WEBVTT NOTE The Austrian Approach to Competition 1 00:00:00.000 --> 00:00:05.000 Thank you, Professor Gleyhi. 2 00:00:05.000 --> 00:00:13.000 At the start of this talk, I should point out that when I describe what I have to say 3 00:00:13.000 --> 00:00:18.000 as an Austrian approach to competition in the market process, I'm going to be using 4 00:00:18.000 --> 00:00:23.000 the term Austrian in a rather broader sense than it is sometimes used. 5 00:00:23.000 --> 00:00:38.000 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. 6 00:00:38.000 --> 00:00:48.000 But in fact what I will be trying to describe of the Austrian approach to competition and market process 7 00:00:48.000 --> 00:01:06.000 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. 8 00:01:06.000 --> 00:01:14.960 Someone like my late colleague Professor Oscar Morgenstern, who, while he did have a good 9 00:01:14.960 --> 00:01:19.560 deal of understanding of Misesian economics, would certainly not describe himself as Misesian. 10 00:01:19.560 --> 00:01:24.760 Both of these, both Schumpeter and Morgenstern, I think, would agree with most of what I will 11 00:01:24.760 --> 00:01:30.000 be describing today as the Austrian approach to questions of competition and the market 12 00:01:30.000 --> 00:01:31.000 process. 13 00:01:31.000 --> 00:01:41.920 Let me first outline what I take to be the standard approach to competition, outline some 14 00:01:41.920 --> 00:01:49.560 of the difficulties which I think are to be discovered in that position, and then proceed 15 00:01:49.560 --> 00:02:00.360 from there by contrast to put before you an Austrian approach. 16 00:02:00.360 --> 00:02:15.400 The standard approach to competition sees competition as a state of affairs. 17 00:02:15.400 --> 00:02:23.280 A competitive state of affairs is one in standard economics in which each individual participant 18 00:02:23.280 --> 00:02:39.280 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. 19 00:02:39.280 --> 00:02:49.280 The perfect competition refers to a situation where each buyer confronts a perfectly horizontal supply curve, a perfectly elastic supply curve, 20 00:02:49.280 --> 00:03:02.280 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. 21 00:03:02.280 --> 00:03:14.280 Or, 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. 22 00:03:14.280 --> 00:03:30.280 And competition refers to this state of affairs. The state of affairs where, in fact, there prevails these conditions. 23 00:03:30.280 --> 00:03:39.640 Now, our textbooks spell out in detail the requirements for the state of affairs to prevail. 24 00:03:39.640 --> 00:03:48.200 Many buyers, many sellers, uniform commodity, perfect knowledge, all of these things are 25 00:03:48.200 --> 00:04:00.200 are conditions, the presence of which signifies the existence of the state of affairs. 26 00:04:00.200 --> 00:04:08.200 Now, this state of affairs is, of course, a state of equilibrium. 27 00:04:08.200 --> 00:04:13.200 It is only in equilibrium that it is true that individuals can buy as much as they want, 28 00:04:13.200 --> 00:04:21.700 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. 29 00:04:21.700 --> 00:04:26.700 And, in fact, a theory of perfect competition is, of course, a theory of equilibrium. 30 00:04:30.200 --> 00:04:35.700 So, these are the two features, I would say, of the standard approach that I would like to single out. 31 00:04:35.700 --> 00:04:42.700 The competitive market, as it is analyzed in standard microeconomics, is a market which is 32 00:04:42.700 --> 00:04:52.060 is perceived as being competitive in the sense of describing a situation as opposed to, as 33 00:04:52.060 --> 00:04:55.060 we should see, describing a process. 34 00:04:55.060 --> 00:05:02.060 And second, that that situation is understood to be and is in fact spelled out to be a state 35 00:05:02.060 --> 00:05:11.740 of equilibrium, equilibrium meaning a state where no decisions, no plans can fail to be 36 00:05:11.740 --> 00:05:25.740 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. 37 00:05:25.740 --> 00:05:33.740 Those are the conditions for equilibrium, and it is only under equilibrium conditions that the state of perfect competition prevails. 38 00:05:33.740 --> 00:05:46.620 This is the theory of competition that builds up the theory chapters in our basic textbooks, 39 00:05:46.620 --> 00:05:55.580 intermediate textbooks, advanced textbooks, and there are certain difficulties. 40 00:05:55.580 --> 00:06:03.340 One difficulty is that when undergraduates come into our classes as freshmen, we're 41 00:06:03.340 --> 00:06:13.480 There are certain terminological difficulties that have to be overcome. 42 00:06:13.480 --> 00:06:15.940 Everybody knows what competition is. 43 00:06:15.940 --> 00:06:20.740 Everybody knows that we live in a competitive world, and yet it turns out that the term 44 00:06:20.740 --> 00:06:26.820 competition is used by economists means something quite different from what it means outside 45 00:06:26.820 --> 00:06:27.820 the classroom. 