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Platonic Competition
By
George Reisman**
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The
doctrine of “pure and perfect competition” is a
central element both in contemporary economic theory
and in the practice of the Anti-Trust Division of
the Department of Justice. “Pure and perfect
competition” is the standard by which contemporary
economic theorists and Justice Department lawyers
decide whether an industry is “competitive” or
“monopolistic,” and what to do about it if they find
that it is not “competitive.”
“Pure and perfect competition” is totally unlike
anything one normally means by the term
“competition.” Normally, one thinks of competition
as denoting a rivalry among producers, in which each
producer strives to match or exceed the performance
of other producers. This is not what “pure and
perfect competition” means. Indeed, the existence of
rivalry, of competition as it is normally
understood, is
incompatible
with “pure and perfect competition.” If that is
difficult to believe, consider the following passage
in a widely used economics textbook by Professor
Richard Leftwich:
“By way of contrast, intense rivalry may exist
between two automobile agencies or between two
filling stations in the same city. One seller’s
actions influence the market of the other;
consequently, pure competition does not exist in
this case.” (Richard H. Leftwich and Ross D. Eckert,
The Price
System and Resource Allocation, 9th ed.,
The Dryden Press, Chicago, 1985, p. 41.)
While competition as normally, and properly,
understood rests on a base of individualism, the
base of “pure and perfect competition” is
collectivism. Competition, properly so-called, rests
on the activity of separate, independent individuals
owning and exchanging private property in the
pursuit of their self-interest. It arises when two
or more such individuals become rivals for the same
trade. The concept of “pure and perfect
competition,” however, proceeds from an ideology
that obliterates the existence of individuals, of
private property, and of exchange. It is the product
of an approach to economics based on what Ayn Rand
has characterized as the “tribal premise.” (Ayn
Rand,
Capitalism: The Unknown Ideal, The New
American Library, New York, 1966, p. 7.)
The tribal premise dominates contemporary economic
theory, and is, as Miss Rand writes, “shared by the
enemies and the champions of capitalism alike . . .”
The link between the concept of “pure and perfect
competition” and the tribal concept of man, is a
tribal concept of property, of price and of cost.
According to contemporary economics, no property is
to be regarded as really private. At most, property
is supposedly held in trusteeship for its alleged
true owner, “society” or the “consumers.” “Society,”
it is alleged, has a right to the property of every
producer and suffers him to continue as owner only
so long as “society” receives what it or its
professorial spokesmen consider to be the maximum
possible benefit. As Professor C. E. Ferguson, a
supporter of the “pure and perfect competition”
doctrine, declares in his textbook: “At any point in
time a society possesses a pool of resources either
individually or collectively owned, depending upon
the political organization of the society in
question. From a social point of view the objective
of economic activity is to get as much as possible
from this existing pool of resources.” (C. E.
Ferguson,
Micro-economic Theory, 5th ed., Richard
D. Irwin, Inc., Homewood, Illinois, 1980, pp. 173f.)
According to the tribal concept of property,
“society” has a right to one hundred percent of
every seller’s inventory and to the benefit of one
hundred percent use of his plant and equipment. The
exercise of this alleged right is to be limited only
by the consideration of “society’s” alleged
alternative needs. Thus, a producer should retain
some portion of his inventory only if it will serve
a greater need of “society” in the future than in
the present. He should produce at less than one
hundred percent of capacity only to the extent that
“society’s” labor, materials and fuel, which he
would require, are held to be more urgently needed
in another line of production.
The ideal of contemporary economics—advanced half as
an imaginary construct and half as a description of
reality, with no way of distinguishing between the
two—is the contradictory notion of a
private-enterprise, capitalist economy in which
producers would act just as a socialist dictator
would wish them to act, but without having to be
forced to do so. (For an account of the origins of
this alleged ideal, see Ludwig von Mises,
Human Action,
3rd ed. rev., Henry Regnery, Chicago, 1966, pp.
689-693.) In accordance with this “ideal,”
contemporary economics tears the concepts of price
and cost from the context of individuals engaged in
the free exchange of private property, and twists
them to fit the perspective of a socialist dictator.
