What Economists Have Thought About Competition

What Economists Have Thought about Competition, and What Difference It Makes
Author(s): Thomas K. McCraw

Source: Proceedings of the Massachusetts Historical Society, Third Series, Vol. 101 (1989), pp.
24-55
Published by: Massachusetts Historical Society
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What Economists Have Thought About
Competition, andWhat Difference ItMakes
Thomas K. McCraw*
Only through the principle of competition has political economy any

pretension to the character of a science.
(John Stuart Mill, 1848)1
Like other words indispensable to modern political and eco

nomic discourse,
"competition" has multiple meanings. In
it is a for sort of con
everyday parlance, rough synonym any
test, rivalry, or conflict. Yet it can be a technical term as well. In eco
nomics, it is a vital term of art, and in the dominant field of modern
neoclassical economics, it underlies whole systems such as static
equilibrium analysis. The integrity of such systems is compromised
when competition is used in its common-sense meaning as a gener
ally disequilibrating conflict or as a synonym for rivalry.
Of course, the phenomenon of competition, as distinct from the
word, has existed for as as humankind and its forebears have
long
struggled to survive. References to something like market competi
tion appear in the work of Hesiod, a Greek poet who
pre-Aristotelian
wrote of two potters whose rivalry in the production of earthenware
a conflict" with constructive results.2 Greek words
represented "good
with meanings related to competition include agon (struggle, battle),
reflected in such English words as and amilla (conflict
"antagonist";
or contest for continued the Latin aemulatio down
superiority), through
to the English "emulation."3
In its common-sense usage, "competition" entered the English lan
guage in about the fourteenth century. Its role as an prin
organizing
ciple for economics, however, did not develop until the middle 1700s.
*
Straus Professor of Business History, Harvard Business School.
i. John Stuart Mill, Principles of Political Economy, (New York, 1964), 1:306.
2. Barry Gordon, Economic Analysis before Adam Smith: Hesiod toLessius (London, 1975), 5.
3. Kenneth Dennis, "Competition" in theHistory of Economic Thought (New York, 1977), 3.
Dennis's book, done as a doctoral dissertation at Oxford is a su
originally University,
on which
perior piece of work, I have relied heavily in several parts of this essay.
What Economists Have Thought 25
The publication in 1776 of Adam Smith's The Wealth ofNations was the
watershed event, and Smith's great work, once and for all, established
competition's central position in economic analysis. By 1793 Jeremy
Bentham could write, with confidence that his meaning would be
understood by a broad audience, "From high profits in trade comes
influx of traders ?from influx of traders,
competition among
traders ?from competition among traders, reduction of prices."4
"Competition" acquired its present-day technical meaning only
around the turn of the twentieth century. In modern economics, this
technical meaning ismost often expressed as "perfect competition,"
an abstract state of affairs in which infinite numbers of buyers and
sellers confront each other in a stable marketplace. As a theoretical
construct, perfect competition requires several other conditions as
well, and, as we shall see, these conditions seldom approximate reality
\fet, as the economist John Roberts has recently written, "In the
[intellectual] competition between economic models, the theory of
competition holds a dominant market share: no set of ideas

perfect
is so widely and
successfully used
by economists as is the logic of per
markets." Thus, not are
fectly competitive only professional
economists' general ideas about competition different from those of
lay persons, but their notion of perfect competition is so remote from

actual conditions that its persistent popularity represents one of the
arresting puzzles of modern social science.5
The existence of the puzzle, I think, derives from two interacting
forces. The first is the ardent desire of economists to make their dis
cipline more "scientific." The second and related force is the recep
tiveness of the theory of perfect competition to mathematicization,
and therefore to a semblance of quantitative determinacy Neither
of these conditions is unique to economics, of course. In modern
as practiced in university departments of sociology, psy
scholarship,
even
and to the status of science have
chology, history, aspirations
become commonplace. So has the tendency toward mathematiciza
tion. But in none of these other disciplines has the momentum of both
4- Jeremy Bentham, "The Emancipation of the Colonies," in The Works ofJeremy Ben
tham, (London, 1843), 4:412
5. John Roberts, "Perfectly and Imperfectly Competitive Markets," The New Palgrave:
A Dictionary ofEconomics, ed. John Eatwell, Murray Milgate, and Peter Newman (London,
1987), 3'837.
Massachusetts
26 Historical Society
tendencies been so strong as in economics, the methods so rigorous,
and the positive intellectual payoff so powerful. in no oth
Conversely,
er discipline has the cost been so in the relative of im
high neglect
portant topics which do not lend themselves to "scientific" inquiry?
when science is implicitly defined as mathematical analysis.
Surveying the whole field, it is hard to escape the conclusion that
today, when even the most broad-minded and well-informed

economists say "competition," they mean something more like per
fect competition than they do conventional business rivalry involv
ing strategic behavior by firms. Sometimes itmakes little difference.

In antitrust analysis and prosecution, the cases easy to select and
prosecute remain today what they have always been: price-fixing,

market-division, and other types of collusive activities. But for most
cases very large firms, the specific tools that have evolved
involving
over ? cross
the years concentration ratios, merger guidelines,
? more
industry profit comparisons derive from the models of per
fect competition and long-run equilibrium than from any other
premises. For the most part, such tools have proved inadequate in
Even more in the modern
both theory and practice. troublesome,
era of international business, orthodox ideas about perfect compe
tition may be actual impediments to a clear understanding of such
as the Japanese economic miracle. Many
complex phenomena
economists today, their minds conditioned by years of thinking in
abstract terms of equilibrium and perfect competition, insist that
even its decisive inroads into crucial American mar
Japan's growth,
kets, represents a routine that raises no problems for
development
public policy.
In the long history of economic thought, "competition" has not al
as a
ways meant "perfect competition." Nor has economics discipline
and forever devoted a major part of its efforts toward the
everywhere
of perfect competition. Nor, in economic methods, has
analysis
mathematical technique always held the triumphant position it now
occupies. The ascendancy of both perfect competition and

mathematicization reflects the cumulative effect of choices made by
identifiable persons over the last one hundred years, principally in
? States. The intellectual tra
two countries Britain and the United
ditions of economic elsewhere, even in other market econ
analysis
omies such as Austria, and Japan, are very different.
Germany,
In other words, the emphasis on perfect and
competition
mathematicization are developments circumscribed in time and
space. Economics an experimental
is not science, and its principles
do not represent the successive discovery of universal properties of
human behavior comparable to the experimentally replicable
phenomena of physics and chemistry. Say's Law in economics lacks
the universality of Boyle's Law in physics. The Iron Law of Wages
cannot be compared with the Law of Gravity. Although economics
is the most authoritative and rigorous of the social sciences, ultimately
no social science is comparable to the physical sciences in the way
the physical sciences are comparable to each other. While the Nobel
Prize is given for achievements in "Economic Science," it would be
surprising ifNobel
recipients in physics and chemistry regarded their
in economics as scientific counterparts. They should, and
colleagues
do, regard them as intellectual equals. But if an economic
probably
controversy were suddenly to burst forth analogous to the sensation
within physics over cold fusion, it might take decades rather than
weeks to settle.6
This is not to argue against the scientific method in economic in
quiry. Nor is it to question the usefulness of mathematics. Abstract
models, probabilities, and statistical studies are all indispensable, but
the best of them are grounded in assumptions shaped by repeated
and cumulative observations. Even when they are so grounded, there
remains the problem of researchers' bias. No study of human be
havior, however careful its application of the scientific method, can
entirely escape value judgments. (This is true in the physical sciences

as well, an extreme example being Galileo's forced Such
recantations.)
can be minimized or made or hidden
judgments implicit altogether,
but they cannot be extinguished. The very idea of free markets, for
6. Lucid commentary on science and its methods is plentiful inmany literatures. See,
for example, James B. Conant, Science and Common Sense (New Haven, ch.
1951), especially
2; Talcott Parsons, The Social System (New \brk, 1951), 335-345, and Thomas Kuhn, The Struc
ture of Scientific Revolutions account
(Chicago, 1970). An engaging popular of the scientific
evolution of cosmology, which suggests some with the progress of economics,
analogies
is Timothy Ferris, Coming of Age in theMilky Way (New York, numerous
1988). Among
economists who have commented on the relationship between economics and science, see
Leon Walras, Elements ofPure Economics, or The Theory of Social Wealth, tr.William Jaffe (Home
wood, 111., 1954, first published in French in 1874-1877), 255-257; and Joseph A. Schum
peter, "The Development of Economics as a Science," ch. I of Schumpeter, Economic Doc
trine andMethod: An Historical Sketch, tr. R. Aris (New \brk, 1954, first published in German
in 1912).
28
Massachusetts Historical Society
example, implies a facie opposition to government interfer

prima
ence, underscored by the use of the word "free."
Similarly, the choice of competition (rather than, say, justice) as
the central organizing principle for economics expresses a
particu
lar view of the way the world is supposed to work. And inherent in the
notion of perfect competition are not men
only the prejudices already
tioned, but a host of other value judgments and personal preferences
as to For historical
methodology. any study of competition, there
fore, it seems appropriate to trace the evolution of ideas about the
subject, so that we see how first then free com
might competition,
petition, and finally perfect competition came to dominate profes
sional discourse, and with what implications.
As we have seen, ideas about economic competition entered the
English language in the fourteenth century. Systematic discussions
of "free competition" began in the late seventeenth century, slowly
gathered force, and then crystallized with the publication of The Wealih
ofNations in 1776. Perhaps the most powerful single idea in the histo
ry of economic thought, free competition continues today as the defin
ing principle of capitalist economies and the salient thread in policy
debates over big business, free trade, and level playing fields among
nations.
In one sense, "perfect competition" also began with Adam Smith.

