Neoclassical economy, as a driving force behind the production, priceing and consumption of goods and services, is one of the wider theory of supply and demand. Benefit maximization is an essential behavioral concept in the Neoclassical Economic theory that governs how companies decide the output and pricing. In the light of relative scarcity, the benefit maximisers ' conduct of corporations is supposed to contribute to economic efficiency. The economic or allocative efficacy of both persons and community must be accomplished to optimize utility or welfare. The dual recognition of the highest private and social benefit is the cornerstone of utilitarian thought, which aims for the greatest good for many. In neoclassical economics, the firm does not focus on maximize the profits because business has multiple goals in neoclassical economics, and profit is only one.

Dear Prof. Chaubey,

I agree that social benefit and utilitarian thought should be the cornerstone of an economy, but this is another issue. My question refers to a great inconsistency of the neoclassical (and mainstream) economic theory, strangely remained undiscovered until now, i.e. that this theory does not maximize the profits of firms in aggregate level (with the total demand and supply curves), while on the other hand this same theory sets this condition as presupposition in its analysis of equilibrium and does maximize profits at the level of firm (with an horizontal individual demand curve for the firm).

The accounting model is simply wrong.

The use by mainstream economics of the assumption of an infinite or quasi-infinite number of firms, as the main feature of perfect competition, is unnecessary and wrong. The main feature of perfect competition is the zero profit and this is enough to define perfect competition. Mainstream economics does also use zero profit in perfect competition, but at the same time makes the assumption of an infinite number of firms, which not only is unnecessary but also comes in antinomy with zero profit. Because the profit becomes zero (by the free entry of firms into the market) as soon as the number of firms reaches a certain finite number which eliminates the excess profit that existed so far when the number of firms was still relatively small. This occurs because, by the continuous entry of firms into the market due to excess profit, price continuously drops (due to supply increase) until some time equates the average cost of the firm. But this happens with a finite and not infinite number of firms. Now, zero profit means price=average cost, which in turn implies demand=supply. This means that the supply curve must be the average cost and not the marginal cost curve.

At the same time firms take care of the maximization of profit, which eventually becomes zero at the end of the equilibrium process, due to the continuous entry of firms into the industry (as described above). So, at the end of the equilibrium process, we have zero profit, which at the same time is the maximum profit for the firms. Of course, when we speak for profit, we always mean, as known, the economic profit (i.e. the extra profit over the normal one prevailing in all kinds of business). This maximization of profit ensures the stability of price, since any declination (+ or -) of the firms from that equilibrium production, in an attempt for more profit, will yield them less economic profit than the previous maximum zero economic profit (i.e the normal profit) or even loss. So, in order to have stability under a single price, it is not necessary to have an infinite number of tiny firms. Neither stability of price means horizontal individual demand curve for the firm, as conventional theory interprets it (price taking principle).

All of the above are mathematically summarized in the solution of a system of three equations (demand, supply, profit maximization) with three unknowns (price, quantity, number of firms), and not a system of two equations (demand, supply) with two unknowns (price, quantity) as conventional economics says. Conventional economics lacks profit maximization at market level equilibrium, although it sets it as a presupposition for the operation of firms, and this is a great inconsistency.

Some colleagues question: Why should profit maximization exist at market level? At firm level, it is the objective of the owner of the firm, but at market level no agent has this objective.

The answer is simple: If each firm maximizes its profit, then the aggregate profit of the industry (market level) is also maximized. This is easily proved mathematically (see Appendix C of my following article).

Article A Revision of the Theory of Perfect Competition and of Value

Since the second half of the twentieth century economic theory, unable to explain economic reality, has been moved increasingly away from traditional price theory to more modern trends such as game theory, decision theory, behavioral-empirical-experimental economics, heterodox economics etc. There is no doubt that reality is always far from the ideal state of theory and any attempt to complete theory with assumptions and parameters closer to reality is welcome. But what about if a big amount of divergence between reality and theory is due to mistakes of the theory itself?