It views the system of prices and costs as the means
by which producers in a capitalist economy can be
led to provide “society” with the optimum use and
“allocation” of its “resources.”
A price is viewed not as the payment received by a
seller in the free exchange of his private property,
but as a means of
rationing
his products among those members of “society” or the
“sovereign consumers” who happen to desire them.
Prices are justified on the grounds that they are a
means of rationing, superior to the issuance of
coupons and priorities by the government. Indeed,
rationing itself is described by Professor George
Stigler, in his popular textbook, as “non-price
rationing,” prices allegedly being the form of
rationing that exists under capitalism. (George J.
Stigler, The
Theory of Price, rev. ed., The Macmillan
Company, New York, 1952, p. 83.)
Similarly, a cost, according to contemporary
economics, is not an outlay of money made by a buyer
to obtain goods or services through free exchange,
but the value of the most important alternative
goods or services “society” must
forego
by virtue of obtaining any particular good or
service. On this point, Professor Ferguson writes:
“The social cost of using a bundle of resources to
produce a unit of commodity X is the number of units
of commodity Y that must be sacrificed in the
process. Resources are used to produce both X and Y
(and all other commodities). Those resources used in
X production cannot be used to produce Y or any
other commodity. To use a popular wartime example,
devoting more resources to the production of guns
means using fewer resources to produce butter. The
social cost of guns is the amount of butter
foregone.” (Ferguson,
op. cit.,
p. 173.)
On the basis of this concept of cost, contemporary
economics holds that the only relevant cost of
production is “marginal
cost.” As a rule, and roughly speaking, for the
concept can only be approximated, “marginal cost” is
held to be the cost of the labor, materials and fuel
required to produce an additional unit of a product.
Their value is supposed to represent the value of
the most important alternative goods or services
that “society” foregoes in obtaining this additional
unit.
The concept of “marginal cost”
excludes
the cost of existing factories and machines. The
reason for this exclusion is that these assets are
“here,” they were paid for in the past and,
therefore, their cost is not regarded as a concern
of “society” in the present.
All prices, according to this view, should be
scarcity prices, i.e., prices determined by the necessity
of balancing a limited supply against a
comparatively unlimited demand.
Supply,
in the context of this doctrine, means the goods
that are here—in
the possession of sellers—and the potential goods
that the sellers would produce with their existing
plant and equipment, if they considered no
limitation to their production but “marginal cost.”
Demand means the set of quantities of the goods that buyers
will take at varying prices. Every price is supposed
to be determined at whatever point is required to
give the buyers the full supply in this sense and to
limit their demand to the size of the supply.
The essence of this theory of prices is the idea
that every seller’s goods and the use of his plant
and equipment belong to “society” and should be free
of charge to “society’s” members unless and until a
price is required to “ration” them. Prior to that
point, they are held to be
free goods, like air and sunlight; and any value they do
have is held to be the result of an “artificial,
monopolistic restriction of supply”—of a deliberate,
vicious withholding of goods from “society” by their
private custodians. After that point, however, the
value they may attain is limited only by the
importance which buyers attach to them.
On this view, every price is supposed to be an index
of the intensity of “society’s” need or desire for a
good—an index of the good’s “marginal social
utility.”
Thus the tribal view of property, of price, and of
cost leads to the view of competition held by
contemporary economics.
Competition
is viewed as the means by which prices are driven
down either to equality with “marginal cost” or to
the point where they exceed “marginal cost” only by
whatever premium is necessary to “ration” the
benefit of plant and equipment operating at full
capacity.
This is not competition as it exists in reality. The
competition which takes place under capitalism acts
to regulate prices simply in accordance with the
full costs of production and with the requirements
of earning a rate of profit. It does not act to
drive prices to the level of “marginal costs” or to
the point where they reflect a “scarcity” of
capacity. The kind of “competition” required to do
that,
is of a very special type. Literally, it is out of
this world. It is “pure” and “perfect.”
