distribution of wealth. There are different approaches to study economics and they are called economic schools of thoughts. There are a lot of different schools of thought in economics, but the three major ones under discussion here are neoclassical school of thought, Keynesian school of thought and Austrian school of thought. They all differ from each other in certain ways, and they all approach the subject of economics in a somewhat different way. But all these approaches have a lot of things in common, as well. This paper would critically analyze each of these approaches and would explain the Austrian and Post-Keynesian criticisms of the standard neoclassical view of the competitive process. But before discussing these schools of thoughts, let’s look at the meaning of the term competitive process.

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This section will look at the main initial concerns of the three different schools of thoughts. The initial concern of the neoclassical school of thought is utility maximization and resource allocation. Whereas, the initial concerns for post Keynesian are distribution and mark up pricing. In case of the Austrian school of thought, the initial concern is market dynamics along with entrepreneurship process. All schools of thoughts provide a different approach towards most areas of economics but the focus is mostly on the different views of the ‘competitive processes’. Competition matters for industrial as well as business economics. The competition process holds significant importance in all schools of thoughts. The conventional model of perfect competition still provides a benchmark. All market structures could be compared to the perfectly competitive equilibrium market. The key notion of competitive markets involving price-taking firms persists as the basic conception of competitiveness in standard theory. This approach is well matched with the Pareto optimal condition (Bellante, 1992). There are different types of competitions and market structures prevailing in economics. If, there is just one single purchaser then market structure is called monopsony. Other market structures area monopoly and oligopoly. In monopoly, there is just one single dominant seller. In this case, he can charge as much price as he would like, and he can make extra profits. For example, if there is just one bank in the whole country then it can have high interest rates, and it can provide services at high costs. This is what happens if there is lack of completion and that is why according to standard economic argument, competition is better because it stops suppliers to make unjustifiable profits (Kirzner, 1978). In case of oligopoly, there are several sellers and in this type of market structure, regulations play a vital role. Neoclassical school of thought was the initial approach towards understanding economics. This approach was developed mostly during 18th and the 19th century. Adam Smith is considered to be the founder of neoclassical approach and in the latter half of the 19thcentury David Ricardo contributed his work to this approach. Many of the economists’ have had different ideas and theories as compared to neoclassic school of thought and with the passage of time these differences have grown, and it has led to the formation of different schools of thoughts. Amongst all the approaches, neoclassical school of thought is considered as standard and conventional theory (Basile and Salvadori, 1994). Neoclassical theory is mainly criticized because it is considered to be ‘normative biased’. Many economists believe that this school of thought does not focus on explaining the actual economies and instead this approach focuses just on describing a utopia in which the Pareto optimality is applied. Some of the economists also question the ‘rationality’ theory that is explained by the neoclassical approach, and they believe that an economic man, who is described by the neoclassical approach, can be quite different from a real man (Schmidt, 1996). Post Keynesian theory came much after the neoclassical theory of economics. During the post world war period, the neo Keynesian economics school of thought got very popular. John Keynes is the founder of neo Keynesian approach. This approach was related mostly to macroeconomics theory, and it formed the conventions of the macroeconomic thought during 1950 to 1970. Though, post Keynesian theory comes much later, and this post Keynesian economics theory describes that the Keynes's theory is very much misrepresented and misunderstood by the two other principal Keynesian schools (Bellante, 1992). These two schools of thoughts are the neo Keynesian economics school of thought and the new Keynesian economics school of thought. The whole point of the post Keynesian economics was to rebuild economics theory in the light of the Keynesian philosophies, ideas, insights and intuitions. This theory is also criticized by a lot of economists. A lot of economists believe that the post Keynesians sought to differ themselves from Keynes himself and a lot of the current post Keynesian thoughts are nowhere to be found in Keynes (Kirzner, 1977).  The Austrian school of thought in economics comes from the 19th and the early part of the 20th century. This school of thought bases its roots/ study of economics on the analysis and the explanation of rational and purposeful acts of an individual or individuals. The Austrian school of thought differs ominously from other economics schools of economic thoughts and there is a lot of criticism on it. In this school of thought, works of Carl Menger and Friedrich Wieser hold significant importance, but it is thought by the majority of the economists that this school of thought rejects a lot of basis economics theory. This school of thought uses an approach termed as ‘methodological individualism’ and there is a lot of criticism on this term (Kirzner, 1977). It is also argued that the Austrian school of thought is opposed to the use of mathematics and statistics approaches in economics. According to the neoclassical school of thought, competition is an equilibrium situation in an economy or market. This school states that the static nature of the equilibrium in the economy does not allow the entrepreneurship tasks to be performed in the right way. The reason is that, in this approach there exists no change in variables like technology or preferences. Almost every school of thought disparaged the theory of neoclassic economics, which was founded on the concepts of competitive equilibrium market (Hayek, 1968). The neoclassical view of the competitive process also emphasis less on entrepreneurship and the element of ‘uncertainty”. Though, the Austrian school of thought talks about uncertainty and entrepreneurial functions in the competitive process and criticizes the neoclassical view to be shallow. This school of thought also criticizes the neoclassical theory due to static equilibrium as well as for mixing the concept of certainty and uncertainty (Kirzner, 1977).