I believe that traditional (mainstream) economics have a series of serious fundamental mistakes, which, if revised, lead to a totally different theory about how economy works. And as we always need a basic theory, before we proceed to any completions and improvements of it to better match reality, we should first consider this revised basic theory. To be more concrete, the fundamental mistakes of the traditional mainstream economics are, in my opinion, the following:

1) The price taking principle and the horizontal individual demand curve for the firm

Price taking of course prevails in the market after the equilibrium has taken place, but the question is how the equilibrium is determined beforehand, by the forces of demand and supply, which certainly remain the same before and after equilibrium (meaning that a sloping demand curve can not be horizontal at the time of equilibrium). The revision here is simply that the individual demand for the firm is the total demand equally distributed to the number of firms, because buyers certainly do not have a preference for some firms in buying the product since it is an homogeneous product. This means that the individual demand curves for the firms are sloping and not horizontal and this has tremendous implications on the economic theory and its outcomes (the equilibrium point is not at the minimum average cost, which invalidates the maximization of social welfare and the optimization of Pareto efficiency, etc).

2) The supply curve

The question here is which the supply curve is, the average cost or the marginal cost curve? According to Marshall it was the average cost curve, but according to the Marginalists, who eventually prevailed in mainstream economics, it is the marginal cost curve. This latter however creates a big inconsistency: the equilibrium point, that is the intersection of total supply and total demand curves, does not maximize the profits of firms, as this maximization occurs at the intersection of total supply (marginal cost) and the total marginal revenue (and not the total demand). Yet, the profit maximization is a basic assumption in mainstream economics and should be hold at market level if it holds at firm level (it is simply a matter of aggregation). The revision here is that the supply curve is the average cost curve, and its intersection with the demand curve gives the zero (economic) profit, which is the fundamental feature in perfect competition with the continuous entry of firms till the zeroing of profit.

3) Ignorance of the firms' number as a key factor in determining equilibrium

Traditional theory sought the solution of the market equilibrium question in the intersection of two curves, demand and supply, to determine the equilibrium pair of price (p) and quantity (Q), while ignoring another factor involved in the determination of equilibrium, namely the number of firms (n), which is absolutely necessary to determine the equilibrium since this factor shapes the total supply and thus its intersection with the total demand. So we need one more equation to determine the additional unknown (n), and this equation could be none other than the equation of profit maximization, that traditional theory lacks at market level as said before. Thus the system of three equations (Demand, Supply, Profit maximization) determines the three unknowns (price, quantity, number of firms); and furthermore the number of firms in perfect competition is definite and not infinite or indefinite, as the traditional theory assumes.

These revisions bring about dramatic changes in the whole economic theory and in the social welfare, with tremendous political implications. For more analysis and for the outcomes of this research, please refer to my articles (available at ResearcgGate and ssrn):

Article The Tragic Mistakes of the Economic Theory Still Being Taugh...

Article A Revision of the Theory of Perfect Competition and of Value

I would be very appreciative to have your opinion, thesis and comments on this discussion.

What is the profounder reason that Neoclassical economics prevailed over Classical economics and the cost-pricing principle? The most easy and apparent answer to this question is the factor of Demand, which the former was taking into consideration, while the latter not. But is this indeed the profounder reason? In my opinion, the profounder reason was not this, but the mathematical validation with which neoclassicals supported the social superiority of the new theory: equilibrium production and price at the minimum cost, maximization of social welfare, fair income distribution according to the marginal product of each productive factor, optimization of Pareto economic efficiency through the optimal allocation of the productive factors in the economy, etc. This mathematical validation could completely support scientifically, and thus impose, the neoclassical theory as true and the respective economic system as the most socially fair and efficient.

But the problem is that the mathematical validation of the neoclassical theory on crucial and fundamental issues is wrong: a) The most obvious mistake and inconsistency of that theory is that it doesn't maximize the profits of firms, although it considers this maximization a presupposition for the economic equilibrium. b) The individual demand curve for the firms cannot be horizontal, while their sum, the total demand, is sloping. c) the theory considers the total supply curve, which determines equilibrium and price, without considering the number of firms, which forms this total supply curve. d) the theory necessitates infinite number of tiny firms for perfect competition, which is wrong and unnecessary; if we introduce the number of firms into the equilibrium system, the derived number of firms is finite.

If we make the right corrections on these mistakes, the revised theory leads to totally different outcomes concerning equilibrium prices and production and, what is crucial, all the previously mentioned social benefits, which neoclassical economics argued, are not valid anymore. And then the existing theory is collapsed by its own means and within its own framework.

