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Platonic Competition

December 20, 2005

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.

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 ever growing 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.


George Reisman, Ph.D., is Professor of Economics (Ret.) at
Pepperdine University's Graziadio School of Business and Management in
Los Angeles. To comment on this piece, go to the blog. His web site is www.capitalism.net. His book Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) is available through Mises.org, Amazon.com, and on his web site. You can contact him by MAIL. See his Mises.org Daily Articles Archive, read his interview in the Austrian Economics Newsletter.This essay originally appeared in Ayn Rand's The Objectivist, vol. 7, nos. 8 and 9, August and September, 1968. It is available as a pamphlet from The Jefferson School of Philosophy, Economics, and Psychology. The author wishes to note that his book Capitalism
contains a far more comprehensive and detailed treatment of the
subjects dealt with here (see in particular, pp. 425-437). Where
possible, references have been updated to conform with those in Capitalism.
This article is copyright © 2006, by George Reisman. Permission is
hereby granted to reproduce and distribute it electronically and in
print, other than as part of a book. (Email notification is requested.) All other rights reserved.


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