The Austrian Approach to Competition

0:00Thank you, Professor Gleyhi. At the start of this talk, I should point out that when I describe what I have to say as an Austrian approach to competition in the market process, I'm going to be using the term Austrian in a rather broader sense than it is sometimes used. Very often we use the term Austrian to refer to a rather narrow group of disciples and followers of the works principally of the professors Mises and Hayek. But in fact what I will be trying to describe of the Austrian approach to competition and market process It's an approach which is shared by Austrians of a rather broader sense, people like the late Professor Schumpeter, who was Austrian by birth and training, but certainly no Misesian by any excessive imagination.

1:06Someone like my late colleague Professor Oscar Morgenstern, who, while he did have a good deal of understanding of Misesian economics, would certainly not describe himself as Misesian. Both of these, both Schumpeter and Morgenstern, I think, would agree with most of what I will be describing today as the Austrian approach to questions of competition and the market process. Let me first outline what I take to be the standard approach to competition, outline some of the difficulties which I think are to be discovered in that position, and then proceed from there by contrast to put before you an Austrian approach.

2:00The standard approach to competition sees competition as a state of affairs. A competitive state of affairs is one in standard economics in which each individual participant The person in the market finds a price at which he is able to buy and sell, and that price is, from this point of view, invariant to the quantity that he may wish to buy or may wish to sell. The perfect competition refers to a situation where each buyer confronts a perfectly horizontal supply curve, a perfectly elastic supply curve, so that the price, the individual finds that he can buy this point if he wants, or that point if he wants, or that point if he wants, but all at the same price.

3:02Or, if he's a seller, he finds a purposely elastic demand curve indicating that he can sell this quantity, or this quantity, or this quantity, without having to lower the price. And competition refers to this state of affairs. The state of affairs where, in fact, there prevails these conditions. Now, our textbooks spell out in detail the requirements for the state of affairs to prevail. Many buyers, many sellers, uniform commodity, perfect knowledge, all of these things are are conditions, the presence of which signifies the existence of the state of affairs.

4:00Now, this state of affairs is, of course, a state of equilibrium. It is only in equilibrium that it is true that individuals can buy as much as they want, or without having to offer higher prices, only in equilibrium that individuals can sell as much as they want without having to lower the price. And, in fact, a theory of perfect competition is, of course, a theory of equilibrium.

4:30So, these are the two features, I would say, of the standard approach that I would like to single out. The competitive market, as it is analyzed in standard microeconomics, is a market which is is perceived as being competitive in the sense of describing a situation as opposed to, as we should see, describing a process. And second, that that situation is understood to be and is in fact spelled out to be a state of equilibrium, equilibrium meaning a state where no decisions, no plans can fail to be Any buyer wishing to buy some quantity at a particular price finds a conducer. Any seller wishing to sell at the going equilibrium price finds a conducer.

5:25Those are the conditions for equilibrium, and it is only under equilibrium conditions that the state of perfect competition prevails. This is the theory of competition that builds up the theory chapters in our basic textbooks, intermediate textbooks, advanced textbooks, and there are certain difficulties. One difficulty is that when undergraduates come into our classes as freshmen, we're There are certain terminological difficulties that have to be overcome.

6:13Everybody knows what competition is. Everybody knows that we live in a competitive world, and yet it turns out that the term competition is used by economists means something quite different from what it means outside the classroom. As a matter of fact, as we should see, it means almost precisely the opposite of what What does competition mean outside the classroom? Outside the classroom, competition means the pressure to attempt to do something different from what other people are doing, to do something better. To compete means to try and do something better than what other people are doing. Competitive world is one in which you are continually pressured to do better than others. In the competitive world of economic theory, it turns out that competition means just the opposite of that.

7:18Let's say the first competition is a state where everybody is doing the same thing, where Everybody faces at the equilibrium price. This is the equilibrium price which people can buy. This is the equilibrium price which people can sell. It's the same price. Everybody's selling at the same price. Everybody's buying at the same price. Everybody's buying the same good. Everybody's selling the same good. I'm a genius product. Nobody's offering a better commodity. Nobody's offering better service. Nobody's competing by cut by offering lower price. Nobody's competing as buyers by offering to pay a higher price. The Federal Reserve is the world in which it doesn't pay to do any of these things.

