Perfect Competition and the Transformation of Economics.

Heath, Will Carrington

This well-researched treatise by Frank Machovec makes the case, not originally but thoroughly and convincingly, that the classical understanding of market activity differed fundamentally from the neoclassical paradigm. Machovec challenges the dominant interpretation of neoclassical economics in general, and the model of perfect competition in particular, as a mathematically formalized rendering of the classical vision. "[T]he model of perfect competition should more aptly be characterized as a mutation," the author argues, "for its genes bear little resemblance to those of its presumed parents."

Professor Machovec does more than challenge the continuity assumption by which neoclassical theorists link present-day equilibrium analysis to classical economics. He goes on to argue that the modern paradigm misrepresents the market in ways that result in maldirected economic policy. To the extent that neoclassical orthodoxy rests on the assumption of perfect competition and ignores the Hayekian problem of knowledge, it inevitably leads, Machovec insists, to interventionist policy which is at once complicated and naive.

If the neoclassical model of perfect competition is a "mutation," as Machovec characterizes it, when did this mutation occur? And why did leading economists eventually embrace it so warmly? Machovec traces the model of pure competition back to Cournot's Researches Into the Mathematical Principles of the Theory of Wealth, where it first appeared in 1838 and languished virtually unnoticed for several decades. (During the first few years of its publication, apparently not a single copy was sold.) Stanley Jevons was an early proponent of the Cournotian approach to market structure, and predicted that it would triumph over the process-oriented approach. History would prove him correct, but not immediately.

By the turn of the century Walras's general equilibrium model was rapidly gaining adherents among the more technically proficient economists around the world, and with this model came the need for a more formal derivation of equilibrium conditions under perfect competition. But Machovec maintains that the decisive turning point in the history of competition theory, the revolutionary coup d'etat, occurred later, with the 1921 publication of Frank Knight's Risk, Uncertainty and Profit. More than anyone else it was Knight, Machovec argues, who transformed the substance of competition theory from an understanding of "process" in the classical sense, which involved thinking, acting entrepreneurs, to the derivation of entrepreneurless static-equilibrium conditions. Economists embraced Knight's methodology because they yearned, then as now, for a measure of scientific legitimacy; they wanted their science to be recognized as rigorous, formal, predictive and "objective." Since entrepreneurship cannot be modeled precisely, the concept of market process had to be abandoned, "banished to the economic hinterlands," as Machovec aptly puts it.

Machovec argues that the new theory of competition elides a critical distinction between the foreknowledge necessary to calculate the prices and quantities of a static equilibrium, and the revealed information which makes possible an equilibrium in the context of entrepreneurial market behavior. The assumption of perfect foreknowledge obviates the role of entrepreneurs, whereas the discovery of revealed information is the essence of entrepreneurial activity. Perfect competition thus removes entrepreneurs from the competitive process and opens the door to a centralized guiding intelligence that can not only carry out the functions of the market, but actually improve upon its overall performance. Armed with more complete information than any single economic agent could hope to possess, the central planners could arrive at equilibrium prices more directly, with fewer trials and errors, than the unplanned market actually does.

Machovec traces the implications of this interventionist mentality for four key fields of economic study: industrial organization, comparative systems, development, and international trade. In each of these areas the author demonstrates that static-equilibrium theory favors consideration of factors and outcomes that can be formalized mathematically and calculated in numerical terms.

This book is one in the series, Foundations of the Market Economy, edited by Mario Rizzo and Lawrence White, the underlying theme of which series is that markets should be understood as causal processes driven by the perceptions, expectations and preferences of human actors. Clearly Machovec echoes these themes in his contribution to that series. The central arguments of his book - that the static-equilibrium model of market analysis is distinctively modern, not classical, and that this model engendered a pro-planning spirit among many post-Walrasian economists - are hardly original; however, few scholars have amassed as much supporting material for these arguments as Machovec offers here. And while he relies heavily on the usual sources from Classical, Austrian and Chicago literature, Machovec also assembles a surprisingly diverse cast of bit-part players, much to pleasure of this reviewer. William F. Buckley, Stephen Jay Gould, Samuel Johnson, Robert Bork, Aristotle, Thomas Sowell, Edgar Allen Poe, Fidel Castro, Dostoyevsky and President Bill Clinton all find their way into this delightfully readable book.

A minor flaw in Machovec's presentation is his tendency to make points repetitively, which adds unnecessarily to the book's length. In general, however, this treatise is artfully written and holds the intelligent reader's attention throughout. Perfect Competition and the Transformation of Economics is a treasure-trove of bibliographic material for those interested in the history of economic theory, particularly the theory of competition.

Will Carrington Heath University of Southwestern Louisiana