What kind of evolution will happen to economics if the axioms are modified such as ‘resources are rare but relative’, ‘economic entities are willing to act rationally’ and ‘the economy is going to balance’? Now let’s solve this problem. Before that, I would like to make it clear in advance that the discussion will be centered on the neoclassical economics. In terms of theoretical system, the neoclassical economics is closer to a complete form than any other schools. Although it remains at the part of exchange, the theoretical spread of the economics is more wide and perfect than others in terms of physiological viewpoint by considering the economy as a circulation system and developing the theory based on it. However, it does not mean to ignore the achievements of the Marxian school, the institutional school, the history school and others. Choe’s Economics regards the theories of these schools as a part of economics which corresponds to the system principle, as it will be discussed later.
For reference, Choe’s economics treats all of Keynesian, Austrian and Monetary school as an epigone of the neoclassical economics. This is because all the schools has a theoretical basis on the neoclassical economics. Of course, it is true that the above schools have shown differentiation by trying to identify economic fluctuations that can not happen in the paradigm of neoclassical economics. Especially, it is quite convincing to clarify economic fluctuations by using monetary variables such as credit cycle, interest rate or effective demand. However, as Thomas Kuhn pointed out in [The Structure of Scientific Revolutions], this is a theoretical split that often occurs before a paradigm revolution takes place, each of which has its own unique proposal to theoretical problems. Indeed, the interpretation and policy of each school collide with others and conflict with the existing paradigm.
In order to overcome limitations of the current mainstream economics, it is necessary to revise axioms as mentioned above. As is well known, the mainstream economics has many problems as below. It is not uncommon for the economics to deny theoretically the repetitive phenomena that exist and develop in reality, of which theories have fundamental limitations in reading economic phenomena. This problem becomes clear when you look at representative examples as below.
What can the mainstream economics tell us scientifically about the labor movement? How can it give us theoretical justification to the terms of productivity, competitiveness, high value-added industry, economic growth and change we often use? The mainstream economics is almost helpless on these important problems. In the real world, what does it mean that labor movement, movement of improving productivity, policy of improving competitiveness, developing high value-added industries and stimulating or stabilizing the economy? From the viewpoint of neoclassic economics, the economy should be free and efficient, but various economic policies are executed by government in order to overcome market failures. These problems mentioned above show clearly that the paradigm of mainstream economics has theoretical limitations. From now on, I will revise each axiom in turn to reveal the economic significance of axiomatic revision, and overcome ultimately the above problems. Furthermore, I will establish a new paradigm that will contribute to the evolution of economics.
(1). The first axiom; the scarcity of resources is relative
Let's examine what theoretical implications of modifying the first axiom of ‘scarce resource’ are. Since the purpose of economic activity is to acquire scarce resources and economics is based on the economic activities, the axiom of ‘scarce resources’ is the starting point of economics and it is the most basic in its theoretical system. The problem is important enough that all of the economic theories must changes if this axiom changes.
However the axiom of ‘scarce resources’ reveals contradictions in the theoretical system of mainstream economics. If resources are scarce, of course, the means of producing goods must also be acknowledged to be rare, and if the means of production are scarce perfect competition and general equilibrium which are prerequisites of the neoclassical economics can not be established. If means of production are scarce, numbers of producers are limited; if numbers of producers are limited, perfect competition can not be worked and general equilibrium also can not be achieved. Thus, the logic of the mainstream economics that resources are scarce while the economy is in perfect competition at the same time is a contradiction, which destroys general equilibrium
Also, if we assume that resources are scarce, it raises the question, ‘is perfect competition economically efficient by all means?’ Input of scarce resources for complete competition in a particular sector means waste. It means that limited resources that need to be dropped into the industry that creates more value-added than others are left in the area where it does not. The mainstream economics based on the logic of perfect competition denies the gap in productivity or profitability that exists among industries, but it is a real factor in the economy. Some industries enjoy relatively high profits, while others do not. Especially, profit margin of perfect competition industry is low on the average. Therefore, the policy efforts for perfect competition may mean waste of rare resources. This logical problem is fundamental to the paradigm of economics. Unless this problem is solved, economics can not overcome the limitations of logic and its ability to explain economic phenomena will also be weak. How can a theory built on logical contradictions explain any economic phenomenon correctly? This problem should be solved first of all, and the starting point of the solution is the modification of first axiom.