Mainstream economics is in general a powerful economic theory and a great starting point to build a new improved and more right economic theory. The grounds it has set to build the economic theory are logical, reasonable and indisputable for a general basic economic theory of perfect competition: homogeneity of commodity, free market, free entry of firms, free movement of production factors, rationality and knowledge by the economic agents. Of course reality does not resemble all these perfections, but it is well-known that always reality deviates from the ideal situation of theory. A basic theory always grounds to some ideal situation, even in physics, otherwise we cannot have a basic theory. What we can do is to complete this basic theory with more parameters and tools in order to capture deviations of the above basic assumptions from their ideal states.

So, the problem with the mainstream economics lies not in the above methodology, but in some fundamental mistakes in its analysis, the most serious being: the price taking principle (horizontal demand curve for the firm) and the wrong assumption for infinite number of tiny firms.

Some colleagues think that modern mainstream economics with its advanced mathematical tools (bordered Hessian matrixes, vectors, differential calculus, optimization conditions, etc) has eliminated whatever shortcomings and errors the neoclassical economics had. For example, Arrow-Debreu theory, Stockey-Lucas's and Sargent's Recursive methods on competitive equilibrium, etc. This is not true, because all these theories are based on the assumptions of the neoclassical economics, the cornerstone of which is the wrong assumption of the price taking principle. This assumption is mistaken because we cannot take the equilibrium price as given, while we search to determine this price in equilibrium; that is, to take the equilibrium price after equilibrium, while we are before equilibrium. This wrong assumption leads to a horizontal demand curve for the firm, and to the big inconsistency of the neoclassical theory: to present the profit of firms as maximized at firm level, but not at the aggregate market level (where the demand curve is sloping), because there maximization occurs at the intersection of aggregate supply with aggregate marginal revenue and not with aggregate demand as neoclassicals say. This wrong horizontal demand curve for the firm also leads to the wrong conclusion of welfare maximization (of both consumers and firms), as in the long run (by the entry of firms due to profit until the zeroing of it) this horizontal curve maximizes welfare by becoming tangent to the U-shape average cost curve at its minimum point, which would be possible only if this firm's demand curve was horizontal, which is not true.

As for the superiority of modern advanced mathematical economics, I am always in favor of mathematics, but I think that topological mathematics in economics with its graphical presentations (instead of abstract mathematics) helps economists to better understand and realize how the mechanics of economy work and therefore to posit the right conceptual foundation.

Neoclassical or any sort of econOMICS does not maximize anything, it is a science, a set of thelries, a branch of knowledge and as such it does not take care of doing things.

Dear Ana Maria,

This is of course self-evident, as equally evident is that the question means why neoclassical economics as a theory does not maximize the profits of firms, whereas it itself sets it as a basic presupposition. And this meaning becomes thoroughly evident from the analysis of the question that follows its title.

What did go wrong and the neoclassical theory slipped into all those mistakes I have often mentioned previously? If we make a rough historical retrospection on this issue, the wrong course of the economic theory starts, in my opinion, from Cournot (1838).

Cournot was a great mathematician and economist and he was the first who introduced profit maximization into economics and examined it in a full mathematical way by using differentiation and margins (marginal revenue= marginal cost). However, he made some mistakes: Although he correctly perceived that firms have a sloping demand curve, he wrongly considered it parallel to the total demand (instead of distributing the total demand among firms), and he also perceived (wrongly) infinite number of tiny firms, which led to the wrong conclusion price=marginal cost.

Marginalists, who came afterwards and prevailed in the formulation of the Microeconomic theory, retained this marginal concept of Cournot for profit maximization, considered marginal cost as the supply curve, and combined it with the demand curve to determine equilibrium at their intersection. In vain Marshall insisted that equilibrium takes place at the intersection of demand with the average cost (and not the marginal cost) as supply curve.

But in this way we have neither zero profit under perfect competition (since this occurs at the intersection of demand with the average cost supply curve, as then price= average cost) nor profit maximization (since this occurs at the intersection of marginal cost with marginal revenue and not with the demand). It must be noted, however, that in this way it seems that a lot of social benefits are achieved: social welfare maximization (by maximizing consumers and producers surplus), Pareto efficiency optimization of the economy (by optimizing allocation of the production factors), minimum cost of production, and fair income distribution among production factors (labor and capital) according to their marginal product. But this does not hold, since the structure of the economic model is wrong.

It is really awkward how mainstream economics has such serious fundamental mistakes (as those I have often mentioned) nowadays that economic science has fully mathematicized. The only reasonable answer could be that it has not been developed from the beginning on solid mathematical thinking and foundations, and this resulted in those failures being inserted into it at its early stages (like that of Cournot and of marginalists, I mentioned earlier), which remained later during its evolution despite its full mathematization.

