Classical Economists and Their Philosophy - Literature review Example

? Reading I and II Reading I Introduction In business studies and economics there have severalconceptions flowing all around. Some are prevailing with implicit definition while other with clear and explicit explanation. Economists from the 19th century had placed it on a general node. Generalizing economics concept, the analysts suggested that the concepts are applicable to all types of business and entrepreneurs respectively. There have several terminologies utilized in the business conduct, like competition, elasticity, supply and demand. All the terms are part of the business strategy which is actually and play a decisive role in constructing marketing tactics (Stigler, 1957). The classical economists had always talked about the business tactics. Idea of growth and competitor business strategy is part of their explanation. Here are some who described economics and behavioral finance in all different perspective: Among major terminologies of economics, the classical economists have given much importance to the term “Competition”. Competition is something that surrounds the basic business environment, in which there are competitors, consumers and the market. Entrepreneurs call it a “business constraint”, as it changes for the success or failure of a business at the same time. The economists have provided several teachings in understanding the term “competition”. This is for the business strategists and those who seek technical strength for competing in the market. In late 19th century just after the World War II ended, the term “competition” was felt in different occasions of the business culture. The business strategists discussed it on all intense occasions of the business and tried to fit it in different situations like in a situation of a “perfect market” or a situation of “business equilibrium” (balance of supply and demand). This is the topic of discussion and is kept closer in this essay (Stigler, 1957). Adam Smith’s Philosophy Adam Smith, a pioneer of political economy, described “competition” as a business condition. It is a condition where competitors meet each other with a strong working business strategy. To give a good competition, the rivals need to compete on price tactics. According to Smith, one is excessive supply tactics where the prices get automatically high for competition, while the other is less supply tactics where the prices increase and sets a demand. This is how competition floats in the market, and the rivals plan according to the same effective strategy (Stigler, 1957). Adam Smith emphasized on following five conditions which sets a competitive advantage of one entrepreneur to another: The competitors should work independently instead of working collectively. A competitor should attain advantage by minimizing the advantage for next competitor. The competitor should attain full knowledge of the market to attain parallel advantage. The competitors are free to work on such knowledge. Resources should be vitally utilized in order to stabilize the presence in the market. The following above statements worked in the agriculture sector where there is not such “monopoly “according to the modern economists. However, the idea of competition is quite clear in a general way as everyone knew how to race in an environment where the competition is simply to bid one another. This is the definition of “business environment” which modern economists summarize in their literature work (Stigler, 1957). John Elliott Cairnes and “Industrial Competition” J.E.Cairnes a pioneer of classical economist got labeled in Industrial competition. He described competition as a condition where there is an exchange of capital and labor between the Industrial partners. He focused the environment of non-competing Industrial groups. In case of capital, his ideology got successfully applied as capital is easy to transfer and sacrifice, but in the labor, it gets hard because the workmen are solely dedicated to their specialized field and cannot compromise their profession in terms of extra remuneration or wage. He highlighted the following two aspects: Capital is an investment that can be used for getting advantage in the competition. Labor can be sacrificed but not to real extent Competition is a condition where non-competing groups meet each other to compete the rivals. The Private Enterprise With the workings on the competitive economy, the private enterprise focused more on the affects of competition rather than providing techniques of raising competition. They criticized on the work of classical economists who worked on techniques of raising competition and value. They described competition as a cause of intense distribution of the profits, which is why they suggested working more on the techniques of raising profits rather than raising competition. Mathematical Economists Mathematical economists provided more decisive techniques of raising competitive advantage. They provided the basis for maximizing the profits and a ground to stabilize the decision making process. They emphasized on mathematical explanation of the word “competition”. When traders understand it they can easily incorporate with it and develop the profit maximizing ability (Stigler, 1957). Antoine Augustin Cournot’s Philosophy Cournot, a French philosopher and mathematician, worked on the concepts of mathematical economics. According to Cournot, firms can compete on the numbers of goods they are producing. The more output generation the more is the chance of raising profits, this is what Cournot’s mathematical model explained in the late 19th century (Stigler, 1957). Elements of Cournot’s Competition Model All industries are homogeneous in their production. Industries hold a prominent position in the market where the price brings affects on the entire market. Entrepreneurs compete on numbers of goods produced. Entrepreneurs set the right numbers to compete on local and international forum. William Stanley Jevons and Cournot W.S. Jevons a classical British economist went on the same road of Cournot’s philosophy. Jevons described competition as follows: All competitors are independent to work and collect knowledge of their respective fields. There are limitations in the collection of knowledge. There is complete independence of action. The competition is right set in the price equilibrium situation, where there is the rule of one price and competition is on difference of value entrepreneurs have achieved. Alfred Marshall and Adam Smith Alfred Marshall another big name in classical economics adapted the similar trait of Smith’s theoretical explanation of the term competition. He generalized the concept of competition by explaining that buyers compete buyers and sellers compete sellers with a freedom of move and action. Each rival acts for his benefit where there is less chance that an entrepreneur is ready to take a loss on his own. Marshall emphasized that competition is something related to human nature. It requires a psychological understanding instead of evaluating it on numbers. This is how Marshall generalized the word competition and associated it to all the pioneers of the 19th century (Stigler, 1957). Assumptions of Gregory Clark and Frank Knight Gregory Clark a classical economist described