46 00:06:27.820 --> 00:06:31.580 As a matter of fact, as we should see, it means almost precisely the opposite of what 47 00:06:31.580 --> 00:06:35.060 What does competition mean outside the classroom? 48 00:06:35.060 --> 00:06:43.380 Outside the classroom, competition means the pressure to attempt to do something different 49 00:06:43.380 --> 00:06:45.660 from what other people are doing, to do something better. 50 00:06:45.660 --> 00:06:51.020 To compete means to try and do something better than what other people are doing. 51 00:06:51.020 --> 00:06:58.300 Competitive world is one in which you are continually pressured to do better than others. 52 00:06:58.300 --> 00:07:17.540 In the competitive world of economic theory, it turns out that competition means just the 53 00:07:17.540 --> 00:07:18.540 opposite of that. 54 00:07:18.540 --> 00:07:23.180 Let's say the first competition is a state where everybody is doing the same thing, where 55 00:07:23.180 --> 00:07:26.180 Everybody faces at the equilibrium price. 56 00:07:26.180 --> 00:07:30.180 This is the equilibrium price which people can buy. 57 00:07:30.180 --> 00:07:32.180 This is the equilibrium price which people can sell. 58 00:07:32.180 --> 00:07:33.180 It's the same price. 59 00:07:33.180 --> 00:07:34.180 Everybody's selling at the same price. 60 00:07:34.180 --> 00:07:35.180 Everybody's buying at the same price. 61 00:07:35.180 --> 00:07:36.180 Everybody's buying the same good. 62 00:07:36.180 --> 00:07:37.180 Everybody's selling the same good. 63 00:07:37.180 --> 00:07:40.180 I'm a genius product. 64 00:07:40.180 --> 00:07:41.180 Nobody's offering a better commodity. 65 00:07:41.180 --> 00:07:42.180 Nobody's offering better service. 66 00:07:42.180 --> 00:07:45.180 Nobody's competing by cut by offering lower price. 67 00:07:45.180 --> 00:07:49.180 Nobody's competing as buyers by offering to pay a higher price. 68 00:07:49.180 --> 00:08:05.020 The Federal Reserve is the world in which it doesn't pay to do any of these things. 69 00:08:05.020 --> 00:08:09.380 You don't need to offer to sell at a lower price, you can sell as much as you want at 70 00:08:09.380 --> 00:08:10.380 a going price. 71 00:08:10.380 --> 00:08:14.980 You don't need to smile more brightly, because you can sell as much as you want with a going 72 00:08:14.980 --> 00:08:15.980 quality of smile. 73 00:08:15.980 --> 00:08:20.660 You're offering the exact quality of smile at the competitive, that is, the equilibrium 74 00:08:20.660 --> 00:08:23.220 quality for the market. 75 00:08:23.220 --> 00:08:29.540 So it turns out that the competitive world of economics, economics theory, is not only 76 00:08:29.540 --> 00:08:35.980 a different kind of world than the world outside the market, excuse me, than the world outside 77 00:08:35.980 --> 00:08:42.500 the classroom, but it in fact is a use of the term competition in a precisely opposite 78 00:08:42.500 --> 00:08:49.460 From the relevant sense, in which students heard the term used by their parents and by 79 00:08:49.460 --> 00:08:53.060 others outside the classroom. 80 00:08:53.060 --> 00:09:00.500 To some economists, this is not a matter of embarrassment, this is a matter of self-congratulation. 81 00:09:00.500 --> 00:09:01.500 We have something to teach our students. 82 00:09:01.500 --> 00:09:04.500 Forget about what competition means outside the classroom. 83 00:09:04.500 --> 00:09:08.500 This is the technological and scientific use of the term. 84 00:09:08.500 --> 00:09:14.780 In the scientific sense, there is a precise use of the term competition, which is vastly 85 00:09:14.780 --> 00:09:19.780 superior to that which the uncultured layman uses in the business world. 86 00:09:19.780 --> 00:09:28.780 And, after all, economists are entitled to their own jargon, why not? 87 00:09:28.780 --> 00:09:38.180 But there are other difficulties, besides the terminological difficulties. 88 00:09:38.180 --> 00:09:44.100 One important difficulty is that the theory of competition, which is, as we've seen, 89 00:09:44.100 --> 00:09:53.180 a theory of equilibrium price, suffers by failing to provide an explanation for how 90 00:09:53.180 --> 00:09:58.120 that equilibrium situation might have come about. 91 00:09:58.120 --> 00:10:02.120 What tendencies are there, what market forces are there that might tend, in fact, to bring 92 00:10:02.120 --> 00:10:06.620 about that particular situation which we described as the theory of competition? 93 00:10:06.620 --> 00:10:14.140 A theory which is confined to the state of equilibrium, by definition, fails to provide 94 00:10:14.140 --> 00:10:19.340 an explanation for the forces which might bring about such a state. 95 00:10:19.340 --> 00:10:23.140 The Theory of Competition, then, is not a theory of market price. 96 00:10:23.140 --> 00:10:29.020 In the sense, a theory of how the market price is determined, how it might be achieved from 97 00:10:29.020 --> 00:10:33.580 some other price, it's a theory of the conditions that would have to be fulfilled if equilibrium 98 00:10:33.580 --> 00:10:45.580 Competition cannot be relied on as an analytical device to explain how price is in fact determined. 