Mises University, pt. 2

Tuesday had several good lectures, but I will highlight one by Thomas DiLorenzo on competition from the Austrian perspective. The Austrian definition he gave of competition is "a dynamic, rivalrous, entrepreneurial process of discovery that facilitates plan coordination among market participants to their mutual advantage." This is a rather complex definition, but it should be emphasized that time is crucial to it, as with much of Austrian theory and as reflected in the real world. Taking a snapshot on one day of an industry has made for many studies and grants but has not been the most advantageous approach for increasing understanding of how the market works. The market is a dynamic process--it happens all the time, and it changes all the time. Given this insight, the standard definition (as given in the Samuelson texts) is clearly insufficient. With minor variations, its conditions are:

1. many firms
2. homogeneous products
3. homogeneous prices
4. "costless" entry and exit
5. perfect information

Most of these conditions are hardly ever or never found in real industries. "Many firms" is somewhat vague, though, and there are industries with "many" firms, so we will leave this out.

Even if conditions 2 and 3 hold, the businesses trying to profit in the industry have every incentive either to differentiate their products or to influence consumers through advertising or lower prices. Not only that, but no industry has costless entry and exit. Even in the easiest case of entry and exit, the very fact that resources are deployed one way means that another possible use is forgone. But in more realistic cases, businesses need capital, and it has to come from somewhere. You can reduce the amount of steel needed to make flivvers only so far. Lastly, one very human limitation is that one can't know everything. Imperfect knowledge is a fact that is completely insurmountable. Given this, the best way is to coordinate economic effort by allowing people with the most relevant knowledge to their situations make decisions.

Samuelson said (for years!) that by these conditions the only two examples of perfect competition were in natural gas and wheat. He must have forgotten that their production is heavily subsidized and that their prices are heavily controlled. This ridiculous theory of competition has lead to many absurd antitrust decisions, which will have to be detailed another time.

The strength of the Austrian definition presented should be clear by contrast. The market is always changing, and at any given time someone is on top and someone is suffering the consequences of bad economic decisions. Entrepreneurs, perceiving unsatisfied but satisfiable wants, take risks and employ the trial-and-error method in determining the most efficient methods of production for their time and industry. These are not the most efficient forever, and so the process of discovery continues all the time in order to satisfy the wants of consumers (to make profits, the ultimate goal of the entrepreneur).

There are many reasons for a bad definition of competition to prevail, mostly due to some firms in an industry bringing in the government to suppress their rivals. It's most easy to see in cases 2 and 3 as presented above: if your product is inferior or more expensive, you'll want the FTC to believe that your competitor is clearly anticompetitive and hence bad for the economy.

The first few days were foundational stuff. On Wednesday the lectures will begin branching out to more complex considerations, so if you're already familiar with the basic case I've presented here, stay tuned.

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I've always thought the

I've always thought the concept of "perfect competition" as put forward in mainstream economics was ridiculous. Wheat and Natural Gas are commodities markets where there is no competition on product, but even in commodities market providers can (and do) compete on service.

"Perfect Competition" as described would mean that choice is arbitrary because every supplier is exactly the same, and thats really the complete absence of competition.

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