… is from page 242 of the late, great UCLA economists Armen A. Alchian’s and William R. Allen’s Universal Economics (2018; Jerry L. Jordan, ed.); this volume is an updated version of Alchian’s and Allen’s magnificent and pioneering earlier textbook, University Economics:
Competition in the market is competition to create goods worth more than the costs.
It’s important here to understand also a point famously and brilliantly made by Joseph Schumpeter: In modern market economies, the most productive form of competition is not that which drives existing competitors simply to keep their output prices as low as possible. Such competition – which still looms overly large in most economics textbooks – is in reality indeed real and not unimportant. But such competition cannot explain modernity’s enormous riches; it is not the essence of capitalism.
Modernity’s enormous riches are the result of innovations competitively tested in markets. Innovations include, of course, new goods and services for final consumers. Innovations, however, also include ‘non-price’ means of competition such as new structures of business management, new means of output distribution, new means of acquiring inputs, new contractual arrangements to share risks, and new ways of marketing. Every successful such innovation will, for a time, yield profits higher than ‘normal.’ And the higher above ‘normal’ are such profits, the greater is the contribution that the innovation makes to humanity.
These innovations are creative, and by the nature of any creative act, it and many of its manifestations will be unfamiliar. It is, therefore, folly to entrust government officials, judges, and juries with power under antitrust legislation to sit in judgment of the merits of these innovations. All innovations that are peaceful and that violate no one’s conventional property rights should be permitted. As long as consumers – and input suppliers – are free to patronize these innovations as they choose with their own money and efforts, the market process over time will weed out commercial and industrial practices that harm consumers and direct resources to those practices that improve consumer well-being.