A Critical Review of Competitive Firm’s Theory

Aims: In the first place, to demonstrate that economic behavior that neoclassical theory attributes to competitive firms is technically inefficient since it does not correspond to the highest possible internal rate of return, which implies the violation of the first theorem of welfare. Secondly, overcoming error in the economic behavior of competitive firms gives rise to the basic results of the theory of nonexistence of the labor market (TNLM), on which the theorem of superiority, a basic element of its construction, is finally proved.

Methodology: The demonstration is carried out through a theorem based on the free entry and exit criterion, fully respecting the initial conditions and hypotheses of neoclassical theory. For all these effects the mathematics of restricted maximization and some concepts of convex optimization are used.

Results: We show that with any internal rate of return higher than the one inherent to the maximization of profits and the same amount of resources determined by current walrasian prices, it is possible to produce more in a more competitive industry, which in turn means higher financing levels for consumers and therefore better situations in the sense of Pareto.

Conclusion: It thus implies that neoclassical theory explains the operation of a market economy in which firms operate inefficiently even though they could overcome their own results; that is acting irrationally. Since efficient theoretical explanations are a prerequisite to efficient predictions, and the latter, necessary to establish efficient criteria to control explained phenomena, the evidence of explanatory inefficiencies shown in this research, have exposed the need to build efficient explanations of the functioning of a market economy. To that end seeks to contribute the theory of nonexistence of the labor market, whose pillars are the criticism and reconstruction of the theory of producer. The demonstration that the inefficiency of the theory of firm in neoclassical tradition violates the first welfare theorem, injures the norm that guides all axiomatic deductions of this logical system, i.e. the perfectly competitive equilibrium. It then imposes the need to replace that norm by any other descriptive notion provided by a robust theory to orient the sense that the criteria of economic policy should follow, for the sake of a more desirable economic order than the current. Apparently, this concept should be to rethink the demonstrations of existence of a general competitive equilibrium, this time based on the correction of the analytical error of neoclassical theory.

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