Modifying the first axiom as ‘resources are rare but relative.’, the following important meanings are newly given in economics. First, ‘there are differences in scarcity of resources.’ Second, ‘economic activity is a process to resolve the scarcity.’ Third, ‘the scarcity of resources changes with time passing.’ These meanings are so self-evident that they do not even need to be explained in detail, but these clear and simple economic meanings revolutionizes economics. Applying these meanings to the paradigm of economics easily solves the fundamental problems of the mainstream economics, including the theoretical contradictions as mentioned above. This problem is closely related to the modifications of other axioms, so we will look at the modifications of other axioms.
As we can see from the above meanings, the new first axiom has dynamic characteristics and plays the role of a stepping stone to evolve economics from the statics to the dynamics. The starting point for dynamics of economics is the amendment of the first axiom that ‘resources are scarce.’ If economics is transformed into dynamics, the logic of competition is given meaning and it can be matched to the axiom that ‘resources are scarce.’ In dynamics, competition does not mean waste of scarce resources but an essential element of economic activity and it acts as a driving force of economic growth. If competition disappears, economic entities neglect efforts to improve productivity such as technology development or cost reduction. From an evolutionary perspective, this is similar to the species diversity that triggers evolution.
(2). The second axiom; Economic entities are willing to act rationally
If the second axiom is modified as ‘economic entities are willing to act rationally’, what result would be happened? The modification of this axiom has three meanings: it takes time to reach a reasonable action, there are individual differences in the degree of rationalization, and there is room for exogenous variables to intervene in the rationalizing process. These three meanings are important in economics, so let's look at them in turn.
First, if the second axiom is modified as above, it is accepted naturally that it takes time for economic entities to reach rational behaviors, which is a logical conclusion. For reference, Alfred Marshall who has been awarded a reputation for completing the neoclassical economics introduced the concept of time into economics in earnest. The long-term cost curve and the short-term cost curve, which appear in any economics textbook, are his achievements. But he did not apply the dimension of time to the paradigm of economics as a whole. He acknowledged the problem of the neoclassic economics by declaring that ‘the problem of economics is that it takes time for the process to lead to the result’.
As a precondition for the mainstream economics, economic entities must always have perfect information in order to act rationally, but this is not realistic. It takes a considerable amount of time for them to get even incomplete information with spending the opportunity cost. For example, even if you want to buy a suit, you may go to the Namdaemun market or a department store, snoop on the streets and surfing the internet shopping malls. Every economic entity, whether consumer or producer, often makes trial and error in the process of rationalizing behavior.
The fact that it takes time to act rationally means that economic entities are always out of rational behaviors, even while Choe's economics accepts it. If economic entities show only the tendency of rationalization, the principle of their behaviors can be derived by discovering regularity there. This revision of the axiom allows economics to get closer to reality. By analogy, it does not only insist on the law of the falling state of vacuum, but it also enables us to find the scientific law that causes the falling motion in the state of air resistance with lift force.
Second, if the second axiom is revised as ‘willing to behavior rationally’ individual differences are acceptable, while the mainstream economics ignores it. Since it is the starting point of the economics to respect the free will of economic entities, naturally there appears differences in their choices, which bring the individual differences of all their activities. There is no doubt about them due to the differences in their birth environment and in the cultural influence of their growth process.
Individual differences appear in the current behaviors, but also in time. Some people approach rational behaviors in a relatively short time, while others take long time to reach rational behaviors. The pace of rationalizing also varies from person to person, and the new axiom can accommodate economics up to this point and enable us more accurate reading of economic phenomena. In addition, it provides a mechanism to evolve economics away from statics to dynamics. We will look back at this issue, dealing with the issue of general equilibrium right after.
Third, since the process of rationalization takes time, exogenous variables interfere with each other, causing conflicts and distorting the function of endogenous variables in the course of rationalizing action. The mainstream economics, while ignoring this reality, describes the functional system of endogenous variables at first and adds the role of exogenous variables afterward. Thus, the role of exogenous variables is often neglected or dealt with case by case, and there is often no way to go forward when exogenous variables change the function of endogenous variables. But the new axiom make it easier to capture the phenomena in reality. This problem can be solved by incorporating exogenous variables into endogenous variables of the dynamic equilibrium, as we shall see later, dealing with the issue of ‘dynamic equilibrium’.
