"[A] couple of ... Austrian economists ... undercut two other fairy tales in mainstream economics. I’m thinking about F. A. Hayek on 'perfect competition,' and Israel Kirzner on 'market equilibrium.'
"Hayek pointed out that in mainstream models of perfect competition, there is no actual competition occurring. For example, when thinking about how businesses compete with each other, one of the first things that comes to mind is price competition – I try to gain an edge on my competitors by offering lower prices than they do. But in the perfectly competitive model, every business is a 'price taker' – that is, they have no options about the price they set, and everyone sets the same price as everyone else. Prices are of course just one way firms can compete with each other, but the larger point is that competition is an active and ongoing process, and that in perfectly competitive models, no such process takes place.
"Kirzner makes a parallel point about [the mainstream fairy tale of] market equilibrium ... Central to his theory of market process is the entrepreneur and their alertness to opportunities. Entrepreneurs acting on opportunities helps supply the information and competitive pressure that drives economic process forward. But this kind of activity doesn’t exist in equilibrium analysis....
"In markets with [so called] perfect competition, no competition actually takes place, and in markets that have reached [so called] general equilibrium, there is no market process being carried out. Nothing really happens anymore in such a world – everything is stable and static.
"Of course, in the real world, markets are never perfectly competitive, nor are they ever in a state of equilibrium.... According to much mainstream economic theory [however], markets falling short of perfect competition, or existing out of an equilibrium state, is a sign that there is a problem with the market itself, perhaps necessitating a solution to be imposed by the state. But wiser minds realise that markets not being perfectly competitive or in a state of perfect equilibrium isn’t a problem to be solved – it’s the whole point of having markets to begin with."~ Kevin Corcoran, from his post 'Fairy Tales and Perfect Markets'
Thursday, 9 March 2023
"...it’s the whole point of having markets to begin with."
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I actually came across a perfectly competitive market when working in Vietnam some years ago. Across the street from the university was a typical Vietnamese row of shed-based businesses. Each ran a photocopier which looked to have been recycled from a Malaysian rubbish dump. Nobody could raise the price above the equivalent of 1.5 NZ cents a page, because all of their customers would immediately walk to the next-door shed. Nobody could afford to lower the price below 1.5 cents, because then their family would starve. And nobody could afford to innovate, because that would have required capital to invest in better equipment.
Vietnam at the time was an interesting place to observe phenomena from first-year economics texts in real life. My students laughed at the information asymmetry shown when I told them about paying a street vendor 10 times the going price for a loaf of bread, because we could only exchange price bids by holding up fingers. I misunderstood what 1 finger represented, and she was not about to share that information with me.
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