99 00:10:45.580 --> 00:10:50.580 It is merely an analytical device that would explain how an equilibrium price would in 100 00:10:50.580 --> 00:10:57.580 fact fulfill the equilibrium condition, which is not very satisfactory. 101 00:10:57.580 --> 00:11:01.580 There is a third difficulty. 102 00:11:01.580 --> 00:11:09.900 takes a world in which all sellers are price takers, that is, each individual seller finds 103 00:11:09.900 --> 00:11:14.020 a price in the marketplace and simply reacts to it passively, deciding how much he should 104 00:11:14.020 --> 00:11:15.020 sell. 105 00:11:15.020 --> 00:11:20.700 But each buyer is a price taker, he finds a price and he reacts to it, deciding simply 106 00:11:20.700 --> 00:11:27.220 how much he should buy at that price, where no individual offers to pay a higher price 107 00:11:27.220 --> 00:11:28.860 or offers to sell at a lower price. 108 00:11:58.860 --> 00:12:09.020 The price is not like the temperature, which in principle happens regardless of what our 109 00:12:09.020 --> 00:12:10.380 actions are. 110 00:12:10.380 --> 00:12:15.980 Price is something which emerges from our actions, it emerges from the offers to buy 111 00:12:15.980 --> 00:12:16.980 and offers to sell. 112 00:12:16.980 --> 00:12:24.980 But if none of our actions can possibly alter the price, if each of our actions takes for 113 00:12:24.980 --> 00:12:29.100 We have granted the existence of a given price, and we have ruled out any possibility of offering 114 00:12:29.100 --> 00:12:36.540 of the price rising or the price falling, so we have in fact ruled out any explanation 115 00:12:36.540 --> 00:12:44.020 of how price might tend to gravitate towards an equilibrium, because we have confined our 116 00:12:44.020 --> 00:12:49.780 analysis to a world of pure price takings, so that is a world in which each individual 117 00:12:49.780 --> 00:13:02.780 Finally, and this difficulty is merely another way of expressing the earlier difficulties, 118 00:13:02.780 --> 00:13:11.140 finally, all of this, all of the assumptions of perfect competition and the competitive 119 00:13:11.140 --> 00:13:21.900 Equilibrium model can be made considerably consistent only by assuming perfect knowledge 120 00:13:21.900 --> 00:13:24.020 throughout the market. 121 00:13:24.020 --> 00:13:30.580 Only if everybody knows what other people are about to do will equilibrium emerge. 122 00:13:30.580 --> 00:13:38.580 Equilibrium, in fact, is a state of affairs where each individual correctly anticipates 123 00:13:38.580 --> 00:13:43.580 What he needs to pay in order to get what he wants, means he correctly anticipates what 124 00:13:43.580 --> 00:13:49.260 others are offering and what others are making available. 125 00:13:49.260 --> 00:13:52.980 Only under those conditions where everybody knows, in effect, what other people will be 126 00:13:52.980 --> 00:13:59.540 doing, can we make sense of the equilibrium market. 127 00:13:59.540 --> 00:14:06.180 So competition then, in the sense of a perfectly competitive model, which is, after all, the 128 00:14:06.180 --> 00:14:30.180 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. 129 00:14:30.180 --> 00:14:39.660 Let me illustrate this by drawing attention to the standard Marshallian crop, the Marshallian 130 00:14:39.660 --> 00:14:47.860 of line and end apparatus, although what I have to say relates not merely to the world 131 00:14:47.860 --> 00:14:53.460 of the single commodity market, but relates to the general equilibrium situation even 132 00:14:53.460 --> 00:14:56.460 more seriously, I would say. 133 00:14:56.460 --> 00:15:09.460 Here you have your demand curve for commodity, here you have your supply curve for commodity, 134 00:15:09.460 --> 00:15:13.460 measuring the quantity of some commodity on the horizontal axis, and you're measuring 135 00:15:13.460 --> 00:15:19.460 price of your money in the vertical axis, and here you have your market demand curve, 136 00:15:19.460 --> 00:15:24.460 you have your market supply curve, and everybody knows that there's something very exciting 137 00:15:24.460 --> 00:15:29.460 This is exciting about the intersection point. This intersection point is the point of equilibrium. 138 00:15:29.460 --> 00:15:40.460 The equilibrium quantity and equilibrium price emerge as the intersection point of the supply and demand curve. 139 00:15:40.460 --> 00:15:51.180 Now, we can say that that point is unique, in the sense that this point is the only point 140 00:15:51.180 --> 00:15:57.980 at which the quantity supplied is equal to the quantity demand, only at this price, the 141 00:15:57.980 --> 00:16:03.660 price level of intersection, only at that price is there no discrepancy between the 142 00:16:03.660 --> 00:16:06.860 quantity that people wish to buy and the quantity that people wish to sell. 143 00:16:06.860 --> 00:16:11.560 And the other price, the higher price, people will wish to buy more than the people wish to buy, 144 00:16:11.560 --> 00:16:14.760 the lower price is people will wish to buy more than the people wish to buy themselves, 145 00:16:14.760 --> 00:16:20.760 on one interpretation at the point. 