Although neither he nor other classical economists ever came close
to articulating the modern technical construct denoted by the term,
neoclassical successors a century later based some of their ideas on
his insights. In The Wealth ofNations, Smith was writing in explicit op
position to the mercantilist tradition, which emphasized economic
nationalism and self-sufficiency, zero-sum wealth in the world, and
the accumulation of precious metals through positive trade balanc
es. The pursuit of mercantilist goals required pervasive government
interference in market transactions. Yet for Smith, the entire mer
cantilist argument rested on false premises. His essential insight
was
that the most useful competition arose not among nations but among
individuals. In his evaluation, the transcendent advantage of mar
ket competition was that it automatically individual interests
brought
into harmony with the public interest.7
7- For a general discussion of Smith's conception of competition, see Samuel Hollander,

The Economics of Adam Smith (Toronto, 1973), 125-133.
In one of the most widely quoted passages in The Wealth ofNations,
Smith uses the phrases "the invisible hand" and "the public interest"
in the same paragraph. He presents the first (that is, free competi
tion operating through the market as ineluctably
mechanism)
the second This is one of the most
promoting (the general welfare).
appealing parts of his entire analysis. Another has to do with the ques
tion of economic power, and, to a large extent, political power as well.
In Smith's universe of free competition, and even more strikingly in
that of perfect competition, the whole issue of power is simply finessed
?
by its atomization that is, by the operation of a free market of
numerous buyers and sellers, each by definition unable to control
overall levels of price or output. Smith's model expresses an ideolog
ical preference (aversion to centralized power and government in
as much as it elaborates a scientific observation
tervention) (that prices
fall with lots of buyers and sellers). Smith's ideology, his acute ob
servations, and particularly the two in tandem are so and
appealing
forceful that they have struck deeply sympathetic chords among mil
lions of readers for two centuries.8
modern economists, one of the most ardent admirers of
Among
Adam Smith, and one of the most insightful students of competition,
is George a Nobel laureate from the University of Chica
J. Stigler,
go. In 1957, Stigler published an article entitled "Perfect Competi
tion, Historically Contemplated." In it he traced the evolution of ideas
about competition from Adam Smith through other important clas
sical and neoclassical economists. Stigler found that in the mid
nineteenth century, Nassau W. Senior foreshadowed both the doc
trine of perfect competition and the problems with it. As Senior
wrote: "Though, under free competition, cost of production is the
regulator of price, its influence is subject to much occasional inter
can be supposed
ruption. Its operation to be perfect only if we sup
8. As George J. Stigler has noted, "The essence of perfect competition, therefore, is
not strong rivalry but rather the utter dispersion of power to influence market behavior.
The power, for example, to restrict quantities sold and raise prices is effectively annihi
a thousand as a an
lated when it is divided among men, just gallon of water is effectively
nihilated if it is spread over a thousand acres." See Stigler, "Competition," in David L. Sills,
ed., International Encyclopedia of the Social Sciences (New York, 1968), 3:181.
One of the ironies here is that in actual operation, different industries naturally gravitate
toward a of structures, few of them atomistic and none of them fulfilling the tech
variety
nical requirements of perfect competition. To make all industries conform to an atomis
tic structure would a near-totalitarian intervention And this, of
require by government.
course, would represent the negation of the overall Smithian ethic.
Massachusetts
pose that there are no disturbing causes, that capital and labour can
be at once transferred, and without loss, from one employment to
another, and that every producer has full information of the profit
to be derived from every mode of production. But it is obvious that
these suppositions have no resemblance to the truth."9
Stigler notes that the decisive changes in the economic definition

of competition came when mathematical economists took up the
subject:
When an inclined economist seeks to maximize the profits of a pro
algebraically
ducer, he is led to write the equation
= Revenue -
Profits Cost
and then to maximize this that is, to set the derivative of profits with
expression;
respect to output equal to zero, times of output] He then faces the
[price quantity
question: How does revenue (say, pq) vary with output (q)? The natural answer
as ?
is to define competition that situation in which/? does not vary with q in which
the demand curve facing the firm is horizontal. This is precisely what [the French
mathematician Cournot did . . . was enormous
Augustin] [in 1838]. [his] definition
more and elegant than Smith's so far as the treatment of numbers was
ly precis?
concerned. A market from unlimited to the extent that price
departed competition
exceeded the marginal cost of the firm, and the difference zero as the
approached
number of rivals approached infinity.
In time, the almost irresistible appeal of this kind of precision would

help to push the mainstream of the economics profession toward ever
more abstract mathematical conventions of discourse.10
In the latter part of the nineteenth century, the French economist
Leon Walras and the English economists W. Stanley Jevons and Fran
cis Y. Edgeworth extended the implications of Cournot's pioneering
approach by specifying certain conditions that must apply if the equa
9- Nassau W Senior, Political Economy, quoted in George J. Stigler, "Perfect Competi

tion, Historically Contemplated," Journal of Political Economy, 65 (i957):i?17.
10. Stigler, "Perfect Competition, 5. Cournot wrote,
Historically Contemplated," "Every
one has a vague idea of the effects of competition. should have attempted to ren
Theory
der this idea more precise; and yet, for lack of regarding the question from the proper
point of view, and for want of recourse to symbols (of which the use in this connection
becomes economic writers have not in the least improved on popular no
indispensable),
tions in this respect. These notions have remained as ill-defined and ill-applied in their
works, as in popular See Augustin Cournot, Researches into theMathematical Prin
language."
ciples of the Theory ofWealth, T Bacon, to
tr., Nathaniel (New York, 1927), 79. It is difficult
avoid the impression, after examining this heavily mathematical text, that Cournot was
a mathematician who wrote on economic rather than an economist with mathe
problems
matical proclivities.
tions were to remain rigorous. Walras made it clear that he himself
was looking for "laws" of economics and that "to this end we shall sup
pose that the market is perfectly competitive, just as in pure mechan
ics we suppose, to start with, that machines are frictionless."11
perfecdy
Jevons focused directly on perfect competition, that a mar
writing
ket "is theoretically perfect only when all traders have perfect knowl
edge of the conditions of supply and demand, and the consequent
ratio of exchange. . . . there must be perfectly free competition, so
that anyone will exchange with any one else upon the slightest ad
vantage appearing." Writing soon after Jevons, defined
Edgeworth
even more and his definition still re
perfect competition thoroughly,
mains influential. Edgeworth's construct required unlimited num
bers of buyers and sellers, no limits on individual preference or be
havior, and uniformity and divisibility of all items being traded.12
For our purposes, it is important to note two facts about Edg
eworth's definition. First, he was writing in the 1870s and early 1880s
in Britain, where most industries remained atomized and where even
the most important business, cotton textiles, was a vertically disin
tegrated industry characterized by a plethora of firms and agents at
every stage of production and marketing. So, whatever kind of eco
nomic system Edgeworth had in mind, if any, it could not have been
one dominated by modern industrial
capital-intensive enterprise with
its complex hierarchies of salaried managers.13 Second, Edgeworth
frankly acknowledged that he was more concerned with "abstract
science" than with empirical and that a great virtue of "a,per
reality,
fect field of competition" was that it exhibited "certain properties
peculiarly favourable to mathematical calculation."14
il. Walras, Elements of Pure Economics, 84. In a telling elaboration, Walras implies that
he believes perfect competition to be the "general case," and illustrates his point with a
reference to physics: "Logic demands that we consider general before special [economic]
cases, and not the other way round. What physicist would deliberately pick cloudy weather
for astronomical observations instead of taking advantage of a cloudless night?" (p. 86).
12. Stigler, "Perfect Competition, 6. Stigler adds that Edge
Historically Contemplated,"
worth and "all his descendants" "treated the small-numbers case
unsatisfactorily" (p. 8).
For an attempt at a simpler definition, see
Joan Robinson, "What Is Perfect Competi
tion?" Quarterly Journal of Economics, i(i934):i04-i20. Here Robinson goes so far as to refer
to "absolutely perfectly perfect" competition (p. 117).
13. The same could be said, of course, of Adam Smith for the late eighteenth century.
And Smith, it has been argued, "is at best an indifferent empiricist." See Philip Mirowski,
"Adam Smith, Empiricism, and the Rate of Profit in Eighteenth-Century His
England,"
tory of Political Economy, 14(1982): 196.
14. Stigler, "Perfect Competition, Historically Contemplated," 7. It seems significant
for the future evolution of neoclassical theory that Edgeworth's was
analogy specifically
Massachusetts
In the early twentieth century, the most influential work on per
fect competition was done by two Americans, John Bates Clark and
Frank Knight. Clark pioneered and emphasized
marginal analysis
the importance of resource mobility (that is, the free movement of
labor and capital from one use to in his book Risk,
another). Knight,
Uncertainly, and Profit (1921), presented what is still one of the fullest for
mulations of perfect competition ever devised.
Knight began by postulating complete rationality by all members

