The behavioral foundations of Austrian economics

Behavioral and experimental economics present challenges to the neoclassical theory of individual behavior, which is based on individuals making choices within the framework of utility functions that are assumed to have certain well-defined characteristics. Results in behavioral and experimental economics have shown that it is common for individual behavior to systematically deviate from the neoclassical axioms of utility maximization. Austrian economics is also based on axiomatic theories of utility maximization, but the assumptions underlying utility-maximizing behavior are much weaker in the Austrian approach. As a result, they have more solid behavioral foundations and are less subject to challenge by the empirical findings of behavioral and experimental economics. Neoclassical policy conclusions are often overly strong because of its behavioral foundations which are challenged by behavioral and experimental economics and are often misleading because of the comparative static nature of neoclassical welfare economics. For purposes of policy analysis, the Austrian approach provides better insights because of its more realistic behavioral foundations.     

On the existence of a market for second hand physical capital: An empirical test of the Keynesian and neoclassical assumptions

In this paper we test Keynesian and neoclassical assumptions concerning the existence of second-hand markets for physical capital. These alternative views of the dynamic profit maximizing firm lead to distinct equilibrium price equations. We use a sample of 4-digit SIC consumer goods and capital goods industries over 1967–1975 to test the relative goodness of fit of the competing price equations. We find consumer goods industries conform better to the Keynesian assumptions and capital goods industries more nearly approximate the neoclassical view of the world. We investigate the policy implications of our finding of sector heterogeneity by constructing a three-sector macro model with a Keynesian consumption goods sector, a neoclassical capital-for-consumption-goods-production sector, and a neoclassical capital-for-capital-goods-production sector. Comparative static analysis reveals that both monetary and fiscal policy variables have ambiguous short run effects on real variables in this heterogeneous three-sector model, which may be the minimum level of detail consistent with the observed behavior of US manufacturing industries.     

Neoclassical vs evolutionary theories of financial constraints: Critique and prospectus

Empirical models based on neoclassical theory predict that if investment is sensitive to current financial performance, this is a sign that something is ‘wrong’ and is to be regarded as a problem worthy of a policy intervention. Evolutionary theory, however, refers to the principle of ‘growth of the fitter’ to interpret investment-cash flow sensitivities as the workings of a healthy economy. In particular, I attack the neoclassical assumption of rational profit-maximizing firms. Such an assumption is not a helpful starting point for empirical studies into firm growth. One caricature of neoclassical theory could be “Assume firms are perfectly efficient. Why aren’t they getting enough funding?”, whereas evolutionary theory considers that firms are heterogeneous and that not all firms should grow. This essay highlights how interpretations and policy interventions can be framed by the initial modelling assumptions, even though these latter are often chosen with analytical tractability in mind rather than realism.     

Asset prices and business cycles under market incompleteness

In this paper, we study the quantitative implications of a real business cycle model where the firm is the capital owner, households are heterogeneous, and markets are incomplete due to restricted asset trade. Since, under these assumptions, the usual firm objective is no longer well defined, several non-standard objectives are incorporated into the model. These include variants of market value maximization and a utility function for the firm. We find that the presence of market incompleteness alters little the behavior of asset returns. On the other hand, the behavior of the macroeconomic aggregates is quite sensitive to the firm objective, which affects the capital accumulation path. In contrast to conventional findings, capital is not necessarily higher when markets are incomplete. In addition, the different capital accumulation effects imply that shareholders with different asset wealth might prefer different firm objectives.     

自生能力、经济转型与新古典经济学的反思

现有的新古典经济学理论体系把企业具有自生能力作为暗含的前提。但是 ,转型中国家和其他许多发展中国家的企业却因政府的赶超愿望 ,进入不具比较优势的产业而不具自生能力。当经济中大量企业缺乏自生能力时 ,实行根据新古典经济学所制定的改革或转型政策 ,往往达不到预期效果 ,而且 ,可能给社会带来巨大痛苦。本文主张 ,在分析社会主义经济、转型经济和发展经济问题时 ,放弃现有的新古典经济学体系中企业具有自生能力的暗含前提 ,把企业是否具有自生能力作为一个具体的考虑变量 ,这是新古典经济学理论的必要发展。     

Teams, Firms and the Evolution of Profit Seeking Behavior

Even as advances in information theory over the last quarter century have cast increasing doubt on the proposition that firms successfully maximize profits, the objective of profit maximization continues to be an axiomatic feature of the neoclassical theory of the firm. This paper attempts to improve our understanding firms by treating the objective function as an open question. Specifically, an ontogenetic thought experiment is undertaken to address the question of what differentiates production teams from firms by asking why team members would sell their control rights to a principal, thereby transforming the team into a firm. What results is an account of the emergence of the objective of profit seeking. Profit seeking emerges endogenously as a more fit alternative than the objective of value maximization, which is less capable of coping with uncertainty through purposive adaptation.     

