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A Note on the History of Perfect Competition
Author(s): Paul J. McNulty
Reviewed work(s):
Source: Journal of Political Economy, Vol. 75, No. 4, Part 1 (Aug., 1967), pp. 395-399
Published by: The University of Chicago Press
Stable URL: http://www.jstor.org/stable/1828600 .
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A NOTE ON THE HISTORY OF PERFECT COMPETITION
PAUL J. MCNULTY*
Columbia University
while competition
in high prices
result
PROFESSOR would
STIGLER his of
opened history
("polypolium")
perfect competition with Adam Smith's in the form of many sellers
treatment of the subject,' but noted that would drive prices down is found in the
did not he writings of the seventeenth-century Ger-
"Smith state how was led to ...
a man mercantilist, Johann Joachim Becher
elements of of
[the] concept competition."
"XVe (Heckscher, 1962, p. 271). And Boisguille-
may reasonably infer," he added,
"that the conditions of numerous and bert, according to Schumpeter, found in
rivals
an of order
of "economic principle
independence
of action of these competition
rivals were
as did A. Smith more than
matters of direct observation" (Stigler, quite as clearly
of
1957, His conception
p. 2). The purpose of this note is to half a century later....
was
equilibrium'
'proportionate
suggest that Adam was competitive
(1) Smith led to the
of his as definite as A. Smith's" (Schumpeter,
concept competition
by acquaintance was
with the 1954, p. 216). Although Cantillon's
economic literature of his and
time,
type of eco-
that the explicitly a "bargaining"
casualness with which he intro- more
of com-
the concept
than was
rivalry
duced and nomic
employed the in
term the Wealth
of Nations reflected Smith, his
the fact that competi- petition later employed by
tion was by then a familiar concept of discussion of market price foreshadowed
economic in
reasoning, and treatment of the several
(2) that the Smith- Smith's subject
ian concept of was respects.
competition of a funda-
mentally
different
character than
that
which on the one hand &
the Butchers
was later Suppose
perfected
by economic
theorists. of will
The meat
on the other. price
Buyers
as has the
Competition, Stigler pointed out, & a
after some altercation:
"entered be determined
economics from will same ratio
common discourse, of Beef about the
pound of bear all the Beef offered
and for to a piece money, that
long it connoted the
only independ- for in Market bears to all the money
ent of sale the
rivalry two or
more persons"
(Stigler, to Beef.
thither buy
1957, p. 1). But any implication that its brought the
altercation;
This is settled by
transition from an element of dis- proportion
common to
holds out for a price according
course to a concept of economic analysis Butcher on
he sees; the Buyers,
a the number of buyers
was contribution of
Adam
Smith
must be as they believe
their offer less according
rejected. Neither the concept itself nor its part, the
will have less market:
analytical function was original with him. that the Butcher followed
is ordinarily
by some
settled upon
The idea that monopoly ("monopolium") price in
are more skillful getting
the others. Some
by more
for their others
prices merchandise,
* I wish to thank my colleague, Maurice Wilkin- good of
method
in Though this
it.
son, for adroit discrediting
helpful discussion of some of the points dealt in Market no
of the has
the prices things
with herein, and to acknowledge the support of the fixing often
or since it depends
basis,
faculty research fund of the Graduate School of just geometrical of a small
or the facility
the eagerness
Business, Columbia University. upon not
or Sellers; yet it does
of Buyers of
1 number
This is, of course, a not uncommon practice in in more
arrive it other
seem to at any
economic literature. J. M. Clark, for example, in a possible the
true that quantity
It remains
chapter entitled "How Our suitable way.
Thinking about Compe- for
offered
of or of merchandise
tition Took Shape," also commences his historical commodities or the
with the demand with
survey of the subject with Adam Smith, whom he sale, compared
calls "a
prophet of which
competition" (Clark, of the basis peo-
1961, p. 24). number is upon
Buyers,
395
396 PAUL J. McNULTY
ple fix, or always think they fix, the prevailing is, when, in a certain degree,
Double competition
market prices; & that in general these prices it takes place on both sides of the contract at
do not differ much from the intrinsic value once, or vibrates alternatively from one to the
[Monroe, 1948, pp. 261, 262]. other. This is what restrains price to the ade-
A decade before the Wealtli of Nations ap- quate value of the merchandize.... Double
is what is understood to take place
peared, Turgot wrote: competition
in almost every operation of trade; it is this
it is
of prices;
The competition of rich entrepreneurs en- which prevents the excessive rise
gaged in agriculture establishes the current this which prevents their excessive fall. WNhile
double prevails, the balance is per-
price of leases in proportion to the fertility of competition
[Steuart, 1767,
the land and the price at which its produce fect, trade and industry flourish
sells, always according to the estimates which I, 196-97].
the farmers make of all their expenses and the These examples suffice to show that by
profit they should make on their advances; the time the Wealth of Nations appeared,
they can pay the proprietor
only the surplus. competition was a familiar concept in eco-
But when the competition between them is nomic writing and that its analytical func-
very keen, they pay him all this surplus, the tion was its recognized tendency to bring,
proprietor leasing his land only to the one who
offers the highest rent [Monroe, 1948, market price to a level which would elimi-
p. 360].