No one has ever defined “pure and perfect
competition”—the procedure is merely to present a
list of conditions which it requires. A fairly full
list of these conditions is presented by Professor
Clair Wilcox (who is not an advocate of capitalism)
as if it were a definition of “pure and perfect
competition.” He writes:
“The requirements of perfect competition are five:
First, the commodity dealt in must be supplied in
quantity and each unit must be so like every other
unit that buyers can shift quickly from one seller
to another in order to obtain the advantage of a
lower price. Second, the market in which the
commodity is bought and sold must be well organized,
trading must be continuous, and traders must be so
well-informed that every unit sold at the same time
will sell at the same price. Third, sellers must be
numerous, each seller must be small, and the
quantity supplied by any one of them must be so
insignificant a part of the total supply that no
increase or decrease in his output can appreciably
affect the market price. . . . Fourth, there must be
no restraint upon the independence of any seller or
buyer, either by custom, contract, collusion, the
fear of reprisals by competitors or the imposition
of public control. Each one must be free to act in
his own interest without regard for the interests of
any of the others. Fifth, the market price, uniform
at any instant of time, must be flexible over a
period of time, constantly rising and falling in
response to the changing conditions of supply and
demand. There must be no friction to impede the
movement of capital from industry to industry, from
product to product or from firm to firm; investment
must be speedily withdrawn from unsuccessful
undertakings and transferred to those that promise a
profit. There must be no barrier to entrance into
the market; access must be granted to all sellers
and all buyers at home and abroad. Finally, there
must be no obstacle to elimination from the market;
bankruptcy must be permitted to destroy those who
lack the strength to survive.” (Clair Wilcox, “The
Nature of Competition,” reprinted in Joel Dean,
Managerial
Economics, Prentice-Hall, Inc.,
Englewood Cliffs, New Jersey, 1951, p. 49. An
essentially identical list of requirements appears
in the much more recent textbook
The Price System
by Leftwich and Eckert,
op. cit.,
pp. 39–41.)
To summarize these conditions: uniform products
offered by all the sellers in the same industry,
perfect knowledge, quantitative insignificance of
each seller, no fear of retaliation by competitors
in response to one’s actions, constant changes in
price, and perfect ease of investment and
disinvestment.
To understand the alleged need for all these
conditions and what they would mean in reality, it
is necessary to project them on a concrete example.
This is usually not done at all, and is never done
fully—if it were, neither the theory of “pure and
perfect competition” nor the rationing theory of
prices could be propounded. So I shall use an
example of my own, which will not be of a kind used
by their supporters, but which will express
accurately the meaning of these theories. |
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Imagine a movie theater with 500 seats. The picture
is about to go on; the projectionist, the ushers and
the cashier are all in their places. “Society” has
the alleged right to the occupancy of 500 seats. If
they are not all occupied for this performance, no
future satisfaction can be obtained by any storing
up of the use of the seats for a future time. The
seats, the theater, the film, the necessary workers
are “here.” “Society,” supposedly, “has them” and
now it demands the full benefit from its alleged
property.
If the film is not run, the only thing that
“society” can save is the electric current which
might be made available elsewhere, or the coal which
must be consumed to generate the current. The costs
of the theater, the film, the workers are all “sunk
costs”—“water over the dam,” as the textbooks say—
and, since “bygones are bygones,” the only thing
which counts for “society” now is the cost of the
electric current.
The theater, according to the tribal-rationing
theory, should charge an admission price which will
guarantee the sale of 500 tickets for the
performance. If droves of people are standing in
line for admission, it should raise the price to
whatever point is required so that only 500 people
will be able to afford it. If all the people in line
have identical incomes, the same medical
disabilities, and natures of equal sensitivity, such
a price, supposedly, will mean that the 500 people
who want to see the film most, will see it. If they
are unequal in these respects, that is already
supposed to be an “imperfection,” as Professor
Wilcox would say, in the justice of the “market
mechanism.”
If, however, there are few people standing in line,
the theater should begin reducing its admission
price. It must keep on reducing its admission price
until it has attracted 500 customers. If an
admission price of only two cents is required to get
this many customers, then, supposedly, that is what
should be charged, provided only that the revenue
brought in at the box office covers the cost of the
electric current.
