The meaning of competition

The so-called “competition policy” lies in some theoretical assumptions which are completely wrong. Yet after few fancy equations, the student believes he already understands how a “perfect” market should behave.

Therefore, when the real one doesn’t behave as it “should”, intervention is conveniently legitimated.  This classic paper explains the root of this incredibly widespread mistake.

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“…There are signs of increasing awareness among economists that what they have been discussing in recent years under the name of ‘competition’ is not the same thing as what is thus called in ordinary language. But, although there have been some valiant attempts to bring discussion back to earth and to direct attention to the problems of real life, notably by J. M. Clark and Fritz Machlup, the general view seems still to regard the conception of competition currently employed by economists as the significant one and to treat that of the businessman as an abuse.

It appears to be generally held that the so-called theory of ‘perfect competition’ provides the appropriate model for judging the effectiveness of competition in real life and that, to the extent that real competition differs from that model, it is undesirable and even harmful.

For this attitude there seems to me to exist very little justification. I shall attempt to show that what the theory of perfect competition discusses has little claim to be called ‘competition’ at all and that its conclusions are of little use as guides to policy.

The reason for this seems to me to be that this theory throughout assumes that state of affairs already to exist which, according to the truer view of the older theory, the process of competition tends to bring about (or to approximate) and that, if the state of affairs assumed by the theory of perfect competition ever existed, it would not only deprive of their scope all the activities which the verb ‘to compete’ describes but would make them virtually impossible.

If all this affected only the use of the word ‘competition,’ it would not matter a great deal. But it seems almost as if economists by this peculiar use of language were deceiving themselves into the belief that, in discussing ‘competition,’ they are saying something about the nature and significance of the process by which the state of affairs is brought about which they merely assume to exist. In fact, this moving force of economic life is left almost altogether undiscussed.

I do not wish to discuss here at any length the reasons which have led the theory of competition into this curious state. As I have suggested elsewhere in this volume, the tautological method which is appropriate and indispensable for the analysis of individual action seems in this instance to have been illegitimately extended to problems in which we have to deal with a social process in which the decisions of many individuals influence one another and necessarily succeed one another in time.

The economic calculus (or the Pure Logic of Choice) which deals with the first kind of problem consists of an apparatus of classification of possible human attitudes and provides us with a technique for describing the interrelations of the different parts of a single plan. Its conclusions are implicit in its assumptions: the desires and the knowledge of the facts, which are assumed to be simultaneously present to a single mind, determine a unique solution. The relations discussed in this type of analysis are logical relations, concerned solely with the conclusions which follow for the mind of the planning individual from the given premises.

When we deal, however, with a situation in which a number of persons are attempting to work out their separate plans, we can no longer assume that the data are the same for all the planning minds. The problem becomes one of how the ‘data’ of the different individuals on which they base their plans are adjusted to the objective facts of their environment (which includes the actions of the other people). Although in the solution of this type of problem we still must make use of our technique for rapidly working out the implications of a given set of data, we have now to deal not only with several separate sets of data of the different persons but also—and this is even more important—with a process which necessarily involves continuous changes in the data for the different individuals. As I have suggested before, the causal factor enters here in the form of the acquisition of new knowledge by the different individuals or of changes in their data brought about by the contacts between them.

The relevance of this for my present problem will appear when it is recalled that the modern theory of competition deals almost exclusively with a state of what is called ‘competitive equilibrium’ in which it is assumed that the data for the different individuals are fully adjusted to each other, while the problem which requires explanation is the nature of the process by which the data are thus adjusted. In other words, the description of competitive equilibrium does not even attempt to say that, if we find such and such conditions, such and such consequences will follow, but confines itself to defining conditions in which its conclusions are already implicitly contained and which may conceivably exist but of which it does not tell us how they can ever be brought about. Or, to anticipate our main conclusion in a brief statement, competition is by its nature a dynamic process whose essential characteristics are assumed away by the assumptions underlying static analysis…”