Various schools of economic thoughts have a different interpretation of competition. The different understanding is mainly based on the approach taken by particular theories. At the same time, there have been arguments as to whether competition is desirable in an economy or not, an aspect that can also be viewed from a different school of thoughts. For instance, even though there is a common view that rivalry between firms can bolster the productivity and global competitiveness of the business sector and support dynamic markets as well as financial growth, it has not been the case in certain cases (Patomäki 2017, p.537). Regardless, competition is still viewed as a crucial component when it comes to market operations, innovation, and a country’s growth (Patomäki 2017, p.537). This paper will examine the interpretation of competition from a Marxist and Neoclassical standpoint using the Australian electricity sectors as the case study.
The Meaning of Competition Based On Marxist School of Economic Thought
According to the Marxist theory, competition is a turbulent and characteristically fierce process that can be likened to an actual war in many respects (Tsoulfidis 2015, p.21). Therefore, based on this view, ‘competition' in the economy can be defined as a rivalrous process that involves more than one entity in their quest for survival. In a capitalist society, this can be demonstrated by the insatiable need of capital among corporations in a bid to obtain the most substantial profit, which is crucial for survival (Tsoulfidis 2015, p.21). The constant desire to make a profit make companies oppose anything that hinders their ability to fulfill their primary objective. As a result, it leads to competition whereby companies use the capital to fight against each other to increase their market share at the expense of rivals. Additionally, corporations go to the extent of using capital against any process that might increase the cost of operation and reduce productivity in a bid to reduce selling price and underprice competitors. Also, based on the Marxist view, competition in an economy has been demonstrated when companies use the capital to fight any legal obstacle that might prevent them from achieving their primary goal (Tsoulfidis 2015, p.22).
The Australian electricity sector is a real-world scenario of Marxist school of thought on the competition. Electricity generation and retail in Australia has been exposed to competition. Most Australians are now at liberty to choose their electricity supplier, and the state monopolies have been disintegrated with many of the new corporations sold (Chester 2015, p.225). To some extent, the changes in the electricity sector have been underpinned by the Marxist conception of competition. For instance, there have been efforts to minimise government participation in the generation and transmission of electricity (Chester 2013, p.316). There has also been increased emphasis on reducing unit cost and undercutting selling price by making operations more efficient. Therefore, based on this view, competition needs to be desirable. However, studies reveal that this is not the case with the Australian electricity sectors since households have experienced an increase in electricity prices (Chester 2013, p.319). At the same time, from a Marxist perspective, competition is desirable because it increases employment opportunities, given that most companies would exert themselves to find the most advantageous labor force for whatever capital they can command. For example, in Queensland, there has been an increase in the sector jobs since the restructuring (Chester 2015, p.231).
The Meaning of Competition Based On Neoclassical School of Thought
The neoclassical school of economic thought describes competition as a state instead of conceptualising it as a process of rivalry. The description of competition, in this case, is confined to the theory of perfect competition. This model label the idyllic circumstances that must be met in the marketplace to guarantee the existence of perfectly competitive activities from a business, as well as the characterisation of the industry as competitive or not. For instance, the conditions in a perfectly competitive market make it difficult for producers and consumers to influence the price of the product or service due to their large number and small size (Palermo 2016, p.352). As a result, the behaviour of the firms becomes entirely passive concerning the price of a product. As for the production, the business chooses the level of yield that can maximise profits. In such a case, the more the number of enterprises operating in a sector, the increased level of competitive behaviour, and so is the creation of an even proportion of income across businesses. On the contrary, the lesser the number of companies, the more monopolistic or oligopolistic the competition will be, hence greater inter-industry earnings rate differences.