If the theater persists in charging its standard
price of, say, one dollar, at which it sells less
than 500 tickets, then, according to the
tribal-rationing doctrine, it is guilty of
“administering” its price and of “monopolistic
restriction of supply.” It is engaged in a process
of “price control”—in violation of the “laws of
supply and demand”—and in creating an “artificial
scarcity” of seats by “monopolistically” withholding
a portion of its supply from the market to maintain
a high price on those seats for which it does sell
tickets.
If the theater cannot sell 500 tickets even at one
cent per ticket, then, according to this theory, it
must either open its doors for free or cancel the
performance. In this case, a theater seat is,
allegedly, a free good—it is no longer “scarce” in
relation to the demand for it, and so there is no
longer any need for a price because there is no
longer any need to ration theater seats. If there
are 100 people who want to see the movie and who are
prepared to make it worth the theater owner’s while,
he should perhaps run the film—contemporary
economics would hold—provided he sells the remaining
400 tickets at whatever price is required to unload
them, including zero. This, however, would be
another “imperfection” in the “market mechanism”—price discrimination. The “ideal solution” in such a case,
it is alleged, would be to have the government
nationalize the theater, charge nothing and
subsidize the loss.
In the process of adjusting its price to attract
customers, the theater must not, of course, send
anyone out in the street to tell people about the
movie it is playing or the price it is charging.
That would be another “imperfection”— advertising.
Advertising, according to this theory, is a wasteful
and vicious means of “demand creation”—it makes the
“consumers” act differently than they really want to
act. So, as the theater is reducing its price, it
must be careful not to be too obvious about it.
Simply changing the price in the cashier’s window
should be enough.
However, while advertising by the theater is an
“imperfection,” “perfection” requires that all
potential customers of the theater possess perfect
and instantaneous knowledge of its price changes and
of the picture it is showing. It is another
“imperfection” in the operation of the “market
mechanism” if people about to enter other theaters,
or riding in their automobiles, or making love, do
not receive instantaneous communication of the price
changes, so that they may speedily alter their
plans. And, presumably, it is an “imperfection” if
they have not already seen all the movies many, many
times—to be perfectly informed about them.
Because the theater owner wants to “maximize his
profits,” he will not act in accordance with the
theory’s tribalistic precepts. However, he
would,
it is argued, if knowledge
were
perfect and automatic, if people
did
race back and forth between theaters in response to
penny price differences, and if a number of further
conditions were also fulfilled. If, for example,
there were 401 identical theaters in the same
neighborhood, all showing the same movie, and all in
the same position with regard to empty seats, then,
it is argued, the cunningly clever,
“profit-maximizing” businessman would reason as
follows: “At my standard price of one dollar, I can
sell only 100 tickets today. But if I charge 99.999
. . .9¢ (it is a standard assumption of the theory
that all economic phenomena are mathematically
continuous and thus capable of treatment by
calculus) I can sell all 500 tickets. For in
response to this insignificant price change, which
is infinitely close to my present price, I could
attract away one customer from each of the 400 other
theaters. This would be very good for me, and none
of the other theater owners would really notice the
loss of just one customer, and thus no one would
match my lower price. So that is what I will do.”
The same thought, however, will be racing
simultaneously, it is assumed, through the heads of
the other 400 theater owners, and so everyone’s
price will be trimmed just so much, and no one will
end up with any additional customers drawn from
other theaters. Each theater may attract
one percent of an additional customer who otherwise would
not have gone to the movies, but that is all.
The same process is repeated at the infinitesimally
lower price, as each theater owner seeks to
“maximize his profit,” led by the idea that his
insignificant price change will draw an unnoticed
amount of business from each of many competitors,
who will not reduce their prices in response to
his
action. This process of infinitely small price
reductions is supposedly performed with infinite
rapidity—presumably through the “automatic market
mechanism”— and so, instantaneously, the price is
brought down either to marginal cost or to the point
where one’s theater is jammed to capacity, which
circumstance alone, in the eyes of the theory’s
supporters, would justify the price being above
marginal cost.
