Sunday, 15 October 2000

From "No History of Ideas, Please, We're Economists"

By Mark Blaug.

What Adam Smith meant by competition is what modern Austrians call "process competition." What we nowadays call competition was for him "the obvious and simple system of natural liberty," meaning an absence of artificial restraints and, in particular, restraints on free entry into industries and occupations. Neither competition nor monopoly was a matter of the number of sellers in a market; monopoly did not imply a single seller but a situation of less-than-perfect factor mobility and hence inelastic supply; and the opposite of competition was not monopoly but cooperation. In short, competition denoted that pattern of business behavior which we conjure up by the verb "to compete:" to invade profitable industries, to expand one's share of the market by price cutting, and to jockey for advantage by any and all possible means. It was Auguste Cournot who in 1838 first invented the idea of perfect competition as a market structure in which business firms are so numerous that each firm must take price as given, being free only to adjust the quantity it produced. Not only was this conception of firms as "price takers" rather than "price makers" totally foreign to the way Adam Smith and all subsequent classical economists thought about competition, but to imagine that the "dynamic efficiency" which they clearly ascribed to the competitive process is exactly the same thing as the "static efficiency" of Pareto and Arrow-Debreu is to pile travesty on travesty (Hutchison, 1999).

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