Assess the significance of Austrian and Post-Keynesian criticisms of the standard neoclassical view of the competitive process

In the contemporary society, a number of schools of thought advance different and unique ideas and view in relation to competitive process. According to the neoclassical theory, competition is viewed as an equilibrium phenomenon in the economy. However, the neoclassical theory asserts that static equilibrium in an economy or market curtails the functions of entrepreneurship that otherwise fail to take place in a relatively correct manner. The above is based on an assumption that changes in technology, consumer preferences and data do not exist. This essay seeks to dissect the Austrian and Post Keynesian schools of thought and give an assessment of the significance of their criticisms of the competitive process.  

            The Austrian theory is a school of thought that came into existence in the 1940s after dissatisfactions in relation to advanced assumptions emerged. During this period, new theories that sought to emphasize competition in a perfect market also sprouted in big numbers. They sought to expound not only entrepreneurial activities but also the dynamism of market forces and the significance of governments hand in the operations of the economy. According to Carlton and Perloff, the manner in which the economy of a county operates is largely intertwined with the level of competition between the entrepreneurs in the economy (126). The theorists behind Austrian school of thought have identified not only fundamental uncertainty but also entrepreneurial functions as two cardinal factors in the competitive process. Furthermore, the Austrian theorists criticize the principle of static equilibrium as advanced by neoclassical scholars. The static equilibrium principle incorporates not only certainty but also uncertainty in its explanation of the competitive market. Fundamental uncertainty hampers entrepreneurs from making rational determinations and decisions of end products through calculation because of changes experienced over time. Entrepreneur’s role of ensuring that they maximize their revenues in market competitions is expounded in a vivid manner by the concept of fundamental uncertainty. Austrian theorists assert that entrepreneurial function in a relatively competitive process involves quite a number of errors attributable to fundamental uncertainty.

            Austrian theorists differ from the popular assumption by neoclassical that the equilibrium point in a market is assumed to be the point where commodity prices equal the marginal costs of production. According to these theorists, the equilibrium point is often determined by the magnitude in which the forces of demand and supply successfully address the mistakes and errors when the market is experiencing disequilibrium. The Austrian school of thought observe equilibrium as a point whereby participants in a market share not only information but also their plans with their fellow players in a perfectly competitive market environment to ensure that profit opportunities present in an economy are well utilized (Hayek 12).

            In relation to the scholarly works of Quddus and Horton, competition according to post-Keynesian is often through dominance (69).  Monopoly and oligopoly type of market structures to some magnitude are often norms as they showcase normalcy market tendencies in their functions. In critiquing Austrian and post-Keynesian theories on competitive process, there is need to bring issues such as market equilibrium, entrepreneur level of activity and last but not least fundamental improbability. Having dissected the aforementioned together with analyzing both the similarities and differences of the two schools of thought, one can therefore utilize a rational market analysis to formulate and implement diverse market strategies. In accordance to the school of thought of post-Keynesian, uncertainty is an aspect that cannot be swept under the carpet relatively because no individual lives in the future or know the probability of events and activities. This implies that it is not easy to determine entrepreneurial behaviors in a given market. Carlton and Perloff, observes that the absence of sound scientific inquiry modes in a competitive process as fundamental uncertainty (271). The behavior of firms in an economy is of utmost concern and importance to post-Keynesian assertions about markets. According to these post- Keynesian theorists, competitive market and processes play a cardinal role in reinforcing the dominance of firms over a period of time in relation with their activities. However, this is where post-Keynesian and Austrian theories differ. Austrian school of thought puts a lot of emphasis on single or individual entrepreneurs. According to them, uncertainty is paramount to economies relatively because deprived of it, power dissolves. In addition, such nations tend to loss value to its populace. Firms often make their decisions i.e. the future prospectus courtesy of entrepreneurial uncertainty. Such firms and corporations employ actions that are directed towards increasing their profitability and growth. The aforementioned is relatively because these firms and corporations are not keen to optimize their operations and it is relatively hard for these firms and corporations to increase their profitability base (Hayek 21).     

The post-Keynesian model expounds the situation whereby the price of a commodity is equal to the marginal productivity cost in a perfectly competitive market. On the other hand, post-Keynesian theorists reject the school of thought of profit maximization i.e. where the marginal revenue of a firm is equated with not only its marginal costs but also the commodity price is determined by the forces of demand and supply. These theorists observed that such a perfect competitive market is never enough to move firms to become monopolies or enable them dominate competitive markets. According to these theorists, profits are never equalized as the decisions relating to commodity prices vary in different companies and industries and the profits accrued by a firm include allowances and are largely same with the average cost. It is therefore apparent that the prices in post-Keynesian are often set by individual firms and not the market. The aforementioned distinguishes the views of post-Keynesian relating to the competitive process of industries especially from this theory of mainstream. Companies keen to exerting their dominance in the market with the guidance of uncertainty are often faced with not only complex but also difficult processes according to the post-Keynesian theory. In the post-Keynesian school of thought, companies embrace uncertainty to stamp their dominance and power in a market. This differs to a large extend with the Austrian school of thought whereby uncertainty can be said to be positive. This is relatively because an entrepreneur is able to utilize opportunities i.e. profit when an entrepreneur in the market commits an error or a mistake. According to Hayek, post-Keynesian theorists are aimed towards not only increasing competition in a market but also increase power by checking prices, increase entry deterrence and enhance market development (17). Furthermore, the theory critiques that decisions made by firms are meant to not only increase companies power but also motivation and lastly behavior courtesy of a competitive process. A firm that has exerted dominance in the market process is often the dictator. This is relatively because they are responsible for setting market prices. It is therefore apparent that in such state, all other smaller firms play inferior to dominant firm. In addition, flexibility of demand and supply forces in an industrial market is responsible for the determination of commodity costs (Carlton and Perloff 68).