Hume, in a letter to Turgot in 1766, fore- nate both excessive profits and unsatisfied
shadowed not only Smith but also Jevons' demand, that is, to the lowest level sustain-
law of indifference by noting that "the price able over the long run. Adam Smith's em-
of labour will always depend on the Quanti- ployment of competition as the force tend-
ty of Labour and the Quantity of Demand ing to equate market and natural price was
. . . there cannot be two prices for the same thus not original but was eminently in the
species of Labour . . . for the high price tradition of the economic literature of his
would tempt so many hands to go into that time. His contribution with respect to the
Species of Industry as must immediatly concept of competition was the systematiza-
[sic] bring down the price" (Hume, 1955, tion of earlier thinking on the subject and,
pp. 208-9); and Turgot, in a reply, remarked more importantly, the elevation of competi-
that the wage rate (and presumably any tion to the level of a general organizing
other price) is "reduced by competition to principle of economic society-an achieve-
its precise level." "In a country where trade ment far greater, surely, than that of any of
and industry are free and active," he added, his predecessors.
"competition sets . . . profit at the lowest Rather than considering Adam Smith as
rate possible" (Hume, 1955, pp. 210, 211). the progenitor of a concept whose refine-
Probably the most complete pre-Smith- ment came at the hands of a group of suc-
ian analysis of competition was that of Sir cessors, it is more accurate, as far as the
James Steuart, who stressed that competi- history of competition is concerned, to think
tion might exist among either buyers or of Smith's work as marking the end of one
sellers. When supply falls short of demand, era and the beginning of another. The pre-
he wrote, it "occasions a competition among Smithian period saw the gradual emergence
the buyers, and raises the current, that is, of a body of literature in which price deter-
the ordinary prices . . . [but] it is from the mination through the principle of competi-
effects of competition among sellers that I tion was coming to replace ethically and
apprehend prices are brought down" (Steu- politically oriented price administration as
art, 1767, I, 174, 189). The ideal situation, the focus of economic analysis. The Wealth
according to Steuart, was that in which of Nations was in many ways the capstone
competition existed simultaneously among of this work. After Smith's great achieve-
both buyers and sellers, which he termed ment, the concept of competition became
"double competition." quite literally the sine qua non of economic
HISTORY OF PERFECT COMPETITION 397
reasoning. Ricardo limited his analysis, as ditions. Smith's concept of competition
was
himself had not to those situa- decidedly not one in which the firm was
Smith done,
in 'which with- passive with respect to price but was,
tions competition operates rather,
out restraint" (Ricardo, 1955, p. 6); and one in which the market moved toward
Mill without
John Stuart went on to assert, equilibrium through the active price re-
dissent from the profession, that "only sponses of its various participants. When
has exceeded
through the principle of competition quantity supplied that demanded,
the "some must be
political economy any pretension to he wrote, part sold to those
of a science" who are to less
character (Mill, 1864, I, 306). willing pay . . . [and] the
The function of competition in late-nine- market price will sink more or less below
economics came to be more the natural as the
teenth-century price, according greatness
the assurance ef- the excess increases or
than simply of allocative of more less
the com-
in resource it of the or
ficiency use; also gave to eco- petition sellers, according as it
nomics itself an analytical rigor without happens to be more or less important to
which, it was felt, its claims to the status them to get immediately rid of the com-
of science would be weakened. If modity" (Smith, 1937, p. 57). Smith's con-
seriously
is men was
"There no among of
longer competition cept competition competition "in
sense in a
and among employers," Jevons could de- the of rivalry race-a race
to get
a
or race
then a "has limited supplies to be rid of excess
little or
clare, problem nothing
with is
to do economics. It not a supplies" (Stigler, 1957, pp. 1-2). This
question of is
different the
science" (Jevons, 1882, pp. 153-55). Econ- fundamentally from concept of
to believe as
omists came that, unless competi- perfect competition which, Frank
Knight
be has "no
could their often stressed, implies
tion as presumption
postulated, discipline,
even Edgeworth admitted, "would be in- of psychological competition, or
emulation,
a and
deed dismal science" 1881, p. rivalry, ... [from which]
(Edgeworth, 'bargaining'
50). But the concept of competition upon is also excluded" As
(Knight, 1946, p. 102).
which came far as the of is
nineteenth-century economists concept competition related
was market we should have
to so not the to to
rely heavily concept which structure, say
had earlier been Adam Smith. that that the
employed by Smith, by suggesting individu-
the the of al seller could sell more by lowering
On contrary, process analytical price
less a
refinement that with and by raising it, presented of
began Cournot and theory
continued through the work of Jevons, imperfect competition. But, in fact, Smith's
Edgeworth, and J. B. Clark, reaching its use of the term seems to have been largely
fullest in Frank Knight's Risk, of market structure. Of du-
expression independent
and in- he wrote: "If ... the
1957),
Uncertainty Profit (Stigler, opoly, capital [in
a basic amount to the demand
volved change. required satisfy for
conceptual
is divided between two different
One of this was that price groceries]
aspect change will
a a their tend to make
came to be rather than vari- grocers, competition
parameter
able from the standpoint of the individual both of them sell cheaper" (Smith, 1937, p.
that
firm (Schumpeter, 1950, p. 78). As Stigler 342). Although Smith specified compe-
the the
has pointed out, the mathematical econo- tition would be more
active, greater
mists came "to define as that was the number of the essence
competition competitors,
in P in was
situation which does with of
not
vary Q- competition duopoly evidently
in which the demand curve the firm what it was in any other market
facing structure,
the to undersell one's rival
is horizontal" 5). This was namely, attempt
(Stigler, 1957, p.
a drastic change from the concept in the market
quite by lowering price.
for whom competition
employed by Smith, The most fundamental difference be-
meant nothing but the necessity for the tween Smith and the mathematical econo-
or mists who the of
individual or to raise lower
seller buyer developed concept perfect
his in to market does reside in
price or offer response con- competition not, however,
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