Is Competition Good

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Review of Industrial Organization 19: 37–48, 2001. © 2001 Kluwer Academic Publishers. Printed in the Netherlands.


Is Competition Such a Good Thing? Static Efficiency versus Dynamic Efficiency MARK BLAUG
University of Amsterdam, Amsterdam, The Netherlands

Abstract. This paper addresses the rationale for antitrust legislation. It is a striking fact that the legitimacy of antitrust law has been taken for granted in the United States ever since the Sherman Act of 1890 and, until the advent of the so-called Chicago School, it was even taken for granted by conservative American economists. Europeans, on the other hand, have always been lukewarm about legal action against trusts and cartels and this attitude is found right across the political spectrum in most European countries. Nevertheless, in both the U.S.A. and Europe, the ultimate justification for antitrust law derives from economic doctrine regarding the beneficial effects of competition. But what exactly are these beneficial effects and how secure is the contention of economists that competition is always superior to monopoly? Surprisingly enough, competition, that central concept of economics, is widely misunderstood by many economists, both as a market phenomenon and as an organizing principle of economic reasoning.

I. A Little History of Thought I begin by drawing what I believe is a fundamental distinction in the history of economics, as far back as Adam Smith or even William Petty, between two different notions of what is meant by competition, namely, competition as an end-state of rest in the rivalry between buyers and sellers and competition as a process of rivalry that may or may not terminate in an end-state. In the end-state conception of equilibrium, the focus of attention is on the nature of the equilibrium state in which the contest between transacting agents is finally resolved; if there is recognition of change at all, it is change in the sense of a new stationary equilibrium of endogenous variables in response to an altered set of exogenous variables; but comparative statics is still an end-state conception of economics. However, in the process conception of competition, what is in the foreground of analysis is not the existence of equilibrium, but rather the stability of that equilibrium state. How do markets adjust when one equilibrium is displaced by another and at what speed will these markets converge to a new equilibrium? But, surely, all theories of competition do both; existence and stability are tied up together and to study one is to study the other? By no means, however; it is easy to show that, for centuries, competition to economists meant an active process of jockeying for advantage, tending towards, but never actually culminating in, an



equilibrium end-state. Only in 1838, in Cournot’s Mathematical Principles of the Theory of Wealth was the process conception of competition totally displaced by the end-state conception of market-clearing equilibria. At first this did not succeed in wiping the slate entirely clean of an interest in competitive processes but in the decade of the 1930s – those years of high theory as George Shackle called them – the Monopolistic Competition Revolution and the Hicks-Samuelson rehabilitation of Walrasian general equilibrium theory, fortified by the New Welfare Economies, succeeded in enthroning the end-state conception of competition and enthroning it so decisively that the process view of competition was virtually buried out of sight. Let me elaborate. It is a striking feature of the language of The Wealth of Nations that the term “competition” invariably appears with a definite or indefinite article preceding it: “a competition between capitals”; “the competition with private traders”, and so forth. For Smith, competition is not a state or situation, as it is for Cournot and for us, but a behavioural activity; it is a race – the original sense of the verb “to compete” – between two...
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