Competition and Monopoly in Classical Economics in Contrast to Neoclassical Economics

The founders of the discipline did not reason about competition within an intellectual matrix comparable to that which dominates the mind grounded in neoclassical method. The classicists saw the market as an incessant discovery process by which consumer preferences and the least-cost methods of satisfying those preferences were revealed. The entrepreneur was indispensable to this process, for he possessed a comparative advantage in gathering and weighing dispersed and often conflicting signals. That is, the entrepreneur existed because judgments had to be made, as contrasted with the neoclassical vision, in which the only acceptable behaviour of firms is to mechanically reallocate capital in response to a new set of perfect-information emissions—provided like manna from heaven, indiscriminately and simultaneously—to the roboticked helmsmen of each firm. In classical economics, to summarize, competition was the process of action and reaction by which firms learned what to produce and how to produce; the relative absence of these adaptive forces was associated with the complacency induced by the privilege of monopoly. 

—Frank M. Machovec, Perfect Competition and the Transformation of Economics, Foundations of the Market Economy (London: Taylor and Francis e-Library, 2003), 15-16.

On the Danger of Considering Only Equilibrium and the Foolishness of Claiming All Theory Should Be Equilibrium Theory

This informational characteristic of equilibrium serves to explain why equilibrium does not provide an adequate framework for studying how an economic system solves the knowledge problem involved in discovering profit opportunities: in equilibrium the problem is already solved. To the extent that many observed market phenomena arise as a consequence of this knowledge problem, an economics interested exclusively in equilibrium would never be able to explain them satisfactorily. Specifically, such an economics is unable to say much about any informational role that prices may perform in disequilibrium. An economic theory of disequilibrium is necessary for this task. 

Many economists appear to be reticent about studying disequilibrium situations, both because they believe that most economic phenomena of interest will, sooner or later, be accommodated within an equilibrium framework, and because they fear that a concern with disequilibrium is synonymous with the abandonment of rigorous economic theorizing. However, some have started to take a different attitude and to point out that much is missing by neglecting the study of disequilibrium. Because their remarks to this effect do not seem to have received much attention, they will be quoted here at some length. One example is provided by Frank Hahn’s (1984:4) comments regarding the ‘danger’ of considering ‘nothing but equilibrium’ and the ‘foolishness’ of claiming ‘that all theory should be equilibrium theory’:

What is plain is that by narrowing our viewpoint in this manner we shall remove a great deal of interest and importance from scrutiny. For instance, imposing the axiom that the economy is at every instant in competitive equilibrium simply removes the actual operation of the invisible hand from the analysis. By postulating that all perceived Pareto-improving moves are instantly carried out all problems of co-ordination between agents are ruled out. Economic theory thus narrowly constructed makes many important discussions impossible.

—Esteban F. Thomsen, Prices and Knowledge: A Market-Process Perspective, Foundations of the Market Economy (London: Taylor and Francis e-Library, 2002), 10-11.

Neoclassical Economics Is Really Mathematics: Business Firms Are Merely Formulas; There Are No People, No Institutions; Entrepreneurship Has Been Ignored

The problem of entrepreneurship for economists is that the best-developed and best-understood part of economic theory—neoclassical economics—is really mathematics. Business firms in that system are merely formulas, “production function.” There are no people, no institutions; it is a timeless paradigm of resources shifting and forth according to changes in relative prices and costs. This has meant that entrepreneurship, the most forceful, dramatic, and obvious phenomenon in all of economic life, has perforce been ignored by theoretical economists in their story of how economic events happen. 

—Jonathan R. Hughes (1986 [1965]: x)

As the title of my book—An Entrepreneurial Theory of the Firm— shows, the goal of this work is to introduce the “most forceful, dramatic, and obvious phenomenon in all economic life”—namely entrepreneurship—into the theory of the firm. Indeed, the economic theory of the firm, like most of the rest of economic theory, does not really make room for entrepreneurial activity and thus does not account for the most fundamental aspect of the market process. 

Firms have always puzzled economists. They are an empirical phenomenon that must be explained along with other phenomena that constitute the market system. However, firms have never been really incorporated in conventional economic theory, thus my purpose in the following pages is to give an explanation for the emergence and the growth of firms in the marketplace that would be consistent with the approach of th4e modern Austrian school. This is an inquiry into the nature of the relationship that exists between firms and markets.

—Frédéric E. Sautet, introduction to An Entrepreneurial Theory of the Firm, Foundations of the Market Economy (London: Taylor and Francis e-Library, 2003), 1.

Economic Theory Is Unending, Because We Are Confronted with an OPEN (NOT Closed) System

The implication of these observations is that economic theory is unending, because we are confronted with an open system. The idea we could have a [closed] ‘system of economic theory,’ say, of the Walrasian type, is a futile one. We may never reach this stage. For the present, this is useless speculation at any rate. The idea at any rate runs afoul of the fact that there can be no formalization of society. Any attempt to formalize will either be self-contradictory or incomplete. But to pursue this observation further would lead us too far into some difficult areas of logic and the philosophy of science and this matter shall therefore only be noted at this occasion. 