The problem of equilibrium seeks to determine price and quantity under given demand and supply (based on cost). Neoclassicals tried to solve this problem at market level, where total demand is more or less known. So far no problem. But on the supply side, supply is based at firm level (production cost of firm) and thus we need the number of firms to determine the total market supply and its intersection with the total demand for equilibrium. This was ignored by the Neoclassicals, which resulted in all those mistakes and in the development of a distorted system in their attempt to solve the problem.

So, we have three unknowns (price, quantity, number of firms) and we need three equations to solve the problem of equilibrium (and not only two -demand and supply- as Neoclassicals did). The third equation is no other than the profit maximization condition, a condition that Neoclassicals themselves set but did not apply at market level where they always examined equilibrium.

I am not a "mainstream" economics. I am dealing with transportation economics. The so-called neo-classical approach is only a mathematical description of the consequences of some "ad hoc" hypothesis.

For apllied economics, (transportation, health, energy,) we can greatly improve our understanding of the way a system works by relying to behavioural economics which encompass sociology and psychology.

Dear colleagues, I would like to inform you that all my previous mentioned arguments about the fundamental mistakes of the Neoclassical -and hence mainstream- economics, as well as the replacement of it by a new reformed theory correcting those mistakes, you can find in my two new articles:

Article A Fundamental Reformation of Neoclassical Economics

Article The Tragic Mistakes of the Economic Theory Still Being Taugh...

I would appreciate very much any comments from you on them.

I referred previously to some mistakes of the Cournot theory (1838) which misled the subsequent neoclassical economics into a wrong course. I would like to say something more on this crucial point.

Cournot connected equilibrium stability with infinite number of tiny firms, so that each of them be not able to influence the total quantity and hence the equilibrium price. This was the first mistake of Cournot, because for stability it is not necessary the infinite number of tiny firms, but just the maximization of profit of firms, which takes place in only one and single point. Any movement away from this point reduces the maximum profit and for this reason the movement is not actualized by any firm, which provides the stability of equilibrium. This profit maximization condition constitutes the 1st equation of the mathematical system.

The 2nd equation is the zero profit due to perfect competition. In connection with the previous equation of maximization, this means that the previous maximum profit of firms is reduced to zero by the entry of new firms into the industry due to the extra profit until it becomes zero.

The 3rd equation is the demand function. This system of three equations determines the three unknowns price, quantity, number of firms (p, q, n).

The critical characteristic of perfect competition is the zero profit. Cournot also concluded zero profit in perfect competition, but due to the infinite number of firms and their tiny size, which is unnecessary, because the profit becomes zero when the number of firms reaches a level where the ever decreasing revenue due to the entry of new firms equals the cost. Unfortunately, the Cournot's mistake about equilibrium stability did not stop there, but it was continued by the post Cournot neoclassicals with a worse confusion, since they misinterpreted the previous stability condition of Cournot as a horizontal demand curve for the firm (price taking principle). The big irony here is how they interpreted it in this way, since Cournot himself considered the individual demand for the firm as sloping.

The second big mistake of Cournot was that while he correctly considered the individual demand curve for each firm sloping, he made the mistake to consider it parallel to the total demand (shifted to the left analogically to the number of firms). This is wrong simply because the sum of all of those individual demand curves doesn’t give the total demand for each price. This paradox comes from the odd (and erroneous) Cournot's perception that the choice of a producer to produce a specific quantity reduced the residual demand for the rest of the producers by this constant quantity for every price of the product; that is, the residual demand for the rest of the producers was cut down for every price by the quantity that the first producer decided to produce, which is wrong. Of course, after the successive counteractions between the producers (the infamous Cournot's concept of “best response”), the eventually resulting equilibrium involved equally shared quantities among them -which is absolutely reasonable for a uniform producers' cost- but, due to the erroneous perception about the individual demand curves, the point of final equilibrium, i.e. the final equilibrium price and quantity was wrong. The real individual demand curves for the firms distribute equally the total demand among the firms for every price, due to product homogeneity and hence indifference of the consumers as to the choice of the selling firm. For more analysis see my paper:

Article A Fundamental Reformation of Neoclassical Economics

So, the "best response concept" of Cournot is wrong and the same holds for the subsequent Nash game theory which is based on that Cournot concept.