8:05You don't need to offer to sell at a lower price, you can sell as much as you want at a going price. You don't need to smile more brightly, because you can sell as much as you want with a going quality of smile. You're offering the exact quality of smile at the competitive, that is, the equilibrium quality for the market. So it turns out that the competitive world of economics, economics theory, is not only a different kind of world than the world outside the market, excuse me, than the world outside the classroom, but it in fact is a use of the term competition in a precisely opposite From the relevant sense, in which students heard the term used by their parents and by others outside the classroom.

8:53To some economists, this is not a matter of embarrassment, this is a matter of self-congratulation. We have something to teach our students. Forget about what competition means outside the classroom. This is the technological and scientific use of the term. In the scientific sense, there is a precise use of the term competition, which is vastly superior to that which the uncultured layman uses in the business world. And, after all, economists are entitled to their own jargon, why not? But there are other difficulties, besides the terminological difficulties.

9:38One important difficulty is that the theory of competition, which is, as we've seen, a theory of equilibrium price, suffers by failing to provide an explanation for how that equilibrium situation might have come about. What tendencies are there, what market forces are there that might tend, in fact, to bring about that particular situation which we described as the theory of competition? A theory which is confined to the state of equilibrium, by definition, fails to provide an explanation for the forces which might bring about such a state. The Theory of Competition, then, is not a theory of market price. In the sense, a theory of how the market price is determined, how it might be achieved from some other price, it's a theory of the conditions that would have to be fulfilled if equilibrium Competition cannot be relied on as an analytical device to explain how price is in fact determined.

10:45It is merely an analytical device that would explain how an equilibrium price would in fact fulfill the equilibrium condition, which is not very satisfactory. There is a third difficulty. takes a world in which all sellers are price takers, that is, each individual seller finds a price in the marketplace and simply reacts to it passively, deciding how much he should sell. But each buyer is a price taker, he finds a price and he reacts to it, deciding simply how much he should buy at that price, where no individual offers to pay a higher price or offers to sell at a lower price.

11:58The price is not like the temperature, which in principle happens regardless of what our actions are. Price is something which emerges from our actions, it emerges from the offers to buy and offers to sell. But if none of our actions can possibly alter the price, if each of our actions takes for We have granted the existence of a given price, and we have ruled out any possibility of offering of the price rising or the price falling, so we have in fact ruled out any explanation of how price might tend to gravitate towards an equilibrium, because we have confined our analysis to a world of pure price takings, so that is a world in which each individual Finally, and this difficulty is merely another way of expressing the earlier difficulties, finally, all of this, all of the assumptions of perfect competition and the competitive Equilibrium model can be made considerably consistent only by assuming perfect knowledge throughout the market.

13:24Only if everybody knows what other people are about to do will equilibrium emerge. Equilibrium, in fact, is a state of affairs where each individual correctly anticipates What he needs to pay in order to get what he wants, means he correctly anticipates what others are offering and what others are making available. Only under those conditions where everybody knows, in effect, what other people will be doing, can we make sense of the equilibrium market. So competition then, in the sense of a perfectly competitive model, which is, after all, the This model presents great difficulty in that it can get off the ground only by making the assumption, I would say, the highly unpalatable assumption, that everybody knows everything that needs to be known in a relevant way.

14:30Let me illustrate this by drawing attention to the standard Marshallian crop, the Marshallian of line and end apparatus, although what I have to say relates not merely to the world of the single commodity market, but relates to the general equilibrium situation even more seriously, I would say. Here you have your demand curve for commodity, here you have your supply curve for commodity, measuring the quantity of some commodity on the horizontal axis, and you're measuring price of your money in the vertical axis, and here you have your market demand curve, you have your market supply curve, and everybody knows that there's something very exciting This is exciting about the intersection point. This intersection point is the point of equilibrium.

