Austrian and Post-Keynesian theories of the competitive process

The Austrian School is a dissident school of economic idea that emphasizes the self-generated forming power of the monetary value mechanism, which was influential in the late 19th and early twentieth century ( Boettke, 2008 ) . After the 1870s, Marxism spread quickly in the ranks of workers, and the economic theories that defended for the capitalists went bankrupt. The Austrian economic sciences based on three nucleus constructs: entrepreneurship, subjectivism and market procedure, which became popular after that. The Post-Keynesian school of idea was developed in the argument with the neoclassical synthesis. After The General Theory of Keynes was published, some different points of position on the practical jobs arose in the followings of Keynes, and bit by bit formed two opposing schools of idea: neoclassical and the Post Keynesian School. The theoretical foundation of Post Keynesian economic sciences is the rule of effectual demand, that demand affairs in the long every bit good as the short tally, so that a competitory market economic system has no natural or automatic inclination towards full employment ( Arestis, 1996 ) . The aim of this paper is comparing and contrasting Austrian and Post-Keynesian theories of the competitory procedure. The similarities and differences between these two theories will be stated orderly.

Although Austrian and Post-Keynesian theories are two different schools of idea, they still have some grade of similarities. First, they both advocate uncertainness. Following, they both can non be regarded as net income maximizers. Last, the competitory procedure is seen as a dynamic procedure by both theories.

First of all, for the Austrian attack uncertainness is permeant. One of the Austrian ‘s nucleus constructs is entrepreneurship. Austrian school thinks that the community is a aggregation of persons. Individual ‘s economic activity is a microcosm of the national economic system. Through the reading of single economic activities, concluding illustrates the complexnesss of existent economic phenomena. Entrepreneur is the person here in the existent economic system. They are all different in each other. Therefore enterprisers in peculiar ever face cardinal uncertainness. Kirzner ( 1973 ) emphasized the uncertainness nowadays in all human decision-making, has chiefly focused on the entrepreneurial market procedure. For the Post-Keynesian attack houses ‘ pricing behavior is determined by a ‘mark-up ‘ regulation. This behavioral attack to pricing is partially in response to the impreciseness of monetary value puting in conditions of uncertainness. Uncertainty is the cardinal component of Keynes ‘ theory, and Post-Keynesian followed and developed it. In the Post-Keynesian theory of bureau, agents are non-optimisers due to cardinal uncertainness. Harmonizing to Fernando Ferarri Filho ( 2001 ) , in a context in which clip is historical, economic agents do non make up one’s mind future actions on the footing of statistical series analyses or beliefs justified by experience. To the contrary, decision-making is classified as an environment of true uncertainness. They are non the rational reckoners of standard theory. This suggests some convergence with Austrian theory.

Second, in Austrian ‘s term, enterprisers display purposeful chase of net income in the competitory procedure, which provides market order. It can non be regarded as net income maximizers due to cardinal uncertainness. However net income is still hence of import in actuating agents. Neoclassical theory assume that makers pursuit net income maximization, but we all know there is another voice in society necessitating makers to take societal duty. Social duty will increase the company ‘s operating costs, which is non contributing to their competition in the market. So, non-profit-maximizing houses will be sustained by the loss of net incomes and investing capacity and uninterrupted losingss, and eventually be forced out of the market. Austrian school advocators idealism and they do non believe that houses select the behavior of chase net income maximization. In post-Keynesian economic sciences, houses are non assumed to maximise net incomes every bit good, as is clear in Lavoie ( 1992, p.105 ) , “ The standard review of the neoclassical theory of the house is that net income maximization is non possible because of the deficiency of pertinent cognition due to an unsure environment. Net income maximization is so replaced by net income satisfying. Firms are assumed to put themselves threshold degrees of net incomes ; that is, minimal degrees of net incomes or of rates of return. ” Furthermore, the house ‘s overall aim is the chase of ‘power ‘ . This involves trying to command its environment. To go powerful, houses must be large ; to go large, houses must turn. Growth is the subjective and net incomes are the agencies to recognize this aim. However, maximising growing does non equal to maximising net incomes. Firms maximize the rate of growing, capable to assorted finance and enlargement restraints.

Last, both school of ideas believe that there is no absolute equilibrium in the competitory procedure. The Austrian school positions competition as a dynamic procedure, and sees the market procedure is driven by entrepreneurial activity. Continual alteration comes from uncertainness gives rise to the procedure of market activity. This procedure provides a more ‘fluid ‘ history of market activity, than is typical of criterion or neoclassical theory. The equilibrium attack of standard theory, it is claimed, can non capture the kineticss of the competitory procedure. “ The dynamic competitory procedure of entrepreneurial find is one which is seen as swerving consistently toward, instead than off from, the way to equilibrium ( Kirzner, 1997 ) . ” In contrast to the equilibrium kineticss of standard theory Austrian economic sciences advocates ‘process kineticss ‘ . The procedure of competition is of all time altering and open-ended, and can non be represented by equilibrium. Furthermore, Hicks, who foremost introduced the term ‘traverse ‘ into economic sciences, characterized it as ‘the way which will be followed when the steady province is subjected to some sort of perturbation ‘ ( Hicks, 1973, p.81 ) . In other words, the crossbeam defines the motion of the economic system outside equilibrium. It plays a peculiarly function in Post-Keynesian theory, as most Post-Keynesian economic experts have serious uncertainties about the relevancy and utility of equilibrium analysis ( King, 2003, p.355 ) . Therefore, Post-Keynesian economic experts analysis the economic phenomenon based on a dynamic competitory procedure every bit good as Austrian school.