According to the theory of “pure and perfect
competition,” the large number of sellers is the
main condition required to drive prices to “marginal
cost,” or else to the point where they reflect a
“scarcity” of the capacity that is “here.” If the
individual seller were a significant part of the
market and were in a position to handle a major part
of the business done by his competitors, then,
supposedly, he would never cut his price because he
would know that as a result of
his action
others will lose so much business that they will
have to match his cut and that he will thus be left
basically only with the lower price. When there is a
large number of small sellers, every price cut is
also matched, but, the argument is,
not because of
one’s own price reduction, but because
the other sellers are led to cut their prices
independently, guided by exactly the same thought.
The significance of all sellers having an
identical
product is supposed to lie in the greater
responsiveness of customers to price changes. If
each theater is playing a different movie, customers
are not likely to shift their business among the
various theaters in response to infinitesimal price
differences, and so a theater owner will have less
incentive to trim his price. The significance
attached to perfect knowledge is similar.
This portrait of the economic world of perfection is
not yet complete, however. There remain two other
major requirements if “society” is to derive the
maximum benefit from its “scarce resources.” It must
be possible, as Professor Wilcox puts it, for
investment to “be speedily withdrawn from
unsuccessful undertakings and transferred to those
that promise a profit. There must be no barrier to
entrance into the market . . .” This condition would
be achieved if movies were shown in tents, with
projectors using candlelight instead of electricity.
Then, whenever demand changed, theater owners would
merely have to unfold or fold up their theaters, and
light or blow out their candles.
This would be “perfection,” but not quite in its
full “purity.” For in addition, “the market price,”
as Professor Wilcox says, “uniform at any instant of
time, must be flexible over a period of time,
constantly rising and falling in response to the
changing conditions of supply and demand.” This
would be achieved if, after leaving the theater and
going to a restaurant for dinner, one were not given
a menu, but were seated in front of a ticker
tape—and were offered a futures contract on dessert;
and if afterward, on leaving the restaurant and
walking back to one’s apartment, one would not know
whether one could afford to live there that night,
or whether the rentals of penthouses had collapsed.
Only then would the world be “purely perfect.”
The
doctrine of “pure and perfect competition” marks the
almost total severance of economic thought from
reality. It is the dead end of the attempt to defend
capitalism on a collectivist base.
Ironically, that attempt took hold in economics in
the late nineteenth century (and has been gaining
influence ever since) through the efforts of
Victorian economists to refute the theories of Karl
Marx on the subject of value and price. The
rationing theory of prices was advanced as the
alternative to the Marxian labor theory of value.
The irony is that the “pure and perfect competition”
doctrine is to
the left of Marxism.
Marxism denounced capitalism merely for the
existence of profits. The “pure and perfect
competition” doctrine denounces capitalism because
businessmen refuse to suffer
losses.
The argument of the supporters of “pure and perfect
competition” is not that businessmen make excessive
profits
through any kind of “monopoly,” but that they are
“monopolistic” in refusing to sell their products at
a loss—which
businessmen would have to do if they treated their
plant and equipment as costless natural resources
that acquired value only when they happened to be
“scarce.”
The “pure and perfect competition” doctrine distorts
the facts of reality to a greater extent than did
the traditional critiques of capitalism. Those
critiques recognized that competition is a
fundamental element of capitalism, but they
denounced it.
Capitalism, they claimed, is ruled by the “law of
the jungle,” by the principles of “dog eat dog” and
“the survival of the fittest.” The “pure and perfect
competition” doctrine proceeds from the same base as
these earlier critiques, and is in full agreement
with them in their objections to such
characteristics of the process of competition as the
continuous improvement in products, the variety of
products, advertising, and the existence of idle
capacity. Both schools regard all these
characteristics of competition as a “waste” of
“society’s scarce resources.”
But the “pure and perfect competition” doctrine
regards these characteristics as “imperfections” and
attacks capitalism on the grounds that capitalism
lacks
competition.
Every industry, it asserts, is “imperfectly
competitive” (with the barely possible exception of
wheat farming). Every industry is guilty of
“monopolistic competition” or “oligopoly.” In the
words of Professor Bach:
“There is a spectrum from pure competition to pure
monopoly. Where there are a good many sellers of
only slightly differentiated products, but not
enough to make the market perfectly competitive, we
call the situation ‘monopolistic competition.’” And:
“Where there are only a few competing producers so
each producer must take into account what each other
producer does, we call the situation ‘oligopoly,’
which means few sellers.” (George Leland Bach,
Economics: An Introduction to Analysis and Policy,
6th ed., Prentice-Hall, Inc., Englewood Cliffs, New
Jersey, 1968, p. 337. Bach expresses the same view
in the eleventh edition of his book, published in
1987, pp. 376–377, but not as succinctly.)