15:29The equilibrium quantity and equilibrium price emerge as the intersection point of the supply and demand curve. Now, we can say that that point is unique, in the sense that this point is the only point at which the quantity supplied is equal to the quantity demand, only at this price, the price level of intersection, only at that price is there no discrepancy between the quantity that people wish to buy and the quantity that people wish to sell. And the other price, the higher price, people will wish to buy more than the people wish to buy, the lower price is people will wish to buy more than the people wish to buy themselves, on one interpretation at the point.

16:20We don't usually rest satisfied with making that point. Usually we go further and we argue that that will be the price. That is the equilibrium price. And the equilibrium price might be interpreted to mean that if that were the price, There would be no tendency for the price to move away from it. But we go beyond that. We say not only is that the price which gets attained would be maintained, we also go ahead and say that will be what the price will turn out to be. But what? Why will the price turn out to be that? See, our competitive theory doesn't really enable us to say that. A cathodic theory points out that if this price were to be the same, the quantity that people should buy at the price would exactly balance the quantity that people are supposed to sell, nobody would be disappointed, everybody would be able to carry out what they were supposed to do, and the market would be in equilibrium.

17:19At any other price, some people are going to be disappointed. This price, for example, is going to be triplet. The price is going to be a shortage. We want the equilibrium because people are going to change. But the statement that this is the only price which is consistent with equilibrium does not by itself give us any assurance that that equilibrium price, if it's not initially occurring, will tend to occur at all. If that price were to work initially at present, there would be no reason for the price to change. But if that price were not the initial price, then what? Are we sure that eventually that would be the price? Well, we usually take it for granted that that will tend to be the price.

18:05The price, the market price, is going to gravitate towards that intersection price. So why do we say that? What credit do we have for making that statement? We can't, you see, rely on the theory of federal competition, because the theory of federal competition, after all, is a theory which imagines that we are already here. Theory of federal competition represents a situation where anybody who wants to buy the going price can buy. doesn't find it a shortfall. Everybody wants to sell, and the going price can sell, and doesn't find that he has left it unsold. That's the situation at the equilibrium. Now, if that works, that equilibrium position, we're attained already, fine.

18:54But the problem is, it opens into another sense, a serious competition. Assuming, as it does, perfect knowledge, doesn't give us any clue as to why on earth that equilibrium position, if it's not initially occurring, would tend to happen. Now, in our economics courses, we generally introduce some elementary dynamics. We say, well, supposing the price were to be higher than the equilibrium price. The quantity of the sale of the sales was greater than the quantity that people are prepared to buy at the price. Surplus? What happens when there's a surplus? Well, everybody knows that when there's a surplus, the price tends to fall.

19:39And everybody knows that when there's a shortage, the price tends to fall. Now, that's fine as far as it goes, but what does it rest on? It doesn't rest on the theory of perfect competition. Because the theory of perfect competition assumes that you have equilibrium in the surplus. Moreover, what is the rationale to argue on that? As soon as you say the price will fall, you're escaping from the assumption of everybody being practicing. The price can't fall with everybody being practicing. Everybody assumes this is the price. This will be the price. Everybody takes the granted if this is the price, this will be the price. If everybody continues to take the granted, that will be the price, that will be the price. Circus and Anthem. Why does Circus require the price fall?

20:24Circus requires the price fall because somebody changes the price. The Theory of Money and Credit He said that, as soon as he said that somebody would unsell goods, goods offered to the seller at a lower price, you are violating the assumption that everybody is a price taker. He was saying that some people do not take the price for granted, do not react actively to given prices and in fact go out of their way to affect the price. Somebody realizes that in order for the seller, he's going to have to offer to the seller at a lower price and he will go out and do so. He will offer to the seller at a lower price. Competition between sellers will in fact force down the price. Not that we use the same competition in business tests, no, how can that be? If there are sellers of unsold goods that are trying to get rid of their goods, and they were competing with each other to get rid of those goods,

21:11they're competing not in the sense of surface competition, but competing in the sense of a term which freshmen bring into the university with. Well, that's right. So that it turns out that this elementary dynamic that price falls within the surplus requires us to violate the conditions of certain competition, as used technically in the classroom, and requires us to revert to a notion of competition which we import from outside the classroom. So it requires us to have to overstep the boundaries of a competitive theory. So the theory which tells us that this will be the equilibrium price cannot be described There are a number of difficulties with this. First of all, the very notion of a single price, at which everybody is initially prepared to buy and sell, or thinks he's able to buy In the case of a single price, if it occurs at all, it must be postulated as being the result of an equilibrating market price.