Australian electricity sector is an ideal example of an industry spearheaded by policies that embody the neoclassical economic theory. For instance, the disintegration of monopolies within the sector allowed many private firms to engage in the generation and retail of electricity (Chester 2013, p.233). One could contend that what is currently being experienced within the Australian electricity sector is a scenario where there are a large number of firms operating in the industry, which according to the neoclassical school of thought should facilitate efficient distribution of resources. Up to this point, it could be argued that competition is desirable. However, this is not the case in Australia. For instance, the pricing, employment, and efficiency claims have not been realised despite privatising the electricity sector (Chester 2015, p.321). In other words, the reality is inconsistent with the neoclassical definition of competition (Chester 2013, p.236).
Common Features in the Views of the Two Schools
Even though the neoclassical school of economic thought does not relate competition to an actual war, both theories recognise the need for firms to survive. For instance, the Marxist view of competition as an act of opposition between corporations creates a condition where enterprises in their continuous struggle for survival invest in new technologies and influence regulations to minimise their unit cost and put rivals out of business. For instance, various state-owned electricity companies in Australia have dominated the generation capacity, and due to this, the National Electricity Market (NEM) rebidding rules has allowed these firms to exert more marketplace power (Chester 2015, p.317). Additionally, the privatisation initiative has been pushed by the need to make companies more efficient, which is a crucial premise of the Marxist view of competition. Similarly, the view of the neoclassical school of thought emphasises the need for firms to survive, despite the difference in the analytical approach. For instance, in a perfectly competitive market, the large number of firms makes it difficult for companies to have a significant influence on price. Therefore, there is a tendency by firms to choose a level of productivity that is consistent with the maximisation of profits, and a price that maximises consumers’ utility, which in itself is a means of survival. For example, according to Chester (2013, p.317), there is a tendency by Australian electricity firms to produce below their capacity in a bid to increase power prices.
The “law of one price” (LOP) is also another feature shared by both Marxist and neoclassical schools of economic thought (Tsoulfidis 2015, p.18). For instance, Adam Smith’s argument that the prices of certain commodities are generally the same or approximately equal in the entire United Kingdom and Leon Walras’s notion that a product or service has only one price in the marketplace are terms of the same thought (Tsoulfidis 2015, p.18). Similarly, Alfred Marshall, a neoclassical school of thought advocator argued that the more a marketplace becomes perfect, the greater the propensity for product or service to command the same price at the same time in all sections of the market (Tsoulfidis 2015, p.18). Therefore, both schools of thoughts determine the LOP as a propensity of prices to the crowd near the regular price. For example, as much as there has been a general increase in electricity price in Australia, the average surge in major states is approximately the same in the past seven years to mid-2014 with Queensland being the highest at 126 percent followed by NSW that saw a 115 percent increase (Chester 2015, p.226).
The Differences between the Positions Taken By the Two Schools
The main difference between Marxist theory and neoclassical economics lies in the analysis of each position. Competition in Marxist viewpoint is confined to the study of the laws of capital amassing (Tsoulfidis 2015, p.21). For instance, as firms struggle to enhance their share of the market, expand output, and attain additional value, it is vital to take the initiative to challenge other companies engaged in related activities. For example, as electricity generation and retail firms in Australia fight for more market share, they also need to enhance efficiency, reduce cost, and consequently make other firms less competitive. Therefore, competition, in this case, is projected to be an unstable and innately fierce process. By contrast, the examination of competition in the neoclassical philosophy is confined in the theory of perfect competition (Tsoulfidis 2015, p.14). The theory describes the idyllic conditions that must be met by a market to guarantee the occurrence of competitive behaviour from a distinctive enterprise as well as the classification of a sector as competitive or not (Tsoulfidis 2015, p.19). For example, concerning the Australian electricity sectors, the conditions that must be met include perfect movement of factors of production such as labor and capital and a large number of firms generating and selling power to a large number of households.
