The contemporary financial conditions around the world have led to the application of various methods by different economists in trying to solve the economic problems in their regions or countries. Several methods including those founded centuries ago have become the focus of their work and have been applied to the current economies of the world. The concept of capitalism has also led to the consideration of markets and money as the most important element in the building of a lasting economy. This essay will examine the distinguishable differences between Austrian economics, described here as the heterodox approach, and the mainstream economic conception. The paper offers a critique of mainstream economic conception using the heterodox school of thought in economics.
According to MacKenzie (2006, p. 29), heterodox economics is premised on the economic indicators that largely depend on interpretation and analysis of the intended actions of people as they interact with the market forces. Unlike mainstream economics, heterodox economics is built on tenets which are in total contrast with any other economic school of thought in that the economic activity must be purposefully implemented by economists. This means that the existing economic conditions are a result of the activities of various business people. On the other hand, Fotiou (2010, p. 3) argued that mainstream economics is mainly dependent on the accepted economic principles combined with the neoclassical methods and Keynesian approach to macroeconomics. The major distinguishing features of mainstream economics are the use of assumptions, methodologies, and the scope through which the economists approach the market.
Contrary to the heterodox economics, the mainstream economics is premised on the assumptions of the rational choice theory, representative agent, and rational expectations that determine the influences of different elements on economic models (Mearman 2007, p. 1). The approach explores the imperfection and asymmetry of information, incompleteness of markets, and the skewed nature of global markets and costs. Mainstream economics also relies on the use of mathematical models such as calculus and comparative statistics and thus may encompass several fields in economics which are generally considered to belong to the heterodox economics. This can be done after the application of the mathematical methods that allow the mathematical interpretation and analysis of the fields, thus establishing the rationality in each approach. This contrasts with the heterodox economics which is built on the principle that using economic models and applying statistics to the interpretation and analysis of economic phenomena presents inherent flaws and cannot be relied on. Therefore, it cannot sufficiently provide a true representation of the actual situation on the ground.
To this end, MacKenzie (2006, p. 31) noted that the contrast between the heterodox economics and the mainstream economics lies not only in the interpretation and analysis of the economic phenomena but also in the application of causative principles of such phenomena. Hence, heterodox economics presents a number of reliable and tenable principles that have been adopted by various economists while addressing the economic issues in their regions. Moreover, the approach presents the most contemporary way of solving modern economic challenges given that it reinforces the reliance on human behaviors as the first cause of the economic events thus underpinning the importance of controlling human behaviors as a way of managing economic conditions on the market
Outlining Mainstream Conception of Markets Being Critiqued
The mainstream economics is built on the concept of creating markets. So it presents a new challenge of the interpretation of the actual meaning of economics (Fotiou 2010, p. 7). As such, the heterodox economics perspective is that economics should involve the study of human actions in the market rather than the study of how to create markets. This way, the markets will emerge and collapse because the behavior of people in those markets is the same. Mearman (2007, p. 3) observed that this is an unreliable approach to the discussion about the economy of a region and criticizes the mainstream approach on these grounds. Another criticism as leveled against the mainstream view focuses on free trade as an alternative for the protectionism, which defines the modern market. Contemporary economically stable countries have developed because they embraced protectionism on their markets, which enabled them to gain control over what enters and leaves their markets. In places where free markets have been exercised such as in socialist countries, there have been problems in the distribution of resources from the market because free markets do not present equal opportunities for everybody in the market.
Another critique of mainstream economics is the emphasis that it puts on the market prices, which typically mean a better price than the subsidized ones. In this case, mainstream economics is thought of as a capital drive. This is in opposition to the actual conditions in the market. This is in opposition to heterodox economics, too, which views the market process as a result of both human and physical conditions in the market. Furthermore, the emphasis is put on private ownership in the market as opposed to the public one. Therefore it relies heavily on capitalism. The mainstream economics depends on the invisibility of natural forces to fix everything in the market. It also depends on the marginal utility of the products in the market while dwelling on the comparative advantage that each product has over the others (MacKenzie 2006, p. 23).
Similarly, mainstream economics is criticized for its overall approach to the market which stipulates that economic systems are composed of self-determined methods that are in a state of balance, as well as for its reliance on the best planning and distribution channels (King 2003, p. 32). Such views undermine the presence of rationality agents in the process of marketing. Thus, the economic systems, according to heterodox economics, are skewed rather than being balanced as perceived by mainstream economics. The mainstream economics is also criticized on the ground of its use of assumptions and mathematical predisposition rather than the reality. Its dependence on rationality does not exonerate it from dependence on the assumptions and mathematical methodologies which do not help in addressing the actual economic conditions on the market. This is the reason why the mainstream economists did not see the global financial crisis because the mathematics kept on balancing while the conditions were completely opposite on the ground. The fact that mainstream economics also depends on the ideologies such as government invention in the capping of inflation and fixing market prices has also caused the heterodox economists to view it as subjective in its approach to the market conditions (King 2003, p. 33).
