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Quotation of the Day…

… is from page 81 of the 1975 HarperPerennial printing of the third (1950) edition of Joseph Schumpeter‘s monumental 1942 treatise, Capitalism, Socialism, and Democracy; this book contains what, in my opinion, remains the very best description of real-world market competition, along with reasons why static models of “perfect” and “imperfect” and “monopolistic” competition deduct far more from our understanding than they add to it:

The theories of monopolistic and oligopolistic competition and their popular variants may in two ways be made to serve the view that capitalist reality is unfavorable to maximum performance in production.  One may hold that it always has been so and that all along output has been expanding in spite of the secular sabotage perpetrated by the managing bourgeoisie.  Advocates of this proposition would have to produce evidence to the effect that the observed rate of increase can be accounted for by a sequence of favorable circumstances unconnected with the mechanism of private enterprise and strong enough to overcome the latter’s resistance.

Schumpeter correctly denied that these theories of competition (and the theory of perfect competition) tell us much of value about actual, capitalist competition.  Indeed, as Harold Demsetz points out somewhere, these so-called theories of competition are no such thing.  They are, instead, static models of output and price determination under different assumed cost and demand conditions.  None of mainstream economists’ “theories of competition” are really theories of competition at all.  (For such theories, one must look outside of mainstream equilibrium economics to scholars working, for example, in the Austrian tradition.)

Misleading conclusions about real-world competition and monopoly, therefore, spring from analyses built on the presumption that mainstream models of competition either capture the essence of real competition or that these models uniquely reveal relevant features and consequences of real competition.  Such conclusions – especially, but not exclusively, in the field of antitrust – have been numerous.  Many are the competitive and growth-enhancing business practices and market conditions that have been interpreted over the years by unwise devotees of these static theories of competition and monopoly to be evidence of monopoly power.