Dear Dimitrios Nomidis, I fully agree with your research findings. Your analyzes are confirmed by my research and teaching in the field of microeconomics, which I have been teaching for 25 years in various schools and as an internship in companies as a salesman, analyst and financial controller. The neoclassical model of perfect competition regarding the static market is based on partially false, unattainable in the real world assumptions and, importantly, this incorrect assumptions and cognitive results have already been exposed by Torsten Veblen and then by scientists such as: NW Senior, FD Walker, HE Cairnes, F. Skarbek. However, the persuasion power of market economists from the neoclassical school and the consistency of mathematical solutions to systems of equations for the derived linear functions convinced the general public of the validity of self-regulation and achieving equilibrium of markets at one stable price coming from the market, provided the conditions of fierce market competition were ensured. I could derive a number of errors here for a long time, which you write about in your articles, but let's also give time and place to other scholars. In conclusion, I will say that the market equilibrium for a given good, achieved at one price resulting from the intersection of the demand and supply functions in the real world, happens only on exchanges, internet auctions, auctions of works of art. In the real world, most markets are characterized by a pulsating flow of demand and a flow of supply pulsating in time, which when confronted with the market create a certain set of partial equilibria, a field in which we have different equilibrium prices for real-time buying and selling transactions. Therefore, among other things, market arbitration can be widely used. Competitive markets for various goods and services do not balance each other at one price, but at a certain spread of prices and quantity of goods traded. It is possible because for buyers time and distance as well as the course of the transaction are of different value (whether it is a little or more complicated - the consumer remembers well how he was treated!). We have ready theories on this, which I do not want to bring up now in order to give others a chance again. Best regards

Dear colleagues, the world has changed a lot! However we still rely on static economics! These theory, sometimes cannot work in the real environment.

So instead of relying to theory, we better focus on dynamic or clinical economics, where we diagnose the causes of the problems, and finally identify the proper solution! This is how the world economics works today!

Thanks.

Dear Dariusz and Mwoya,

There is no doubt that real economy differs a lot from the economic theory. Likewise, there is no doubt that real economy is a dynamic phenomenon, and a static model cannot embody its ever-varying and pulsating main forces of demand and supply, not to mention technology, psychology, trend, etc. However, the static model gives us the basic mechanics of economy and the basic way in which the main forces of demand and supply determine equilibrium and price in the market. Nevertheless, the static model includes all interim equilibria until the final equilibrium (under unchanged conditions), and in this sense has a time-dynamic element. The only thing we can further do to approach closer reality is to expand this basic static model by introducing into it the dynamic factors and parameters, and this is something that econometrics already does in some extent to adapt the basic model to the local and time environment and conditions. So, the static model is the basic theoretical model upon which all other models expressing reality in a greater degree are built, and therefore it must be correct.

This is the point of this discussion, because neoclassical and mainstream economics are based on a misinterpretation of a Cournot's price stability condition that led economics to the notion of price taking and horizontal demand curve for the individual firm, while Cournot himself considered this individual demand curve to be sloping. This misconception, in turn, led economics to erroneous models and outcomes, as it determined equilibrium at the tangency point of this horizontal demand curve with the average cost curve, which occurs at the minimum average cost because of the horizontal demand curve; while it does not occur at this minimum point when the firm's demand curve is sloping, as is correct (then the tangency point for equilibrium is at higher cost and price, and lower production). This, beyond being a crucial error of neoclassical and mainsteam economics, explains better reality (prices higher than minimum cost, lower production and employment) and furthermore has negative implications for social welfare, which is most critical.

Some colleagues argue that there is not a contradiction between Cournot and Neoclassical theories because both of them converge to the same equilibrium point (minimum average cost) when the number of firms becomes very large in perfect competition. Indeed, in this case, total demand curve becomes nearly horizontal, and the individual firm's demand curve of Cournot, having the same slope, tends to become tangent to the U-shaped average cost curve at its minimum point, i.e. the same point as for Neoclassicals. This is the outcome of the so called Folk Theorem, and has become the subject of quite recent literature (Friedman, Ruffin, Novshek, Sonnenschein, Mas Colell, and others).