According to Austrian methodology, in a competitive market, the neoclassic school of thought does not explain the concept of uncertainty. They argue that the uncertainty hinders an individual’s rational thinking, and the outcomes may vary due to this. This is how the Austrian methodology explains the role of entrepreneurship in a competitive market and it criticizes the neoclassical approach because it cannot explain entrepreneurship. Hence, according to Austrian school of thought ‘uncertainty’ is a major factor and the neoclassical theory lack to explain the ‘uncertainty’ factor. There is another major difference also. Austrian school of thought argues that the market efficiency is not achieved by the assumptions that neoclassical school of thought takes about equilibrium point. According to neoclassical school of thought, in a competitive market structure, prices are equal to marginal cost (MC). But according to Austrians, the market efficiency is achieved through the degree of market forces to successfully resolve all the errors when there is no equilibrium in the market (Krizner, 1978). Both schools of thoughts, Keynesian as well as Austrian, criticize the neoclassical approach due to obtuse explanation of “Firms”. In a market, profit maximisation can be seen as a special case of utility optimisation. Every firm in the market regards profit as the principal element in its utility function. The degree of ‘market power’ indicates the competitiveness of a particular market and the neoclassical school of thought gives a very weak link between market structure and market power. Post Keynesians and Austrians look at this issue in detail and criticize the neoclassical approach. According to post Keynesian school of thought, the objectives of a firm are “gaining power” and “growth” and neoclassical view is superficial in considering these factors. (Lavoie, 1992) According to post Keynesian school of thought, the competition in the market is achieved through dominance. According to them the factor of uncertainty is also of a vital concern because no one knows what is going to happen in the future, and the concept of finding probabilities cannot be used to establish agent behaviours. So, they criticize the neoclassical school of thought because of the absence of the scientific methods in the competitive market. There difference with the neoclassic school of thought is different as compared to the Austrian school of thought. According to Austrian economists, the concept of uncertainty is critical to nations because, without the uncertainty, the power of nations would dissolve and thus the nation would lose its value to the people.The post Keynesian school of thought also rejects the profit maximization concept that is used in neoclassical theory. They are against the idea of marginal revenue being equal to price of the goods and the marginal costs. According to post Keynesian school of thought, such markets are not competitive enough for firms to move towards other market type like monopoly and dominate it (Schmidt, 1996). According to their school of thought, profits cannot be equalized because price decisions are different for different firms and the profits include the allowances and are equal to the averaged cost. In post Keynesian methodology, prices are set by firms themselves, and market prices have no role to play in this school of thought. This is the main reason that differentiates the post Keynesian views about competitive process of firms from the neoclassical school of thought. The post Keynesian views also differ from the Austrian view on ‘uncertainty’ and on ‘behaviour of the firm’ basis (Schmidt, 1996). As David states, post Keynesian school of thought is aimed at increasing market competition and power through prices, entry hindrances and market development (Grassland Smith, 1986). Though it is also a fact, the post Keynesian school of thought criticizes that firm’s decision are taken to increase the notion of power and behaviour through a competitive process. A firm in the market that is dominant sets the prices and adjusts outcomes. Therefore, the post Keynesians believe that all other firms in the market/ economy are dominated by that one firm which has all the power. They also argue that imperfect competition normally exists when reserves of capability are in surplus. All the above sections of the paper discussed the differences in the three schools of thoughts in economics. But these schools of thoughts have a lot in common also. The theories in the neoclassical approach are much more simple and straight forward as compared to other theories and sometimes they are criticized to be superficial. The importance of the post Keynesian school of thought along with the Austrian criticism of the neoclassical approach of competition can be reduced to a somewhat unsophisticated outcome. This outcome suggests that the alternative views force traditional neoclassical economists to reassess the validity of their theories (Schmidt, 1996). The traditional view might be very helpful when it comes to analyze simple things such as environments of perfect competition, but in the real world complex situations it holds little importance. In short, these three schools of thoughts have a lot in common, and they also differ significantly from each other,but these new schools of thoughts look deeper into economics issues, and they try to find out solutions for complex problems (Kirzner, 1978). Whereas, neoclassical school of thought is based on basic and simple theories and sometimes it is not enough to provide answers to the current economic problems. Basile, L and Salvadori, N. (1994).On the Existence of a Solution to Kalecki's Pricing Equations.Journal of Post Keynesian Economics.16(3), 436-49.
Bellante, D. (1992). The Fork in the Keynesian Road: Post Keynesians and Neo-Keynesians. Mark Skousen, ed. New York, 117–29.
Grassl, W. and Smith, B. (1986) .Austrian Economics.Croom Helm Ltd.
Hayek, F. (1968).Competition as a Discovery Process.New Studies in Philosophy, Politics, Economics, and the History of Ideas.University of Chicago Press.
Kirzner, M. (1977). Entrepreneurial Discovery and the Competitive Market process: An Austrian Approach. Journal of Economic Literature. 35 (1) 60-85.
Kirzner, M. (1978).Competition and Entrepreneurship.The University of Chicago Press.73-77.
Lavoie, M. (1992).Foundation of Post-Keynesian Economic Analysis. U.K. Edward Elgar
Schmidt, C. (1996). Uncertainty in Economic Thought. Cheltenham, U.K. Edward Elgar.

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