146 00:16:20.760 --> 00:16:23.960 We don't usually rest satisfied with making that point. 147 00:16:23.960 --> 00:16:27.760 Usually we go further and we argue that that will be the price. 148 00:16:27.760 --> 00:16:30.160 That is the equilibrium price. 149 00:16:30.160 --> 00:16:34.660 And the equilibrium price might be interpreted to mean that if that were the price, 150 00:16:34.660 --> 00:16:38.660 There would be no tendency for the price to move away from it. 151 00:16:38.660 --> 00:16:40.660 But we go beyond that. 152 00:16:40.660 --> 00:16:45.660 We say not only is that the price which gets attained would be maintained, 153 00:16:45.660 --> 00:16:49.660 we also go ahead and say that will be what the price will turn out to be. 154 00:16:49.660 --> 00:16:52.660 But what? Why will the price turn out to be that? 155 00:16:52.660 --> 00:16:58.660 See, our competitive theory doesn't really enable us to say that. 156 00:16:58.660 --> 00:17:19.660 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. 157 00:17:19.660 --> 00:17:24.660 At any other price, some people are going to be disappointed. 158 00:17:24.660 --> 00:17:30.660 This price, for example, is going to be triplet. The price is going to be a shortage. 159 00:17:30.660 --> 00:17:33.660 We want the equilibrium because people are going to change. 160 00:17:33.660 --> 00:17:50.660 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. 161 00:17:50.660 --> 00:17:56.660 If that price were to work initially at present, there would be no reason for the price to change. 162 00:17:56.660 --> 00:17:59.660 But if that price were not the initial price, then what? 163 00:17:59.660 --> 00:18:02.660 Are we sure that eventually that would be the price? 164 00:18:02.660 --> 00:18:05.660 Well, we usually take it for granted that that will tend to be the price. 165 00:18:05.660 --> 00:18:11.660 The price, the market price, is going to gravitate towards that intersection price. 166 00:18:11.660 --> 00:18:15.660 So why do we say that? What credit do we have for making that statement? 167 00:18:15.660 --> 00:18:34.660 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. 168 00:18:34.660 --> 00:18:41.660 Theory of federal competition represents a situation where anybody who wants to buy the going price can buy. 169 00:18:41.660 --> 00:18:48.660 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. 170 00:18:48.660 --> 00:18:54.660 That's the situation at the equilibrium. Now, if that works, that equilibrium position, we're attained already, fine. 171 00:18:54.660 --> 00:18:58.660 But the problem is, it opens into another sense, a serious competition. 172 00:18:58.660 --> 00:19:10.660 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. 173 00:19:10.660 --> 00:19:18.660 Now, in our economics courses, we generally introduce some elementary dynamics. 174 00:19:18.660 --> 00:19:25.660 We say, well, supposing the price were to be higher than the equilibrium price. 175 00:19:25.660 --> 00:19:33.660 The quantity of the sale of the sales was greater than the quantity that people are prepared to buy at the price. 176 00:19:33.660 --> 00:19:39.660 Surplus? What happens when there's a surplus? Well, everybody knows that when there's a surplus, the price tends to fall. 177 00:19:39.660 --> 00:19:43.660 And everybody knows that when there's a shortage, the price tends to fall. 178 00:19:43.660 --> 00:19:49.660 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. 179 00:19:49.660 --> 00:19:55.660 Because the theory of perfect competition assumes that you have equilibrium in the surplus. 180 00:19:55.660 --> 00:20:00.660 Moreover, what is the rationale to argue on that? 181 00:20:00.660 --> 00:20:05.660 As soon as you say the price will fall, you're escaping from the assumption of everybody being practicing. 182 00:20:05.660 --> 00:20:08.660 The price can't fall with everybody being practicing. 183 00:20:08.660 --> 00:20:12.660 Everybody assumes this is the price. This will be the price. 184 00:20:12.660 --> 00:20:16.660 Everybody takes the granted if this is the price, this will be the price. 185 00:20:16.660 --> 00:20:19.660 If everybody continues to take the granted, that will be the price, that will be the price. 186 00:20:19.660 --> 00:20:21.660 Circus and Anthem. 187 00:20:21.660 --> 00:20:24.660 Why does Circus require the price fall? 188 00:20:24.660 --> 00:20:28.660 Circus requires the price fall because somebody changes the price. 189 00:20:28.660 --> 00:20:29.660 The Theory of Money and Credit 190 00:20:29.660 --> 00:20:30.660 The Theory of Money and Credit 191 00:20:30.660 --> 00:20:31.660 The Theory of Money and Credit 192 00:20:31.660 --> 00:20:40.660 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. 193 00:20:40.660 --> 00:20:49.660 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. 