However, there are two critical mistakes in these considerations: First, the individual firm's demand curve does not have the same slope as the total demand, as Cournot argues (it is much steeper, see my paper The Mistakes of Neoclassical Economics); and second, even with the wrongly sloping individual demand curve of Cournot, the zero profit, which is the critical characteristic of perfect competition, is obtained before the number of firms becomes indefinitely large, and specifically when the sloping firm's demand curve becomes tangent to the U-shaped average cost curve (before the minimum cost point). So, there is no need for a very large number of firms to have the zero profit of perfect competition, and this number becomes much smaller with the correct individual demand curves which are much steeper (see the paper), and this entails higher prices and lower productions (and empoyments) than the standard economic theory says, with bad social implications.

Good work

Dear Dimitrios Nomidis,

Yes, that's right. The dominant view is that the mainstream of classical economics revealed the shortcomings of a macroeconomic model based mainly and / or solely on the assumptions of classical economics in the 1930s. For the first time on a larger scale, the disadvantages of the macroeconomic model based mainly and / or solely on the assumptions of classical economics began to be discussed during the deep recession of the global economy in the 1930s. It was then the first major global economic crisis during which labor market imbalances persisted over an extended period, which meant high levels of unemployment that lasted for years. The economy did not recover quickly. Also in highly developed countries, a high level of unemployment continued, reaching even around 30% in some regions. The problem of high unemployment was related to low employment, low income, a decline in production and consumption, an increase in crime, a decline in tax revenues flowing into the state budget, a decline in investment, etc. economic growth, to the level of potential production, full use of production factors, to employment growth, it was the state that had to come with help, which created new jobs in public sectors and with the use of financing new investments from the public finance system of the state. In this way, Keynsism arose as a formula for an interventionist pulling the economy out of a deep economic crisis in the form of investments organized and financed by the state. However, in my opinion, the disadvantages of the first mainstream in the history of economic thought, ie classical economics, can be identified already during the first industrial and technological revolution. It is since that period that economic systems have developed as expansive and unsustainable, not taking into account the negative effects of economic development in economic growth, i.e. social and environmental costs resulting from the level of environmental pollution, which has been increasing for over 200 years, reduction of biodiversity of natural ecosystems, degradation of the biosphere and the climate of the planet. On the other hand, the anti-crisis state intervention applied in the 21st century during the last largest global financial and economic crises on a record-breaking scale also includes many mistakes. The anti-crisis state intervention used in the twenty-first century on a record scale combined selected instruments of a relaxed fiscal and monetary policy with the loosely treated Keynsian formula. For example, by lowering the scale of the economic crisis and recession, you have generated an increase in liquidity in the financial system and / or the economy by injecting large amounts of extra money into the economy without cover and thus generating an increase in inflation that was considered the lesser evil. This kind of interventionist and imperfect actions within the broadly understood anti-crisis and pro-development socio-economic policy are used until now. Unfortunately, no better solutions have been developed that would be better adapted to the current macroeconomic situation, the sector and branch structure of the economy, taking into account the implementation of the sustainable development goals and the needs related to the pro-environmental transformation of the economy.

Best regards,

Dariusz

In the beginning of this discussion, I said that the mistake of the wrong interpretation of the Cournot's stability condition of an infinite number of small firms that cannot affect the price, into a horizontal demand curve for the individual firm remained undiscovered till now. There is an explanation why this misconception remained undiscovered so long:

The horizontal firm demand implies that the equilibrium point, i.e., the point where this horizontal firm demand becomes tangent to the U-shaped average cost curve (so that the profit becomes zero) is at the minimum average cost. On the other hand, it is known that through this point passes the marginal cost curve too. So, it seems that this point also achieves the maximization of profit, since it is the intersection of the marginal cost with the marginal revenue (which, in the case of a horizontal demand curve, coincides with this horizontal curve). So, everything seems to be right. We have maximum profit and at the same time this maximum profit becomes zero due to perfect competition and free entry of firms.

