Comparison Austrian and Post-Keynesian Theories of Competitive Process - Case Study Example

 Comparison Austrian and Post-Keynesian Theories of Competitive Process Introduction Microeconomics explains how members in a household and firms make important decisions with regards to the allocation of available financial and non-financial resources within a competitive market (Marchant and Snell, 2007). On top of this, either microeconomics or macroeconomics theories can be used in studying the labour market. With the use of microeconomics or macroeconomics theories, we can have better understanding with regards to the interrelated patterns of employment, salary and wages and its impact on business performance and the economy as a whole. By removing barriers to trade, globalization aims to make business people in developed countries able to maximize cheaper human and non-human resources in developing countries. As a result of globalization, the modern business society changes in such a way that it establishes new business conditions and challenges in exchange of the previous ones. In general, the presence of market failure could adversely affect the socio-economic well-being of each individual. To avoid going through the socio-economic consequences associated with market failure, professional economists are continuously searching for effective economic strategy that could minimize the risk of developing a market failure. Competitive process is an integral part of economics. In line with this, the act of stabilizing an unstable economic condition is possible through the use of micro- and macro-economic policies. In relation to the importance of analyzing competition in the market, this study will compare and contrast the Austrian and post-Keynesian theories of competitive process. Upon reflecting the current market competition as a result of globalization, the advantages and disadvantages of the Austrian and post-Keynesian theories of competitive process will be tackled in details as part of the study conclusion. Differences between the Austrian and post-Keynesian Theories of Competitive Process Equilibrium Model Both the post-Keynesian and Austrian economics have some argument or complaints with regards to the economic ideas presented by the neoclassical economic theories (Kirzner, 1997; Boettke, 1994, p. 220). In line with this, the post-Keynesians theory of competitive process does not accept the idea of neoclassical’s general equilibrium. It means that general equilibrium is not possible due to the fact that the market changes constantly and is often uncertain because of a lot of internal and external business factors (Brothwell, 1992, p. 193). Similar to the stand of post-Keynesian with regards to the theory of equilibrium as proposed by the neoclassical theory particularly with regards to its methodological foundation and the link between the consumer and the market level. Specifically the supply and demand graph of a neoclassical competitive market does not provide any clear explanation with regards to the equilibrating effects in a competitive market as proposed by the modern Austrian economists (Kirzner, 1997). Given that the neoclassical theorists acknowledge the importance of perfect market competition where close market competitors are not present, believe that the individual preferences of the consumers within the consumer level and reaching the state of equilibrium does not provide the market with new room for economic growth within the market level. Due to the fact that the market environment is not constant, some of the past Austrian economists do not agree with neoclassical economics’ idea that the point of equilibrium where demand and supply meets could readily solve economic problems (Loasby, 1989, p. 156). Because of the continuous changes that is taking place in the market, majority of the modern Austrian economists strongly believe that the system of a market competition is based on a process that can be studied using the equilibrium models. Specifically the use of equilibrium models in the study of market competition is evident under Kirzner’s approach in market process which is a part of the modern Austrian economics (Kirzner, 1997). Modern Austrian economists believe in the idea that surplus or shortage in the supply of goods significantly affects the changes in the market prices of goods. With regards to business profitability of each entrepreneur, the differences between the “too high” or “too low” margin of the market prices would point out a “more narrowed equilibrative direction” (ibid). Since modern Austrian economists promote the importance of free market competition, the economic concept as suggested by the neoclassical economics should not be considered sufficient when it comes to solving economic problems. Demand and Supply Curve The post-Keynesian economics strongly believe and support the principle that the market of a competitive economy is dictated by the demand-side curve and will never attain or satisfy the idea of full employment (Arestis, 1996). In line with this, the post-Keynesian economics proposed the theory of aggregate employment such that the distribution of income, economic growth and developments in trading practices are dictated by the demand-side curve (Holt and Pressman, 2001, p. 4). Post-Keynesian economists believe that the presence of several manufacturers or oligopoly in the market structure makes the production of goods possible. Given that manufacturing companies have the power not only to manipulate or control salaries and wages in exchange of employees’ services and the market prices of goods sold in the market, Holt and Pressman (2001, pp. 4 – 5) explained that government intervention through the use of fiscal policy is necessary to maintain fair market competition as much as possible. For example: The government can implement income policies in order to regulate the minimum wage each employee should receive from their employer. Likewise, price control policy should be implemented by the government to prevent abusive sellers of basic commodities from over charging their target consumers. In case of excessively high gross domestic product (GDP) as a result of a significant increase in foreign direct investment, the government should make use of fiscal policy to control high inflation rate. Austrian economists strongly believe in the significance of ‘entrepreneurship’ and ‘role of discovery’ in the development of free market competition (Kirzner, 1997). Unlike the post-Keynesian economics, Austrian economists do not support the theory or concept that demand dictates the supply curve or vice versa. Instead of trying to come up with theoretical explanation concerning the movements of supply and demand curve, a typical Austrian economist would simply explain that significant changes in the market price of goods would determine an increase or decrease in demand for products (Kirzner, 1997; Boettke, 1994, p. 138). This is partly