Austrian and Post-Keynesian theories of the competitive process

Austrian and Post-Keynesian theories of the competitive process The Austrian School is a heterodox school of economic thought that emphasizes the spontaneous organizing power of the price mechanism, which was influential in the late 19th and early 20th century (Boettke, 2008). After the 1870s, Marxism spread rapidly in the ranks of workers, and the economic theories that defended for the capitalists went bankrupt. The Austrian economics based on three core concepts: entrepreneurship, subjectivism and market process, which became popular after that. The Post-Keynesian school of thought was developed in the debate with the neoclassical synthesis. After The General Theory of Keynes was published, some different points of view on the practical problems arose in the followers of Keynes, and gradually formed two opposing schools of thought: neoclassical and the Post Keynesian School. The theoretical foundation of Post Keynesian economics is the principle of effective demand, that demand matters in the long as well as the short run, so that a competiti ve market economy has no natural or automatic tendency towards full employment (Arestis, 1996). The objective of this paper is comparing and contrasting Austrian and Post-Keynesian theories of the competitive process. The similarities and differences between these two theories will be stated orderly. Although Austrian and Post-Keynesian theories are two different schools of thought, they still have some degree of similarities. First, they both advocate uncertainty. Next, they both cannot be regarded as profit maximizers. Last, the competitive process is seen as a dynamic process by both theories. First of all, for the Austrian approach uncertainty is pervasive. One of the Austrian’s core concepts is entrepreneurship. Austrian school thinks that the community is a collection of individuals. Individual’s economic activity is a microcosm of the national economy. Through the interpretation of individual economic activities, reasoning illustrates the complexities of real ec onomic phenomena. Entrepreneur is the individual here in the real economy. They are all different in each other. Therefore entrepreneurs in particular always face fundamental uncertainty. Kirzner (1973) emphasized the uncertainty present in all human decision-making, has primarily focused on the entrepreneurial market process. For the Post-Keynesian approach firms’ pricing behaviour is determined by a ‘mark-up’ rule. This behavioural approach to pricing is partly in response to the imprecision of price setting in conditions of uncertainty. Uncertainty is the fundamental element of Keynes’ theory, and Post-Keynesian followed and developed it. In the Post-Keynesian theory of agency, agents are non-optimisers due to fundamental uncertainty. According to Fernando Ferarri Filho (2001), in a context in which time is historical, economic agents do not decide future actions on the basis of statistical series analyses or beliefs justified by experience. To the cont rary, decision-making is classified as an environment of true uncertainty. They are not the rational calculators of standard theory. This suggests some overlap with Austrian theory. Second, in Austrian’s term, entrepreneurs display purposeful pursuit of profit in the competitive process, which provides market order. It cannot be regarded as profit maximizers due to fundamental uncertainty. However profit is still therefore important in motivating agents. Neoclassical theory assume that manufacturers pursuit profit maximization, but we all know there is another voice in society requiring manufacturers to take social responsibility. Social responsibility will increase the company’s operating costs, which is not conducive to their competition in the market. So, non-profit-maximizing firms will be sustained by the loss of profits and investment capacity and continuous losses, and finally be forced out of the market. Austrian school advocates idealism and they do not believ e that firms select the behaviour of pursuit profit maximization. In post-Keynesian economics, firms are not assumed to maximize profits as well, as is clear in Lavoie (1992, p.105), â€Å"The standard critique of the neoclassical theory of the firm is that profit maximization is not possible because of the lack of pertinent knowledge due to an uncertain environment. Profit maximization is then replaced by profit satisfying. Firms are assumed to set themselves threshold levels of profits; that is, minimum levels of profits or of rates of return.† Furthermore, the firm’s overall objective is the pursuit of ‘power’. This involves attempting to control its environment. To become powerful, firms must be big; to become big, firms must grow. Growth is the subjective and profits are the means to realize this objective. However, maximizing growth does not equal to maximizing profits. Firms maximize the rate of growth, subject to various finance and expansion const raints.