194 00:20:49.660 --> 00:20:54.660 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. 195 00:20:54.660 --> 00:20:57.660 He will offer to the seller at a lower price. 196 00:20:57.660 --> 00:21:01.660 Competition between sellers will in fact force down the price. 197 00:21:01.660 --> 00:21:05.160 Not that we use the same competition in business tests, no, how can that be? 198 00:21:05.160 --> 00:21:09.160 If there are sellers of unsold goods that are trying to get rid of their goods, 199 00:21:09.160 --> 00:21:11.660 and they were competing with each other to get rid of those goods, 200 00:21:11.660 --> 00:21:15.160 they're competing not in the sense of surface competition, 201 00:21:15.160 --> 00:21:22.160 but competing in the sense of a term which freshmen bring into the university with. 202 00:21:22.160 --> 00:21:25.660 Well, that's right. 203 00:21:25.660 --> 00:21:32.380 So that it turns out that this elementary dynamic that price falls within the surplus 204 00:21:32.380 --> 00:21:39.100 requires us to violate the conditions of certain competition, as used technically in the classroom, 205 00:21:39.100 --> 00:21:44.620 and requires us to revert to a notion of competition which we import from outside the classroom. 206 00:21:44.620 --> 00:21:50.300 So it requires us to have to overstep the boundaries of a competitive theory. 207 00:21:50.300 --> 00:21:54.300 So the theory which tells us that this will be the equilibrium price cannot be described 208 00:21:54.300 --> 00:22:09.900 There are a number of difficulties with this. First of all, the very notion of a single 209 00:22:09.900 --> 00:22:17.340 price, at which everybody is initially prepared to buy and sell, or thinks he's able to buy 210 00:22:17.340 --> 00:22:37.140 In the case of a single price, if it occurs at all, it must be postulated as being the 211 00:22:37.140 --> 00:22:39.140 result of an equilibrating market price. 212 00:22:39.140 --> 00:22:45.140 The market will not tolerate, for a long time, many prices for the same commodity. Why not? 213 00:22:45.140 --> 00:22:49.140 Clearly, those who are selling for the lower price will tend to sell for the higher price. 214 00:22:49.140 --> 00:22:52.140 Those who are selling for the higher price will tend to sell for the lower price. 215 00:22:52.140 --> 00:22:58.140 There will be market forces tending to compress prices for the same commodity through a single narrow band. 216 00:22:58.140 --> 00:23:03.140 That's the result of an equilibrating process. That's not going to have to take the granted. 217 00:23:03.140 --> 00:23:13.140 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. 218 00:23:17.140 --> 00:23:25.140 Moreover, we found it out by saying that initially everybody was a price taker, and consequently at the going price, 219 00:23:25.140 --> 00:23:31.140 buyers decided to have an aggregate and would want to buy that quantity, others decided an aggregate and would want to sell that quantity. 220 00:23:31.140 --> 00:23:38.140 So we started out with the assumption that everybody knew what the price was, and in fact that wasn't the case. 221 00:23:38.140 --> 00:23:45.140 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. 222 00:23:45.140 --> 00:23:52.140 But it turns out that was wrong, it wasn't true, that the individuals could sell as much as they wanted at that price. 223 00:23:52.140 --> 00:23:59.140 So we are violating one of the initial conditions, which says that there was personal knowledge, there was not personal knowledge. 224 00:23:59.140 --> 00:24:02.140 of the Four Perfect Knowledge and Five Equilibrium. 225 00:24:02.140 --> 00:24:07.140 As soon as you talk about a situation outside equilibrium, you have to violate it. 226 00:24:07.140 --> 00:24:10.140 Perfect knowledge would mean immediate equilibrium. 227 00:24:10.140 --> 00:24:15.140 If you want to start out by talking about an equilibrium situation, you have to violate the condition. 228 00:24:15.140 --> 00:24:25.140 You have to assume that there was not perfect knowledge. 229 00:24:25.140 --> 00:24:35.140 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. 230 00:24:35.140 --> 00:24:46.140 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. 231 00:24:46.140 --> 00:24:53.140 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. 232 00:24:53.140 --> 00:24:56.140 All we have is a point of intersection, the rest will be erased. 233 00:24:56.140 --> 00:25:03.140 What that means is that if you're there, you're there, and if you're not there, you're not there. 234 00:25:03.140 --> 00:25:09.140 Because, notice, what do we mean by a point on the supply? 235 00:25:09.140 --> 00:25:18.140 We mean a point which shows the aggregate quantities that people will be prepared to sell at a given price. 236 00:25:18.140 --> 00:25:22.140 If the price exists, this is what people in the aggregate will wish to sell. 237 00:25:24.140 --> 00:25:26.140 But why will the price not exist? 238 00:25:26.140 --> 00:25:30.140 Well, the price would be there only if there was a demand curve passing through there, 239 00:25:30.140 --> 00:25:32.140 and this would be the price that would have happened. 