Also, even though both Marxist and neoclassical school of thoughts accept the “law of one price,” the implications of this rule entirely vary in the two theories (Tsoulfidis 2015, p.23). For instance, in neoclassical economics, the “law of one price” is the outcome of firm’s homogeneity (Tsoulfidis 2015, p.23). For example, one could argue that companies in the Australian electricity sector charge roughly the same electricity prices in the same market because the corporations are similar when it comes to the services and products they offer. As a result, the companies in the industry are unable to influence electricity prices. Therefore, to maximise profits, firm in the industry has resorted to choosing an output level that can maximise their profits and consumer utility. On the contrary, the “law of one price” is being used to highlight the consequences of firm heterogeneity in the Marxist approach (Tsoulfidis 2015, p.23). In other words, according to Marxist theory, enterprise heterogeneity is the outcome of the establishment of the “law of one price,” which results in the stratification of both profit margins and proportion of earnings. In the end, it might also lead to variations in firms ranking within an industry (Tsoulfidis 2015, p.23). For example, the difference in power ranking between electricity firms in Australia can be attributed to the fact that all electricity producers sell power for approximately the same price (Chester 2015, p.317). If that is the case, then more extensive firms who have attained economies of scale always earn more income than those with more significant cost, consequently increasing their influence within the industry.
Consideration of Other Related Issue
Since their inception, both neoclassical and Marxist economics has grown to become the leading concepts on modern-day economics. However, as much as the two school of thoughts are most widely taught forms of economics, various scholars have identified concerns regarding their conception of competition. For instance, many works of literature have pointed out that neoclassical economics makes many baseless and impractical presumptions that do not embody actual circumstances (Stamate 2011, p.556). For example, the assumption that all firms within the Australian electricity sector will behave rationally after privatisation overlooks that fact that the nature of the business is vulnerable to other sources, which can make corporations in the sector make irrational decisions (Stamate 2011, p.556). Therefore, one could argue that neoclassical economics cannot be used when describing competition in real economies. At the same time, it cannot be used to inform policy decisions. However, it is essential to point out that the Marxist idea of competition has taken a realistic approach, and has been widely recognised in the business literature (Tsoulfidis 2015, p.29). The current business theories share many similarities with the dynamic view of competition as a manner of rivalry between corporations in their continuous efforts to enhance market presence through increased output and reduced unit cost (Tsoulfidis 2015, p.29). In other words, an important issue to consider when defining competition using the two school of thought is their representation of actual circumstances.
Conclusion
The paper has presented a discussion on the meaning of competition in the economy based on the Marxist and neoclassical economics. From a Marxist point of view, competition is a rivalrous process that involves more than one entity in their quest for survival, whereas neoclassical economics view it as a state rather than a practice of rivalry. Based on the above discussion and by referring to the Australian electricity sector, competition is desirable to some extent. However, the actual circumstances of the Australian electricity sector is an indication that theory can sometimes be inconsistent with the reality of the market. As a result, competition might not be desirable in certain cases. The paper has also presented a discussion on some of the features shared by the two school of thoughts as well as how they differ in their interpretation of competition. Finally, from the above discussion, it is evident that neoclassical economics cannot be used to inform policy decisions.
References
Chester, L. (2013). The Failure of Market Fundamentalism: How Electricity Sector Restructuring is threatening the Economic and Social Fabric. Review of Radical Political Economics, 45(3), pp.315-322.
Chester, L. (2015). The privatisation of Australian electricity: Claims, myths, and facts. The Economic and Labour Relations Review, 26(2), pp.218-240.
Palermo, G. (2016). Post-Walrasian Economics: A Marxist Critique. Science " Society, 80(3), pp.346-374.
Patomäki, H. (2017). Capitalism: Competition, Conflict, Crisis. Journal of Critical Realism, 16(5), pp.537-543.
Stamate, A. (2011). An economic interpretation of neoclassical monopoly theory in the light of austrian school. Annales Universitatis Apulensis Series Oeconomica, [online] 13(2), pp.549-557. Available at: http://oeconomica.uab.ro/upload/lucrari/1320112/36.pdf [Accessed 30 Apr. 2018].
Tsoulfidis, L. (2015). Contending conceptions of competition and the role of regulating capital. Panoeconomicus, 62(1), pp.15-31.