22:39The market will not tolerate, for a long time, many prices for the same commodity. Why not? Clearly, those who are selling for the lower price will tend to sell for the higher price. Those who are selling for the higher price will tend to sell for the lower price. There will be market forces tending to compress prices for the same commodity through a single narrow band. That's the result of an equilibrating process. That's not going to have to take the granted. If we start out with the assumption that there is a single price, we are, in a very important way, begging the question, oh yeah.

23:17Moreover, we found it out by saying that initially everybody was a price taker, and consequently at the going price, buyers decided to have an aggregate and would want to buy that quantity, others decided an aggregate and would want to sell that quantity. So we started out with the assumption that everybody knew what the price was, and in fact that wasn't the case. That everybody knew, or of course they knew, that they could sell as much as they wanted at that price, and buy as much as they wanted at that price. But it turns out that was wrong, it wasn't true, that the individuals could sell as much as they wanted at that price. So we are violating one of the initial conditions, which says that there was personal knowledge, there was not personal knowledge. of the Four Perfect Knowledge and Five Equilibrium.

24:02As soon as you talk about a situation outside equilibrium, you have to violate it. Perfect knowledge would mean immediate equilibrium. If you want to start out by talking about an equilibrium situation, you have to violate the condition. You have to assume that there was not perfect knowledge. Mr. Dennis Robertson once said, the only reason why we draw demand like a big, like that is because the people at the back of the class are able to see what's going on. What he meant was that really the only relevant point, the only relevant range of this diagram is the range right around the point of equilibrium. But I think the point goes further than that. I think the only point to which this diagram is relevant at all is the point of intersection.

24:53All we have is a point of intersection, the rest will be erased. What that means is that if you're there, you're there, and if you're not there, you're not there. Because, notice, what do we mean by a point on the supply? We mean a point which shows the aggregate quantities that people will be prepared to sell at a given price. If the price exists, this is what people in the aggregate will wish to sell. But why will the price not exist? Well, the price would be there only if there was a demand curve passing through there, and this would be the price that would have happened. If there was a price, that would be a point in the supply curve. Every point in the supply curve really has meaning only on the hypothesis of what is the demand curve.

25:40Convertibly, every point in the demand curve has meaning only if you can hypothesize what the price will have. But, in fact, there's only one point where you have both a supply curve and a demand curve. That's the only real point on either curve. Any other point violates the initial conditions. Any point other than the intersection, on the intersection, violates the initial conditions by which we set up in terms of a third place, because when we cut up a domain curve, we ask ourselves, well, supposing a buyer found that this is the price, how much would he wish to buy? Add it up to all potential buyers and you get to your market, you get a point in your market domain curve. But that notion that you can assume that there's a given horizontal price line, a given horizontal supply curve facing each individual buyer, as you said earlier, seems equilibrium.

26:31So it's true we can draw a domain to it, the meaning of which, meaning of each point of which, is a hypothetical meaning. That is, whether it's the product of the task at that point, or if it's the activity of other people. But as a fact, there is only one point at which to draw a domain to it. There is really only one point there. Now, so far, I've been analyzing the elementary dynamics, based on a horizontal line to the unscored or reasoning dynamic, where you focus attention into the price path, isn't the price equilibrium, it's the shortage that drives the price up.

27:20What about Marshalian economics? Marshalian economics is aerodynamic. It operates by the I'm asking different kinds of questions. The Marshallian dynamics doesn't focus attention on the price, asking whether there would be surpluses and shortages based on these prices and whether these shortages and surpluses would generate prices. Rather, the Marshallian dynamics focuses attention on quantity. At this quantity, there is a demand price and there is a supply price.