240 00:25:32.140 --> 00:25:34.140 If there was a price, that would be a point in the supply curve. 241 00:25:34.140 --> 00:25:40.140 Every point in the supply curve really has meaning only on the hypothesis of what is the demand curve. 242 00:25:40.140 --> 00:25:47.260 Convertibly, every point in the demand curve has meaning only if you can hypothesize what 243 00:25:47.260 --> 00:25:48.260 the price will have. 244 00:25:48.260 --> 00:25:53.540 But, in fact, there's only one point where you have both a supply curve and a demand 245 00:25:53.540 --> 00:25:54.540 curve. 246 00:25:54.540 --> 00:25:58.740 That's the only real point on either curve. 247 00:25:58.740 --> 00:26:02.140 Any other point violates the initial conditions. 248 00:26:02.140 --> 00:26:06.820 Any point other than the intersection, on the intersection, violates the initial conditions 249 00:26:06.820 --> 00:26:12.820 by which we set up in terms of a third place, because when we cut up a domain curve, we 250 00:26:12.820 --> 00:26:16.820 ask ourselves, well, supposing a buyer found that this is the price, how much would he 251 00:26:16.820 --> 00:26:17.820 wish to buy? 252 00:26:17.820 --> 00:26:21.820 Add it up to all potential buyers and you get to your market, you get a point in your 253 00:26:21.820 --> 00:26:22.820 market domain curve. 254 00:26:22.820 --> 00:26:27.820 But that notion that you can assume that there's a given horizontal price line, a given horizontal 255 00:26:27.820 --> 00:26:31.820 supply curve facing each individual buyer, as you said earlier, seems equilibrium. 256 00:26:31.820 --> 00:26:46.820 So 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. 257 00:26:46.820 --> 00:26:56.820 But as a fact, there is only one point at which to draw a domain to it. There is really only one point there. 258 00:26:56.820 --> 00:27:20.820 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. 259 00:27:20.820 --> 00:27:49.820 What about Marshalian economics? Marshalian economics is aerodynamic. It operates by the 260 00:27:49.820 --> 00:28:04.820 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. 261 00:28:04.820 --> 00:28:12.820 Rather, the Marshallian dynamics focuses attention on quantity. At this quantity, there is a demand price and there is a supply price. 262 00:28:12.820 --> 00:28:25.820 Now demand price means that you are referring to the highest price which is sufficiently low to attract buyers to buy up that total quantity. 263 00:28:25.820 --> 00:28:36.820 That is labeled as point A, this point is piece of A, and piece of A is the demand price for the quantity OA, 264 00:28:36.820 --> 00:28:43.820 Meaning that any price higher than these are very, is insufficiently low to attract buyers to buy that quantity. 265 00:28:43.820 --> 00:28:54.820 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. 266 00:28:54.820 --> 00:29:00.820 Any price higher than that will drive some buyers away so you won't get rid of that quantity. 267 00:29:00.820 --> 00:29:12.820 Similarly, 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. 268 00:29:12.820 --> 00:29:24.820 And what Marshallian Dynamics says is that so long as the demand price exceeds the supply price, there is incentive for quantity to expand. 269 00:29:24.820 --> 00:29:46.820 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. 270 00:29:46.820 --> 00:29:52.820 So long as there is a footprint of demand price and excess in demand price over the supply, 271 00:29:52.820 --> 00:29:57.820 so long as that excess exists, quantity would expand. 272 00:29:57.820 --> 00:30:01.820 Were quantity to be to the right of the detection point, you see, 273 00:30:01.820 --> 00:30:08.820 then in the long year the demand price is lower than the supply price, that is, the highest price, 274 00:30:08.820 --> 00:30:17.820 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. 275 00:30:17.820 --> 00:30:23.820 Therefore, there is no price for those quantities that will simultaneously divide incentives for those buyers to buy and those others to sell. 276 00:30:23.820 --> 00:30:26.820 Those quantities will not happen. 277 00:30:26.820 --> 00:30:35.820 Therefore, if they did happen, there'll be a tendency for those quantities the next period to not reproduce, not be on the set. 278 00:30:35.820 --> 00:30:42.020 But this dynamic, the Marshallian-type dynamics, assumes that in some way the market knows 279 00:30:42.020 --> 00:30:46.020 where the demand price is and the market knows where the supply price is. 280 00:30:46.020 --> 00:30:51.020 So, again, it assumes a kind of perfect knowledge which is inconsistent with its equilibrium 281 00:30:51.020 --> 00:30:52.020 conditions. 282 00:30:52.020 --> 00:31:01.020 So, this illustrates, I think, the difficulties which Austrian economic economists have with 283 00:31:01.020 --> 00:31:04.020 a standard approach to competition. 284 00:31:04.020 --> 00:31:09.020 It's an approach which I think has to be confined to the state of equilibrium. 