Market-Process Theory and "Dynamic" Theories of the Market

Abstract

Few constructs in neoclassical economics are as elegant and closely bound as the theories of perfect competition and pure monopoly. These theories represent indispensable items in the basic analytical toolbox of the modem neoclassical economist. Their formal derivation relies on the twin propositions that (a) individual agents are rational in the sense that they continuously maximize expected utility (or profits) given knowledge of objective function and constraints and (b) the equilibrium that results when agents (in isolation and in the aggregate) behave rationally describes the universe of relevant discourse. Economists engaged in the application of microeconomic theory to economic reality have learned, however, that conducting successful research requires the use of theoretical constructs that were not strictly a part of their technical training, and which appear to conflict with one or both of the above propositions. These constructs are largely comprised of the stories or bits of economic intuition that are thought merely to be heuristic devices to accompany the teaching of formal models. But they constitute in fact a logically distinct verbal (or what Nelson and Winter have termed appreciative) theory of what behavior looks like outside of equilibrium, where rationality (in the standard neoclassical sense defined above) need not serve as a useful rule for the individual decision-maker or, even less, as a useful approach for the economic theorist. Antitrust economists, for example, have long realized that few if any markets meet the structural conditions necessary for the optimal allocation of resources, or that exhibit the zero economic-profit result of the model of perfect competition (assuming economic profit can be accurately measured empirically [5, 219-69]). Similarly, they have come to suspect that the conditions for pure monopoly or the various forms of imperfect competition are rarely if ever met in practice. An economic theorist might respond to this state of affairs in one of two ways. The first is to attempt to expand the concept of rationality and the scope of equilibrium theorizing in order to incorporate, for example, the phenomena of price and output adjustment, product differentiation,