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

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Question: Compare and contrast Austrian and Post-Keynesian criticisms of the standard neoclassical view of the competitive process.

Competitive process is one of the major controversially topics amongst different school of thought. Mainstream or neoclassical economists defines competition as static equilibrium and optimisation with its characteristics focusing upon: (a) the constrained maximising pattern imposed by the theory upon individual decision making, and (b) the mathematics simultaneous equation system ( Kirzner, 1997 ). This standard theory assumption was critcised by both Austrian and Post-Keynesian school. Austrian dissatisfaction with the neoclassical competitive model stemmed from their dynamic insights of the market phenomenon. Austrian economists argue that the key issue in understanding the competitive process of economy is entrepreneurship ( Kirzner, 1997 ) . The P-K school deemed that competition process is inherently about dominance, as markets incline to reinforce dominance over time. Firms' behaviour in P-K theory are central to understand how markets works and oligopoly is the normal state of affairs in most industries, in other words some degree of monopoly is the norm. This essay focuses on analysing the similarities and discrepancies of the views of competitive process between the Austrian and P-K school in terms of their different (or similar) concepts. The discussion begins with the Austrian approach and subsequently the P-K theory.

Neoclassical theory, based on its assumption of rational economic agents, has portrayed individual decisions as mechanical exercise in constrained optimisation, in this context, risk can be predicted with the known probability functions ( Kirzner, 1997 ). The above argument is consistent with the traditional benchmark model called perfect competition market structure, in this structure, the competitive process attained when the price-taking firms produce as efficiently as the current technology allows reaching the equilibrium point where price is equal to marginal cost and make long-run normal profit. However, both Austrian and P-K economists disagree with the competitive process in the perfect competition assumption, they argue that with the existence of fundamental uncertainty, economic agents are not instrumentally rational calculators hence they are unable to allocate probabilities on risk and therefore they cannot be the utility maximisers. Though the two schools share the similar views of fundamental uncertainty, their illustration and attitude toward uncertainty are quiet distinctive.

Fundamental uncertainty in Austrian view indicates the future is to some extent unknowable because of the surprise triggered by intended or unintended human actions ( Dequech, 2000 ). This concept facilitates the understanding of entrepreneurship and entrepreneurial profit "seen from the aspect of uncertainty inherent in every action ( Mises, 1949 )". The entrepreneurial role drives the ever-changing market process as the entrepreneur continually changes price and output data. Within the fundamental uncertainty, entrepreneurial activities inevitably make errors; alert entrepreneurs discovered these profit opportunities, buys where prices are too low and sell where prices are too high as their reaction to the earlier errors. In a world of uncertainty, such alertness expressed itself in the boldness and imagination ( Kirzner, 1997 ).

Entrepreneurial discovery, or entrepreneurship, is the driving force behind the market process. The entrepreneurial discovery was developed from Mises' driving entrepreneurially driving process and Hayek's role of knowledge. " Mises claims that the driving force of the market process is neither generated by the consumer or by the owner of the factors of production, "but by the promoting and speculating entrepreneurs ( Mises 1949 )". Hayek's emphasis on the role of knowledge explain the market process or equilibrating tendencies that involves…