The concepts of “monopolistic competition” and
“oligopoly” are indistinguishable, both in theory
and in practice. As examples of “monopolistic
competition,” Professor Bach cites Kellogg and Post
in the field of breakfast cereals, and RCA and
Philco in the field of television sets—even though
these industries are fully as “oligopolistic” as the
automobile or steel industry. (Even small retail
establishments, a more popular example of
“monopolistic competition,” can also be classified
under “oligopoly,” since there are only a few of a
given kind in a given neighborhood.) In any case,
these two concepts embrace virtually all industries,
except the few that are called “pure monopoly.”
The competition that capitalism is accused of
lacking—as a result of “monopolistic competition”
and “oligopoly”—is called price competition.
The nature of price competition, as contemporary
economists see it, is indicated in another passage
in Professor Bach’s textbook:
“Analytically, the crucial thing about an oligopoly
is the small number of sellers, which makes it
imperative for each to weigh carefully the reactions
of the others to his own price, production, and
sales policies. The result is a strong pressure to
collude to avoid price competition or to avoid it
without formal collusion.” (Ibid.,
p. 361.)
Capitalism is accused of lacking price competition
on the following grounds: if there are few sellers
in a market, any seller who cuts his price must take
into account the fact that the other sellers will
match his cut—so he may be better off if he refrains
from price cutting; thus prices will not be driven
down to the level of “marginal cost” or to the point
where they “ration” the benefit of “scarce”
capacity.
Consider the evasion entailed in the accusation that
capitalism lacks price competition. Every decade,
since the beginning of the Industrial Revolution,
commodities have become not only better, but also
cheaper—if not always in terms of paper money (the
value of which has been constantly reduced by the
policies of governments), then in terms of the labor
and effort that must be expended to earn them. What
is it that has made producers lower their prices for
the last two hundred years? Blankout.
Actual price competition is an omnipresent
phenomenon in a capitalist economy. But it is
completely unlike the kind of pricing envisioned by
the doctrine of “pure and perfect competition.” It
is not the product of a mass of short-sighted,
individually insignificant little chiselers, each of
whom acts to cut his price in the hope that his
action won’t be noticed by any of the others. The
real-life competitor who cuts his price does not
live in a rat’s world, hoping to scurry away
undetected with a morsel of the cheese of thousands
of other rats, only to find that they too have been
guided by the same stupidity, with the result that
all have less cheese.
The competitor who cuts his price is fully aware of
the impact on other competitors and that they will
try to match his price. He acts in the knowledge
that some of them will not be able to afford the
cut, while he is, and that he will eventually pick
up their business, as well as a major portion of any
additional business that may come to the industry as
a whole as the result of charging a lower price. He
is able to afford the cut when and if his productive
efficiency is greater than theirs, which lowers his
costs to a level they cannot match.
The ability to lower the costs of production is the
base of price competition. It enables an efficient
producer who lowers his prices, to gain most of the
new customers in his field; his lower costs become
the source of additional profits, the reinvestment
of which enables him to expand his capacity.
Furthermore, his cost-cutting ability permits him to
forestall the potential competition of outsiders who
might be tempted to enter his field, drawn by the
hope of making profits at high prices, but who
cannot match his cost efficiency and, consequently,
his lower prices. Thus price competition, under
capitalism, is the result of a contest of
efficiency, competence, ability.