of society, who are supposed "to know what they want," pursue it "in
telligendy" and "to know absolutely the consequence of their acts when
they are performed, and to perform them in the light of the conse
quences." He then added the requirement of "perfect mobility," in
which "all the elements into ?
entering economic calculations effort,
commodities, etc.?must be continuously variable, divisible without
limit." All market exchange must take place instantaneously, and with
out any costs connected with efforts of buyers and sellers to find each
other or to write contracts. There must be "perfect, continuous, cost
less intercommunication between all individual members of socie
ty." Every item for sale must be "divisible into an indefinite number
of units which must be separately owned and compete effectually with
each other." All members of society must act individually and non
collusively, "in entire independence of all other persons." In the area
of motivation, only self-interest is to be considered, "for good or for
ill."Most important of all, every aspect of this situation must "remain
absolutely unchanged."15
These conditions seem austere and exacting. Com
extraordinarily
mon sense suggests that no conceivable economic situation could pos
sibly fit even one or two of them, let alone all of them together. It
to physics, one of the hardest of the hard sciences. Here is the full text of the quotation:
"A perfect field of competition in addition [to free communication,
professes etc.] certain
properties peculiarly favourable to mathematical calculation; a certain indefinite
namely,
multiplicity and dividedness, analogous to that infinity and infinitesimality which facilitate so large
a of Mathematical the theory of Atoms, and all applications of
portion Physics (consider
the Differential Calculus)." Elsewhere, Edgeworth urges the reader "who wishes to dig down
to the root of first principles, to trace out all the branches of a complete system, to gather
fruits rare and only to be reached by a mathematical substructure," to look to the mathemat
ics of Jevons, and Walras. See Edgeworth, Mathematical on the
Marshall, Psychics: An Essay
to the Social Sciences (London, to
Application ofMathematics 1881), 18, 30. For other paeans
see pp. 48n and As with Cournot, the impression
mathematics, 55-56^ lingers that Edge
worth was a mathematician, not an economist.
primarily
15. Frank Knight, Risk, Uncertainty, and Profit (Boston, 1921), 76-79.
is as if, in a study of human physiology, the controlling assumptions
were that all persons must be one inch tall, blue in color, genderless,
and immortal.
So the puzzle remains, why has the model of perfect competition
so durable? Why do economists to this it over any
proved day prefer
other? George Stigler offers two reasons. endless
Citing complaints
that the concept is "unrealistic," Stigler argues that similar charges
could be made against all abstract constructs in science. To this "con
ventional line of defense" he adds a second, namely the test of the
intellectual marketplace: "Perfect competition is being used more
widely by the profession in its theoretical work than at any time in
the past. The vitality of the concept is strongly spoken for by this
triumph."16
This is all true enough, but it is difficult to let the matter rest there.
For one thing, the persistence of the model owes a very great
obviously
?
deal to its convenience. Rigorous it certainly is at least as a closed
system; but it also facilitates the techniques of mathematical econom
ics.17 A critic truly hostile to the model of perfect competition would
say that this convenience has triumphed over its obvious inappropri
ateness. Mathematical economists seem to be what
maximizing they
mistakenly regard as the "scientific" dimension of their work rather
than the work's usefulness in the analysis of actual economic systems.
Such a line of criticism would hold that the medium (mathematics)
? as
has become the message that the tool has replaced the problem
the focus of the work, as if a farmer were more obsessed with his com
bine than his crop, or a novelist more enamored of her metaphors
than her
story.
A sympathetic critic would respond that neoclassical analysis, as
developed by contemporary economists such as Kenneth Arrow and
Gerard Debreu, can demonstrate that in a purely
mathematically
theoretical situation perfect competition produces a
general equilibri
um in which allocative and technical are maximized. Yet
efficiency
i6. Stigler, "Perfect Competition, Historically Contemplated," 16-17.
17. The mathematicization of perfect competition and its convenience for mathemat
ical analysis ismanifest in the symbol-filled entry on "Perfect Competition" by M. Ali Khan
inNew Palgrave, 3:832. Only a person skilled in advanced mathematics could understand
Khan's essay. Here is a representative sentence: "Since internal, star finite sets may have
cardinality of the order of the continuum, the Brown-Robinson formalization of perfect
competition is another way of making precise the concepts of many agents and of their
negligibility." Many sentences in the entry are a good deal more arcane than this one.
Massachusetts
even such a friendly critic would to concede
have that perfect com
as the model of choice tends to focus attention on certain
petition
aspects of economic life at the expense of others. Equations and curves
are typically concerned with price and quantity. with
Preoccupation
them implicitly exaggerates the importance of market exchange and
underemphasizes such matters as economic distribu
development,
tional outcomes, and practically all organizational matters pertain
ing to the business firm.18
Most seriously of all, "competition" in neoclassical analysis has
come to mean a determinate outcome more than a process, an
more than a a static condition more than
equilibrium disequilibrium,
dynamic behavior. It is perhaps significant that there is no word that
?
denotes the act of becoming competitive analogous for example to
"monopolization" and "oligopolization."19 The term "atomization"
serve insofar as itmeans the into many small units.
might splitting
But this would imply a shift from some other state, not, as in the case
of the other two words, a shift from the presumably natural ("per
fect") state of atomized competition.
Given all these characteristics of perfect competition, the most cul
turally interesting aspect of the theory is the extent to which it has
come to represent an attractive ideal, a toward which
goal public poli
cy should be directed. The very fact that so many well-informed per
sons now take for granted that a large number of buyers and sellers
is always better than a small number shows how deeply we ourselves
have embraced not merely the competitive ideal in its common-sense
meaning (i.e., the notion that rivalry stimulates effort and innova
tion); but the perfecdy competitive ideal in its technical meaning (i.e.,
that an infinitely large number of buyers and sellers will produce the
greatest output at the lowest prices). Surely this situation demon
strates that the stakes are exceedingly high when it comes to the ideas
of competition that we have internalized, the pictures of ideal econ
omies that we carry in our heads.
i8. As Edward Chamberlin once put it, economic analysis "must seek out the indeter
minate as well as the determinate, and carefully avoid the tempting expedient, currently
so popular with the mathematicians, of adjusting the formulation of its problem with the
a determinate answer." See Chamberlin, "The Impact of Recent Mo
objective of securing
on the Schumpeterian System," in Seymour E. Harris, ed., Schumpeter, So
nopoly Theory
cial Scientist (Cambridge, Mass., 1951), 85.
on Competition: A Radical Conservative's Cri
19. See Kenneth Dennis, "Schumpeter
of Neo-Classical thesis, Univ. of Manitoba,
tique and Revision Analysis," (M.A. 1970), 55.
In 1967, a decade after Stigler's influential article appeared, the
Columbia economist Paul McNulty published a response entitled
"ANote on the History of Perfect Competition." As McNulty wrote,
"After [Adam] Smith's great achievement, the concept of competi
tion became quite literally the sine qua non of economic reasoning."
Competition "gave to economics itself an analytical rigor without
which, it was felt, its claims to the status of science would be seri
ously weakened." As John Stuart Mill had asserted as early as
1848,
"only through the principle of competition has political economy any
pretension to the character of a science." A
few years after that, W.
Stanley Jevons added that without competition, a "has lit
problem
tle or nothing to do with economics. It is not a question of science."20
McNulty argues that the redefinition of competition from the time
of the classical economists (Smith, Ricardo, and to that of the
Mill),
early neoclassicists (Edgeworth, Jevons, J.B. Clark, and Frank
"involved a basic Whereas Adam
Knight), conceptual change."21
Smith had conceived of competition as a process, the neoclassical
economists focused on a particular result: the effects, rather than the
workings of competition; a state of rather than of action. "The
being
20. Paul McNulty, "A Note on the of Perfect C ompetition,n
History Journal of Political
Economy, 75(1967) 1395-399 (the quoted portion is on pp. John Stuart Mill, Princi
396-397).
ples ofPolitical Economy, (New York, 1964), 1:306.W Stanley Jevons, The State inRelation toLabour
(London, 1882), 155.
The full text of the Mill quotation is pertinent to the themes of this essay: "Political
economists generally, and English political economists above others, have been accustomed
to lay almost exclusive stress upon to exaggerate the effect of competition
[competition];
and to take into little account the other and conflicting principle are
[i.e., custom]. They
apt to express themselves as if they thought that competition actually does, in all cases,
whatever it can be shown to be the tendency of competition to do. This is partly intelligi
ble, if we consider that only through the principle of competition has political economy
any pretension to the character of a science. So far as rents, profits, wages, prices, are de
termined by competition, laws may be assigned for them. Assume competition to be their
exclusive regulator, and principles of broad generality and scientific precision may be laid
to which they will be regulated. The political economist
down, according justly deems
this his proper business: and, as an abstract or
hypothetical science, political economy
can not be to do, and indeed, can not do, more. But it would be a great
required anything
misconception of the actual course of human affairs to suppose that competition exercises
in fact this unlimited sway"
21. McNulty, "ANote on the of Perfect Competition,"
History 397. For the insight noted
here, McNulty cites Joseph Schumpeter, Capitalism, Socialism and Democracy (New \brk, 1950), 78.
The concept of active rivalry, McNulty continues, "is fundamentally different from
the concept of perfect competition which, as Frank has often stressed, 'no
Knight implies
of psychological emulation, or rivalry, and . . .
presumption competition,
" [from which]
"bargaining" is also excluded.' McNulty also quotes Knight as "the use of this
saying,
word [competition] is one of our worst misfortunes of technology." See Knight, "Immuta
ble Law in Economics: Its Reality and Limitations," American Economic Review, 3?(i946):i02.
Massachusetts
two concepts are not only different," writes
McNulty, "they are fun
damentally incompatible. Competition came to mean, with the
mathematical economists, a realized situation in which
hypothetically
business rivalry, or competition in the Smithian sense, was ruled out
by definition. Perfect competition, as famous Austrian econo
[the
mist Friedrich] Hayek has cogently observed, 'means indeed the ab
sence of all competitive activities'. . . .The resolution of this appar
ent contradiction versus neoclassical
[in the classical uses] must surely
lie in the distinction between competition as a market structure and
competition as behavioral activity"22
In 1968, McNulty continued his analysis with a piece in the Quar
terlyJournal ofEconomics entitled "Economic Theory and the Meaning
of Competition." Here he wrote, "It is one of the great paradoxes of
economic science that every act of competition on the part of business
men is evidence, in economic theory, of some degree of monopoly
power, while the concepts of monopoly and perfect competition have
this important feature: both are situations in which the possibility
of any competitivebehavior has been ruled out by definition. That
is an ideal state, of actual realization,
perfect competition incapable
is a familiar theme of economic literature. That for various reasons
it would be less than altogether desirable, even if it were attainable,
is also widely acknowledged. But that perfect competition is a state
of affairs quite incompatible with the idea of any and all competi
tion has been insufficiently emphasized. It is this last feature of per
fect competition, and not, as is sometimes incorrectly claimed, its
level of abstraction or the 'unreality' of its assumptions, which
high
limits its usefulness, especially for economic policy"23
On the issue of policy, McNulty continues, "Economists have some
times criticized American competitive policy for its not infrequently
22. McNulty, "A Note on the History of Perfect Competition," 397-399.