because of the fact that Austrian economists acknowledge the role of entrepreneurs when it comes to the changes in the market prices of goods. For example: When a seller is increases the market price of product A from £100 to £150, there is a strong possibility that the seller would lose some of its valued customers given that other sellers would continue selling product A at the price of £100. Given that the seller would reduce the market price of product A from £150 to £100, there is a better chance for the seller to win back the trust and loyalty of his old customers. Although the modern Austrian economists do not believe agree that either demand-curve or supply curve dictates the market prices of goods, the modern Austrian economists strongly believe that surplus or shortages in the supply of goods will significantly affect the movements in the market prices of goods (Kirzner, 1997). It means that even though modern Austrian economists do not directly agree with the neoclassical explanation of the law of supply and demand, modern Austrian economists simply created a new economic explanation behind a free market competition. For instance: Given that there is a surplus in the supply of goods in the market, the market prices of goods is expected to decrease to allow the seller to compete with other sellers who may be selling homogenous product at a much lesser price. In line with this, sellers of homogenous product should avoid selling the goods below the cost of manufacturing the product since selling the goods below the production cost would mean selling the product at a loss. In case there is a scarcity in the supply of goods, sellers of homogenous products will have more bargaining power over their target consumers. Therefore, the seller could somehow dictate the market price of goods by charging them with higher market price. Significance of Government Intervention Aside from discussing issues related to the impact of government intervention through fiscal policy, macroeconomics tackles economic issues related to the movement of each country’s economic growth and recession, the main factors that could result to high inflation or deflation, and the cases of high employment and unemployment rate. In an unstable economic condition, either fiscal and/or monetary policy can be use in controlling high economic inflation. Under the post-Keynesian theories of competitive process, Keynes is making use of government intervention as a strategic way to boost a slow growing economic condition (Holt and Pressman, 2001, pp. 4 – 5). On the contrary, Austrian economics does not believe that the government should infuse any form of intervention in order to boost economic growth. Instead of depending on government intervention through the use of fiscal policy, Austrian economic theories of competitive process strongly believe in the importance of free market competition. Either fiscal or monetary policy can be use to ensure that the economic condition of each country is stable. However, the case of European Union is an exception to the rule. In line with this, fiscal policy is not applicable in the case of European Union because of its complex and unique economic and political condition. Considering the fact that the European Union is composed of 27 member countries, it is more difficult to use and implement a single fiscal policy to all members of the European Union as compared to the use of monetary policy since each of the member countries have already implemented its unique policies that people has been very much accustomed with. Unlike the case of other countries around the world, European Union is using only a single currency (Euro - €) as dictated by the central bank. For this reason, the European Union is highly depended in the manipulation and use of monetary policy when maintaining competitive process in the market. By controlling the European Union’s interest rate, monetary policy can be utilized when solving economic problem’s high inflation and unemployment rate. Conclusion Both the Austrian and post-Keynesian economics is similar in the sense that both school rejects some market economic theories as suggested by the neoclassical methodology. Between Austrian and post-Keynesian economics, the theories of competitive process today are more aligned with the theories as proposed by the Austrian economists. In response to Word Trade Organization (WTO), the market competition as a result of globalization tightens because of the gradual weakening over the use of import and export taxes when managing global trade transactions. Instead of focusing over the use of fiscal policy when controlling foreign direct investment through the use of taxes, there is a growing need to focus on the use of monetary policy since global trading significantly affect each countries’ balance of cash flows and the adverse economic effects of exchange rate. As explained by Gwartney et al. (2009, p. 469), “competitive process works well when firms are price takers”. Within a given competitive market, the price takers are referring to a group of sellers who are selling homogenous products. Since group of sellers are identical goods, price takers normally do not have that much effect with regards to the market prices of goods. This example of economic framework strongly supports the Austrian economics such that the need for government intervention within a competitive market lessens. Prior to globalisation, Japan was successful in exporting electronic goods and cars. As a result of global trading, the market of Japan started to shrink due to the high costs of its product. Because of the presence of competition for Japan-made products, the market competition today does not necessarily follow the demand-side curve as proposed by post-Keynesian theory of competition process (Arestis, 1996). Instead, market competition became price-driven because of the continuous importation of cheaper products coming from fast-growing economies like China. With regards to utility, several authors revealed that Austrian economists follow the ordinal rather than cardinal method since consumers’ decision to purchase a product can only be measured based on their product preferences rather than intensity to buy a product (Block, 1999; Caplan, 1999). *** End *** References Arestis, P. (1996). Post-Keynesian economics: towards coherence. Cambridge Journal of Economics , 20, pp. 111–135. Block, W. (1999). Austrian theorizing: recalling the foundations. The Quarterly Journal of Austrian Economics , 2(4), pp. 21-29. Boettke, P. (1994). The Elgar companion to Austrian economics. Edward Elgar Publishing. Brothwell, J. (1992). Extending the General Theory into the Medium Run. In Gerrard W.J. and Hillard J.V. (eds) "The Philosophy and Economics of J.M. Keynes". Cheltenham: Edward Elgar. Caplan, B. (1999). "The Austrian Search for Realistic Foundations. Southern Economic Journal , 65 (4), pp. 823–838. 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