(3). The third axiom; Economy is willing to balance
What happens to economics if the third axiom changes to ‘the economy is willing to balance’? From the conclusion, the amendment of this axiom is so important that it changes fundamentally all the theoretical system of economics because all the theories of economics is based on the balance logic. Even the scarcity of resources and rational behavior of economic entities, which have been discussed so far, are also explained on the balance logic by the economics. In other words, the function of price is to balance the scarcity of goods and the maximization of consumer’s utility and company’s profit lead to their rational actions which determine the price by balancing supply and demand .
Since the balance logic thus governs the economics as a whole, the modification of the third axiom is very important and has a variety of economic meanings. For a start, it means that the static imbalance of demand and supply is natural, imperfect competition is accepted general, surplus profit is natural and general, the size of surplus profit is determined by monopoly power and all the balances do not happen instantaneously and simultaneously.
Let's look at the first meaning that the static imbalance of demand and supply is natural. The mainstream economics holds that each of demand, supply and distribution is determined by a different variable, that is, demand is determined by marginal utility, supply is determined by marginal cost and distribution is determined by marginal productivity. Since demand, supply and distribution are determined by these separate variables, a balancing medium is needed to assume their equilibrium, and the mainstream economics considers it as the price function. It is the logic of mainstream economics that imbalances may arise, but the price function solves it quickly.
But in reality, the price function does not work as quickly and perfectly as the mainstream economics believes. The process for producer and consumer to reach balance between supply and demand need consuming time as have been showed in the second axiom, and the sensitivity and speed in response to the signal of price have to be different between economic entities since there is no evidence for the equality between them. For example, when the response to price of consumer is ahead of that of producer, fluctuation in demand lead to price fluctuation. At this time, the price is an imperfect balanced price which is different from the marginal cost of producer. This phenomenon is evident when the economy is changing rapidly. It is found too in commodities produced by monopoly.
In the case of daily commodities, the demand rises before the supply increases when the economy rises and income increases, so that the market price is determined at higher level than the equilibrium price and the producer enjoys excess profit for a while. Likewise, the demand of goods supplied by a monopolist also tend to be ahead of the supply, so they enjoy larger profit than the normal profit when the economy is strong. On the other hand, when the economy is retreating, the demand falls first before the supply falls and the market price is determined at a lower level than the equilibrium price. In this case, the stock of goods increases and the producer lose. Also, the goods produced by competitive firms are relatively quicker to respond to the demand than the goods produced by a monopolist. Thus, when the economy rises, the profit of the competitive firms increases faster than the profit of the monopoly in the short term, and their losses become relatively large when the economy declines.
Thus, consumer’s response is relatively more sensitive and producer’s response is relatively faster than each others, depending on the type of goods, the type of business and the economic situation. This means that the structure of price function differs by industry, by kind of goods, and by type of company. In reality, the price fluctuation of competitive goods occurs too often to say that supply and demand is balanced, and the stocks of monopolistic goods fluctuate before their prices fluctuate. Therefore demand and supply are either logically or realistically often unbalanced and price fluctuations are also common regardless of marginal utility or marginal cost. This means that economic reality is rejecting the balance logic of the mainstream economics.
Price is not in balance between demand and supply, but is always in the direction and process of balance. Rather, demand and supply are in a static imbalance, so the balancing power of price function works. If this assumption is taken that imbalance between supply and demand is natural, then it is theoretically possible to assign the existence of unemployment, inventory and idle facilities which are typical phenomena of imbalance.
For reference, Keynesian economics has been sharply criticizing the prevalence of unemployment and idle facilities in the real world, but has not even shown interest in the theoretical justification for their existence. This is why the Keynesian theory is bound to have inherent limitations. Keynesian economics almost followed the theoretical framework based on the logic of general equilibrium, except introducing the effective demand as a partial imbalance variable and replacing the aggregate demand. However the new third axiom solves this problem quite easily as we have seen above.
In the real world unemployment and inventory function economically as a buffer or an automatic adjustment organ regardless whether they are seemed negative or positive in our eyes. The increase or decrease of inventory plays a role of controlling production by rising or falling of prices as well as the increase or decrease of unemployment plays a role of controlling growth rate by suppressing rise of wages or promoting the drop. If unemployment and inventories have such economic functions, it is a duty of economics to give theoretical justification to them. Of course, when these economic functions are broken down, panic may occur which can be considered as a pathological phenomenon. The economic pathology to be discussed later is thus given its theoretical basis.