The citation here is to Friedrich A. Hayek, "The Meaning of Competition," in Hayek,
Individualism and Economic Order (Chicago, On p. 92 of the same essay
1948), 96. (adapted
from a lecture originally in writes: "I shall attempt to show that what
given 1346), Hayek
the theory of perfect discusses nas little claim to be called 'competition' at all
competition
and that its conclusions are of little use as guides to policy. The reason for this seems to
me to be that this theory assumes that state of affairs already to exist which,
throughout
to the truer view of the older theory, the process of competition tends to bring
according
about (or to approximate) and that, if the state of affairs assumed by the theory of perfect
competition ever existed, it would not only deprive of their scope all the activities which
the verb 'to compete' describes but would make them virtually impossible."
23. Paul J. McNulty, "Economic Theory and the Meaning of Competition," Quarterly
Journal of Economics, 82(i9?8):64i-642.
manifested tendency over the years to identify the maintenance of
competition with the maintenance of competitors. But economic the
ory offers no clear guide for distinguishing between them." The cen
tral problem is "the historical tendency on the part of economists to
identify competition as entirely a phenomenon of exchange." This

constriction of analysis began with Adam Smith; then the neoclas
sical economists made things worse by reconstruing competition not
as a behavioral theory but as a state of affairs.24
Adam Smith had a fair amount to say about how the
Although
absence of competition ?that is, monopoly?"is a great enemy of
good
management," most of Smith's professional descendants simply ig
nored management altogether. In the technical sense, says McNulty,
"the competitive and monopolistic firms of economic theory differ
curves
only with respect to the demand they face, and the single ana
lytical function of competition has been to get price down to mar
ginal cost. 'Under free competition,' as Senior wrote,

[Nassau W.]
'cost of production is the regulator of price.' But the question remains:
of cost? Economic stresses -
what is the regulator theory the optimal
ity of the equation of price and marginal cost. There is nothing op
timal in this equation, however, ifmarginal cost is higher than need
be due to internal inefficiencies."25
This is the most
useful part of McNult/s analysis, and in the same
passage he goes to on
cite the work of the business historian Alfred
D. Chandler, Jr.: "Chandler's research in the history of Am?ricain busi
ness administration points up the significance of the search for cost
reducing methods within the company itself as one of the significant forces
shaping the reorganization of American industry around the turn
of the century" The new organizational ?
forms ofthat period trusts,
holding companies, merged giant corporations ?"had little to do with
price competition except in terms of the search for ways to avoid it."
The later apostles of perfect competition, by focusing on
exchange,
price, and quantity, and by emphasizing static analysis, excluded from
their own purview such broad and crucial matters as economic de
velopment and the theory of the firm. As for the overall study of
24- McNulty, "Economie Theory and the Meaning of Competition," 642, 645-646,
648-650.
"Economic and the Meaning of Competition," a relat
25. McNulty, Theory 650-651. On
ed point, see McNulty, "Allocative vs. Comment," American Eco
Efficiency 'X-Efficiency':
nomic Review, 57(1967) ^249-1252.
Massachusetts
change, they simply ceded that to "the newly emerging discipline of

economic history," which, in the nature
of things, could not be un
duly constrained in its definitions of competition.26

McNulty, writing in the 1960s, was hardly the first critic to point
out problems with the theory of perfect competition. Edgeworth,
? ?
Marshall, and Knight prominent neoclassicists themselves had
already cited its limitations. Perhaps the most conspicuous early chal
lenges came from two books published in 1933:The Theory of
Monopolistic
Competition, by Edward H. Chamberlin of Harvard University, and
The Economics ofImperfectCompetition,by Joan Robinson of Cambridge
University.27
Chamberlin pointed to the vast differences among products com
ing from companies assumed to be parts of the same industry. Within

each category as automobiles, furniture, and even industrial
(such
goods like specialty steel), individual products differed from each oth
er in many details besides price. They differed in design, quality,
length of useful life, general reputation of the manufacturer, and doz
ens of other details. Thus, Chamberlin argued, the assumption about
product uniformity so vitad to the theory of perfect competition sel
foundation in fact. He made a related the
dom has any point about
interchangeability of raw materials (wood
versus aluminum versus
plastic), and also the substitutability of ways in which conspicuous

consumption could be demonstrated (jewels, travel, large estates).
For Chamberlin, the upshot was that since most products can be
differentiated so thoroughly from others, each firm has a "monopo
ly"
on the items it offers for sale. In the marketplace, these items com
pete with other firms' which are also monopolistic in the
products,
same sense. the otherwise oxymoronic name he chose,
(Hence
Yet, as George has written,
"monopolistic competition.") Stigler
Chamberlin's revision, while leading "to a much more thorough
ex
amination of the problems of defining commodities and industries,"
has nonetheless "not been found useful in the analysis of concrete
economic For Stigler and other theorists aspiring to max
problems."
imize the scientific character of economics, the problem with Cham
berlin's formulation is that since every product is a "monopoly," then
26. McNulty, "Economie Theory and the Meaning of Competition," 650-651, 653.
27. Edward H. Chamberlin, The Theory ofMonopolistic Competition (Cambridge, Mass.,
The Economics
1933); Joan Robinson, of Imperfect Competition (London, 1933).
mathematical equivalencies, and therefore rigorous calculations, be
come difficult.28
construct was addressed
Joan Robinson's of "imperfect competition"
to some of the same conceptual problems that Chamberlin had no
ted. Whereas a perfectly economy exhibits constant re
competitive
turns a fixed between and cost of
(that is, relationship output produc
a returns. These
tion), firms in great many industries show increasing
may derive from economies of scale, scope, organizational superi
and incremental efficiency over many years' duration
ority, gains
(what later came to be called the "experience curve"). Thus, wrote
Robinson, "The analytical economist his manners usual
(although
ly conceal the fact) is conscious, in the presence of the practical man,
of an agonising sense of shame." Because economists were "misled
by the logical priority of perfect competition," they "were somehow
trapped into thinking that itmust be of equal importance in the real
world. When they found in the real world some such
phenomenon,
as 'economies internal to the firm,' which is inconsistent with the as
sumptions of perfect competition, they were inclined to look for some
complicated explanation of it, before the simple explanation occurred
to them that the real world did not fulfill the assumptions of perfect
competition."29
For analytically-oriented as the economist
scholars, John Roberts
has recently noted, the problem with imperfect competition is that
no "standard paradigm" exists, and many different models are pos
sible. "It sometimes seems that one can concoct an imperfect com
petition model that predicts any particular outcome one might wish."30
The same holds true for Chamberlin's
objection theory of monopolis
tic competition. It also applies to John Maurice Clark's popular var
iant of "workable competition," first outlined in 1940, and perhaps also
28. Stigler, "Competition," International Encyclopedia of the Social Sciences, 184. As another
writer has put it, "It is this image of thick markets [i.e., homogeneous private goods with
many small sellers and buyers of each good] that Chamberlin found to be a grotesque
caricature of our economic reality"; see Louis Makowski, "Imperfect Competition," New
to what several economists and
Palgrave, 2:724. Contrary Stigler says here, (EM. Scherer
A. Michael Spence, for example), have found Chamberlin's formulations useful.
29. Robinson, Economics of Imperfect Competition, 2-5. A few pages later Robinson notes
that the comparisons of output under competition and monopoly "prepare the way for
the analysis of one of the most important practical questions of the present age: the effect
of the combination of firms, selling against each other in imperfect competition, into a
single unit of control" (p. 10).
30. John Roberts, "Perfectly and Imperfectly Competitive Markets," 3:839.
Massachusetts
to the more recent idea of "contestable markets" set forth by William
Baum?l and others. Each of these alternative models represents a
creative economist's effort to escape the strictures of reigning or
thodoxy. The problem is that none of the models can match the
breadth and generalizability of perfect competition. Using any one
of these other models, honest and proficient scholars can come to
widely varying conclusions. They then find themselves bereft of any

satisfactory method to settle their differences. Meanwhile, the goal
of science recedes into the distance.31
With the failure of each alternative construct, perfect competition
remains the paradigm of choice.
Yet, as Roberts
writes, it is "remark
able that economists so consistently opt for a mode with so little ap
parent descriptive value." Perfect competition a