28:12Now demand price means that you are referring to the highest price which is sufficiently low to attract buyers to buy up that total quantity. That is labeled as point A, this point is piece of A, and piece of A is the demand price for the quantity OA, Meaning that any price higher than these are very, is insufficiently low to attract buyers to buy that quantity. You can think of this as a range of pricing, which is more low prices going higher and higher and higher until you reach the highest price, which is sufficiently low to attract buyers to buy that quantity. Any price higher than that will drive some buyers away so you won't get rid of that quantity.

29:00Similarly, if the price of a supply price goes to the lower limit of the prices which are sufficiently high to attract sellers and aggregates possible to sell, let's say, the funds. And what Marshallian Dynamics says is that so long as the demand price exceeds the supply price, there is incentive for quantity to expand. If, as you can see, there is a little range in which the highest prices that buyers are prepared to pay exceed the lowest prices that can attract sellers to sell and that would mean that there is incentive for buyers, for sellers and buyers to get together for an exchange.

29:46So long as there is a footprint of demand price and excess in demand price over the supply, so long as that excess exists, quantity would expand. Were quantity to be to the right of the detection point, you see, then in the long year the demand price is lower than the supply price, that is, the highest price, The tendency low to attract buyers to buy isn't anywhere near as high enough as the lowest price, which is essentially high, to attract others to sell. Therefore, there is no price for those quantities that will simultaneously divide incentives for those buyers to buy and those others to sell. Those quantities will not happen. Therefore, if they did happen, there'll be a tendency for those quantities the next period to not reproduce, not be on the set.

30:35But this dynamic, the Marshallian-type dynamics, assumes that in some way the market knows where the demand price is and the market knows where the supply price is. So, again, it assumes a kind of perfect knowledge which is inconsistent with its equilibrium conditions. So, this illustrates, I think, the difficulties which Austrian economic economists have with a standard approach to competition. It's an approach which I think has to be confined to the state of equilibrium. It has an important function to build in analyzing the state of equilibrium. I don't wish to slip it out of hand and think it's of no value at all.

31:21It's of great value in terms of analysis of equilibrium situations, but it seems to be entirely meaningless. As soon as one steps out of the state of equilibrium and tries to understand what forces in fact operate on market prices to determine what those prices will tend to be. And this brings me to the Austrian alternatives. The Austrian alternative, in a way, is closer to the layman's view of what there's on in the market. Professor Stiegler of the University of Chicago wrote an important paper many years ago on the history of the theory of competition.

32:12If I can sum up rather crudely the story which Stigler presented, it was that in the beginning there was a crude concept of competition, which economists held. This concept is the concept of competition as a rivalry. This concept gradually became refined until, in the hands of Frank Knight, the six teachers, the concept became a spiced concept, a refined analytical concept, a concept of perfect competition. So you have, then, a historical view which sees competition theory as being a continuous, This was an upward analytical movement from a crude, rivalrous notion of competition to a refined, scientific notion of competition in the state of the universe.

33:13Stiegler was taken to task by late writers, who pointed out that it's not that the earlier rivalrous competition was gradually refined into the notion of competition of the state of affairs, rather what happened was that the earlier notion of competition of the state as a rivalrous process was replaced by an entirely different notion of competition of This is important to add in Smith's competition memorandum, we mentioned earlier that if there's a surplus, the fellows will be on their toes, competing with each other, trying to get rid of the goods at a lower price, the price will fall.

33:59Now that's a different notion of competition from the notion of competition in The Theory of Money and Credit, and the notion which, according to Stiglitz, was rendered pre-signed And for Austrian, competition in the marketplace requires us to return to that original Adam Smith's notion or layman's notion of competition as a process. What is the competitive process? What is competition when it is seen in the sense of process? Process is the kind of series of changes which occur when individuals are free to do better for the market, to provide better opportunities for the market than are currently being provided, where at the same time each participant of the market feels under pressure to try and do that because he's aware that if he doesn't do the best he can do, others will get ahead of him.