More on alternative objectives of labor-managed firms

This paper focuses on an alternative theory of a labor-managed firm where the main behavioral assumption is profit per laborer maximization subject to an employment constraint, or, alternatively, employment maximization subject to a profit per laborer constraint. This theory and its implications are derived employing a standard duality approach. The results are then compared with those obtained in the theory of the traditional labor-managed firm which maximizes profit per laborer.     

On supporting the maximization postulate

This paper presents some thoughts in defense of the maximization postulate principle as a basis of microeconomic theory. First it is argued that switching from one objective function to another is not a trick of neoclassical economists to explain some given behavior as the result of a maximization approach, but. is the attempt to find the correct objective and to avoid the wrong one. Replacing one objective function by another ones does not remove the possibility of suboptimal solutions under each objective. Second it is argued that the adequate choice of constraints often allows application of the maximization postulate whereas the economic agent would be considered as acting suboptimally when the constraints were ignored. Third, we show some difficulties which arise in the mathematical treatment of movements in suboptimal spaces.     

后凯恩斯主义的企业理论

后凯恩斯主义者认为在典型的两权分离的现代企业制度条件下,企业的目标是多元化的。但企业所有者和经理人的目标函数存在根本差别,所有者更偏好于企业利润目标,而经理人更偏好于企业增长目标。后凯恩斯主义者还区分了经理人资本主义化的企业和金融演化下的股东控制型企业两种模式。     

Constrained sales maximization under a linear technology

This paper employs the activity analysis framework of linear programming to solve the decision problem of maximizing sales revenue in the presence of a minimum acceptable profit constraint. One of the advantages of using this model relative to the standard neoclassical approach is that, in addition to determining the firm's optimal product mix, we can also explore the ramifications of constrained revenue maximization on the imputed valuation of the firm's resources. The primal and dual solution values for the constrained revenue maximization problems are then compared with those derived from a linear profit maximization model. A computational technique is offered which demonstrates how constrained revenue maximization is carried out in actual practice.     

On the theory of the competitive labor-managed firm under price uncertainty

The short-run behavior of a labor-managed firm under competitive assumptions and price uncertainty is analyzed assuming risk aversion. It is compared with its behavior under certainty and the behavior of a capitalist-managed firm under price uncertainty. It is shown that a risk-averse labor-managed firm employs more labor than a risk-neutral labor-managed firm. Generally, uncertainty is seen to have greater impact on the behavior of a labor-managed firm than on the behavior of a capitalist-managed firm. Except under constant risk aversion, the behavior of a labor-managed firm under price uncertainty is less predictable than that of a capitalist-managed firm.     

Adjustment costs and time-to-build in factor demand in the U.S. manufacturing industry

In order to explain cyclical behavior of factor demand, the static neoclassical model of the firm has been extended to include either adjustment costs (e.g. Lucas (1967)) or time-to-build considerations as in Kydland and Prescott (1982). This paper presents an intertemporal factor demand model which accounts for adjustment costs and gestation lags. The closed form solution of the model is a highly restricted vector ARMA-process that is estimated using quarterly data for the manufacturing industry in the U.S., 1960–1988. The main conclusion is that both sources of dynamics of factor demand are identifiable and found to be empirically of importance.     

Malmquist and Törnqvist productivity indexes: returns to scale and technical progress with imperfect competition

Caves, Christensen and Diewert proposed a method for estimating a theoretical productivity index for a firm using Törnqvist input and output indexes, augmented by exogenous estimates of local returns to scale. However, in order to implement their method, they assumed that the firm maximized revenue in each period, conditional on the observed input vector in each period, taking output prices as fixed. This assumption is not warranted when there are increasing returns to scale. Thus in the present paper, it is assumed that the firm solves a monopolistic profit maximization problem when there are increasing returns to scale and the results of Caves, Christensen and Diewert are modified in accordance with this assumption.     