Second, what does it mean ‘to accept the existence of surplus profit as a natural state’? Although the existence of consumer surplus and supplier surplus is recognized by the mainstream economics, its significance has almost been ignored. The main reason that the mainstream economics neglects the existence of surplus and its meaning theoretically is that the theoretical system is developed based on the logic of perfect competition. As there is no room for surplus profit in the theory based on perfect competition, the mainstream economics has deliberately ignored the existence of surpluses in order to avoid a anti-rational logic because supplier surplus means profit which can not appear in perfect competition. There is no doubt that ideological consideration has intervened here.
If the existence of surplus, especially supplier surplus, is allowed and the existence of excess profits is recognized, the basic proposition of perfect competition and general equilibrium in the mainstream economics is broken. Thus the mainstream economics has been ignoring the profits that exist in reality. This has also played a part in denying the labor movement from the modern times. Of course, the mainstream economics does not deny normal profit, but this is just a pun. In reality, when the economy is brisk, most companies make too big profit to claim normal profit, and they often lose money when the economy slows down. The new axiom of economics accepts this imbalance as a matter of course. This issue is theoretically important, so let's take a closer look.
Each point on the curve of demand and supply represents what a particular consumer consumes and a particular supplier supplies among the consumer group and supplier group. Therefore, when a balanced price is given, all consumers and suppliers except the specific consumer or the specific supplier that consume or supply at the price enjoy surpluses. It is a logical consequence if individual differences are recognized. It is a good idea for you to ponder the demand curve and the supply curve when it is not easy to understand the above logic.
If surpluses are taken for granted by this logic, it is easy to solve the logical duality that has so tormented the mainstream economics as below. The mainstream economics argues that the incentive of supply is profit, but it falls into the trap of perfect competition and ultimately can not allow excess profits, which is an obvious double logic. How can the power of supply work if there is no profit? On the other hand, the new third axiom make the profit be taken for granted inevitably that exist in reality. This supplier surplus accumulates in the form of capital which makes its enlargement and reproduction possible. The new axiom provides such a theoretical ought for the existence of capital.
Consumer surplus also has an important new meaning by the third axiom modified as above. In terms of perfect competition and general equilibrium, consumer’s behavior must always be rational and balanced and then it is difficult to find a driver for additional consumption activity in this condition of static balance. On this viewpoint the utility has already been met and no new demand can arise. However on the viewpoint of dynamic balance, consumer incentive is given constantly and it is made possible by consumer surplus. In short, consumer surplus sustains demand increase and economic growth.
Third, what does it mean that “imperfect competition is accepted as a general phenomenon and surplus profit is natural"? Even though imperfect competition is regarded as an exceptional phenomenon in the mainstream economics of which theoretical system is based on perfect competition, there is no perfect competition in the real economy. The numbers of suppliers and consumers in all fields are limited, so everyone enjoys a certain degree of monopolistic profit. Of course there are differences of profit amount among economic entities. In this way, imperfect competition is a general phenomenon in the economy, so the theoretical framework should be built on the basis of imperfect competition. If it is argued that there exits perfect competition, this is a logical antinomy because the axiom of "resources are scarce" which is the starting point of economics denies the logic. If resources are scarce, the means of production are scarce, and perfect competition can not be achieved at the source.
In addition, the logic of the mainstream economics, in which consumer maximizes the utility, company maximizes the profit and demand and supply are balanced by the price, is also denied by perfect competition. If competition is momentarily balanced as in the mainstream economics, then the differences among individual companies will lead to a competitive gap and only one company which is the most competitive will survive. If we admit that there are individual differences, perfect competition effectuate only to cause such a monopoly. The newly revised third axiom resolves this contradiction at once by accepting that the existence of profit is taken for granted and that the balancing process takes time. We'll look at this problem right after.
As we have seen so far, the logic of the mainstream economics which is based on perfect competition should be discarded. Of course, the fact that the logic of perfect competition has to be discarded means that the theoretical system that is centered on it is needed to be revised, which does not mean that the significance of perfect competition has to be discarded. I would like to emphasize that the economic significance of perfect competition should be acknowledged but the theoretical framework should be newly constructed on the base of incomplete competition. For reference, [Theory of Monopolistic Competition] written by Edward Chamberlain in 1933 was unique notable in terms of imperfect competition, but he did not redefine the paradigm of economics.