On the other manus, there are besides many differences between Austrian theory and Post-Keynesian theory of the competitory procedure. It is chiefly reflected in three facets, basic rules and methodological analysis, positions on competition, theories of bureau.

First, Austrians are concerned with how a whole economic system works. The ‘individualism ‘ and ‘subjectivism ‘ of theoretical premises is a major concern. They avoid tunnel vision and look into how the specialised activities of 1000000s of individuals, who are doing their determinations in a decentralised mode, can be coordinated. The relevant cognition, such as resources, engineering, human wants, and market conditions, is necessarily fragmented among 1000000s, even one million millions, of separate human heads ( Yeager, 2001 ) . Therefore, in Austrian footings there would be no competition in perfect competition as there is no function for entrepreneurial activity. Because enterpriser will non remain in a market which can non do unnatural net incomes. However, Post-Keynesian economic experts are typically more concerned with account than anticipation every bit good as distribution, peculiarly at an sum and systemic degree, but non with standard public assistance economic sciences. The ‘realism ‘ of theoretical premises is a major concern. They believe that oligopoly is the normal province of personal businesss in most markets and oligopolists will typically keep some grade of extra production capacity. The grade of monopoly will change across different markets. These are different from Austrian economic sciences.

Next, the 2nd difference is the positions on competition. In the Austrian school, competition is redefined in footings of entrepreneurial competition. Entrepreneurs play a important function by detecting lost chances and detect an act upon new pieces of information. The Austrian school of economic sciences argues that true competition is a procedure instead than a inactive status. For competition to be improved and sustained at that place needs to be a echt desire on behalf of enterprisers to prosecute in competitory behavior, to introduce and to contrive to drive markets frontward ( Riley, 2006 ) . In an unsure environment entrepreneurial activity is characterised by mistake and mistakes lead to alter. In contrast, Post-Keynesian economic sciences argues that competition is inherently about laterality. Laterality here indicates dominant houses set the monetary value in the market. The Post-Keynesian economic sciences believe that market can non find the monetary values. Monetary values are administered in conformity with houses ‘ aims and are non typically market-clearing monetary values due to the chase of ‘power ‘ . Therefore, houses use a ‘mark-up ‘ pricing regulation, which is monetary value peers mean cost plus grade up. The Post-Keynesian school of economic sciences argues that market laterality is simply perfect and markets are prone to reenforcing laterality over clip.

Finally, theses two school of ideas advocate different theories of bureau. On the one manus, Austrian theory is strongly individualist. All theory is based on persons, which are enterprisers alternatively of houses or industries or other higher-level agents. But some Post-Keynesian theories are concerned with the societal and historical ‘location ‘ of economic histrions. On the other manus, because of cardinal uncertainness, agents in Austrian theory are loosely rational but they are non the rational reckoners of neoclassical theory. But agents do act with purpose. They engage in ‘purposeful action ‘ and can do ‘qualitative ‘ opinions. This ‘radical ‘ subjectivism leads to an involvement in single rights over public assistance considerations. “ These diverse activities are mutualist ; yet no peculiar bureau takes charge of organizing them, and none would be competent to make so ( Yeager, 2001 ) . ” However, agents in Post-Keynesian theory are cardinal to understanding how markets work. King ( 2003, p.1 ) argued that since agents make picks, they must possess a capacity that enables them to carry through this. The thought of doing a pick involves more than merely a random or freakish action. To do a pick is to prosecute in an knowing act based upon grounds and beliefs, which must be possessed by agents. Furthermore, agents can non be optimisers because they have to cover with uncertainness in trying to set up their laterality. The function of uncertainness is possibly less positive than it is in Austrian theory.

In decision, this paper compared and contrasted Austrian and Post-Keynesian theories of the competitory procedure. First, the three similarities between these two theories of the competitory procedure were stated. Both Austrian and Post-Keynesian theories advocate uncertainness in the competitory procedure. Both these two schools can non be regarded as net income maximizers. And the competitory procedure is seen as a dynamic procedure by both theories. Then the differences between these two theories been shown. The differences are chiefly reflected in three facets, basic rules and methodological analysis, positions on competition, theories of bureau. Austrians are concerned with how a whole economic system works. The ‘individualism ‘ and ‘subjectivism ‘ of theoretical premises is a major concern. Competition is redefined in footings of entrepreneurial competition. And Austrian theory is strongly individualist. All theory is based on persons, which are enterprisers alternatively of houses or industries or other higher-level agents. However, Post-Keynesian economic experts are typically more concerned with an sum and systemic degree, but non with standard public assistance economic sciences. The ‘realism ‘ of theoretical premises is a major concern. Competition is inherently about laterality. And they are concerned with the societal and historical ‘location ‘ of economic histrions.