35:06Now, that very crude notion of competition, but a very vital notion of competition, is the core of the Austrian analysis of market processes. Now, the very emphasis that Austrian economics places on competition as a process brings with it a related emphasis on market process as distinct from market equilibrium. For Austrians, understanding the market does not consist in understanding the conditions that would have to be fulfilled for the market to be in equilibrium.

35:58For Austrians, to understand the market needs to understand the forces that are operating at all times on market decisions that may or may not tend to lead towards equilibrium positions. At any rate, we are certainly not confined to analysis of already assumed and sustained equilibrium states of theory. For example, in Austrian economics, we don't take the notion of a single price as something to start out with. We take the notion of a single price as something that can be shown to tend to happen. The notion of a single price goes back to Jevin, a long years ago, who called it the law of indifference.

36:48Now, the law of indifference does not mean for Austrian that we start out by saying there has to be a single price. But for us it means that we understand that there are at all times powerful forces tending to eliminate price discrepancies for the same commodity. These forces are pretty clear for us to understand, and we understand what these forces are. If at any point in time there are more than one price for the same commodity, as I mentioned earlier, there will be incentives for these differences to be discovered and taken advantage of. The point of view is sometimes taken that there can be more than one price for the same commodity. Because if there were, there would have been the possibility for pure entrepreneurial profit.

37:38It would have been taken already, which would have bid up the price where the price would be low, and bid down the price where the price would have been high. Now, it's fine to recognize that if there would have been more than one price, There would have been pure entrepreneurial profit opportunities, and that we can rely on these to be discovered and acted on. But we cannot assume at all times that all profit opportunities have already been acted on. We have to incorporate it in our analysis. We have to build our analysis around the way in which, in fact, entrepreneurial opportunities are discovered and are then acted on. So we see, yes, we see that there is powerful tendency for prices to converge to a single price. This is a tendency, as a tendency, which is fueled by entrepreneurial discovery, fueled by the profit incentive, fueled by competition in the sense of a process.

38:33That is, where I find that I can buy at five and sell at ten, I will try and do so. But there are others trying to do so. All of us try and buy at five and try and sell at ten. This will mean that some of us will realize that what the way to do it is to run by 6 and sell at 9, and as this goes on, the price will tend to converge somewhere between 6 and 9, but this is a result of an equilibrium process. The essence of the market is seen as consisting in this process, not as consisting in the state of equilibrium that might possibly result from that process. Another way of emphasizing this is to interpret the equilibrating process as a process of discovery.

39:22We criticize the standard approach to theory of competition by its assumption that knowledge is perfect to start out. To start out with perfect knowledge assumption is, after all, to beg so much of what the real question is. So we would like to escape from the constraint of having to assume knowledge to be perfect in the first place. And it turns out, it turns out very interestingly, that the equilibrating process, or more generally the market process, turns out to be a process of discovery. The relationship between process and equilibrium is exactly parallel to the relationship between discovery and perfect knowledge.

40:14Perfect knowledge is a state of affairs when everything that needs to be discovered has already been discovered. But what is surely of interest to economists is to understand what the process of discovery is so that we can perhaps help to comment on what kinds of institutions will facilitate discovery, what kinds of institutions will facilitate the discovery of error, the discovery and the Theory of New Information that might bring it out to the perfect knowledge conditions. But to start out by assuming the perfect knowledge conditions is the question of very essential work. So the Austrian is not prepared to assume that everything takes care of itself and that somehow or other we know everything, everybody knows everything, and somehow or other we are already in a pretty competitive equilibrium situation. We would like to focus attention on precisely what happens during this equilibrium phases In fact, we are interested in the market process, whereas competition is then not a state of affairs, and the market is relevant, not primarily as a set of equilibrium conditions, whereas

41:18competition is a rivalrous process, and markets are relevant, precisely, in the systematic movement, which market price tends to display as a result of the discovery process, which is set in motion by rival of competition, where in a world of a single commodity, Howard and Austrian wrote the analysis, and they would say, in the beginning, there is no single In the beginning, no one of us knows what the market price is, no one of us knows what the equilibrium market price is.

