What Is Competition?

April 13, 1959

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.”