In reality, monopolistic profits generally and widely exist as imperfect competition is common. What remains to be solved now is, ‘what makes the profit and the size of it’. To speak shortly in advance, profit is generated by the incomplete competition and the size of it is determined by the competitiveness gap among producers which is general in the real economy. The topic 'what determines the size of surplus' discussed from now on will solve these problems easily.
Fourth, what does it mean in economics that the size of surplus is determined by monopoly power when demand and supply are stable? Companies with perfect competition do not generate surplus profits if new entrants are always possible to enter and all of companies follows the equilibrium price determined in the perfectly competitive market. On the other hand, monopoly which is extreme of incomplete competition can make the biggest profit. Monopoly can determine price and enforce price differentiation. Companies in imperfectly competitive market, such as oligopolies, can also earn excess profits to match their monopolistic position. As can be seen from this fact, the profit of supplier is closely related to the intensity of monopoly.
In reality, almost all suppliers have various kind of monopolistic power and can not survive without it. Large enterprises are maintained on the monopoly power mainly built up by the power of capital, organization and information. Small companies compete with large ones through quickly adapting to changes in economic condition with taking advantage of organizational resilience and elasticity. Corner shops survive depending mainly on their geographical advantage. High-tech enterprises maintain their monopoly powers by technologies and traditional companies maintain it by public trust and trademark. Existing companies have monopoly powers of organization, human resources and sales capabilities compared to the new companies entering or willing to enter. And agriculture has monopoly power of land productivity with farmer’s competitiveness. These monopoly powers give producers profits that exceed production costs. In conclusion, the profit of a firm is caused by its monopoly position and the scale of profit is determined by the strength of monopoly power. This monopoly power is given not only to the supplier but also to the consumer, which leads to consumer surplus. The greater the monopoly power, the larger the consumer surplus is given. It is also possible for the production participants to earn income equivalent to their monopoly status.
Now what we need to consider is the concept of monopoly power. If the monopoly power is the factor that creates profit and determines its scale, which is an important driver of economic activities, it is necessary to clarify this concept since it implies an important meaning to construct a new paradigm of economics. Also, there is a growing need to redefine the monopoly concept because the magnitude of profit varies among producers with similar monopoly status, depending on the quality of the monopoly and the type of goods produced. This is a problem that must be solved, as the 'profit size is determined by the monopoly power'.
For the sake of discussion, I would like to define the monopoly power as 'exclusive power' or 'exclusive right'. When a monopolist often faces the possibility that a new company enters into the market, its monopoly power can not be said to be large enough to correspond to its position. Therefore, the power to prevent the entry of a new company is the most important variable determining the monopoly power. The larger the exclusive power, the more profit the producer can gain. If the exclusive power is small, it is common that even a monopolist accepts lower profits than the extreme profits of monopoly in order to prevent new entrants and enjoy continuously monopolistic profits.
Monopoly power, of course, is not of a nature that can be expressed in quantity or calculated in advance. In reality, it tends to be adjusted afterward by the price function. Indeed, no firm measures its monopoly power in advance in order to determine the price of its product. As is well known, most firms determine prices based on normal profits and their prices are controlled by demand and supply in the market. By the way, why does the economics have dismissed these facts? Let's look at the process for a while.
Robert L. Hall and Charles H. Hitch of Oxford University interviewed representatives of business and found that most companies did not determine the prices for profit maximization. They published a paper entitled [Price Theory and Business Behavior] in 1939, which is widely known as the full-cost principle. However their accomplishment was rejected almost by the mainstream economics because it is contrary to the principle of profit maximization which is one of its basic propositions, and its theoretical importance was also ignored.
In reality, the greater the monopoly power, the greater the profit a company enjoys by the natural rise of the price when the demand increases. On the contrary, if the monopoly power is weak, the profit is lowered by the new entry or by its threat. Therefore, whether it is possible to measure the monopoly power does not determine the suitability as an economics term, since it can be estimated by the magnitude of post-realized profit. At least it can be judged posteriorly of which monopoly power is greater than others.
Meanwhile, if the term monopoly power is interpreted in reverse, it means competitive power. The term of competitive power is more realistic and positive than the term of monopoly power. In our language habits it is easy to understand that the scale of profit is determined by competitive power rather than by monopoly power. In fact, the terms international competitiveness and company or country competitiveness are used naturally and frequently. This term has an important meaning because it provides a starting point for accepting one of the important economic phenomena that has not been explained so far in the mainstream economics. In other words, the term ‘productivity’ which is often used but could not provide a rationale for economics is easily afforded by its competitiveness. While competitiveness also needs to be understood dynamically, however it is difficult to understand it dynamically without introducing the concept of productivity. The dynamic competitiveness is mainly determined by the improvement speed of productivity. In order to understand competitiveness dynamically, the term of improvement speed of productivity is essential and important. This issue will be discussed in detail in the ‘Income Decision Theory’ and ‘Scientific Policy’.