In a contemporary perfect competitive market, firms are often price takers. The above scenario is shared by both the Austrian and post-Keynesian theories. More often, the model of perfectly competitive markets is utilized by different schools of thought to expound diverse market situations. The attainment of a market equilibrium point is attributable to a relatively organized and the utilization of a sound technology which relatively spurs profitability of a firm in the long run. However, the two schools of thought, Austrian and post-Keynesian observe that fundamental uncertainty in a competitive market process fail to enhance competitive among individual entrepreneurs. Therefore, equilibrium point in a market cannot be utilized to showcase the standard revenues in companies. In a perfectly competitive market structure, there is an assumption that market participants are in possession of relevant market information and accurate knowledge about the commodities brought to the market by producers. The accuracy of information in possession of market participants discourages sellers from dictating the prices of commodities. In such a condition, the suppliers of basic commodities are hampered from optimizing their utility because prices are dictated by the market. Moreover, both the Austrian and post-Keynesian theories are in agreement of the presence of fundamental uncertainty. However, the two theories differ on the effects of fundamental uncertainty to not only scientists but also economic players who play a cardinal role in market operations. Austrian theorists fail to criticize entrepreneurial functions in an exhaustive manner (Quddus and Horton 76).

As market players’ commits errors and mistakes, profit opportunities present themselves. More often, these market players respond promptly to these errors and mistakes. In addition, entrepreneurs make decisions courtesy of their imagination to ensure the creation of profit opportunities. The competitive market process eases the ability of market players to embrace not only technological changes but also consumer preferences and resources. Competitive process aid in the discovery of market guidelines as it not only creates but also destructs revenue opportunities of entrepreneurs in a perfectly competitive environment (Carlton and Perloff 43). In a competitive market process, fundamental uncertainty is often positive relatively because errors and mistakes tend to occur at this state of uncertainty. These errors and mistakes impact entrepreneurial activities thus making market competition processes dynamic.

Despite the aforementioned similarities, there exist ideological differences between the two schools of thought, the Austrians and post-Keynesian theories. In Austrian school of thought, it has relatively positive impacts since it comes up with changes in the functions of entrepreneurs that are responsible in the realization of profits. On the other hand, post-Keynesian theory fundamental uncertainty often causes hitches for it deprives the growth of a firm in the long run. Through the two fundamental theories, the standards utilized to overcome fundamental uncertainty are well expounded to depict how entrepreneurs maximize their revenues in a dynamic market that is often competitive. The views by Austrian theorists on competitive market process are relatively realistic and more detailed in its explanation of economic systems of an economy. Furthermore, this school of thought criticizes the principle of static equilibrium. However, it is quick to acknowledge that equilibrium cannot be delinked from any competitive market. On the other hand, the post-Keynesian theory fails to offer a detailed explanation in relation to monopolistic and oligopolistic type of market structures. According to Austrian theorists, monopolistic tendencies of a firm hamper competitive market process in a nation. Moreover, they are credited for showcasing entrepreneurial functions in a competitive market, a condition that is often neglected by other schools of thought (Hayek 19).

In conclusion, from the above discussion, it is apparent that the views of the two schools of thought in relation to competitive process differ in a relatively huge manner. Both the Austrian theorists and post-Keynesian scholars reject the views of neoclassical theorists in relation to the configuration of competitive market based on the principle of static equilibrium. The Austrian school of thought and that of post-Keynesian are of a relatively huge significance and this big significance is evidently unquestionable. From the above discussion, it can be said that the criticism of the two schools of thought triggered a number of developments, developments that are now utilized in explaining competitive process in an economy. In addition, it is evident that the criticism of these theories has led to the development of other neoclassical theories. Therefore, it can be said that the criticism of the Austrian and post-Keynesian theories is cardinal until a point in time when neoclassical scholars devise other ways to propagate their roles and come up with models that are well aligned to address the problems highlighted by the Austrian and post-Keynesian schools of thought.

Works Cited

Carlton, D and J Perloff. Modern Industrial Organization, 4th edition. Boston: Addison-Wesley, 2005.

Hayek, F. "Competition as a Discovery Procedure." The Quarterly Journal of Austrian Economics 5 (2002): 9-23.

Quddus, Muni and Joseph Horton. "Principles of Economics: An Austrian Critique." The Quarterly Journal of Austrian Economics 5.2 (2002): 67-77.