Dear colleagues,

I see that many fellows read my article "A Revision of the Theory of Perfect Competition and of Value". I would like to inform you that there is a recently revised version of it on my profile page under the title "A Fundamental Reformation of Neoclassical Economics" and I would suggest that you rather read the latter as more improved. I think that the above article, supplemented by the equally important article "The Tragic Mistakes of the Economic Theory Still Being Taught in Universities", which is very short and easy to read, correct some fundamental mistakes and change dramatically the conventional Neoclassical theory.

I also see that many fellows read my theses, arguments and explanations on this discussion page, closely related to the above articles and theory, and follow me as they find them interesting.

However, I don't see any reaction from the academic society regarding these dramatic changes in the economic theory. I would be very interested in having your opinion, comments, objections, or questions/queries on these mistakes and the relevant corrections of the conventional theory, and having a discussion through this discussion/question page.

Dear colleagues,

I see that many fellows read my research articles on the mistakes of the Neoclassical theory, but there is a reluctance to express their opinion on them at this discussion page, although I have kindly requested for it. Maybe this is because my research may be viewed as belonging to heterodox economics, for the acceptance of which there is much reluctance. I would like to make here clear that such a view is wrong. Because heterodox economics criticizes neoclassical economics on the basis that its assumptions are too much ideal (complete knowledge, rationality, perfect mobility of labor and capital, free entry of firms into the market, etc) and not at all realistic, while my research accepts all those assumptions, which it considers necessary for the formation of the basic economic model (that could be maybe improved afterwards by introducing more realistic parameters), and just corrects some fundamental mathematical mistakes in the structure of this basic model. The fact that those corrections lead to a considerably different microeconomic and welfare theory is another thing, but this is the truth.

You can find the complete view of my research in my new article (which is a merger of my previous main articles A Revision of the Theory of Perfect Competition and of Value and The Tragic Mistakes of the Economic Theory still being taught in Universities):

Article The Mathematical Mistakes of Neoclassical Theory and its Reformation

and I would appreciate very much to have your opinion, comments, objections, or questions about that on this discussion page.

There is already much criticism against neoclassical economics and many modern economic theories have been developed because of this (game theory, decision theory, behavioral-empirical-experimental economics, neuroeconomics, heterodox economics, etc). In what my approach is different?

All modern theories criticize conventional theory on the basis of its deviation from reality due to its ideal assumptions. There is no doubt that reality is always far from the ideal state of theory, and any attempt to complete theory with assumptions and parameters closer to reality is welcome. But what about if a big amount of divergence between reality and theory is due to mistakes of the theory itself?

My approach accepts the ideal assumptions of neoclassical theory, because it considers them necessary for a basic theory, but reveals some fundamental mistakes in it, which, if revised, lead to a totally different theory and outcomes about how economy works, thus approaching closer reality. So, before seeking for a new more realistic theory, we must correct the conventional theory, and then improve it (to the extent it is necessary) by new more realistic models based on this corrected basic model.

You can find all this reformation in my new paper (that replaces my previous one A Revision of the Theory of Perfect Competition and of Value):

Article The Mathematical Mistakes of Neoclassical Theory and its Reformation

I would like to say a few words about the biggest mistake of Neoclassicals to consider the demand curve of the firm as horizontal. First of all, this is based on the price taking concept of Neoclassicals, which is wrong because it refers to a time after equilibrium, whereas we are before equilibrium seeking for an equilibrium price.

But even if we accepted this wrong concept, the interpretation of it does not mean that the demand curve of the firm is horizontal, but rather that this happens to its supply curve, as the firm can sell as much as it wants to potential customers at this equilibrium price without affecting the price due to its very small production. So, its supply curve becomes horizontal. But regarding the demand for the firm, this is not affected by the firm itself, so that the firm could make it horizontal, but by the consumers. So, why would the demand for a firm change (increase to infinite), i.e. why would consumers leave other firms and buy from this firm in question, if all other firms have the same price? Consumers don't have any incentive to do this. So, the demand for the firm in question shall not change. And, as the product is homogeneous and not differentiated, it is reasonable to assume that the total demand is equally distributed among the firms (for each price), which exactly my new approach does.