"is theory of price com
that contains no coherent of price formation. . . .
petition explanation
Given all this, the dominance of perfectly competitive methods should
be viewed as a reflection of the weakness of com
probably imperfecdy
petitive analysis. There is in fact no powerful general theory of im
perfect competition."32
To the historian this kind of comment, repeated by Roberts, Sti
seems most as a reflec
gler, and many other economists, significant
tion of the variety of structures and behavior observable in actual
markets. theory
Any applied that to the market for a major pro
ducers'-goods item such as mainframe computers would likely be of
less value in analyzing the consumer market for small items such
31. J.M. Clark, "Toward a Concept of Workable Competition," American Economic Re

view, 30(1940):241-256; Stigler, "Competition," International Encyclopedia of theSocial Sciences, 184.
For the intellectual controversies over competition the 1930s, very high-stakes
during
were at issue. The decade was one of markedly increased participa
policy implications
tion by government in economic decision-making, and for neo-classicists this represent
ed an ominous development. See, for example, the alarmed tone of Henry C. Simons,
"The Requisites of Free Competition," American Economic Review, 26(1936 Suppl.):75
32. John Roberts, "Perfectly and Imperfectly Competitive Markets," 3:838 (emphasis
supplied). Roberts goes on to say, "These problems with imperfect competition theory
some of the popularity of perfect competition models. However, they also
perhaps explain
suggest two important, positive points. First, the multiplicity of models and the divergence
in their predictions indicates that, at least in small numbers situations, institutional de
tails are important. Economists, habituated to the use of perfectly competitive methods,
typically
are imprecise about such factors as how prices are actually determined, wheth
er decisions are made or sequentially, whether individuals select prices,
simultaneously
or both, and what happens when are inconsistent." Against this
quantities, agents' plans
dismal Roberts sees great hope in game theory, which "is revolutionizing
background,
the field of industrial organization" (p. 840).
as cosmetics, or even for large consumer durables such as automo
biles. \fet all three markets are imperfecdy competitive and oligopolis
tic. And if no generad theory
can cover these
oligopolistic markets,
then how can it cover any one of them plus the more atomistic mar
kets for furniture, auto repair, and haircuts? Merely to list a few mar
kets at random suggests how peculiar the situation is. As Roberts
writes, "it has now become completely evident that no important mar
ket fully satisfies the conditions of perfect competition and that most
would not appear even to come close."33
Defenders might argue, as many have, that the unreality of per
fect competition is widely recognized and therefore is not a serious
Yet a moment's on the
reflection system of
problem. language
economics suggests how firmly established the notion has become
as a normative ideal. Calling it "perfect" rather than "dysfunctional"
or "loathsome" is hardly a neutral choice of words. Nor is speak
as "second
ing of certain situations best," where "best" is per
fect competition. Nor is a phrase such as market "clearing," which
a resolution, or even a of clouds. Nor
implies pleasant parting
is speaking of the end toward which a market or economy should
tend as one of "equilibrium" as opposed to, say, "enterprising
motion."34
Conversely, the designation of everyday conditions in powerfully

is equally symptomatic of an implicit ideal.
negative phraseology
Consider such terms as "market failure," "barriers to entry," "barri
ers to exit," and "vertical restraint." None of these conditions is un
usual or necessarily dysfunctional. But each is at variance with per
and Imperfectly
33- John Roberts, "Perfectly Competitive Markets," 3:838. Roberts
might be challenged here on the grounds that the same limitation applies in other fields
as well: no model of population can apply equally to elephants, turtles, and but
biology
terflies. But it remains true that the diversity of industries and therefore of competition
is one of the major circumstances that separate the ways of thinking characteristic of
economists on the one hand and business historians on the other.
Friedrich once wrote, "Economists
34. On "equilibrium," Hayek ? a usually ascribe the
order which competition produces as an equilibrium somewhat unfortunate term, be
cause such an equilibrium presupposes that the facts have already been discovered and
competition therefore has ceased." Hayek proposes "order" as a substitute word, since,
"While an economic equilibrium never
really exists, there is some justification for assert
our an ideal type, is approached in a high
ing the kind of order of which theory describes
See Hayek's lecture, "Competition as a Discovery Process," delivered
degree." originally
in 1968, published in Hayek, New Studies in Philosophy, Politics, Economics and theHistory of Ideas
(London, 1978), 184.
Massachusetts
feet competition, and, perhaps for that reason, is expressed in dis
approving terminology.35
One even reads in the work of scholars who the model of
deplore
perfect competition a tacit acceptance of its dominance. The econ
omist Joseph A. Schumpeter drew a distinction between "competi
tive capitalism" and "trustified capitalism," as if the onset of big busi
ness removed One hears well-informed business
competition.
historians such as Alfred Chandler speak of "competitive industries"
(textiles, furniture, as opposed to "oligopolistic industries"
printing)
(oil, automobiles, electrical machinery), giving the impression that
the latter somehow are not competitive. Even when Chandler and
others want to call attention to the very routineness of oligopoly, they
are apt to say like these industries were
something "Historically,
characterized by ten years of competition followed by a hundred years
of oligopoly." By "competition" mean more like the
they something
economist's model of perfect competition than the common-sense
of even those who are to elu
meaning rivalry. Thus, trying hardest
cidate the nature of actual business conditions unconsciously become
prisoners of neoclassical terminology.
Nor should bias against interference in the market be overlooked
as one of the values inherent in the idea of perfect competition. Just
as the work of both the classicists and neoclassicists held powerful
so the
implicit (and often explicit) messages against policy activism,
revisionist work during the 1930s of Chamberlin, Robinson, and oth
ers was taken up by reformers interested in the state
quickly using
to improve economic performance.36
Of all critics of the perfect competition model, perhaps the most
was Joseph A. Schumpeter Born in Austria,
insightful (1883-1950).
have commented on the values in economic
35- Several economists implicit terminology.
See, for example, I.M.D. Little, A Critique ofWelfare Economics, 2 ed. (Oxford, 1957), ch. 5;
and Gunnar Myrdal, The Political Element in theDevelopment ofEconomic Theory, tr. Paul Streeten
(London, 1933).
As one economist writing during the thirties put it, "[B]y tackling rather than
36.
such matters as differentiation and market the re-oriented
neglecting product promotion,
is far more realistic. It begins its definition a real world, which ismore
theory by assuming
than can be said for the older [perfect competition] apparatus. In the sphere of ethico
economic . . . the of widespread of the new theoretical de
thought prospect recognition
velopments [imperfect and monopolistic competition] is certain, for in them the groping
of social welfare advocates for a rationale of public interference in private en
capitalistic
terprise effectively to combat that of laissez faire finds glorious realization." See Horace
A merican
G. White, Jr., "AReview of Monopolistic and Imperfect Competition Theories,"
Economic Review, 26(1936)1649.
Schumpeter published important works in German before emigrat

ing to the United States, where he
taught for many years at Har
vard. He wrote numerous books, the most relevant to present con
cerns being Capitalism, Socialism and Democracy (1942) and History of
EconomicAnalysis (published posthumously in 1954).
Whereas the neoclassicists
had downplayed the human factor in
economics, Schumpeter put it back in ?perhaps too emphatically,
as in his excessive of the entrepreneur. Schumpeter ar
glorification
that the driving force of economic development was continu
gued
ous and merciless innovation. His concept of "creative destruction"
and processes the one of the
(new products displacing old) represents
most ideas in all of economic as well as one of its
powerful thought,
best metaphors.
From the standpoint of economic growth, Schumpeter wrote, it
is not price competition that counts most, but rather "the competi
tion from the new commodity, the new technology, the new source
of supply, the new type of organization . . . which com
competition
mands a decisive cost or quality advantage and which strikes not at
the margins of the profits and the outputs of the existing firms but
at their foundations and their very lives."37
was no mindless opponent of neoclassicism, per se,
Schumpeter
and he recognized the indispensability of mathematics in economic
analysis. Although he himself seldom used sophisticated mathemat
ical techniques, he did help to found the Econometric Society, and
he edited journals whose contents highlighted mathematical nota
tion. Yet, in his efforts to construct a he
dynamic theory of growth,
remained in his of static com
unyielding skeptical appraisal perfect
petition. "The introduction of new methods of production and new
commodities is hardly conceivable with perfect ?and perfectly
?
prompt competition from the start. And this means that the bulk
of what we call economic progress is incompatible with it. As a mat
ter of fact, perfect competition is and always has been temporarily
new ?
suspended whenever anything is being introduced
or by measures ? even in other
automatically devised for the purpose
wise perfectly competitive conditions." Examples of such suspensions
would include the protection of inventions through patents, the shield
37- Schumpeter, Capitalism, Socialism and Democracy (New York, 1962), 84.
Massachusetts
ing of infant industries through tariffs, and the forcible production

of weapons war mobilization.38
during
As one close student of Schumpeter's work has observed, his anal
ysis treated competition "as a behavioural process in which business
strategy is the In so tried to
organizing principle." doing, Schumpeter
liberate competition from its conceptual constraints. He argued that
if perfect competition and monopoly were used as the parameters
of analysis, then all firms in between (that is, all actual businesses)
must be construed as hybrids. "But instead of considering the hy
brid cases as deviations from, or adulterations of, the fundamental
ones we may also look upon the hybrids as fundamental and on pure
monopoly and pure competition as limiting cases in which the con
tent of actual business behaviour has been refined away." The over
all lesson, he goes on to say, is that any attempt to analyze a phenome
non by dividing it up too finely into logical components "may cause
us to lose the phenomenon in the attempt to understand it: the es
sence of a chemical compound may be in the compound and not in
any or all of its elements."39
In Capitalism, Socialism and Democracy, Schumpeter extended his anal
ysis of the dynamics of competition. Here again he emphasized the
compelling need to include the dimension of time in all economic
analysis. Once that is done, the system of perfect

competition col
lapses upon its own stasis.40 Economic

activity under capitalism,
Schumpeter reiterated, is "first and last a process of change." Static per
fect competition is "not only impossible but inferior, and has no title
to being set up as a model of ideal efficiency. . . .The firm of the
type
that is compatible with perfect is in many cases inferior
competition
38. Stigler, "Competition," inNew Palgrave, 1:535, quoting Schumpeter, Capitalism, So

