Comparison between Austrian and PostKeynesian Criticisms to Neoclassical Theory

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The Neoclassical approach views the real world of market economies to be exactly representative of markets at the equilibrium state. It assumes that the world mirrors the interrelationships present in the equilibrium condition of the market. It also contends that the market is composed of agents whose maximization desires fit each other’s wants (Kirzner, 1997, p.63). In other words, markets are expected to reach the equilibrium state in such a way that the interaction [between buyers and sellers] would push the market into the equilibrium price–sellers who are willing to trade their goods at or below the given price will be met by buyers who are willing to pay for such goods at or above the stated price. Therefore, the price is the sole indication that the market is not flawed. As long as the price lets demand and supply to intersect, the market will work efficiently. An additional assumption of the Neoclassical approach states that individuals and firms are expected to make rational decisions for their own benefit so that individuals are expected to make decisions geared towards utility maximization while firms are assumed to be always aiming for profit maximization. Lastly, the Neoclassical model assumes that individuals and firms are given full of relevant information about the market (Kirzner, 1997, p.63). With all these assumptions, it is not surprising to see economists who perceive the Neoclassical view as some kind of a classic utopia in economics. For some, it failed to account several important characteristics of a market economy. Economists also began to contest the utmost motive of both individuals and firms in the buy, sell, and trade of goods and services. Some of them proposed that firms and individuals are not inherently maximization-seekers because they also have other ulterior motives in interacting with the market. Last and most importantly, economists start to go back to the question of equilibrium theory set in the neoclassical model. They continue to examine the elements built under this equilibrium model and attempts to invalidate the realism of the theoretical framework set in this assumption. Among this multitude of converging economists are Israel Kirzner and Marc Lavoie. Although each of them belongs to different schools of thought, both economists challenge the neoclassical perspective and its critical elements. In fact, the two economists share the main aim of presenting alternative views through which the firm achieves the point of equilibrium. Whereas the Neoclassical view passively assumes the state of equilibrium, both Austrian and Post-Keynesian proponents are determined to illustrate the processes and conditions that influence the equilibrating tendencies of the market.