42:14We begin to grope in the dark. Some of us offer to sell apples at high prices, some of us offer to sell apples at low prices, Some of us offer to buy apples at high prices, some of us offer to buy apples at low prices.

42:34Some of us discover that we bought apples at a price higher than what our neighbor bought apples at. Some of us discover that we sold apples at prices which are lower than the price which our neighbor sold apples at. We won't make that mistake again. We revise our estimations of what the eagerness of buyers is to buy and what the eagerness of sellers is to sell. The point is, in the beginning, we don't know. None of us know. And the market process is a process of discovery. We discover how eager other people are to buy and or to sell by interaction, by market experience. Some of us discover that we refuse to buy apples at a low price because we thought there

43:46This is a process of learning by experience, of learning by experience with other market participants. It's a process which is systematic, because one learns that one's information yesterday or one's guesses yesterday were perhaps wrong, or one guesses the direction in which a revision is required. One has discovered that the market was not as eager as he thought, or one has discovered the market was more eager than he thought. The decision-staker on any one day, not by price-takers, but by individuals who are fully conscious of competitive pressures, fully conscious that there's no point in offering to pay a low price for apples if there are others who are prepared to pay a higher price for apples. And this process of discovery, this process of learning about the preparedness of other market participants to offer interventions and to bid, This experience is a systematic one which leads to equilibrating pros and cons, generalizing from the single commodity market to a market for many markets, to markets linked horizontally,

45:03To markets linked vertically, to the relationship between factor markets, markets for resources, commodity markets, markets for produced products, one realizes that the process is exactly the same type. If the sum of resource prices necessary to produce some product is lower than the price This can only mean that sellers of resources or underweight knowledge can be marshaled and organized to communicate with decision makers the information which they lack.

45:49This, of course, is where the entrepreneurial profit motive comes in. is the motive, which is on the alertness of different individuals to opportunities that others have to overlook. Well, I've gone on for a little too long, let me try and sum up very briefly. The Austrian approach to competition in the market process is that these two are inseparable. is a notion which relates strictly to market process. Market process can be fluctuated to appear in a systematic way only under the force of rivalries and competition.

46:36The kinds of revisions which Austrian economists would like to see in a standard price theory is then the relegation of perfectly competitive theory to a much more subordinate position is a special case where, as a result, presumably, of some discovery process, we are entitled to analyze the state of affairs that might eventually perhaps emerge when discovery, as a result of Riper's competition, has successfully been carried out to completion. Of course, long before such a process would have run its course, the basic underlying data which define a state of equilibrium would have changed.

47:25We live in a kaleidic world, as Shackle has described it, a world in which the underlying data never stay put for long enough for the state of equilibrium really to be relevant. Professor Kirzner has to leave promptly at 3 p.m. to catch an airplane, but we have 10

48:35The change of emphasis from equilibrium economics to process economics requires a concomitant If we deal with the state of affairs, then the crucial question is, is the state of affairs an efficient one or an inefficient one? That is, could one conceivably devise an alternative configuration of production, utilization of resources that would in some sense make society If one focuses attention not on states of equilibrium, or states of affairs at all, but on processes, the question then is not on whether a particular state of affairs is efficient enough. That is not on whether hypothetically one could think of a better world. Rather, the focus of attention should surely be on what incentives are there for existing inefficiencies to be as rapidly as possible discovered and corrected.

49:53This wasn't the subject of today's talk, but I certainly agree that an important implication of this is that it requires us to alter our focus of normative attention. That is, our attention as normative economists would not be on whether a state of affairs is efficient or not, as standard welfare economics do, but rather would require us to focus attention on the flexibility of decisions and the responsiveness of decisions The ability of decisions to detect, discover, and move to correct existing inefficiencies, which at any one time certainly would exist. Yes? Does the government have the right to involve in the construction of new points of revenue?