competition as a condition where there is ideally present perfect market. A market where there is no fluctuation and a perfect equilibrium. On contradiction Knight emphasized more on uncertainty and fluctuations. He explained that competition can not prevail in the situation of certainty. There are possible ups and downs in the market and in the environment where competitors compete. Clark provided an ideal description where Knight went with an experimental approach (Stigler, 1957). Reading II Introduction In the business world today, there had been lot theories floating on price changes and price stickiness. Price stickiness is a term used to describe resistance which occurs in changing up of price for sellers. Do the traders follow a standard to set price for the domestic and local market products or how much percent is the United States GDP which is sold under nominal contracts? These are few of many questions which often come when the theories of price stickiness are discussed (Blinder et al., 1998). How much standardized are the price changes? In a survey the following two questions were asked from the firms: How often do the prices change of their respective products in a year? The majority replied 1 time per year which decided that at least once in a year, the prices are changed. Why so frequently the prices change if the price of GDP changes once in a year? The question provided a good answer on price stickiness as the firms replied with different perspectives and explanations. How much is the time between demand changes and cost changes respectively? Replies Twenty seven firms replied with a reason that due to unexpected variation of expenses, they have to change the price on finished goods. Fifteen firms replied with a reason that due to poor management and lack of coordination they have to change the price to overcome the loss. Nineteen firms gave a reason of implicit contracts for frequent change of price. The last question brought clear explanation of price rigidity. Majority of the firms replied that their prices vary as demand and cost vary. Variation in demand and cost actually sets the price for the sellers and this occurs frequently in a year and with the aspect of time. The firms provided several facts and gave many reasons of why they have to adjust the price more specifically increase the price instead of decreasing. Their emphasis was more on raising the price than that of decreasing. This is the reality which prevails even after a standardized model of economics is there which emphasize on cost cutting, price rigidity and stickiness (Blinder et al., 1998). The Nature of Price Adjustments In modern concepts of price adjustment there are two ways in which the prices are adjusted. The first is the time-dependant policy, in which the companies review and change the prices with respect of time likewise monthly or annually. The second is state-dependant in which the companies review prices with no fixed schedule or time. The fourth question in the survey was that how many firms change prices on time-dependent rules and how many changed according to state-dependant policy. Sixty percent of firms replied with time-set rules while thirty percent of firms emphasized on state-dependant policy and many firms emphasized on not to limit with both the rules as a price can reviewed on the basis of uncertainty or shocks of demand and cost. Out of 200 firms, 74 percent emphasized on changing the prices rapidly while the rest told that the prices need to be changed in small steps (Blinder et al., 1998). Contracts and Price Rigidity In modern theories the concepts of implicit and explicit contracts are there. Contracts to some extent fix the prices for a finite period of time. The fact is true or not was actually found out in the survey by asking the question on the same respect (Blinder et al., 1998). Do contracts set prices in an overall way? 13.4 percent firms in the survey replied “rarely or never”. 8.3 percent firms “replied sometimes depending upon the nature of the contract”. 11.8 percent told “most of the time”. 66.5 replied “always and almost always”. The Nature of Product Demand To understand that how demand affects the price, following questions were asked: Where demand exists? Does it exist in consumers or businesses? Who are the direct consumers that set the demand? Does the demand exist in regular customers or in new customers? In replies out of 200 firms of the survey, majority replied that 70 percent of demand exists in other businesses, which meant that entrepreneurs buy entrepreneur’s product with implicit contracts. Implicit contracts relief the traders as it brings them out from the limitation of price rigidity. They can change the price rapidly depending on the customs of the market and business. This was surprising in the survey as majority of firms were dealing in implicit contracts, which sets a reason for them to raise the price for the common user (Blinder et al., 1998). Future worth analysis, Business Cycle and Pricing In theories of price stickiness, majority of the firms say that future value of assets is a decisive factor to set a price. In the survey, it was contradictory as it was found that the majority of the firms rely less on future assumptions for setting the prices, which is actually opposite to what is in the modern theories and concepts. It was also found in the survey that less than 10 percent of the firms apply inflation forecast for setting the price. 70 percent of firms did considered the “business cycle” in their analysis while 14 percent claimed that they follow the macroeconomic model to set the right prices. It was another surprising factor that came up in the survey, which portrayed contradictions with the present theories of price rigidity and the realistically present model of economics (Blinder et al., 1998). Nature of Cost and its effects on Pricing In the survey the last questioning was about the nature of cost that affects the pricing operation, and about the accuracy of cost calculation and pricing in respective means. 62 percent of firms replied that they calculate expenses accurately, because they knew that how much important cost calculation is for pricing. The rest of the firms came up with moderate answers and showed less emphasis on cost calculation tactics (Blinder et al., 1998). Chapter Summary According to the results of the survey, 75 percent of the GDP in the United States is reprised quarterly. The variation in demand and costs takes places every three months a year, but it differs firm to firm. In service sector the prices are more rigid and stable, which is majority section of the whole economy. The retail and wholesale sectors are of more variation. 80 percent of firms are doing business with other businesses while the rest of 20 percent is trading for common buyers. 60 percent of firms are experts in cost calculation tactics while the rest are moderate with less effective results. Reference List Blinder, A., Canetti, E., Lebow, D. & Rudd, J., 1998. Wouldn't it be nice to know? The Factual Basis for Theories of Price Stickiness. In Asking About Prices: A New Approach to Understanding Price Stickiness. New York: Russell Sage Foundation. pp.40-54. Stigler, G., 1957. Perfect Competition, Historically Contemplated. The Journal Of Political Economy, pp.1-17. Read More