cialism and Democracy, 105.
39. Joseph A. Schumpeter, History of Economic Analysis (New York, 1954), 975; Dennis,
"Schumpeter on vi, 58, 91. Throughout this discussion of Schumpeter, I
Competition,"
am heavily indebted to Dennis's work.
40. In one of his most memorable sentences, Schumpeter wrote, "A system ? any sys
tem, economic or other ?that at every given point of time utilizes its possibilities to the
best advantage may yet in the long run be inferior to a system that does so at no given
the latter's failure to do so may be a condition for the level or speed
point of time, because
of long-run performance." This is a profound insight, analogous to the aphorism about
winning battles yet losing wars. In the analysis of an industry, it underscores the differ
ence in understanding that might be derived from a snapshot of a steel mill in a given
year, on the one hand, and on the other a full-length documentary film on the steel in
dustry from 1870 to 1990. See Schumpeter, Capitalism, Socialism and Democracy, 77-78, 82-83.
in internal, especially technological, efficiency." Schumpeter gave
numerous examples from industries
atomistically structured but
backward and inefficient:
English coal mining and cotton textiles,
early American agriculture. He argued that the later achievements
of twentieth-century agriculture arose from the machines produced
by oligopolistic farm-equipment companies, not from atomistic com
petition in agriculture itself. He went on to say that the great inno

vations in such industries as rayon and aluminum show that superb
can come even with domination.41
performance monopoly
Schumpeter's attractiveness to business and economic historians
lies not so much in his well-known idealization of the entrepreneur
as in his ? own stock-in
preoccupation with change the historian's
trade. In a critique of neoclassical approaches that no historian could
put any better, he wrote, "Economists who ex visu, of a point of time,
look for example at the behaviour of an oligopolist indus
. . . the idea of the situation as if there were
try accept momentary
no past or future to it and think that they have understood what there
is to understand." %t in actual fact, "every piece of business strategy
acquires its true significance only against the background ofthat proc
ess and within the situation created by it."42
For such an analysis the theory of perfect competition has little
to offer, and this is why many historians consider it unhelpful. As
a rule, historians often find static models of any kind unin
general
teresting. Within economics, these include models not only of per
fect competition but also of imperfect, monopolistic, and all others
that exclude the dimensions of time and sequence. For a historian,
Socialism and Democracy, this last obser

4L Schumpeter, Capitalism, 103-106. Of course,
vation about rayon and aluminum does not prove anything conclusively, since even bet
ter performance might have come from a different structure.
Interesting attempts to connect the theory of the firm to concepts of competition in
clude James A. Clifton, "Competition and the Evolution of the Capitalist Mode of Produc
tion," Cambridge Journal ofEconomics, 1:137-151; Robin Marris, "The Corporation, Competi
tion, and the Invisible Hand," Journal of Economic Literature, 18(1980):64~89; and Paul J.
McNulty, "On the Nature and Theory of Economic Organization: The Role of the Firm
Reconsidered," History of Political Economy, i6(i984):233-253
42. Schumpeter, Capitalism, Socialism and Democracy, 83-84. With respect to time and the
a similar comment,
importance of change, Friedrich Hayek made noting "the many points
on which the neglect of the time element makes the theoretical of perfect compe
picture
tition so entirely remote from all that is relevant to an understanding of the process of
competition." See Hayek, "The Meaning of Competition," a lecture given in 1946, pub
lished in Hayek, Individualism and Economic Order (Chicago, 1948), 102.
Massachusetts
any study that is not longitudinal and dynamic is ipso facto ahistor
ical. Historians are attracted to because he shares their
Schumpeter
prejudices, and it hardly seems that Schumpeter himself
surprising
once said that if he had to choose various career
among paths, he'd
choose economic history over pure theory.
What Schumpeter called "creative destruction" was for him "the
essential fact about capitalism." In his view, the giant American busi
ness firm, with its active and re
strategic management organized
search and development, "has come to be the most powerful engine"
of progress. He therefore opposed a too-enthusiastic antitrust poli
cy. There should be no "indiscriminate 'trust-busting' or . . . prose
cution of everything that qualifies as a restraint of trade."43
Schumpeter's hostile stance toward antitrust enforcement was
evaluated with great insight by his Harvard colleague Edward S. Ma
son, who himself pioneered the structure-conduct-performance par
adigm that dominated industrial organization theory from the 1950s
to the 1980s. Mason pointed out that Schumpeter's was dis
analysis
tinctively behavioral, not structural. It "denies completely the sig
nificance for public policy purposes of any standard of evaluation de
rived from pure competition, marginal cost-price relationships, or
other formulations of static economic analysis." \fet Schumpeter's em
on very
phasis long-term evolutions was, for Mason, "clearly an in
vitation to non-enforcement" of the antitrust laws. "Although Schum
peter assures us that what he is opposed to is not every antimonopoly
policy but only certain kinds, he does not offer much guidance to
a sensible policy." This was a fair critique of Schumpeter, but the over
all charge about insufficient policy guidance might in fact be brought
against the entire economics profession.44
Most of this essay has been concerned with ideas about competition
among economists. From this point onward itwill be useful to touch
on the problematical connection between these ideas and the
briefly
public policies with which they became identified, and between those
43- Schumpeter, Capitalism, Socialism and Democracy, 83, 106; Schumpeter, "The Com
mon Sense of Econometrics," in Richard V. Cl?mence, eel., Essays off. A. Schumpeter^Cam
bridge, Mass., 1951),
100. Again I am indebted to Kenneth Dennis for his analysis of Schum
peter and antitrust. See Dennis, on Competition," 191-192, 194-195.
"Schumpeter
44. Dennis, on Competition," 224-225. Mason's analysis is from his book
"Schumpeter
Economic Concentration and theMonopoly Problem, (New York, 1964), 91, 94, 101, 379.
policies and actuad outcomes. Obviously, both sets of connections are
analytically treacherous. Specific links between ideas and policies can

almost never be demonstrated conclusively. Relationships between
policies and outcomes are sometimes direct, sometimes absent, and
sometimes perverse, with wholly unintended consequences. Never
theless, the potential intellectual rewards of trying to make such con
nections are very rich and should not be foregone.
Certainly in the history of American public policies toward com

and a deal of information is available
petition Big Business, great
for the historian to consider. The relevant dates are clear enough,
as is the pattern of in the business system. Big Busi
general change
ness the railroad industry, which in the 1840s
began with emerged
and pioneered in American finance, construction, and organizational
design from the 1850s until the 1880s. The returns to scale from rail
roads were so
gigantic that the industry's economics confounded ac
cepted notions of competition as an automatic regulator. Then, too,

the railroads' economic power was so great as to present entirely new
political problems of legitimacy and governance.

Whereas in Europe public ownership of railroads was often seen
as the answer, in America nationalization was not in the cards. In
stead, new instruments were State railroad
governmental developed.
commissions as early as rose to importance in
appeared 1839. They
the 1860s, and by the 1870s had become a standard element in the
making of public policy. Landmark federal legislation created the
Interstate Commerce Commission in 1887, culminating two decades
of congressional debate about the "railroad problem." Over the next
thirty years, Congress regularly added to the ICC's power and greatly
augmented public authority over the affairs of railroads.45

Meanwhile, Big Business in manufacturing followed
the pattern
of railroad development, lagging that evolution by about twenty years.
What the 1850s and 1860s had been for the railroads, the 1870s and
1880s represented for emerging industrial giants. Standard Oil be
came large in the 1870s as a loose federation of associated companies,
was reorganized as a trust in 1882, then as a holding company in the
1890s. Carnegie Steel became important in the 1870s, operating suc

as a then as a held and
cessively partnership, closely corporation,
45- Thomas K. McCraw, Mass., chs. 1and 2.

Prophets of Regulation (Cambridge, 1984),
Massachusetts
finally as the biggest single entity in the $1.4 billion merger of 1901
that created United States Steel. Similar dates apply to the early years
of dozens of other giant companies.46
The public policy response to Big Business followed the now fa
miliar pattern of railroad regulation. Nearly two dozen states enacted
antitrust statutes during the 1880s. In 1890 Congress passed the Sher
man Antitrust Act, yet the "trust remained in
question" conspicuous
national politics during the next twenty years, much as the "railroad
problem" had dominated it during the preceding twenty. Public policy
toward Big Business finally began to mature in 1911,with the enun
ciation by the Supreme Court of a "Rule of Reason" in the major an
titrust cases Standard Oil and American Tobacco; and in
against 1914,
with the passage of the Federal Trade Commission Act and the Clay
ton Antitrust Act. By that time, both the railroad and the
problem
trust question, though far from settled, had at least stabilized. Dur
ing the forty years between 1875 anc* l9^ therefore, the foundations
of the modern industrial economy were laid, and the fundamentals
of its relationship to the American Government were worked out.47
What remains unclear is the extent to which this relationship was
defined reference to of competition ?
by any particular theory the
classical theory as set forth by Smith, Ricardo, and Mill; the neo
classical as formulated by Walras, and J.M. Clark; or
Edgeworth,
the less abstract institutional analysis promulgated by such turn-of
American economists as Richard T
the-century Ely, J. Laurence
Laughlin, and Henry Carter Adams.
Over the last one hundred years, the scholarly literature on com
petition policies and antitrust laws has become As one immense.