The concept of competitive power or monopoly power does not apply only to production or consumption. When it is applied to distribution, one more important implication is thrown as follows. Although the current theory of distribution based on the marginal productivity has been convinced as a theorem that determines the value of each production factor, it has a crucial weakness that there is no mention about the distribution ratio among the production participants. Especially when the monopoly profits are issued or when the profits are getting strong due to the economic boom, the current theory of distribution becomes powerless. Since the theory does not clarify what determines the distribution ratio between the production participants, it is inevitable to be revised and complemented. The clue of the revision is found in monopoly power. The total size of the distribution, i.e. the supplier surplus, is determined by the marginal productivity, but the supplier surplus is assumed to be distributed by the bargaining power based on the monopoly power of each production participant. In short, the concept of bargaining power of each participant based on monopoly power must be newly introduced to compensate the incompleteness of the theorem of marginal productivity. In this case the theory can explain the reality.
The application of the notion of monopoly power or competitive power to the theory of international trade provides one more new academic implication. The theory of international trade, based on the comparative advantage hypothesis, has made an academic contribution in terms of the overall benefit of trade between countries, but it still has theoretical limitations that it can not explain the protective trade policies in reality, the income gap between the countries and the problem of economic subordination of underdeveloped countries. These weaknesses can be solved by complementing the comparative advantage with monopoly or competitive power. In other words, surplus occurs in international trade and it is shared by the bargaining power of both sides based on monopoly power. The current trade theory is not a complete one, because the hypothesis of comparative advantage does not account for how the increased production through trade is divided among countries. Therefore, it is necessary to complement the comparative advantage with the bargaining power. If this complement is done, it is easy to identify the cause of income gap between countries. In other words, countries that have relatively bigger bargaining power occupy more trade surplus than the others. The rationale that underdeveloped countries have to promote the industries of import substitution for economic development as Raul Prevish have asserted can be found here. The reason can be found too why the economic growth rate of developing countries which have focused on industrial-oriented export have been faster than the others.
The term of international competitiveness, which is often used in the real world, has come to be accepted into economics by this point. International competitiveness is improved by growing industries which has relatively big bargaining power. And it provides a way of logical explanation for trade protectionism. In other words, it can be understood that the protection policy of trade is implemented to promote the infant industry which will have greate competitiveness or bargaining power. However, the policy is often carried out in order to protect the infant industry or to protect domestic employment, the result is rather bad in historical experience. Let's look at a typical example. China has executed relatively open policies in electronics industry, on the contrary strong protection policy in automobile industry. There has been a dramatic development in the electronics industry as some global companies have come in to the world. However in the automobile industry, most of the chinese companies produce automobiles attached foreign trademarks.
The evil of protectionism is not only that. If protectionism calls for retaliatory countermeasures in other countries, it can lead to economic collapse as in the Great Depression. This problem will be examined in full in the 'Principles of International Trade and Exchange Rate Movement'. If one issue have to be said first before it, the balance of payments fluctuates with the considerable time difference from the balancing function of exchange rate. If exchange rate does not reflect international balance in time, trade protectionism is used to be raised. For example, the protectionism had a fierce force from the late 1960s to the mid-1970s in the United States. The exchange rate does not reflect the trade balance accurately in the short term because it is also closely related to prices, growth rate and unemployment.
Fifth, what does ‘equilibrium not occur at the same time’ mean? The economic significance of this proposition is evident when the logic is developed assuming that the equilibrium happens instantaneously at the same time. The general equilibrium theory of the mainstream economics is based on perfect competition, however there is a serious problem in the logic that perfect competition does not presuppose full equality of its conditions. In short, if competition conditions are not completely equal, full assurance of competition implies complete destruction of competition. When the equilibrium is accomplished temporarily and the competition between companies is fully guaranteed, the outcome of competition should be shown in a moment and then only one company survives to be a monopoly because of the inequality of its conditions.