But here is the illusion and the fallacy. Because if this would be right at firm level, with a supposed horizontal firm demand curve, it should be also right at aggregate market level with the real downward sloping total demand curve. But there the equilibrium point, i.e., the intersection of the total supply (marginal cost) curve with the total demand curve, does not maximize the profit, since the latter is maximized at the intersection of the total supply (marginal cost) with the total marginal revenue that comes from total demand, and not with the total demand itself.

This indicates that the assumption for horizontal demand curve for the firm and price taking is wrong. You can see more in: Article Revisiting Cournot and Neoclassical Economics

To justify the idea of horizontal demand curve for the firm, adherents of neoclassical economics say that firms in fact do not know their individual demand curve, so it is natural and logical to take price at every time as given (price taking concept) and to consider their demand as a horizontal curve. This mechanism of price setting is understandable, and one can understand that this is actually the way followed in praxis. But if the price that firms temporarily take as given does not maximize their profit, they will change it until they achieve profit maximization through a process of trial-and-error. That is why the neoclassical-walrasian equilibrium of the minimum cost, based on the price taking concept, is not correct as it does not maximize the profit of firms (as explained in my previous comment). Besides, if equilibrium price were equal to the minimum cost and demand played no role in price determination, then neoclassical theory would cancel itself, as its main feature and difference from classical theory is the crucial role of demand in price determination.

Is it (the idea of the horizontal demand curve) true even long-run (in case of increasing and decreasing cost industries)

The tragic mistakes of economic theory (neoclassical and mainstream economics) lead to paradoxes, which strangely have not been noticed for so long.

1) How is it possible for the mathematical economic model, whose role is to determine the equilibrium price and quantity in the market of a product, to take the price as given (price taking assumption) and thus be limited only to the determination of the market quantity? Should not both these values be determined simultaneously by the mathematical model based on supply and demand? Price taking has a meaning only after the formation of the equilibrium (of price and quantity), and not before it, as the economic theory considers. Furthermore, if the equilibrium price is given, then what role does demand play in shaping the equilibrium price, as neoclassical theory itself (as opposed to classical theory) posits? In this way the neoclassical theory contradicts itself.

2) According to the neoclassical Walrasian theory, which mainstream economics follows to this day, this given price in a perfectly competitive economy is equated to the minimum average cost of the product. But this contrasts with the firm's profit maximization, which occurs at the intersection of marginal cost and marginal revenue. That is, the Walrasian equilibrium point, which is the intersection of total marginal cost with total demand (which intersection corresponds to the minimum average cost, according to Walras) does not maximize business profit, since it is maximized at the intersection of total marginal cost with total marginal revenue derived from the aggregate demand and not with the aggregate demand itself.

3) Obviously, neoclassical theory fell into these errors because it has associated perfect competition and price stabilization then prevailing with an infinite number of small firms, each of which has no power to change the price. This assumption (introduced by Cournot) is neither realistic nor necessary, because the key feature of perfect competition, which is zero profit, occurs long before the number of firms needs to become infinite, as long as there is a fixed cost. Apparently, this assumption of an infinite number of firms was made by (great) Cournot because at his time (1838) the nature of the cost function had not yet been thoroughly investigated and it was perceived as being proportional to the product quantity. However, should not this correction have been made by now?

Dear colleagues, you can find more explanations for the mistakes of Neoclassical (and mainstream) economics, that we discuss here, and the deeper causes that led to these mistakes in my new article "Revisiting Cournot and Neoclassical Economics" recently published open access in the History of Economics Review: Article Revisiting Cournot and Neoclassical Economics (open access)

Dear colleagues, you can find all the mistakes of Neoclassical (and mainstream) economics we have mentioned in this Discussion (and even more) and their causation, as well as an enlightening numerical example showing the differences between the economic theories (Neoclassical, Cournot, and the new revised theory) in my new article recently posted open access in ResearchGate:

Article Revisiting Cournot and Neoclassical Economics (2nd part)