Outlining Heterodox School (Austrian)
According to Walsh (2007, p. 65), heterodox economics is an amalgamation of several fields that seek to contrast the views and principles of mainstream economics. The emergence of various schools of thought within the heterodox economics underpins the urgency of establishing heterodox as a reliable and efficient way of managing the economy and economic conditions. The Austrian is among many different heterodox economic views that exist within the larger heterodox economics. One of the main points that are common among different heterodox fields is the opposition to the use of mathematical models in providing solutions to the many economic challenges. Walsh (2007, p. 65) observed that the mainstream economics relies on assumptions, methodologies, and topics in explaining various solutions in the market, and employs equilibrium economic systems in its approach to market conditions. The Austrian heterodox agrees with the mainstream economics to the extent of rationality and individualism, and also on the equilibrium analysis. However, this is true as long as commonalities between the two exist. The Austrian heterodox thus specifically contrasts the fetishism that is prevalent in mainstream economics with the mathematical models which are used in the study of economic conditions (Fotiou 2010, p. 3). The Austrian heterodox does not see mathematical models and methodologies as the only viable analytical tools available to economists. Rather, the Austrian views economy as a changing rather than stagnant construct. Furthermore, the economy according to heterodox economists defines the sociological elements and social relations, which are instrumental in the definition of the final results in the market.
Moreover, the Austrian heterodox emphasizes the uniqueness of certain conditions, which means that each region has its own unique conditions enshrined in the social and cultural practices in the market. The latter will ultimately define the final conditions in the economy. This contrasts with the mainstream economics that views mathematical models as universal instruments that can be applied to any part of the world as a way of enhancing the application of the models in any given financial environment. As observed by Sent (1998, p. 22), this might be the case for mainstream economics because the universality of methodologies and mathematical models cannot be questioned. The mathematical models do not change with the change in the conditions in the market. This means that this can be applied to any environmental condition across the world.
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As such, Sent (1998, p. 22) argued that the heterodox economics is contextual in nature as the tenet which defines it depends on the existing social and traditional activities within which the market is operating. In essence, all heterodox economists disagree with the mathematical model fetish evident in mainstream economics. A common belief by heterodox economists from all fields is that mathematical models and methodologies used by the mainstream economics are as irrelevant as they can be and that there is nothing like the universal application of economic theorems, as insisted by the mainstream economists. Their main argument is that each region, however small, is unique in its economic and social conditions and therefore the economic indicators used in such regions should reflect the actual conditions of the market in that region. In addition, the heterodox economics opposes the use of methods of analysis and interpretation which rely on mathematical models as their source of substantiation (Sent 1998, p. 22).
Evaluation of Mainstream Conceptions of Markets
According to Mearman (2007, p. 2), mainstream economics is premised on synthetically complicated theories that use mathematical models as drivers of the theory rather than serve as tools. The neoclassical approach conceptualizes markets as contained and controlled by the natural force that controls everything that happens in the markets. As such, it relies on the use of the comparative advantage to perceive the incidents and mechanisms that influence the operations of the market. In addition, Mearman (2007, p. 2) observes that the mainstream theory establishes the marginality and functionality of the markets within the contexts as defined by the assumptions and methodologies. This, therefore, makes the approach more susceptible to scientific interpretation and analysis of the constructs within which the theory is implemented. The equilibrium that exists within the theory determines the outcome in the markets. It is therefore important to have a simplified approach in the markets even though the assumptions and methodologies contained therein can be applied to any region across the world. According to MacKenzie (2006, p. 35), the main foundation of the mainstream economics is the assumption that all economic systems are self-determined in nature and in a state of balance based on their planning mechanisms. The markets are thus created for the purpose of maximizing the profits and utility of financial services and products in these markets.
Furthermore, MacKenzie (2006, p. 35) observed that mainstream economics and the conception of markets are dependent on the rationality of the methodologies that are used to explain the incidences in the market. As such, the results of the methodologies are vital in determining the next action, which is exclusively mutual of the activities or actions of the people and their inputs in the control of the market forces. Similarly, King (2003, p. 17) explained that because the mainstream conception of the market is not void of the ideologies, it is possible for the economists to use past experiences and the existing ideologies to give explanations to the occurrences on the markets without necessarily being vague. This is different from the heterodox approach that claims independence from ideologies but instead relies on the existing conditions in the markets. To this end, King (2003, p. 18) argues that there is the likelihood that the mainstream economists can use the existing ideologies and the mathematical and scientific models in formulating policies that control the overall functioning of the markets, thus being able to create a situation of perfect competition on the market.
