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Compare and contrast Austrian and Post-Keynesian theories of the competitive process.
Alternative Schools of thought describe the variety of approaches in the history of economic theory worth mentioning enough to be described as a 'school of thought'. While economists do not always fit into particular schools, particularly in modern period, classifying economists into schools of thought is common. In other words, a separate School of thought can be defined as different basic principles, on which the analysis of all economic problems are based, and as different historical roots. The phase of modern economic thought began with Adam Smith and classical economics in the late 18th century and it is classified in Neoclassical, Austrian and Marxian theories. The Neoclassical or Standard Theory studies utility maximization and resource allocation. The main initial concerns of Austrian School are market dynamics and entrepreneurship. The Post-Keynesian Theory discusses the distribution and mark-up pricing. Another school named Schumpeterian develops the innovation and dynamics. Although different Schools offer a distinct approach to all areas of economics our focus is always on the different views of the competitive process. This is what really matters for business/industrial economics. The objective of this paper is to outline the differences between Austrian and Post-Keynesian theories of the Competitive process.
Firstly, Austrian school can be defined as a school of thought originally identified with the University of Vienna. It views competition as a dynamic process, driven by the acquisition of new information and tends to be hostile to government intervention. The best known Austrian economists are Carl Menger, famous for contributing to the development of the theory of marginal utility, subjectivism, growth and uncertainty, Friedrich von Hayek, best known for his contribution of knowledge, market order and individualism in Austrian theory, and Richard von Mises who worked on entrepreneurship and dynamics, especially on non-equilibrium.
The main issues that modern Austrian theory handles are the "radical" subjectivism, fundamental uncertainty, entrepreneurship and co-ordination vs. multiple trajectories. All these factors play a role in Austrian theory, but certain theories emphasize some factors more than others. Our focus throughout is on the theory of competition. Radical subjectivism is important for this because if there is no such thing as objective marginal cost then this undercuts the basis of the standard distinction between competitive and monopolistic prices. Moreover if welfare can only be assessed from an individual subjective standpoint there may no such thing as a social welfare function. All of this undermines the validity and usefulness of pursuing welfare objectives such as Pareto optimality. This in turn diminishes the significance of models like perfect competition.
Many Austrian economists argue that the key issue in understanding the competitive process is entrepreneurship. This involves understanding the actions of entrepreneurs and the conditions or circumstances in which they act. However, the key point here is uncertainty. To understand entrepreneurship we must first understand the nature of uncertainty. "Fundamental uncertainty" is the term that we use to say that agents cannot allocate a subjective probability distribution over all future outcomes. Agents act in conditions of fundamental uncertainty and therefore cannot calculate the future as in standard theory, which typically reduces uncertainty to risk. In standard theory everything that matters about the future can be stated in the present. But in Austrian theory the future is unknowable. However it is not unimaginable.
According to Kirzner, the Austrian school views competition as s dynamic process, and sees the market as comprising a configuration of decisions made by consumers, entrepreneurs and resource owners. Entrepreneurs play a crucial role by noticing missed opportunities for mutually advantageous trade to take place. Entrepreneurs discover and act upon new pieces of information. By observing the actions of entrepreneurs, other decision makers are able adjust their trading plans and arrive at improved outcomes. Disequilibrium reflects imperfect information or ignorance on the part of buyers and sellers. The entrepreneurial function adds to the flow of information, and helps lubricate the process of adjustment towards a new and superior allocation of scarce resources. The role of the entrepreneur in Austrian thinking is more passive: the Austrian entrepreneur merely responds more quickly than other agents to new information that is generated exogenously. According to Austrian economists, a monopoly position is attained through the originality and foresight of the entrepreneur. As information arrives and new trading opportunities open up, other entrepreneurs appear who by their actions help propel the economy towards a further reallocation of resources. The entrepreneur is constantly alert to new and unexploited opportunities to earn a profit, and initiates the changes that propel the economy towards a new equilibrium. "The entrepreneur â€¦ brings into mutual adjustment those discordant elements which resulted from prior market ignorance" (Kirzner, 1973: 73)
Entrepreneurs in particular always face fundamental uncertainty. They cannot however be regarded as profit maximisers due to fundamental uncertainty. Profit is still therefore important in motivating agents. In addition the pursuit of profit provides market order. However, market activity may or may not become better co-ordinated over time.
Now let's examine the competition and market process from Austrian point of view. Uncertainty is pervasive and the market process is driven by entrepreneurial activity. In an uncertain environment entrepreneurial activity is characterized by error. Errors lead to change. Competition is redefined in terms of entrepreneurial rivalry. This contrasts with standard theory, where models like perfect competition are no longer a goal or benchmark. In Austrian terms there would be no competition in perfect competition as there is no role for entrepreneurial activity. Continual change gives rise to the process of market activity. This process provides a more 'fluid' account of market activity, than is typical of standard/neoclassical theory. The equilibrium approach of standard theory, it is claimed, cannot capture the dynamics of the competitive process. In contrast to the equilibrium dynamics of standard theory Austrian economics advocates 'process dynamics'. The process of competition is ever-changing and open-ended, and cannot be represented by equilibria.
