CHAPTER 5 Competition and the Market Process

‘Only through the principle of competition has political economy any pretension to the character of a science.’

—John Stuart Mill1

Despite its importance the term ‘competition’ had been used by economists up until the twentieth century with barely a thought – it meant the same as it did in common discourse. It was shared by both the classical economists and managers, and meant ‘trying to outdo your rivals’. Whether in sport or in business ‘competition’ was a verb. As we shall see, however, an alternative view of competition began to dominate. Some economists treated ‘competition’ as an adjective with which to label various types of theoretical market. And policymakers used this as a basis to regulate. In this chapter we will look at the theoretical reasons why this came about, but also acknowledge a trend away from it. Increasingly the discipline is returning to the pre-twentieth century attention to processes, evolution and spontaneous order. This is good, because economic theory should reflect business reality. The key issue is whether we view markets as a dynamic process or as a static state.

There is a famous quote from Keynes,

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves ...

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