Price competition is not the self-sacrificial
chiseling of prices to “marginal cost” or their day
by day, minute by minute adjustment to the
requirements of “rationing scarce capacity.” It is
the setting of prices perhaps only once a year—by
the most efficient, lowest-cost producers, motivated
by their own self-interest. The extent of the price
competition varies in direct proportion to the size
and the economic potency of these producers. It is
firms like Ford, General Motors and A & P—not a
microscopic-sized wheat farmer or sharecropper—that
are responsible for price competition. The price
competition of the giant Ford Motor Company reduced
the price of automobiles from a level at which they
could be only rich men’s toys to a level at which a
low-paid laborer could afford to own a car. The
price competition of General Motors was so intense
that firms like Kaiser and Studebaker could not meet
it. The price competition of A & P was so successful
that the supporters of “pure and perfect
competition” have never stopped complaining about
all the two-by-four grocery stores that had to go
out of business.
Competition is the means by which continuous
progress and improvement are brought about. And
nothing could be more pure and perfect—in the
rational sense of these terms—than the competition
which takes place under capitalism.
The ideal of the “pure and perfect competition”
doctrine, however, is a totally stagnant economy—the
“static state,” as it is called—in which production
and consumption consist of an endless repetition of
the same motions. (For a valuable discussion of the
influence of this “ideal” on contemporary economics,
see von Mises,
Human Action.)
It is in the name of this “ideal” that the
supporters of “pure and perfect competition” attack
the constant introduction of new or improved
products, the evergrowing variety of products, and
the advertising required to keep people abreast of
what is being offered.
And only from the standpoint of this “ideal” can one
declare that idle capacity is a “waste”—for only in
a “static state” would there be no need for any
unused capacity.
A capitalist economy is not “static.” Producers know
that they must respond to changes in conditions.
They endeavor always to have a margin of idle
capacity, which can be brought into production if
and when it is needed. Under capitalism, the normal
state of production requires the possession of extra
machines and tools in every industry, to meet every
foreseeable change in demand. This is not a “waste,”
not any more than the fact that consumers under
capitalism own more shirts than the ones they happen
to be wearing.
What the “pure and perfect competition” doctrine
seeks is the
abolition of competition among producers.
Its “ideal” is a state in which no producer is able
to take any business away from another producer. If
a man is producing at full capacity, he cannot meet
the demand of a single additional buyer, let alone
compete for that demand. And if he is not producing
at full capacity and is charging a price equal to
his “marginal cost,” he still cannot compete for the
demand of any additional buyers because he is
forbidden to “differentiate” his product or to
advertise it.
The “pure and perfect competition” doctrine seeks to
replace the competition among producers in the
creation of wealth, with a
competition among consumers in the form of a mad scramble
for a fixed stock of existing wealth. It seeks a
state of affairs in which no additional buyer can
obtain a product without depriving some other buyer
of the goods he wants—for that is what competition
at full capacity would mean. It seeks to make men
competitors in consumption rather than in
production. It seeks to transform the competition of
human beings into a competition of animals fighting
over a static quantity of prey. In other words, when
it denounces capitalism, it is denouncing the fact
that capitalism
is not ruled by
the law of the jungle.
The supporters of “pure and perfect competition” are
aware of the fact that their doctrine is
inapplicable to reality. This does not trouble them.
Their view is expressed by Professor Wilcox, who
observes casually (in a passage immediately
following his alleged definition—the list of
conditions I quoted earlier):
“Perfect competition, thus defined, probably does
not exist, never has existed, and never can exist. .
. . Actual competition always departs, to a greater
or lesser degree, from the ideal of perfection.
Perfect competition is thus a mere concept, a
standard by which to measure the varying degrees of
imperfection that characterize the actual markets in
which goods are bought and sold.”
This “concept” divorced from reality, this Platonic
“ideal of perfection” drawn from non-existence to
serve as the “standard” for judging existence, is
one of the principal reasons why businessmen have
been imprisoned, major corporations broken up and
others prevented from expanding, and why economic
progress has been retarded and the improvement of
man’s material well-being significantly undercut.
This “concept” is at the base of antitrust
prosecutions, which have forced businessmen to
operate under conditions approaching a reign of
terror.
Such are the effects of mysticism when it is brought
into economics. Non-existence has no consequences;
but those who advocate it, do. |
This essay originally appeared in Ayn Rand’s
The Objectivist, vol. 7, nos. 8 and 9,
August and September, 1968.
Copyright © 1968 by The Objectivist.
Copyright © 2005, 1991 by George Reisman. All
rights reserved.
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