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BOOK REVIEWS

Perfect Competition and the Transformation of Economics. By
Frank M. Machovec. New York and London: Routledge, 1995

rofessor Machovec of Walford College has written what might be called
a monograph in the history of economic thought, dealing with the
economic profession’s adoption of the general equilibrium theory as
the starting point of all economic analysis. He argues that this revolu-
tion, which took place in the 1920s, radically altered the way economists would
come to view economic phenomena. The acceptance of this new “paradigm”
meant the abandonment of specific ideas associated with classical economics.

The importance of this book is Machovec’s documentation of how the
adoption of empirical methodology leads to the abandonment of key classical
concepts and leads to the adoption of an anti-market bias. “The classical descrip-
tion of the market process—a broad tapestry which explains much but provides no
concrete mathematical predictions—came to be considered useless and thus was no
longer defined as a legitimate theory in the sense of positive science” (p. 269).
Having abandoned the view of the market as an ongoing process of resource
allocation, the way was clear for the adoption of utopian and activist policies.

Machovec discusses anti-trust law and international trade as areas where
unintended and disastrous results have also occurred as a result of the link
between the methodology of the economists and their policy recommendations.
Quoting Hahn, “it is the models that lead people to view the economic systems
as they do” (p. 309).

International trade and development economics is another area where the
knowledge and wisdom of classical economists have been ignored or abandoned,
leading to specific policy recommendations which, when practiced, cause disas-
trous, unintended results. “We should not underestimate the damage wrought
by Walras’s entrepreneurless and, hence, non-market vision of the economy, a
vision which has made intrusions by government appear efficacious in far more
areas than would otherwise be the case” (p. 305).

Those who have become dubious of the government’s interference in the
market will appreciate the insightful connection between the question of meth-
odology and the type of government policies engendered by that methodology,
the discussion of the intellectual history of the profession and the explanation of

Review of Austrian Economics 10, no. 1 (1997): 137-140
ISSN:0889-3047

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138 Review of Austrian Economics 10, No.1 (1997)

how the profession has come to its current state is one of the most interesting
and useful portions of Perfect Competition.

The adoption of general-equilibrium theory has trained economists to look
at problems in a certain narrow way. Professor Machovec defines five distinct
areas where adoption of the perfect-competition model has had deleterious
results: an explanation of price change, modeling and predictability, the re-defi-
nition of monopoly, and the dependence on central planning in international
trade. Price change, and its significance, is a key classical concept which
Machovec argues was abandoned as a result of the adoption of Walras’s perfect-
competition model. The classical economists viewed price changes as the result
of entrepreneurial initiative in the way of new products, methods, and elimina-
tion of imperfect markets by arbitrage, etc. After the adoption of Walras’s model,
all prices were assumed to be at equilibrium and were changed only by exogenous
forces outside normal market dynamics. This assumption led to the questionable
attempt to mathematically determine production levels. An additional notion of the
classical economists which the neoclassical economists abandoned was the impor-
tant role of the entrepreneur as the innovative force driving the economy, and the
idea of the consumer as the ultimate and final source and authority for deciding
through the price system which goods get produced and in what quantity.

The acceptance of Walras’s equilibrium theory leads logically to the now-
common practice of modeling and prediction. “For the classical case, in which
information is revealed incrementally, the equilibrium price vector is solely
an ex post phenomenon and hence cannot be determined (calculated) ex ante. . . .
The culmination of such a process is a set of equilibrium prices and quantities
different from those yielded mathematically by Walras’s system of simultaneous
equations, yet Walras erroneously believed that his model’s prices were identical
to the market’s equilibrium prices” (p. 5).

The abandonment of the view of entrepreneurship as a benefit to society and
the adoption of equilibrium, Machovec argues, redefined the role of the entrepre-
neur as harmful under the static models of the neoclassical economists. Machovec
shows the effect this has had on anti-trust policy in the way of Supreme Court
decisions. Machovec echoes Coase: “As static neoclassical models became under-
stood by jurists, business practices whose efficiency rationales were subtle—and
hence not easily explicated by defense teams—were routinely yet incorrectly im-
parted to the existence of monopoly power. More harm than good has flowed from
the inflexible application of the perfect-competition benchmark as ‘the measure
against which particular [anti-trust] policy and actions are first tested” (p. 201).
The classical economists viewed the market as a self- regulating mechanism against
monopoly if there was ease of entry The substitution of a different criterion as


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Book Reviews 139

opposed to the “ease of entry” of the classical economists led to anti-monopoly
legislation which was not in the best interest of the consumer. He quotes Baumol
and Ordover, “Anti-trust can and probably does serve as a vehicle for rent seeking
and as a means to prevent ‘unfair competition,” meaning any competition that
threatens to make life uncomfortable for rivals . . . To this extent, rather than
promoting static efficiency, anti-trust legislation may serve to undermine it” (p.
228). The result has been anti-trust legislation which has failed to encourage
competition to the detriment of the consumer.

In the same vein of anti-trust legislation, Machovec details how similar
counter-productive policies have resulted in the area of international trade, and
shows the important connection between methodology and policy. The overall
result of Walras’s influence has been an anti-free-market prejudice and a statist
activist government bias. One can only conclude that the understanding of the
classical economists has to some extent become almost a body of lost knowledge.
The frightful idea lurking in the background from all this is that the economics
profession is filled with PhDs who view their profession as the exercise of the
correct “test” from their “toolkit” but actually have little conceptual under-
standing of economics.

On balance, despite the excellent scholarship and informative history, the
book is not without its flaws. Perfect Competition was sponsored in part by the
Austrian economics program at New York University, and one can no doubt safely
assume a fair amount of familiarity on the part of the author with the works of
Carl Menger and the methodological positions of the Austrian economists.
Although Professor Machovec’s criticisms may ring with resonance in the hearts
of Austrian economists, it would be a mistake to count Professor Machovec
among the members of the Austrian school. He explains, “As one who holds
undergraduate degrees in mathematics and meteorology, I am an equivocal
supporter of the value of formalism in economics. I fully concur with Jevons’s
observation thatin a discipline devoted to the study of small marginal effects, the
widespread employment of calculus is inescapable” (p. 9). We do not have here
an author who is calling for a fundamental change in the method and philosophi-
cal foundations of the discipline, but rather a reform in the de-emphasis of
general-equilibrium theory. “My purpose, however, is not to criticize the abstract
nature of perfect competition nor the model’s frequent employment as an
analytical tool. I readily concede that equilibrium models play a cardinal irre-
placeable role in the study of the process of competition. My primary objective
is to demonstrate that the adoption of perfect competition as the bench-
mark—and the employment of static models as the only acceptable engines of
market analysis—combined to transform . . . economics!” (p. 9).


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140 Review of Austrian Economics 10, No.l (1997)

The author fails to follow the force of his argument to its compelling
conclusion: the rejection of empirical methodology. He is content instead to
merely suggest a de-emphasis of the perfect-competition theory. But this recom-
mendation is inconsistent, and fails to deal directly with the fundamental flaw
and problem of the economics discipline and that is the adoption of the method
of physics on a foundation of positivist presuppositions.

Only the Austrian school of economics has carried on the methodological
tradition of the founders of economics. The problems and waning prestige of the
economics profession will continue until the Austrian methodological position
is once again the accepted orthodoxy.

Perfect Competition and the Transformation of Economics, despite this flaw, is a
valuable and worthwhile contribution to understanding the history of economic
thought and will be enjoyed for its informed insights and trenchant analysis.

William D. Curl
Mayport, Florida