Antitrust law relies heavily on flawed economic theory–particularly its theory of competition. It’s a view held explicitly or implicitly by most economists, politicians, and journalists. It’s been taught for decades in the universities. Unfortunately, it’s also a view of competition held even by the victims of antitrust.
I’m referring to the textbook theory known as “pure and perfect competition.” This is a theory, not about how market competition really works–but about how it ought to work, according to the Judeo-Christian ethic, regardless of reality. According to this theory, markets are “perfect,” or “ideal,” only if they possess the following characteristics:
Every industry must have hundreds of firms and potential entrants, each firm with tiny shares of the overall market.
Potential entrants must have equal and virtually cost-free access to the industry. No firm can have the power to influence the price of its products or to alter its market share.
Within each industry the products and services of each firm must be virtually indistinguishable from those of other firms; with no need to differentiate one’s offerings, ideally there should no promotion or advertising; if there is, it’s a waste.
Profits are non-existent; if they exist, there is an imperfection. A firm’s price should only cover its “marginal costs”–the variable costs, the extra costs needed to produce extra goods, such as materials, fuel, inventory and labor. In pricing its product a firm is not supposed to cover fixed costs, the costs associated with plant, equipment, and patents, because these assets already exist. Since, in fact, fixed capital wears out and must be replaced, the requirement that price cover only marginal costs means that the “ideal” situation is firms showing losses.
In short, the theory says there should be intense competition, but if any firm is actually observed competing or, God forbid, winning a competition, that’s evidence of “imperfect competition” and of “market failure.” What then is the solution to a market that “fails?” Obviously, a government policy to “fix” the failure, to “enforce competition”–all in accordance with the demands of this bogus theory.
Need I remind you that this theory of “perfect competition” is wholly at odds with the facts of reality? It is a theory that pertains to no industry and no market, any place in the world, at any time in history. It is a theory at odds with facts. The proponents of the theory know this full well; they admit it openly in their texts. Still, they say, the theory must serve as a “rough guide” for judging real market competition.
Where on Earth did this unreal theory of competition come from? It came from bad ideas in philosophy. After all, doesn’t the theory of “pure and perfect” competition fit the prevailing view of “ideal” fairness and “social” justice? Aren’t large companies and wealthy capitalists seen as ruthless and powerful exploiters? Let’s have hundreds of firms, each with no influence on us. Isn’t it felt that everyone, regardless of ambition or merit, should have equal access to wealth and the preconditions of wealth? That’s egalitarianism; its political application is socialism. Well, let’s have equal access to industry, to goods, to information, to software code. Isn’t it considered vulgar and crass to promote oneself and one’s products? Isn’t it thought impolite to stand out as different, let alone as better? Let’s have no advertising or promotion. Isn’t profit considered a theft–a booty that rightly belongs to the community? Let’s have the opposite; let’s have losses. Don’t the critics insist that business must be a “steward” of the wealth that’s “already here” and belongs to “society?” Isn’t business urged to ignore the rights of its shareholder and instead serve the needs and wishes of the public and consumers? Let’s have an ideal goal of pricing and profit-making which forbids any business to take care of, replace or upgrade its capital equipment. If business does any of these forbidden things, let’s call that “imperfect.” Let’s call it “impure” behavior. Let’s say it’s “tainted” competition. “Clean” competition, we are told, really means no competition.
Such contradictions are the necessary result of judging capitalist behavior by an anti-capitalist ethic.
Although the liberals in America, the traditional disciples of big government, have been willing accomplices in promoting this view of competition, it is the conservatives, the alleged defenders of capitalism, who are most responsible for it. The conservatives were the ones who initiated the antitrust laws, the ones who, like Teddy Roosevelt, intensified their enforcement and the ones who have defended the laws and their basis in academia for decades–primarily at the University of Chicago.
The “pure and perfect competition” doctrine appeals to conservatives and liberals alike because it offers an ideal world free of what they call crass self-interest, free of the so-called vicious profit motive. It’s a world that says business must be a humble and self-sacrificial servant of society and consumers, a world that preserves a place for the losers and laggards, by sacrificing the best among us and by enacting laws that permit the meek to inherit the Earth now. Frank Knight, father of the Chicago School of Economics and main proponent of “perfect competition” wrote that the “Christian conception of goodness” “is the antithesis of competitive.” Conservative F,A. Hayek wrote that “it may be a good thing if the monopolist is treated as a sort of whipping boy of economic policy.” And Milton Friedman has written that “the participant in a competitive market is hardly visible as a separate entity.” Any businessman who is “visible” is virtually a monopolist, he claims, and as such “it is easy to argue that he should discharge his power . . . to further socially desirable ends.” Friedman realizes that “widespread application of such a doctrine would destroy a free society,” so he suggests that antitrust laws be enforced selectively. This means, of course, that they should be applied arbitrarily–as indeed they are.
Adapted from a press conference at the National Press Club on 29 June, 2000.
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Made available by the Center for the Advancement of Capitalism.
