Post-Keynesian And Austrian Criticisms

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Post-Keynesian and Austrian Criticisms of the Standard Neoclassical View of Competition

Post-Keynesian and Austrian Criticisms of the Standard Neoclassical View of Competition

One of the most controversial areas in Austrian economics, and one where even long-established Austrian theorists differ sharply, is monopoly theory. Indeed, as we shall see below, the differences are not merely semantic, nor are they confined to detail or some minor theoretical implication. Rather, there are major and fundamental disagreements between some of the leading Austrians, and these disagreements are created by wholly different theories concerning the definition of monopoly, the origins of monopoly, and the supposed effects of monopoly on consumer sovereignty and efficient resource allocation.

Neoclassical Monopoly Theory

By way of contrast, and in order to place the Austrian theories of monopoly in perspective, it is perhaps necessary to review and criticize the traditional (neoclassical) theory of monopoly. A monopolist in neoclassical analysis is a firm that faces the entire demand for the product under consideration. In order to maximize its profits, it produces an output where the marginal revenue associated with the last unit sold is just equal to the marginal costs associated with producing and selling that final unit. But since the demand function facing the monopolist is necessarily sloped downward (perhaps even steeply downward), the price charged for the output is greater than both marginal revenue and marginal cost.

This situation, it is argued, compares "unfavorably" with price and output (and cost) under competitive conditions. Under competitive conditions, since price and marginal revenue are equal, price is always identical with marginal cost when profits are maximized. Further, under competitive equilibrium conditions, price is always driven down to the minimum point of the average cost function, so that production tends to take place at its most "efficient" point. Therefore, monopoly prices are higher than competitive prices, outputs are less, and average costs greater than under comparable competitive (cost) conditions.

But, importantly, how is a firm able to obtain a monopoly position in the market and, thus, "misallocate" economic resources? In the first place the monopoly could simply be due to governmental prohibition of competitive entry, and there is certainly a recognition of this source of monopoly in the neoclassical literature. However, more recently it has been popular to stress certain non-legal "barriers to entry" that, allegedly, preserve monopoly and resource misallocation. These barriers would include any difficulty or impediment that a new firm might have to overcome in order to compete successfully with an existing firm (monopolist). Thus, scale economies enjoyed by an existing firm, or commercially successful product differentiation employed by such a firm, becomes, in the new jargon, a barrier to entry that limits competition and reduces society's "welfare." (Bucknall, 1997)

Post Keynesians argued that the privatization process in the neoclassical model was formulated independently of any macroeconomic, political, bureaucratic and structural considerations. These elements of the transition process resulted in delaying privatization. The privatization process would be inhibited by economic uncertainty and by adjustment shocks inherited in the neoclassical transition ...
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