The consequences for education follow very quickly: we should never pretend as I fear we do too often, especially in the introductory textbooks, that we can give systematic knowledge to our students. In a wider context, this has been well stated by Paul Valéry when he said that educating means ‘to prepare the young for situations that have never been.’

—Oskar Morgenstern, “Descriptive, Predictive and Normative Theory,” Kyklos: International Review for Social Sciences 25, no. 4 (November 1972): 709.

Hayek Rejected the View that Monetary Disturbances Must Be Attributed to Exogenous Central Bank Action

 In Mises’s theory, the business cycle begins when a central bank exogenously expands the quantity of central bank-issued money and drives the market rate of interest below the “natural” or equilibrium rate consistent with intertemporal coordination. Mises accordingly recommended a monetary regime without central banking, a “free banking” system with competitive market determination of the quantity of money and of the loan rate of interest. In clear contrast to Mises, and explicitly drawing on the Swedish economist Knut Wicksell, Hayek in his early writings consistently and repeatedly rejected the view that monetary disturbances must be attributed to exogenous central bank action. He considered the competitive commercial banking system to be at least equally responsible, because it responds to changes in loan demand in a disequilibrating way. By Hayek’s own account the “sole purpose” of the fourth chapter of his Monetary Theory and the Trade Cycle was “to show that the cycle is not only due to ‘mistaken measures by monopolistic bodies’ (as Professor Löwe assumes), but that the reason for its continuous recurrence lies in an ‘immanent necessity of the monetary and credit mechanism.’ ” 

—Lawrence H. White, “Why Didn’t Hayek Favor Laissez Faire in Banking?” History of Political Economy 31, no. 4 (Winter 1999): 754-755.

The Fatal Error of Rousseau and the Jacobins (French Revolution) Was to Resurrect the ANCIENT Ideal of COLLECTIVE Freedom in the Modern World

[Benjamin] Constant’s discussion of the ancient polis, or city-state, is celebrated. Max Weber took what he called “the brilliant Constant hypothesis” to be a perfect example of the concept of “ideal-type.” Briefly, according to Constant, Ancient Liberty was the ideal of the classical republics of Greece and Rome, and, in the modern time, of writers like Rousseau and Mably. It held that freedom consists in the citizens’ exercise of political power. It is a collective notion of freedom, and it is compatible with—even demands—the total subordination of the individual to the community. While each citizen would be subordinate to the whole, he would have his share in the exercise of total power over the community’s members. 

Ancient Liberty had its roots in the society of those times, a society of slaves and incessant warfare. The idea of Modern Liberty, too, has its roots in its own distinctive society, one based on free labor and peaceful commerce. . . . 

The fatal error of Rousseau and the Jacobins was to attempt to resurrect the ancient ideal in the modern world. Since the modern world has produced an entirely different sort of human personality—what we know as “the individual,” in a sense unknown to the ancients—the result could only be catastrophe. 

But the Jacobin project did not end in 1794. In fact, the essence of the totalitarian movements of the twentieth century was the goal of realizing a collective freedom and creating a uniform and collective type of human being (Soviet Man, National Socialist Man, etc.). As the philosopher of an irreducible pluralism, Constant was the great critic of all such totalitarian pretensions avant la lettre. 

—Ralph Raico, “The Centrality of French Liberalism,” in Classical Liberalism and the Austrian School (Auburn, AL: Ludwig von Mises Institute, 2012), 222-224.

Classical Liberalism Is No Religion, No World View, No Party of Special Interests; It Is Something Entirely Different

 Liberalism is no religion, no world view, no party of special interests. It is no religion because it demands neither faith nor devotion, because there is nothing mystical about it, and because it has no dogmas. It is no world view because it does not try to explain the cosmos and because it says nothing and does not seek to say anything about the meaning and purpose of human existence. It is no party of special interests because it does not provide or seek to provide any special advantage whatsoever to any individual or any group. It is something entirely different. It is an ideology, a doctrine of the mutual relationship among the members of society and, at the same time, the application of this doctrine to the conduct of men in actual society. It promises nothing that exceeds what can be accomplished in society and through society. It seeks to give men only one thing, the peaceful, undisturbed development of material well-being for all, in order thereby to shield them from the external causes of pain and suffering as far as it lies within the power of social institutions to do so at all. . . . [Classical liberalism] has no party flower and no party color, no party song and no party idols, no symbols and no slogans. It has the substance and the arguments. These must lead it to victory.

—Ludwig von Mises, Liberalism: The Classical Tradition, ed. Bettina Bien Greaves, trans. Ralph Raico (Indianapolis: Liberty Fund, 2005), 150-151.