AN IN EXHAUSTIVE CRITICISM OF THE STANDARD ECONOMICAL THEORY FROM AN AUSTRIAN PERSPECTIVE RELATED TO GROWTH AND DEVELOPMENT

Authors: Ana Iolanda Vodă, Cătălin Chiriac"Alexandru Ioan Cuza" University of Iasi, Faculty of Economics and Business Administration

PURPOSE

The main purpose of this paper is to underline the downfalls of neoclassical growth theory, the narrow and its artificial framework and to highlight the contributions of the Austrian School of Economics to the development of economics as science.

MAIN TOPIC: THE NECESSITY OF INNOVATION IN THE EPISTEMOLOGICAL CONSTRUCTION, WHERE:

I. We place the homo oeconomicus face to face with the entrepreneur

II. And Where static “marginalist” analysis is opposed to the dynamics of the “Austrian School of Thought”,

III. In order to compare general equilibrium and spontaneous process;

IV. Finally, we will move the line of discussion in a different topic, which regards the debate on the subject of transaction costs in the context of environmental resources management.

HOMO OECONOMICUS VERSUS THE ENTREPRENEUR

From an individual perspective, the two schools of thought are placed on two opposed layers: The first, of a neoclassical origin, handles the

individual as a mere inanimate object or as a variable from a system of mathematical equation.

On the second level, the Austrian analysis present an individual gifted with the capacity to imagine things, to perform value judgments etc.

I. HOMO OECONOMICUS VERSUS THE ENTREPRENEUR The role of the entrepreneur is completely missing from

the neoclassical theory The entrepreneurs are meant to coordinate the

resources, the capital and the work according to the requests of the consumers, in other words, they promote, speculate and create

The opportunities of profit appear always when the mistakes of the market actors are made. The entrepreneurs are those who observe these mistakes, who exploit and then eliminate them

This dimension has not being exploited by the neoclassical economists, because they considered the entrepreneurial function purely as an additional factor of production

II. STATIC VERSUS DYNAMIC

Through its static nature of the developed analysis, the neoclassical paradigm remains a sum of unrealistic ideas that lack the connection to the economical realities.

The institution of the market is reduced to a set of simultaneous equations of the function

The static analysis of the market-institution omits the very essence of this institution, because the market is the place where the plans of the individual take shape and his needs find the highest degree of satisfaction.

The market institution is, as Ludwig von Mises said, “a process, actuated by the interplay of the actions of the various individuals cooperating under the division of labor. There is nothing inhuman or mystical with regard to the market, because the market process is the adjustment of the individual actions of the various members of the market society to the requirements of mutual cooperation” (Mises, 1966, p. 258)

III. GENERAL EQUILIBRIUM VERSUS SPONTANEOUS PROCESS

Inspired by the model of Newton’s mechanics, the neoclassical economists usually appeal to the construction of a model of maximization / general equilibrium used every time when the macro-economical phenomena had to be explained.

“Today many, if not all, Austrians accept the importance of disequilibrating tendencies in markets” (O'Driscoll and Rizzo, 1996, p. xviii).

Menger understands the process of the market not as a system of equations and equilibrium constructions, but as a process of learning and discovery, that cannot be described ex ante and that has no need for artificial support.

An so, the Austrian tradition illustrates the civilization’s institutions as a product of spontaneous actions that have developed through a process of evolution.

The linkage between evolution and spontaneous order confers the Austrian school of thought a specific orientation. Even if the institutions are changing or evolving, their realization is produced within the same game, of spontaneous order.

IV. THE PROBLEM OF TRANSACTION COSTS

According to the neoclassical economy property rights are defined and established in the absence of the transaction costs.

In reality, these costs appear, are positive, and the adjustment of the prices on the market cannot take place instantly, as the neoclassical economic theory suggests.

The environment goods are given and not produced, thus the offer is inelastic. This inelasticity can be translated in high transaction costs, emerging the inefficiency of the market.

IV. THE PROBLEM OF TRANSACTION COSTS

From the property rights’ perspective, it is considered that they precede the act of transactional exchange on the market.

When the transaction costs are taken into account and are positive, it results an imperfect definition and application of the rights.

This is another cause for the emergence of the market’s imperfections.

IV. THE PROBLEM OF TRANSACTION COSTS

There are two ways through which the costs may be internalized: through taxes, subventions etc. through market’s mechanisms.

The solutions of the standard theory regarding the issue of the externalities, through the mediation of the Pigovian taxes, suffers from a certain degree of inconsistency and this for at least two reasons: first, the logic of the Paretian analysis, which is being

invoked, requires a priori the definition of the property rights, although the externalities are a result of the lack of rights or of a inefficient definition of those rights;

second, at a theoretical level, the externalities describe a physical interdependence between the polluter and polluted. Given the complexity of the social construction, we may think that in reality it is almost impossible to identify and isolate the interdependence between two individuals (Vatn, Broomley, 1997, p. 136)

• In respect to the internalization of the externalities through market mechanisms, the neoclassical theory suffers from the same inconsistency derived from the fact that, as well already mentioned at the first point, the transaction costs are a priori regarded to be zero.

The Austrian footprint is found in the developing of two new scientific and ideological directions: Institutional Ecological Economics Free-market Approaches to Environmental Protection.

It is obvious that from a methodological point of view, these two schools of thought are inspired by the Institutional and Neo-Institutional School of Thought and the Austrian School of thought.

CONCLUSIONS The neoclassical models, describing the world and the

environment in a general equilibrium, once they transcend in reality, prove their “imperfections”.

The empty space left by the neoclassical authors is filled with Austrian philosophy on individual, community, society etc.

Starting from common ground, the Austrian School of Thought reaches some contrasting conclusions with the general view of “marginal” economics, conclusions that are firmly fixed in reality.

Rules, spontaneous order, property rights, human cooperation are just some of the elements which define the Austrian analytical framework, one that is fertile and consonant with economic realities.

THANK YOU!