Another point about Austrian school is the agency. Agents in Austrian theory are broadly rational but (due to fundamental uncertainty) they are not the rational calculators of standard/neoclassical theory. But they do behave with intent. They engage in 'purposeful action'; and can make 'qualitative' judgments. Austrian theory is also strongly individualist. All theory is based on individuals, not firms or industries or other higher level agents. This is consistent with 'radical' subjectivism and leads to an interest in individual rights over welfare considerations.
On the other hand, Post-Keynesian economics is a school of economic thought with its origins in The General Theory of John Maynard Keynes, although its subsequent development was influenced to a large degree by Michal Kalecki, whose work spanned from the 1930s to the early 1970s. Kalecki is usually linked, in particular, to Post-Keynesian microeconomic theory. Kalecki's work was influenced certain ideas originating in 'radical'/Marxian economics. The Post-Keynesian school begins much later than neoclassical and Austrian theory, around the early 1960s. In the United States, it is particularly associated with the work of Davidson, who was particularly concerned with developing key aspects of Keynes' approach (mainly constructed in the 1930s and 1940s). This branch of Post-Keynesianism is much concerned with uncertainty. It is often in the context of macroeconomic problems that such concerns are developed.
The characteristics of Radical Theories are the conflict within the production process, the class analysis and the theories (including theory of agency) which are historically and socially specific.
There are a number of strands to Post-Keynesian theory with different emphases. Joan Robinson regarded as superior to Keynes's Michal Kalecki's theory of effective demand, based on a class division between workers and capitalists and imperfect competition. Much of Nicholas Kaldor's work was based on the ideas of increasing returns to scale, path dependency, and the key differences between the primary and industrial sectors. Paul Davidson follows Keynes closely in placing time and uncertainty at the centre of theory, from which flow the nature of money and of a monetary economy. The two strands of Radical/Marxian theory is Classical Marxian theory which works on equalization of profit rates across different sectors, and monopoly capitalism which figures out the hierarchy of profits.
The Kaleckian pricing theory supports the mark-up rule which based on average prime costs. A firm's price is set in accordance with the unite prime costs and weighted average of all firm' prices. In Post-Keynesian theory, oligopoly is the normal state of affairs in most markets. Oligopolists will typically hold some degree of excess production capacity. However, the degree of monopoly will vary across different markets. Firms' pricing behaviour is determined by a 'mark-up' rule not a marginalist principle. This behavioural approach to pricing is partly in response to the imprecision of price setting in conditions of uncertainty. Prices are determined by dominant firms not markets. Prices are administered in accordance with firms' objectives and are not typically market clearing prices. The firm's overall objective is the pursuit of 'power'. This involves attempting to control its environment.
The Post-Keynesian view of competition differs from this in Austrian School as well as the Post-Keynesian method. Competition is inherently about dominance. There is no sense in which market dominance is merely an imperfection. Markets are prone to reinforcing dominance over time. Post-Keynesian economists are typically more concerned with explanation than prediction. The 'realism' of theoretical assumptions is a major concern. There is a concern with distribution, particularly at an aggregate/systemic level, but not with standard welfare economics.
The theory of agency is another theme that it has to be mentioned. In Post-Keynesian Agents are non-optimisers due to fundamental uncertainty. They are not the rational calculators of standard theory. This suggests some overlap with Austrian theory. Some Post-Keynesian theories are concerned with the social and historical 'location' of economic actors. Firms are central to understanding how markets work. Firms have to deal with uncertainty in attempting to establish their dominance. The role of uncertainty is perhaps less positive than it is in Austrian theory.
A last point that is significant to discus for both schools of thought is the advertising and preferences. Alternative schools of thought take different views of the nature and role of advertising. This is mainly because of the alternative theories of agency which each School offers. Thus neoclassical, Austrian and Post-Keynesian views of advertising differ significantly. In standard neoclassical theory preferences are given and fixed. In contrast, in Austrian theory preferences change over time but consumer preferences remain sovereign and in Post Keynesian theory preferences change and can be "manipulated" by some agents more than others.
To sum up, the nature of competition and its consequences on key economic variables, such as prices, profits, and growth, have always been important for theoretical and empirical investigation. The neoclassical theory of competition prevails often giving the impression of being the only theory of competition. It is our contention that microeconomics is a developing discipline, and in addition to the neoclassical theory, there are two other major alternatives, the Austrian and the Post-Keynesian. The key features of Austrian theory are the entrepreneurial and rivalry. In Contrast, the Post-Keynesian theory's critical element is dominant firms which set administered prices.