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Economics Essay Sample: Assessment of the criticisms of neoclassical

Assessment of the criticisms of neoclassical competition model from a Post Keynesian and Austrian School perspective

This brief will be an assessment of the Post Keynesian and Austrian criticisms of the standard neoclassical view of competition. The first discussion will centre on Post-Keynesian thought and its development away from neo-Keynesian economics and New Keynesian economics. It will especially focus on the Post Keynesian principle of effective demand and its influence on a competitive market economy through aggregate employment theories. The second part of this brief will discuss the Austrian theory of economic thought which holds that the use of mathematical modelling in economics to predict outcomes is inherently difficult because of the complexity of human behaviour. An additional emphasis will be on discussing the Austrian School’s basic view of the working market economy. This will be followed by a description of the standard view of neoclassical competition. Analyses of how Post Keynesian and Austrian School criticisms of neoclassical competition will then be followed by the conclusion of the paper. In the end this brief should provide the reader with an understanding of how the ideas from Post Keynesian thought and the Austrian School’s theories work against the neoclassical view of competition.

A basic understanding of Post Keynesian economics reveals that it is a rebuilding of Keynesian thought about economics after what they regard as the serious misrepresentation Keynes ideas. It is important to note that Post Keynesian’s see themselves as rebuilding Keynes thoughts rather than as expanding or combining them with other economic views. They are in fact trying to bring Keynesian theories about economics back to his basic principles in order to fully appreciate their value. As mentioned in the introduction one of the main features of Post Keynesian thought is the theory of effective demand where in a competitive market economy there is no opportunity for full employment of the masses. This theory has been added to by other Post Keynesian theories about income distribution, growth and development play a key role in opposition to ideas put forward by neoclassical economics who believe that market economics is based on the supply side. The criticism of the neoclassic view of the perfect curve as an example of working economics is a fundamental contribution that Post Keynesian thought brings to the economic table.

Example of a Perfect Curve

Post Keynesian economic theorists believe that the neoclassical perfect curve is purely a theoretical model and has little or no basis for use in real world economics. In order to understand how Post Keynesians object to the neoclassical perfect model, several questions must first be explored; they are “what are the shapes of the cost curves and why is there excess capacity, how are margins on costs set when pricing; what happens to prices when demand fluctuates; and is there any link with Sraffian prices of production?” Lavoie argues that the ultimate objective for a form is to have power over its intended environment whether that is economic, social or political. This power leads to growth which is a recurrent theme in Post Keynesian economics who assert that the maximum rate of growth is subject to various constraints both inside and outside of the firm. Lavoie describes this power, expansion and growth link as “growth is the objective, and profits are the means to realize this objective.” This understanding then leads Post Keynesian theorists to the understanding of the relationship between profit goals and growth objectives in respect to the hypothesis that firms will only borrow as much as they can accumulate in their own investments. This then leads us to the understanding of how the Post Keynesian theorists object to the U-shaped neoclassical cost curves or that firms which are profitable increase their costs as they augment their sales.

One of the principle concerns for Post Keynesians is to have a more robust framework for supply and demand that includes mark up pricing and the distribution of goods and materials. Uncertainty in markets leads to an unstable capitalistic economy therefore agreements must be made about the fairer distribution of surplus goods and materials. This would in turn stop hoarding and promote a more evenly shared access to resources. Firms that follow the Post Keynesian philosophy also set their prices as mark-ups, which are above their prime costs. This means that profits of these firms usually have a large impact on investment decisions and in the end determine profits for the future. This is a double sided approach to the relationship of investment and profits, but it is a unique feature of Post Keynesian economics. It will be revealed later in this paper how the Post Keynesian outlook on distribution and mark up pricing differ from neoclassical ideas of market process and Austrian ideas of entrepreneurship.

The Austrian School of economic thought is based on the theory that there is a spontaneous organising power of the price mechanism. Just like the Post Keynesian’s they believe that because human behaviour cannot be rationalised a coherent model of the economy cannot easily be put into mathematical terms. This brings them to the conclusion that there should be strict enforcement of voluntary contractual agreements between economic agents. Economists from the Austrian School also advocate a firm adherence to methodological individualism, which they interpret as the analysis of human actions from an individual standpoint. They believe that the only way to arrive at a valid economic theory is to examine principles of human behaviour very closely and that it is impossible to test economic theories in experiments in controlled settings because people would be altering their behaviour for the tests. The lack of testability of the Austrian School’s theories make them unpopular with most popular mainstream economists who believe that the testing of economic theories form the solid basis for making accurate statements about the markets. The Austrian School has made significant contributions to the subjects of inflation, business cycles and insights into the economic calculation question around price mechanisms and the distribution of resources in the economy.

Although early work produced by the Austrian School could be seen as a variant of the neoclassical approach to economics, after the 1930s the theories that started to come out of the Austrian School varied sharply away from the earlier path. The basis of this new direction lies in how the Austrian School views the understanding of the competitive market economy. It is basically based on the conclusion that standard neoclassical explanations for microeconomics have a “lack of relevance in models which seek to explain market phenomena as if they were at each and every instant, strictly equilibrium phenomena and in the belief that it is a methodologically legitimate demand to be made of a theory of the market…”In other words theoretical economic models lack the ability to predict the market because there is no basis for equilibrium among the elements. Other economic schools of thought have also made these same criticisms of the neoclassical approach; however the positive elements of the Austrian approach make them unique. For example the Austrian school “sees equilibration as a systematic approach process in which market participants acquire more and more accurate and complete mutual knowledge of potential demand and supply attitudes and sees the driving force behind this systematic process…of entrepreneurial discovery.” This leads the Austrian School to criticise patterns of imperfect information and the neoclassical view of competition or the perfect curve.

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