285 00:31:09.020 --> 00:31:16.020 It has an important function to build in analyzing the state of equilibrium. 286 00:31:16.020 --> 00:31:21.020 I don't wish to slip it out of hand and think it's of no value at all. 287 00:31:21.020 --> 00:31:28.020 It's of great value in terms of analysis of equilibrium situations, but it seems to be entirely meaningless. 288 00:31:28.020 --> 00:31:34.700 As soon as one steps out of the state of equilibrium and tries to understand what forces in fact 289 00:31:34.700 --> 00:31:42.500 operate on market prices to determine what those prices will tend to be. 290 00:31:42.500 --> 00:31:47.260 And this brings me to the Austrian alternatives. 291 00:31:47.260 --> 00:31:58.260 The Austrian alternative, in a way, is closer to the layman's view of what there's on in the market. 292 00:31:58.260 --> 00:32:12.260 Professor Stiegler of the University of Chicago wrote an important paper many years ago on the history of the theory of competition. 293 00:32:12.260 --> 00:32:26.500 If I can sum up rather crudely the story which Stigler presented, it was that in the beginning 294 00:32:26.500 --> 00:32:32.900 there was a crude concept of competition, which economists held. 295 00:32:32.900 --> 00:32:39.660 This concept is the concept of competition as a rivalry. 296 00:32:39.660 --> 00:32:47.660 This concept gradually became refined until, in the hands of Frank Knight, the six teachers, 297 00:32:47.660 --> 00:32:56.660 the concept became a spiced concept, a refined analytical concept, a concept of perfect competition. 298 00:32:56.660 --> 00:33:02.660 So you have, then, a historical view which sees competition theory as being a continuous, 299 00:33:02.660 --> 00:33:13.660 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. 300 00:33:13.660 --> 00:33:26.440 Stiegler was taken to task by late writers, who pointed out that it's not that the earlier 301 00:33:26.440 --> 00:33:31.660 rivalrous competition was gradually refined into the notion of competition of the state 302 00:33:31.660 --> 00:33:37.300 of affairs, rather what happened was that the earlier notion of competition of the state 303 00:33:37.300 --> 00:33:43.420 as a rivalrous process was replaced by an entirely different notion of competition of 304 00:33:43.420 --> 00:33:52.780 This is important to add in Smith's competition memorandum, we mentioned earlier that if there's 305 00:33:52.780 --> 00:33:56.700 a surplus, the fellows will be on their toes, competing with each other, trying to get rid 306 00:33:56.700 --> 00:33:59.900 of the goods at a lower price, the price will fall. 307 00:33:59.900 --> 00:34:04.860 Now that's a different notion of competition from the notion of competition in The Theory 308 00:34:04.860 --> 00:34:09.340 of Money and Credit, and the notion which, according to Stiglitz, was rendered pre-signed 309 00:34:09.340 --> 00:34:23.780 And for Austrian, competition in the marketplace requires us to return to that original Adam 310 00:34:23.780 --> 00:34:28.780 Smith's notion or layman's notion of competition as a process. 311 00:34:28.780 --> 00:34:30.780 What is the competitive process? 312 00:34:30.780 --> 00:34:34.940 What is competition when it is seen in the sense of process? 313 00:34:34.940 --> 00:34:48.180 Process is the kind of series of changes which occur when individuals are free to do better 314 00:34:48.180 --> 00:34:54.700 for the market, to provide better opportunities for the market than are currently being provided, 315 00:34:54.700 --> 00:34:59.900 where at the same time each participant of the market feels under pressure to try and 316 00:34:59.900 --> 00:35:05.780 do that because he's aware that if he doesn't do the best he can do, others will get ahead 317 00:35:05.780 --> 00:35:06.780 of him. 318 00:35:06.780 --> 00:35:14.460 Now, that very crude notion of competition, but a very vital notion of competition, is 319 00:35:14.460 --> 00:35:19.140 the core of the Austrian analysis of market processes. 320 00:35:19.140 --> 00:35:32.380 Now, the very emphasis that Austrian economics places on competition as a process brings 321 00:35:32.380 --> 00:35:47.740 with it a related emphasis on market process as distinct from market equilibrium. 322 00:35:47.740 --> 00:35:54.780 For Austrians, understanding the market does not consist in understanding the conditions 323 00:35:54.780 --> 00:35:58.300 that would have to be fulfilled for the market to be in equilibrium. 324 00:35:58.300 --> 00:36:02.660 For Austrians, to understand the market needs to understand the forces that are operating 325 00:36:02.660 --> 00:36:09.780 at all times on market decisions that may or may not tend to lead towards equilibrium 326 00:36:09.780 --> 00:36:10.780 positions. 327 00:36:10.780 --> 00:36:20.780 At any rate, we are certainly not confined to analysis of already assumed and sustained equilibrium states of theory. 328 00:36:23.780 --> 00:36:31.780 For example, in Austrian economics, we don't take the notion of a single price as something to start out with. 329 00:36:31.780 --> 00:36:39.780 We take the notion of a single price as something that can be shown to tend to happen. 