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:
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.
I.
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!