The Impossibility of Entrepreneurship Under the Neoclassical Framework: Open vs. Closed-Ended Processes

In spite of its use to explain market processes, neoclassical economics still has not integrated entrepreneurship into its analyses. This explanatory gap is the consequence of the analytical closed-endedness of the “market” processes described by the neoclassical framework, where social interactions do not result in new unpredictable information. However, entrepreneurship as profit-seeking under uncertainty is an open-ended process characterized by a creatively reflexive and emergent interactive behavior in society. This open-endedness involves the generation of novel, complex, and extensive future information that is not what anyone intended it to be. Neoclassical economics, with its predetermined assumptions on economic behavior, cannot really account for the fundamental uncertainty of open-ended processes because it cannot explain reflexivity or emergence. Therefore, it cannot explain entrepreneurship as either an innovatively cohesive or disruptive behavior that converges toward future market situations.     

Indirect public control of self-managed monopolies

How difficult is it and by what means is it possible to control a self-managed firm that has some monopoly power? To answer this question, classical modeling options are adopted: static framework, maximization by the firm of value added per capita. Three assumptions are added: perfect information on technologies by the Center, availability of unlimited lump-sum transfers and linear excise taxes, and market clearing. Attention is thus restricted to allocational problems, ruling out concern for distribution and regulation.     

The economic debate on power: a Marxist critique

In the economic debate on power, seemingly opposite positions have been presented. Contractualists have claimed that power relations do not exist in capitalism, and radicals have maintained that they are ubiquitous. In the middle, transaction costs and property rights economists have argued that power relations exist only within the firm. The underlying conception, however, is the same: power is an interpersonal relation caused by imperfections in the decision-making context and is incompatible with Walrasian competition. The difference among these theories involves their viewpoints on the concrete spread of imperfections in reality. The thesis of this paper is that this narrow conception of power is a consequence of neoclassical methodology. Following Marx, I analyze power as a social relation, and I discuss three problematic aspects of the neoclassical conception: its individualistic methodology, the assumption of universal rather than historical categories, and an ontology that conflates production and circulation.     

Consistent firm choice and the theory of supply

Summary. This paper analyzes the problem of deriving predictions, regarding supply behavior of a competitive firm, from prior consistency postulates about input-output choices made by such a firm. It extends the literature by introducing a consistency postulate for firm choice, which is weaker than profit-maximization. This consistency postulate is nevertheless both necessary and sufficient for supply responses predicted by the standard theory of firm choice based on the postulate of profit-maximization. Furthermore, our rationality postulate, in conjunction with another condition, is shown to be equivalent to firm choice behavior that can be rationalized in terms of profit maximization.Received: 11 April 2003, Revised: 26 April 2004, JEL Classification Numbers: D21.Indraneel Dasgupta: I thank Bhaskar Dutta and two anonymous referees for helpful comments on earlier versions.     

Heterogeneity in Production Structures and Efficiency: An Analysis of the Czech Food Processing Industry

The present study analyses firm heterogeneity and sector‐specific technology. The theoretical model stands on the assumption of maximizing the return on capital and overcomes problems involved in simple profit maximization. The results show that a random parameter model with sector dummies and heteroscedasticity is the most appropriate model specification for distinguishing firm‐level and sector‐level efficiency and heterogeneity. The heterogeneity among firms as well as among sectors was found to be an important characteristic in Czech food processing. This holds for production technology as well as for technical efficiency. Moreover, the decomposition of total variance shows that intrasectoral differences in technologies are much more pronounced than the intersectoral differences. The differences in intrasector heterogeneity also suggest that the food processing industry will be subject to accelerated structural change in the coming years. Moreover, we found that on average the companies highly exploit their production possibilities. However, some companies cannot keep pace with competitors. Because leapfrogging does not appear to be present in selected industries (except for Milling), structural change is expected to occur in such a way that the most successful companies will strengthen their position.     

Existence and Stability of Steady State in an Augmented Solow Model with Multiple Capital Goods

This paper relaxes two assumptions on the traditional augmented Solow model: strict concavity of production functions and dual capital goods. It generalizes traditional conclusions of the Solow model by demonstrating that neoclassical properties of a production function are sufficient for the existence and global stability of the steady state in the augmented Solow model with multiple capital goods. Moreover, we prove necessity of essentiality of inputs for a neoclassical production function and generalize the golden rule of capital accumulation.