However, despite the advantages of using mathematical models and reliance on scientifically proven methods to explain the markets, Fotiou (2010, p. 3) argues that mainstream economics does have inherent shortcomings such as the inability to perceive the physical capacity of the markets. With mainstream economics, the most important thing is the construction of the market without paying regard to the expandability of the markets and other externalities that might affect the overall market performance.
Additionally, mainstream economics tends to rely more on the numerical part of economics while ignoring other important elements of the economy like the social relations and the socialization effects. According to King (2003, p. 21), these are important factors that immensely affect the final outcome and can determine the growth and development in the markets. Another disadvantage of mainstream economics is its failure to perceive global markets as heterogeneous, each with its own characteristics. Instead, it assumes that the global market is homogenous and the conditions that exist in one region and influence the functionality and behaviors of the market are much the same as those in any other region around the world.
The final disadvantage that is inherent in the mainstream conception of markets is the view that considers environmental resources as business assets that must be exploited without considering if they are getting depleted on not. In other words, mainstream economics is a form of capitalism that emphasizes the exploitation of natural resources with a view of maximizing the profits while minimizing the costs of exploiting the resources. This goes in contrast with the heterodox economics which puts into consideration the social effects that a given activity is going to have on the environment. Thus, human action is an important element in defining different economic activities in the markets. However, the mainstream conception of the market can be important especially where policies are needed in the provision of market-oriented solutions. As such, it provides avenues for deregulation of the markets, privatization of market entities and removal of subsidies to allow perfect competition in the market.
According to Fotiou (2010, p. 4), heterodox economists have always viewed the mainstream economics as harboring capitalism, hence they have found out that it has the tendency to cause crises, unemployment, and misallocation of resources and finance in the markets. The principles that outline the functioning of economy through the heterodox approach can help address the challenge of emerging crises in markets where mainstream economics has taken over. Heterodox economics is also able to combine the social and environmental conditions that characterize a common market environment that is able to come up with unique solutions to the challenges of a given market. Thus, the idea of global markets does not hold any meaning of the heterodox economics because they believe that solutions to market problems can and must be borne locally because each market has unique elements that affect their performance and analysis. Characteristically, the heterodox economics can address all the shortcomings identified with the mainstream as it argues that mainstream economics depends too much on the assumptions which are not empirically proven. Besides, the use of mathematical models and theories in the interpretation and analysis of conditions in the markets undermines the influence of human activities in the final outcome. As noted by Fotiou (2010, p. 5), no single heterodox approach to the economy can solve the disadvantages that are inherent within mainstream economics.
The recent and ongoing incidences in the global economy require the application of various economic approaches in an attempt to avert the negative impacts on the global economy. Most of the heterodox and mainstream economic fields are trying to outperform each other by portraying themselves as offering the most viable and reliable solutions to the current economic conditions in the world (Earl 2005, p. 2). Heterodox economics thus emphasizes the use of social elements and unique features of the market in addressing the challenges that are uniquely identified within this market. On the other hand, mainstream economics which has been around for nearly two millenniums now claim to have necessary experiences to fix the current challenges of the economy in the world.
Moreover, mainstream economists emphasize the use of scientifically proven methods and mathematical models in addressing the economic market problems affecting the contemporary environment. With the current conditions in the global market and considering the recent financial crisis, the heterodox economics is slowly finding ground against the mainstream economics especially in the way the mainstream continues to emphasize the old fashioned methodologies and maintain the overall emphasis on the mathematical models and theories which are surpassed with events. Therefore, as Earl (2005, p. 2) observes, the heterodox economics rejects the majority of neoclassical constructs that rely on the rationality and methodology rather than on the actual evidence in the market. So, it is becoming a formidable area of economics, which promises to contribute much to the general understanding of economics and financial management.
Most available information resources deal with the concepts of mainstream economics. This has definitely affected the development of heterodox approaches to economic matters. There is a lack of consensus between the heterodox economists themselves over what constitutes their field. However, the bottom line among the various economists in this area has always been the agreement that mathematical and methodological models cannot offer universal solutions to different challenges that affect the functioning of financial and fiscal markets across the globe. The consensus is also attained on the principle that each market consists of unique characteristics that must be addressed within the social and environmental contexts of those characteristics. Evidently, this can make the finding of the solution to some of the marketing challenges easier and efficient.
It is therefore important that where mainstream economics has explicitly failed the opportunity should be given to the heterodox economists. The latter should be able to apply their principles and come up with solutions that might just work for the benefit of the whole region. There is also a need to have a clearly defined historical account of each approach, whether heterodox or mainstream, to give an explanation as to why things succeeded or failed. By doing so, economists will be able to deduce lessons and assist in addressing modern challenges in the economy. Moreover, more attention should be paid to the non-orthodox approaches to economics rather than the neoclassical approaches which are becoming more and more unpopular with many economists around the world partly because of the rampant failures in financial management where they have been widely used.