50:42Yeah, that is it. It plays no role. In the market, the government plays no role, other than as one of those who are buying, or as one of those who are selling. A government may, of course, be a monopolist of one kind, a monopolist buyer, a monopolist seller, in which case both the neoclassicals and the theory and not the economics, none of it would apply. Mostly, governments come into the picture of being extra market agents, agents that operate outside the market because they operate not through voluntary exchanges, but through the use of the tax rep, the use of tax revenues, all the use of regulations. but to the extent that government participate in market without monopolization they would enter with everybody else government production and government allocation it tend to be an alternative to market If one wishes to evaluate the relative usefulness of these alternatives, government or market, an important question would be what do markets do, as opposed to what the government does.

51:55What I would argue is that if you want to understand what the market does for whatever purposes, including the particular purposes of pairing it with alternatives and institutional arrangements, you have to understand what I would argue to be the important functions and contributions in the market, namely its ability to initiate systematic processes rather than its ability somehow or other to faultlessly grind out equilibrium solutions. The market sometimes been described as a computer, market as a computer analogy, and there is There's something which I think is unfortunate about that analogy, in that the market, in fact, does not operate as a computer, because you get out of the computer what you feed into it.

52:47And if you start out by assuming that everything is known, then all that is required is a computation of the relevant solutions. Whereas in the market, the initial assumption must be that in fact no one knows everything, And in fact, there is an enormous amount of ignorance turning around, and the function of the market then is not to generate, to grind out the computer solutions to a fully articulated problem, but the function of the market is in fact to draw out the bits of information that would be necessary in principle before one could even begin to discuss the way in which the solution might be computed. So, this new approach has, I would say, important implications both for normative economics as such and for the way in which you might wish to understand what a market does as compared to all kinds of institutions, for example.

53:39What kind of distinction are you trying to draw? Can you state in broad brush strokes the kinds of errors that have been based upon an equilibrium concept of competition? If you use that as the foundation of your economic system, what kind of problems does it lead to?

54:09In a framework of competitive equilibrium, advertising has no role, it has no role because everyone is assumed to know everything, there's no information required, there is no rival competition required, and in fact advertising is perceived as a violation of competitive Advertising is then labeled as being monopolistic. In fact, I think you and I know that the way you compete, one of the ways you compete is advertising. Advertising is one of the avenues for competitive activity, for rivalries to competitive activity. Now, I think the inability to see the market process as a rivalries process, to see competition in that sense, being responsible, was responsible for a long time in a complete misunderstanding of the role of advertising in a market economy.

55:04This does not justify advertising as such or justify advertising in messages. It merely points out to the role of advertising in a competitive sense rather than the way it's being built as being anti-competitive. Not anti-competitive. It's the way in which one competes. Another implication of standard economics would be its attitude towards, I thought, the anti-trust. Within the framework which sees competition as a state of affairs, competition means a state of affairs where you have many increasingly small buyers and sellers. And, in fact, if there is a small number of sellers, then the assumption is that competition doesn't exist, because you don't have the conditions for competition.

55:56But surely competition, in the rivalry sense, does not evaporate simply because you have few numbers. Now, few numbers may lead to collusion, certainly. But unless collusion occurs, and if you have collusion, of course you have an opposite. But unless you have collusion, the fact that there are a small number of sellers doesn't by any mean eliminate the possibility of a rival of competition between those several members, those several oligopolists. Competition in the process sense is fully consistent with the small numbers. This brings this, I think, throws an entirely different light on the social function of antitrust. If one sees the task of antitrust to restore competition and understand by competition the state of equilibrium, the state of fairly competitive equilibrium, you're likely to frustrate, you're likely, first of all, to overlook the rivalrous processes that are by no means eliminated.

56:57It may be, in fact, accelerated in the market where you have a few firms, we have price wars and so forth, where competition is extremely vigorous, and it's that kind of competition which we rely on, surely, to discover opportunities and to eliminate slack. These will be examples of implications and an approach which I think Austrian economics will tend to escape. Thank you very much, Professor Kirk.