A Weekly Dose of Hazlitt: What Is Competition?

What Is Competition?” is the title of Henry Hazlitt’s Newsweek column from April 13, 1959. Here Hazlitt highlights a book that exposes some of the truly bizarre notions of all too many economist: the idea that any deviation from their text book fantasies of “perfect” competition is a market failure. Of course, once this has been established, the inevitable call for government intervention follows.

The Roots of Capitalism, by John Chamberlain (Van
Nostrand, $5.50), is a book unapologetically in praise
of the American system of free enterprise. It is a history
of the ideas, the men, and the deeds that produced
the capitalism of the present day. The ideas include liberty,
freedom of choice, private property, limited government,
and contract. The men include the economic
theorists from Adam Smith to Ludwig von Mises, the
political theorists from John Locke to James Madison,
and inventors and enterprisers like James Watt, Eli
Whitney, and Henry Ford.

Chamberlain interweaves fascinating thumbnail
biographies and portraits with a discussion of abstract
principles. As he writes in his preface, for years the
system we call capitalism was on the defensive, because
it existed in the here-and-now, and its imperfections,
whether inherent or not, were plainly apparent to everybody.
When contrasted with a dream of perfection, such
as socialism, capitalism was manifestly at a disadvantage.
But since the advent of socialist economies, as in
Communist Russia and China, and of the semi-socialist
or “mixed” systems of Scandinavia, Britain, and New
Deal America, capitalism “no longer requires apologists.
Under any comparative audit of systems it comes
out very well indeed.”

‘Administered Prices’

Chamberlain defends capitalism against some of the
more persistent current criticisms of it. One of these
is that real competition has disappeared in America,
and has been supplanted by “administered prices,” by
monopoly or “oligopoly,” or by “imperfect” or “monopolistic”
competition.

The term “administered prices” was invented by
Gardiner Means in the early New Deal era and is being
exhumed today by Senator Kefauver. It turns out to be
merely a sinister name for a price established or quoted
by the seller. Quoted prices are immemorial. As Roger
Blough of the U.S. Steel Corp. has pointed out, they
can be found anywhere, from the corner newsstand to
Macy’s. It is only when a firm has the “market power”
to make the “established” or the “quoted” price stick
through periods of declining sales and unused manufacturing
capacity that competition ceases to be the
governor of market transactions.

And as Chamberlain conclusively shows, this power
very seldom exists in present-day America. The presence
or absence of competition seems to have very little to
do with the size of the units involved. “It can be absent
in a small town . . . where the barber or the hardware store
proprietor has a local monopoly. It can be present
among automotive giants when they are engaged in a
dingdong battle for sales leadership.”

Role of Innovation

This is being illustrated afresh by the present plight of
the Buick. In 1955 it was the most popular medium priced
car. But it has now dropped from third place
to sixth in its share of the American market. Its sales
are down so far in 1959 (according to The Wall Street
Journal of March 24), 61.2 percent from their best pace.
Chamberlain brilliantly shows the terrific price as well
as quality competition that the American automobile
companies are under. For example, there are upwards
of some 50 million cars on the roads of the U.S., and
“each one of the 50 million is in the hands not only of a
buyer but also of a potential seller.”

Recent economists have gone sadly wrong in their
postulate of something they call “perfect” competition.
Compared with this, all actual competition seems to
them “imperfect” or “monopolistic.” As F.A. Hayek
pointed out a dozen years ago, their “perfect” competition,
on analysis, seems to mean “the absence of all
competitive activities.”

Chamberlain follows up the Hayek lead with a
beautifully lucid exposition of what real competition
means today. The characteristics of the so-called
“perfect” market—an undifferentiated product, many
buyers and sellers, no trade secrets—are built on the
analogy of the wheat market. They have never applied
to industrial competition. Industrial competition is not
merely competition in prices; it is competition in product,
in improvement, in innovation—in short, in the
very “differentiation” that the theorists deplore as an
“imperfection.”

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