might expect, it has emerged from many disciplines: law, econom
ics, political science, history, business administration. Of all the mul
titudinous aspects of the subject, the ones most relevant to this essay
to the reversad, over time, of the attitudes of professional
pertain
46. Alfred D. Chandler, Jr., The Visible Hand: The Managerial Revolution inAmerican Busi
ness Mass.,
(Cambridge, 1977), 207-454.
a host of useful studies of this period,
47. McCraw, Prophets ofRegulation, chs. 2-4. Among
three are especially enlightening: Samuel P. Hays, Conservation and the Gospel of Efficiency:
The Progressive Conservation Movement, i8go-ig20 (Cambridge, Mass., 1959); Robert H. Wie
be, Businessmen and Reform: A Study of theProgressive Movement (Cambridge, Mass., 1962); and
Martin J. Sklar, The Corporate Reconstruction of American Capitalism, i8go-igi6: The Market, the
Law, and Politics (Cambridge, 1988).
economists toward the passage of the Sherman Act in 1890, the criti
cal starting point of modern U.S. competition policy.
The economics was still in its infancy the latter
profession during
part of the nineteenth century, and the American Economic Associ
ation, like many other professional groups, came into being only in
the i88os. At the time of the Sherman Act the population of profes
sional economists
in the United States numbered in the low hundreds.
Most were
not yet of the neoclassical persuasion, as they are today,
but represented a mixed group ?a number of institutionalists,
large
a few historicists of the German school, a rare Marxist.
Of the economists whose views can be ascertained, most opposed
both of the two major pieces of economic legislation passed by Con
gress in 1890: the Sherman Antitrust Act and the highly protective
McKinley Tariff. Economists regarded the tariff as hostile to those
principles of free trade and comparative advantage articulated so con
vincingly by Smith and Ricardo. As for the Sherman Act, most

economists apparently believed that capital-intensive big business
es were agents of economic progress. %t weretheir voices
strangely
muted in the congressional debate. One scholar has even speculat
ed, conspiratorially, that none were called to testify because Sena
tor Sherman and others knew that these economists "would not have
advised Congress to do what it was obviously intent upon doing?
an antitrust bill by near unanimous consent." The Act passed
passing
by 240-0 in the House, 52-1 in the Senate.48
George J. Stigler addresses this same phenomenon in "The
Economists and the Problem of Monopoly," an article published in
notes that for a hundred years before passage of the Sher
1982. Stigler
man Act, most economists had consistently endorsed free interna
tional trade. \et they did not support the antitrust law of 1890, whose
48. Thomas J. DiLorenzo, "The Origins of Antitrust: An Interest-Group Perspective,"

International Review of Law and Economics, 5(iq85):86. DiLorenzo is not a conventional schol
ar but a representative of the so-called school of economists ?those who in
public-choice
terpret the and administration of laws as not necessarily serving the in
passage public
terest or the interest of private groups, but instead that of the legislators and administrators
themselves. He believes that economists opposed the Sherman Act because they thought
it regressive. The economics profession had not yet, as of 1890, embraced the idea of per
fect competition. "One can imagine," he concludes, "that ifJohn Bates Clark and his [econ
omist] colleagues had thought of competition in terms of the static equilibrium condi
tions of perfect competition rather than the dynamic, rivalrous process of 'Smithian'
they would have roundly condemned the trusts. The trusts were, after all,
competition,
causing a greater from the ideal of perfect or atomistic
divergence competition."
Massachusetts
were consistent with classical free trade theory and there
provisions
fore represented a policy economists might have been expected to
approve for the same reason they opposed the McKinley Tariff.49
Today's economists, on the other hand, are much more warmly
to the Sherman Act than were their predecessors of 1890,
disposed
and the shift represents an interesting riddle. aIt would be gratify
ing to me," Stigler writes, "if I could report that our profession's chang
was based upon the systematic study by economists of the
ing view
effects of the policy. . . . there have been no
Unfortunately, persua
sive studies." What, then, explains the shift? Stigler suggests that "in
the first decades of the Sherman Act, all? literally all ?the attention
of economists and public was focused on combination and explicit
cooperative arrangements (now labelled cartels) with monopoly pow

er."The general public did not view these loose cartels as being nearly
so harmful as the consolidated giant firms that emerged later.
Economists, on the other hand, saw little harm in giant companies
but regarded cartels as "industrial incest." So there was inconsistency
between the perceptions of economists and those of the general public
as represented by the Congress that passed the Sherman Act. Over
the years, the two views converged, owing to the emerging pattern of
Because the government attacked loose cartels more often
prosecution.
than efficient big businesses, the economists' dilemma disappeared.50
line of argument here makes some sense, and itmay be
Stigler's
correct. It is primarily a deductive argument, however, with litde hard
historical evidence behind it.While it is true that many cases of col
lusion were brought against loose associations of small firms, the more
focus of antitrust was and remained on
conspicuous prosecution "big
cases" against such as Northern Securities
giant companies (1904),
American Tobacco (1911),Standard Oil (1911),and U.S. Steel (1920).
It is possible that professional economists, watching the evolution of
antitrust doctrine ?as in the Supreme Court's Rule of Reason (1911)
and its declaration in the U.S. Steel case that industrial was
giantism
not more on the antitrust laws. Yet,
in itself illegal ?looked favorably
in the absence of strong evidence that economists actually reasoned
in this way, the argument seems strained.
"The Economists and the Problem of Monopoly," American Eco

49- George J. Stigler,
nomic Review, 72(i982):5
50. Stigler, "The Economists and the Problem of Monopoly," 5-6.
Stigler goes on to say that the most striking aspect of the relation
ship between economists and the antitrust laws over time is
economists' lack of influence. Several dozen came to be em
general
ployed by both the Antitrust Division of the Department of Justice
and the Federal Trade Commission. But their voices were often
drowned out by those of the far greater number of lawyers in both
In a more sense, economists "have provided
organizations. general
precious little tested economic knowledge to guide policy." Even "the
batde on market definitions, which is fought thousands of times what
with all the private antitrust suits, has received no atten
virtually
tion from us economists." Had written this piece a few years
Stigler
later (in 1986, say, rather than 1982), he could have cited very power
ful and direct influence of neoclassical on antitrust
thought policy.
During the middle 1980s, led by the ardent neoclassicist Assistant At
torney General William Baxter, the Antitrust Division pushed
through the breakup of the Bell System, ended the long suit against
IBM, and reoriented official antitrust doctrine.51
Although American economists, presumably stimulated by
antitrust policy questions, have done considerably more
work on industrial organization than have their European and
Japanese counterparts, not much has come of this work, accord
ing to Stigler. "A literature such as that on workable compe

tition or administered prices ?neither an ornament to our sci
ence?was created to give advice on monopoly policy." The sad
truth is that "active public policy carries no assurance that funda
mental economic research relevant to that policy area will
flourish."52
51. Stigler, "The Economists and the Problem of Monopoly," 8.

On the general issue of economists and policy making, see Robert H. Nelson, "The
Economics Profession and the Making of Public Policy," Journal of Economic Literature,
25(io67):49-9i.
On the AT&T case, see Peter Temin, with Louis Galambos, The Fall of the Bell System:
A Study in Prices and Politics (Cambridge, an intense and ex
1987). Temin writes, "Baxter,
was a man of very decided
tremely bright Stanford law professor, views. His ideology blend
ed two parts of neoclassical economics with one part of law, and he was committed to im
that ideology as a true believer can be."
plementing only (p. 217).
During the revolution in antitrust doctrine that occurred in the 1970s and 1980s, the
most influential of the neoclassical were Robert H. Bork and Richard
legal scholars A.
Posner, both of whom were to the federal bench. See Bork, The An
appointed appellate
titrust Paradox: A Policy at War With Itself (New York, 1978); and Posner, Antitrust Law: An Eco
nomic Perspective (Chicago, 1976).
52. Stigler, "The Economists and the Problem of Monopoly," 8-9.
Massachusetts
Stigler concludes his survey by

speculating that economists'
present-day support for the antitrust
laws "is strongly influenced by
the corpus of technical price theory." Whereas in 1890, "competition
was a common sense notion in economics, more a loose
description
of economic behavior than an analytical it is now much bet
concept,"
ter understood. Today, Stigler surmises, economists an
champion
titrust activism because they believe it promotes competition.53
In explicit response to Stigler's questions about the connections
between economists' beliefs and their commitment poli to antitrust
cy, two scholars recently surveyed the works of prominent economists
who wrote about antitrust between 1885 and 1920. Of those studied,
only two supported the Sherman Act. Ten others opposed it. Another
scholar, researching a broader found a pronounced inatten
sample,
tion by economists toward issues related to antitrust and industrial
organization. As measured by preferred topics of study, they were
more interested in the money question and labor relations.54
Later on, in the decades after 1920, the triumph of the perfect com
petition model and the rise of a theory of tacit oligopolistic collusion

cleared the way for economists' broad endorsement of antitrust ac
tivism. This
phenomenon holds true for the theorists of imperfect
and monopolistic competition in the 1930s (Joan Robinson and Ed
ward Chamberlin), the workable competition advocates of the 1940s
(led by John Maurice Clark), the industrial organization pioneers

of the 1940s and 1950s (Edward S. Mason,
S. Bain), and some
Joe
of the Chicago School economists1960sof the
and 1970s.55
The last two groups are for their support
especially noteworthy
of the antitrust laws, because they consistently approached the issue
53- Stigler, "The Economists and the Problem of Monopoly," 9; Stigler goes on to say,
"Consider one small example: the earlier literature of predatory had the pred
competition
ator cut prices in the vicinity of the prey and raise prices elsewhere to recoup the loss.
Today it would be embarrassing to encounter this argument in professional discourse."
54. Thomas J. DiLorenzo and Jack C. High, "Antitrust and Competition, Histori
cally Considered," Economic Inquiry, 26(1988): 423-435; George Webster, "Monopoly The
ory in American Economic Thought, 1870-1910," (Ph.D. diss., State University of New York
at Binghamton, C.
1981), appen.
55. DiLorenzo and High, "Antitrust and Competition, Historically Considered,"pas
sim. This article not take up the transaction
does cost school led by Oliver Williamson,
the contestable markets scholars such as William Baum?l, the "new industrial organiza
tion" theorists such as Richard Schmalensee and A. Michael or game theorists
Spence,
such as Jean Tir?le.
from different
points on the ideological spectrum. The Chicago
School has
long been as rightist, the Harvard pioneers Mason
regarded
and Bain as left of center; but both groups support antitrust prosecu
tions. Typical Chicago arguments focus on price theory and attach
litde significance to concentration ratios and other aspects of industry
structure; while the industrial organization pioneers ascribe transcen
dent importance to structure. As Mason himself put it in 1939, the key
intellectual question "runs from differences in market structure to
differences in price response, and from differences in price response
to the consequences of these differences for the functioning of the econ
omy." For Mason and the dominant school he represented, the struc
ture of markets remained the preferred
yardstick. The more concen
trated the industry, the more serious
the threat to competition.56
The position of Mason and Bain highlights a central problem un
the entire antitrust question: the difficulty of measuring com
derlying
that public policy should be framed so as to max
petition. Assuming
imize competition, how can it be determined with certainty whether
a given policy is pro- or anti-competitive when economists cannot
agree on the meaning of As Friedrich Hayek observed
competition?
in 1978, "It is difficult to defend economists against the charge that for
some 40 or 50 years they have been discussing competition on assump
tions that, ?f they were true of the real world, would make it wholly
uninteresting and useless."57
56. An especially vivid illustration of the conclusions of the structure-conduct