Considering the fact mentioned above, it is a blessing that the equilibrium does not take place momentarily and it takes time to reach equilibrium. Since the process of balancing takes a considerable amount of time, companies with poor competitive conditions are given the possibility of survival. As the competition process takes time, it affords the opportunity for the companies to compensate their competitiveness and they receives a second benefit more importantly from the fluctuation of the economic situation in reality. By shifting the demand curve and the supply curve or by changing the shape and slope of each curve, the most competitive company loses its competitiveness if it can not adapt to the changes and market changes.
Generally speaking, a large company has a strong competitiveness from a static standpoint, while a small company has usually a competitiveness from a dynamic standpoint since it is relatively flexible in its organization and activity. This is similar to the historical fact that the giant dinosaurs disappeared when the ice glacier arrived on the Earth but the dwarf mammal survived and flourished. In fact, the economy is usually monopolized when the economy does not grow for a long time to stagnate or the economic conditions do not change. On the contrary, when economic conditions rapidly change or the economy grows relatively fast, the role of small companies which can respond flexibly to the situations is likely to undergo a process of competition with large ones in the long run. However, when the economy is in a catastrophic crisis it is not unusual for the monopolization to progress rapidly. We will look at this issue in the 'Scientific Policy'.
The proposition in the mainstream economics that perfect competition is always efficient is not true in a dynamic perspective, because perfect competition means complete monopoly unless competition conditions are assumed to be equal. However perfect equality of competitive conditions can not be found anywhere else in the real world. Since the economy is not always in perfect competition but it tends to be competitive, it is imperative to revise the third axiom as 'the equilibrium process takes time.' The above logic developed around supply can be applied to demand and it can be extended to distribution at the same time. To avoid repetition of the same logic, detailed descriptions thereof is omitted.
On the other hand, even though the theoretical framework of the mainstream economics is completed when the general equilibrium is reached, however equilibrium does not occur instantaneously, nor does it occur simultaneously in the real world. If we look at the fact that the equilibrium between supply and demand in the market of commodities and production factors do not occur at the same time, the fundamental problem of the mainstream economics is easily revealed. Although this problem is partly known by Keynesian economics, let's examine it at the viewpoint of Choe’s economics for logical consistency.
As we have seen in the previous discussion that imbalances of supply and demand are taken for granted and supply and demand are determined by separate factors that are not correlated, and then there appears time lag between them in the process of balancing. Demand responds almost instantly but fluctuates slowly over time, while supply shows relative delayed response but fluctuates more rapidly once reacted. These differences are mainly caused by the nature of supply and demand. Consumption is directly linked to life, but supply is indirect because it is aimed at profit. In addition, the supply requires time-consuming to expand production facility and has the characteristic of considering the risk of oversupply due to the expansion of production facility.
Differences in sensitivity and speed of response can be easily found between investment and savings which are important variables in macroeconomics. The fluctuations of savings are relatively stable, while investment is relatively less sensitive but its response speed is relatively faster than savings. Recognizing the existence of this disparity between savings and investments which are the functional variables in economic fluctuation provides a definitive clue to the theory of business cycle. Let's look briefly at this point, though we'll look at it in detail later in the ‘Income Theory’.
Taking the disparity between aggregate demand and aggregate supply as a result of the differences in the response sensitivity and speed between investment and savings, it can be assumed that aggregate demand exceeds aggregate supply. In this case, the economy booms during the continuous expansion of supply capacity. However, when aggregate supply surpasses aggregate demand caused by the nature that the response of supply is faster than demand, there happens oversupply and downturn in the economy. This logic is overly simple, which is insufficient to explain economic cycle that takes place in reality, but it certainly provides a theoretical basis for understanding the principle of business cycle. This problem will be addressed in detail later in the ‘Income Theory’
In short, there is time lag between demand and supply and there are differences in response sensitivity and speed between all the factors that make general equilibrium. Indeed, demand and supply of production factors are relatively inelastic to price changes. For example, if prices fall and oversupply occurs due to shortage of demand, demand for production factor should decrease and the price of production factor should fall, however labor is inelastic to the price change among production factors in reality. Since capital also has to be temporarily invested and it is difficult to recover, unemployment occurs and facilities become idle rather than falling in wage and price when the economy slows down. As a result, demand and supply of production factors are distorted, which in turn affects supply and demand of goods. The phenomena will be resolved in the long run, but until then they distort the several economic variables during the process. These distortions can lead to a continuous recession of the economy. At last depression and panic may happen. This problem will be also discussed in detail later in the ‘Income Theory’.