Dear colleagues,

So far my research about the fundamental mistakes of the conventional (neoclassical) theory is based mainly on its wrong perception for the price taking and the horizontal demand curve for the firm. Despite the great readability and vivid interest this research has caused, I feel some reluctance regarding the acceptance of the revised theory and perhaps even difficulties in its understanding, which is understandable due to addiction to traditional theory. For this reason, my new article demonstrates these mistakes of conventional theory by using its own methodology, without getting involved in the controversial issue of the horizontal or sloping demand curve for the firm:

Article The Disproof of Neoclassical Theory by Means of Its Own Means

Neoclassical theory must stop being taught in universities in the way it is taught, simply because it is not true and leads to fallacious conclusions about how economy works, the distribution of income, the optimization of everything (social welfare, economic efficiency, etc), things that distort reality and do a disservice to the society.

The theoretical (beyond practical or empirical) mistakes that exist in this theory are proven indisputably, by using its own assumptions and methodology, in my paper:

Article The Disproof of Neoclassical Theory by Means of Its Own Means

A colleague, with whom I had a debate on the inconsistency of neoclassical economics regarding the non-maximization of firms' profits at market level, argued that the equilibrium point of neoclassical theory does maximize the aggregate profits of firms since it maximizes the profit of each firm at firm level (based on the horizontal demand for the firm due to the price taking principle).

This is not true, because at market level the maximization of profits occurs at the intersection of the total marginal cost (total supply) with the total marginal revenue coming from the total demand and not with the total demand itself. To make it absolutely clear I used the numerical example attached here.

Trying to point out and to track historically the theoretical mistakes and the wrong course of the neoclassical theory regarding perfect competition and the value theory, we could distinguish the following points:

Cournot (1838). He introduced the wrong assumption of infinite number of tiny firms for the stability of equilibrium, so that each firm with its own small production cannot affect the total production and therefore the price. This assumption for price stability is unnecessary and also wrong, because the stability of price in perfect competition is ensured by the zero profit (i.e. the normal profit) due to the free entry of new firms. That is, every change (+ or -) of the firm's production from the equilibrium production of zero economic profit (which is also the maximum profit under perfect competition) will bring an economic loss, and for this reason it will not be done by the firm, thus resulting in price stability. Now, to have zero profit, the infinite number of firms is unnecessary and wrong, because this occurs when the number of firms becomes so large that the ever decreasing revenue for each firm becomes equal to its cost, which occurs with a finite number of firms.

Marginalists and Neoclassicals (1871-today), who mostly formulated the neoclassical theory. They accepted this wrong Cournot's assumption of infinite number of firms for price stability, and furthermore they misinterpreted the price stability condition of Cournot as an horizontal demand curve for the firm, whereas Cournot himself explicitely considered the firm's demand curve as sloping(!), as also did Marshall (1890). Apart from that, the horizontal demand for the firm is wrong for a number of reasons already discussed in this discussion, the main reason being that the total demand, which is sloping, is distributed among the firms, thus producing also sloping demand curves for the firms.

The neoclassical horizontal demand curve for the firm led neoclassical theory to the great inconsistency of maximizing profit at the firm level but not at the market level, and to wrong conclusions about how economy operates and the results of this operation, that is: location of the equilibrium point at the minimum cost, maximization of the social welfare (consumers and producers surplus), fair reward of labor and capital according to their marginal product, maximization of economy's efficiency (Pareto) and optimization of the allocation of production factors. All these outcomes are invalid and the economic theory changes dramatically by the correction of the above mistakes, with tremendous social and political implications.

Dear colleagues,

It is amazing how much neoclassical and today's mainstream economics are based on a misinterpretation of a Cournot's price stability condition, which remained undiscovered till now.

Cournot’s idea for price stability and perfect competition through an infinite number of firms, each of inappreciable production that cannot affect the price, has been fully adopted by the subsequent neoclassical theorists and embodied in today’s mainstream economics. But, in the passage of this idea from Cournot to neoclassical economics, there was a misinterpretation of this price stability condition that led neoclassical 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 led neoclassical and mainstream economics to erroneous models and outcomes. The most serious implication is that the equilibrium price in perfect competition is not at the minimum average cost, as neoclassical economics argues, but at a higher cost, which, in turn, has further implications for social welfare.

You can find more about this in my recent article:

Article Revisiting Cournot and Neoclassical Economics

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.

In my penultimate comment , 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.

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 makes sense 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 the neoclassical theory itself posits (as opposed to classical theory)? 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 perfect competition 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 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)