performance school of analysts is in the widely used textbook by Clair Wilcox, Public Policies
Toward Business (Chicago, statement occurs: "A firm should be judged
1955), where the following
not by the social consequences of its operations, but by the power conferred by its opera
tions, not by market performance, but by market structure." Structure, writes Wilcox, "throws
on the extent of market ... in itself, should be the test of legality." Wil
light power [which]
cox goes on to call for more prosecution of the antitrust laws. See DiLorenzo and
vigorous
High, "Antitrust and Competition, Historically Considered," 432-433.
57. Hayek, as a Discovery Procedure," inNew Studies in Philosophy, Politics,
"Competition
Economics and theHistory of Ideas, 179. For a related comment on
competition by another "Aus
trian," see Israel M. Kirzner, "The Austrian' Perspective on the Crisis
[in economic the
ory]," The Public Interest, special edition (1980), 116-117.
A similar kind of argument from a non-Austrian" appears in John Eatwell, "Competi
tion," ch. 6 of Ian Bradley and Michael Howard, eds., Classical andMarxian Political Economy:
Essays inHonor ofRonald L. Meek (New York, 1982), 203-228. Eatwell writes: "The argument
of this essay has been intended to show that something has gone badly wrong with economic
analysis. The careful specification, and separation, of method and theory developed by Smith,
and essentially preserved by the early neoclassics, has been abandoned in the interest of
the preservation of a was set. This
theory which proved inadequate for the task it originally
suggests a need for a of the notion of competition and its role in economic the
reappraisal
ory" (p.223).
Massachusetts
The English analyst A.D. Neale, in an important treatise on
American antitrust law, makes a similarpoint: "This complete reversal
of ordinary language in economics, whereby competing in the lay
sense is 'monopolistic' in the technical and 'perfectcompetition' in
the technical sense
involves complete passivity among sellers, is
among the reasons for the businessman's suspicion that the policy
recommendations of economists in this field do not always reflect the
merits of the matter."58
This essay has concerned

itself primarily with the intellectual histo
ry of competition as construed
for the firm, but the issues at stake
go well beyond that. Assuming that competition is a good thing, neo
classical economics still seems to lack all the tools necessary to specify
with confidence what sort of policy will best promote the well-being
of a industry or country. In the study of national econo
particular
mies, a conspicuous shortcoming of orthodox theory is its weakness
in connecting microeconomic analysis with macroeconomic frame
works, especially its inability to relate national aggregates directly
to successes and failures in specific industries and sectors.
In part for this reason, the outstanding modern successes of neo
mercantilist economies such as those of Japan tend to confound the
neoclassical model at every level: firm, industry, sector, nation. Neo
classical theory would predict chaotic failure from the use of those
very devices that seem to lie near the root of Japan's miracle growth
? reces
in the 1950-1970 period capital controls, window guidance,
sion cartels, forced mergers, lifetime employment, sharp restrictions
on foreign direct investment, and deliberate blockage of rationali
zation in agriculture and distribution.59
All of these questions are tied up, analytically, with an understand
ing of what is meant by "competition." The issues reach far beyond
Japan and the United States alone, but the economic and business
histories of these two countries do provide vivid benchmarks for
studying the connections among ideas, policies, and outcomes. Few
The Anti-Trust Laws of theUnited States ofAmerica (Cambridge,

58. A.D. Neale, 1962), 480.
of strictly economic success here, not the achievement of a consumer
59. I am speaking
oriented liberal polity. For an analysis of the Japanese economy, see Thomas K. McCraw,
a harshly critical evalua
ed., America Versus Japan: A Comparative Study (Boston, 1986). For
tion of the entire Japanese see Karel van Wolderen, The Enigma ofJapanese Power
polity,
(New York, 1989).
national manufacturing today are more
sectors successful than
and few industries or firms
have better than those
Japan's, performed
for which Japan has achieved worldwide renown. Within the Japa
nese economy, inter-firm rivalry is generally more intense than it is
in the United States or any other western country, and this is quite
likely the key to Japan's success. And yet few capitalist economies
in any epoch, our own, bear less resemblance at any level
including
or in any particular to the model of perfect competition than does
that of Japan.
As Stigler has said, "Competition may be the spice of life, but in
economics it has been more nearly the main dish."60 To the extent that
this is true, we need to have a much better understanding of what it is
we are eating. \fet the confusion continues, on several levels at once.
Dozens of important questions remain part of the puzzle, and this
essay has touched on a few of them. Why indeed did the Japanese
only
miracle occur? (There is no scholarly consensus on the
answer.) With
respect to what kinds of are warranted to the
policies, exceptions
rule that domestic or international protection from unlimited
general
a bad no consensus in the
competition is thing? (Again, exists.) And
realm of ideas, why does the model of perfect competition, seemingly
so irrelevant to actual problems anywhere, exhibit such hardiness?
The tentative answer
advanced in this essay has more to do with aca
?
demic habits of mind the quest for determinacy, the conflation of
?
science with mathematicization than with any other single cause.
6o. George J. Stigler, "Competition," International Encyclopedia of the Social Sciences, 3:181.

What Economists Have Thought About Competition

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What Economists Have Thought About Competition

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What Economists Have Thought about Competition, and What Difference It Makes

Author(s): Thomas K. McCraw

Only through the principle of competition has political economy any

(John Stuart Mill, 1848)1

Like other words indispensable to modern political and eco

[intellectual] competition between economic models, the theory of

competition holds a dominant market share: no set of ideas

lay persons, but their notion of perfect competition is so remote from

today, when even the most broad-minded and well-informed

ing strategic behavior by firms. Sometimes itmakes little difference.

prosecute remain today what they have always been: price-fixing,

occupies. The ascendancy of both perfect competition and

entirely escape value judgments. (This is true in the physical sciences

example, implies a facie opposition to government interfer

In one sense, "perfect competition" also began with Adam Smith.

7- For a general discussion of Smith's conception of competition, see Samuel Hollander,

Stigler notes that the decisive changes in the economic definition

In time, the almost irresistible appeal of this kind of precision would

9- Nassau W Senior, Political Economy, quoted in George J. Stigler, "Perfect Competi

Knight began by postulating complete rationality by all members

22. McNulty, "A Note on the History of Perfect Competition," 397-399.

identify competition as entirely a phenomenon of exchange." This

ginal cost. 'Under free competition,' as Senior wrote,

change, they simply ceded that to "the newly emerging discipline of

duly constrained in its definitions of competition.26

ing from companies assumed to be parts of the same industry. Within

plastic), and also the substitutability of ways in which conspicuous

widely varying conclusions. They then find themselves bereft of any

parent descriptive value." Perfect competition a

31. J.M. Clark, "Toward a Concept of Workable Competition," American Economic Re

Conversely, the designation of everyday conditions in powerfully

Schumpeter published important works in German before emigrat

ing of infant industries through tariffs, and the forcible production

analysis. Once that is done, the system of perfect

lapses upon its own stasis.40 Economic

38. Stigler, "Competition," inNew Palgrave, 1:535, quoting Schumpeter, Capitalism, So

petition in agriculture itself. He went on to say that the great inno

Socialism and Democracy, this last obser

policies and actuad outcomes. Obviously, both sets of connections are

analytically treacherous. Specific links between ideas and policies can

Certainly in the history of American public policies toward com

cepted notions of competition as an automatic regulator. Then, too,

political problems of legitimacy and governance.

augmented public authority over the affairs of railroads.45

1890s. Carnegie Steel became important in the 1870s, operating suc

45- Thomas K. McCraw, Mass., chs. 1and 2.

petition policies and antitrust laws has become As one immense.

principles of free trade and comparative advantage articulated so con

vincingly by Smith and Ricardo. As for the Sherman Act, most

48. Thomas J. DiLorenzo, "The Origins of Antitrust: An Interest-Group Perspective,"

cooperative arrangements (now labelled cartels) with monopoly pow

"The Economists and the Problem of Monopoly," American Eco

Japanese counterparts, not much has come of this work, accord

ing to Stigler. "A literature such as that on workable compe

51. Stigler, "The Economists and the Problem of Monopoly," 8.

Stigler concludes his survey by

petition model and the rise of a theory of tacit oligopolistic collusion

(led by John Maurice Clark), the industrial organization pioneers

56. An especially vivid illustration of the conclusions of the structure-conduct

This essay has concerned

ing of what is meant by "competition." The issues reach far beyond

studying the connections among ideas, policies, and outcomes. Few

The Anti-Trust Laws of theUnited States ofAmerica (Cambridge,

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