Most of academic economics is polluted by the dangerous notion of ‘perfect competition’. It is dangerous because it is so utterly unlike the real world. Capitalism’s great duty is the taking of risks. Success is measured not so much by the virtues of the product but its place in a subtle flux of prices and alternatives. Perfect competition, with its associated poetry of ‘equilibrium’ is a romantic folly.
– John Blundell, Institute of Economic Affairs
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Samizdata slogan of the dayJuly 23rd, 2003 |
 12 comments to Samizdata slogan of the day |
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Excellent quote. All this business about perfect competition and the “Evenly Rotating Economy” has nothing to do with the real world. Economies are laden with uncertainty and continual change.
While we are at it, can we mock the notion of fair prices?
My employer is in a difficult financial position.
Recently, a senior manager at our primary client offered to cover my paycheck out of his own pocket. After some reflection, I responded that corporations are vehicles for risk management.
Really, that is something they (as a vehicle) do very well. Individual companies that make the right decisions more often than not prosper. The judge of “right decisions” is economic success, which is the closest we’ve got to an impartial judge.
… continuing my train of thought…
Part of the business cycle is the “herd mentality” tendency for large numbers of people to simultaneously make the same kind of bad decision.
The advantage of a free market is that while many make a bad decision, there are others who make a different decision, often only to differentiate themselves from the pack. Where a command economy only gets to take one choice or the other (in binary decisions), a free market gets to take both choices and evaluate them based on the aforemention impartial judge.
The trouble with the theory of perfect competition is that several of the key axioms underlying the theory are false.
Transactions costs are not zero. Knowledge is not freely and equally diffused, but in fact expensive, rare, and difficult to obtain. Skills are not perfectly transferable, nor equally distributed. Capital is not allocated perfectly or even widely. The incentives of corporate management are not fully aligned with shareholders. Even entrepreneurs do not act entirely on financial interests.
All these factors, and I’m sure many more I haven’t thought of, combine to prevent perfect competition ever occuring in reality.
“Perfect competition would be a lot closer if everybody possessed a nuclear handgrenade…”
Dilbert, (alledgedly… :0).
Competition is nothing more than a condition that produces an end state. It is not an end state in itself. The things so many advocates of “perfect competition” theory decry are the very things which prove that competition exists and is functioning as free market theory predicts it will.
Jonathan – fascinating! What is that notion of an ‘Evenly Rotating Economy’ you mention in passing?
I can guess – but please explain more.
No reasonable economist would claim that perfect competition is a good approximation of reality except for certain markets where, indeed, the number of agents is high, transaction costs are low, and informational asymmetries are limited. However, it is an extremely useful theoretical concept. Economics does not attempt to model economic reality in its incredible complexity; rather, it tries to capture certain phenomena by building simple models that only take into account the most important factors. Thought experiments are central to economics. It makes sense to begin studying it with static perfect competition models, as the simplest case, and proceed to more realistic constructs, throwing in asymmetric information, monopoly power, using game theory, introducing intertemporal choice, uncertainty, etc. The notion of equilibrium also applies to non-perfect-competition markets. Some economists have eschewed that notion (Schumpeter for one), but it doesn’t make it meaningless or dangerous.
In other words, we start with saying, “suppose there were perfect competition” and see how the world would look then. Next, we ask ourselves how we can factor in various imperfections.
This is how we study physics, by the way. For instance, to understand how two bodies collide, we first assume they are points; then, perfect undeformable balls; then, allow for deformation, etc.
Economics does not attempt to model economic reality in its incredible complexity Nor does science in general attempt to model the complexity of the real world. ‘scientific models’ are not science in any generally accepted meaning of the term.
Alex(ie) is correct and the author is putting up a strawman.
Unrelated, but here’s an interesting thing i found on Indymedia UK, along with…
a puff piece about an anti-war protest in Edinburgh (war’s over, kids),
a bunch of lefty comment invective,
and a photo of a US flag with a swastika on it:
bush nazi connection
22.07.2003 00:34
Prescott Bush who is one of Bush’s grandfathers was a banker/money launderer who was responsible for financing 40% of the entire nazi war machine. He was prosecuted under the trading with the enemy act, and labeled in the papers as Hitler’s Angel.
Well, that man’s son became president, and then his grandson.
There is a reason for the swastica, america is ruled by a fascist crime family.
http://www.consortiumnews.com/1999/100599b.html
http://www.yuricareport.com/index.html
Amazing! The Bush familay had access to funds equal to that of 40% of the GDP of Nazi Germany?
These kids need to put their bongs down.