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home / study / business / economics / economics questions and answers / “due to differences between economies and industries within economies, there is no one heterodox ... Question: “Due to differences between economies and industries within economies, there is no one heterodox ... “Due to differences between economies and industries within economies, there is no one heterodox theory of price. Rather, there is a general frameworks, with the specifics differing depending on the institutional and other differences of the industry being examined.” Explain both the general framework of heterodox price theory and the main sources of differences. Minimum: 800 words
Explanation / Answer
The very idea behind the heterodox econpomic theories is that it is different from other conventional or mainstream theories of economics which mainly try to generalise models or concepts or equations with certain asuumptions and hence lose its ability for universal applicabbility. Heterodox economics is a amalgamtion of various other economic school of thoughts including socialism , marxism , post -kerynesian etc. These theoris give a more realsitic approach to economics theories digging deepr into historical, regional and social influences on the variable studied.
Heterodox price ttheories come form the post-keynesin era , authored by economists such as Frederick Lee along with Kalecki(mark up pricing) , normal-cost pricing or full-cost pricing and administered pricing.Since we all know the importance of pricing for mainstream economics, these economists set out to challenge the neo-classical theory of pricing.
As stated in the staement in the question, there is no one heterdox theory of pricing but there is a general framework or idea behind these therories.
1. Heterdox therories rejects various concepts of mainstream economics such as supply and demand
curves, equilibrium, marginal products or costs and also a deductive reasoning methods to therorise a phenomenon.
2. They believed that the description of theories should not be superficial but must be determined through understanding the whole process of flow of goods and services and should be 'grounded' . They adopt a more comprehensive idea behind social provisioning which includes grounded theories with empirical actualism and casual analysis, environment consistent rationality where in meanstream economics price is the major determinant. Here, it is mostly the data collection at the ground level instead of imaginary market demand and supply curves. They used a mixture of both quantitative and qualitative data collection methods.
3.These theories have a sociological view of the price adjustment mechanism of firms. They believe in price cyclicity in accordance to the business cycles in the economy. Neo-classicals belief in cyclical adjustment and the moving of the economy towards an equilibrium and full employment is rejected by the heterodox economists. They argue that prices are cyclical in nature and does not function smoothly to return to full employment or equlibrium.Economic systems are complex, evolving and unpredictable and hence focues on dynamic process rather than equilibrium.
4. Kalecki's price theory emphasize on 'Credit economy; or 'engineering economy' where the production of commodities is a capitalistic process aimed at money making and hence resulting in capital accumulation.Corporate enterprises enjoy price and quantity monopoly and hence being able to control society in terms of rules and culture. Higher the degree of monopoly ,higher the mark up leading to profit maximisation.
5.The existence of capitalism and/or monopolists on the distribution of functional income in the economy leading to misallocation, higher unemployment and crisis.They believe that the market failure has lead to distributional inefficiencies.
6.They believed that "sticky prices" actually stabilise the aggragate demand. Steve keen, a heterdox economist, says that the business cycle are less severe when the prices sticky.He supports Kalecki's view of mark up pricing above the margianal cost.He also believe that the neo-classical theories are flawed and empirically unsupported
7.Heterodox theories goes agianst the "Marginal value product theory" . They believe that higher wages do not necessarily raise unemployment in the economy but they are an integral part of the AD and hence beleive that lower wages may actually be counter-productive.
8.They believe in pluralism, that is, plural theories for different aspect sof th economy. NO generalisation is possible.
Heterodox theories are genrally criticised for its highly informal approach towards economic therories and its lack of applicability imn formaland finaancial sectord.
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