330 00:36:39.780 --> 00:36:48.780 The notion of a single price goes back to Jevin, a long years ago, who called it the law of indifference. 331 00:36:48.780 --> 00:36:56.780 Now, the law of indifference does not mean for Austrian that we start out by saying there has to be a single price. 332 00:36:56.780 --> 00:37:03.020 But for us it means that we understand that there are at all times powerful forces tending 333 00:37:03.020 --> 00:37:07.500 to eliminate price discrepancies for the same commodity. 334 00:37:07.500 --> 00:37:13.020 These forces are pretty clear for us to understand, and we understand what these forces are. 335 00:37:13.020 --> 00:37:19.020 If at any point in time there are more than one price for the same commodity, as I mentioned 336 00:37:19.020 --> 00:37:25.100 earlier, there will be incentives for these differences to be discovered and taken advantage 337 00:37:25.100 --> 00:37:26.100 of. 338 00:37:26.100 --> 00:37:33.100 The point of view is sometimes taken that there can be more than one price for the same commodity. 339 00:37:33.100 --> 00:37:38.100 Because if there were, there would have been the possibility for pure entrepreneurial profit. 340 00:37:38.100 --> 00:37:44.100 It would have been taken already, which would have bid up the price where the price would be low, 341 00:37:44.100 --> 00:37:47.100 and bid down the price where the price would have been high. 342 00:37:47.100 --> 00:37:51.100 Now, it's fine to recognize that if there would have been more than one price, 343 00:37:51.100 --> 00:37:54.100 There would have been pure entrepreneurial profit opportunities, and that we can rely 344 00:37:54.100 --> 00:37:57.100 on these to be discovered and acted on. 345 00:37:57.100 --> 00:38:02.100 But we cannot assume at all times that all profit opportunities have already been acted 346 00:38:02.100 --> 00:38:03.100 on. 347 00:38:03.100 --> 00:38:05.100 We have to incorporate it in our analysis. 348 00:38:05.100 --> 00:38:10.100 We have to build our analysis around the way in which, in fact, entrepreneurial opportunities 349 00:38:10.100 --> 00:38:12.100 are discovered and are then acted on. 350 00:38:12.100 --> 00:38:19.100 So we see, yes, we see that there is powerful tendency for prices to converge to a single 351 00:38:19.100 --> 00:38:20.100 price. 352 00:38:20.100 --> 00:38:27.420 This is a tendency, as a tendency, which is fueled by entrepreneurial discovery, fueled 353 00:38:27.420 --> 00:38:33.180 by the profit incentive, fueled by competition in the sense of a process. 354 00:38:33.180 --> 00:38:42.300 That is, where I find that I can buy at five and sell at ten, I will try and do so. 355 00:38:42.300 --> 00:38:43.300 But there are others trying to do so. 356 00:38:43.300 --> 00:38:47.300 All of us try and buy at five and try and sell at ten. 357 00:38:47.300 --> 00:39:01.300 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. 358 00:39:01.300 --> 00:39:13.300 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. 359 00:39:13.300 --> 00:39:21.860 Another way of emphasizing this is to interpret the equilibrating process as a process of 360 00:39:21.860 --> 00:39:22.860 discovery. 361 00:39:22.860 --> 00:39:29.500 We criticize the standard approach to theory of competition by its assumption that knowledge 362 00:39:29.500 --> 00:39:30.500 is perfect to start out. 363 00:39:30.500 --> 00:39:37.180 To start out with perfect knowledge assumption is, after all, to beg so much of what the 364 00:39:37.180 --> 00:39:41.180 real question is. 365 00:39:41.180 --> 00:39:51.300 So we would like to escape from the constraint of having to assume knowledge to be perfect 366 00:39:51.300 --> 00:39:52.300 in the first place. 367 00:39:52.300 --> 00:39:59.620 And it turns out, it turns out very interestingly, that the equilibrating process, or more generally 368 00:39:59.620 --> 00:40:05.300 the market process, turns out to be a process of discovery. 369 00:40:05.300 --> 00:40:11.380 The relationship between process and equilibrium is exactly parallel to the relationship between 370 00:40:11.380 --> 00:40:14.660 discovery and perfect knowledge. 371 00:40:14.660 --> 00:40:17.340 Perfect knowledge is a state of affairs when everything that needs to be discovered has 372 00:40:17.340 --> 00:40:19.420 already been discovered. 373 00:40:19.420 --> 00:40:23.580 But what is surely of interest to economists is to understand what the process of discovery 374 00:40:23.580 --> 00:40:29.180 is so that we can perhaps help to comment on what kinds of institutions will facilitate 375 00:40:29.180 --> 00:40:34.700 discovery, what kinds of institutions will facilitate the discovery of error, the discovery 376 00:40:34.700 --> 00:40:38.700 and the Theory of New Information that might bring it out to the perfect knowledge conditions. 377 00:40:38.700 --> 00:40:43.700 But to start out by assuming the perfect knowledge conditions is the question of very essential work. 378 00:40:43.700 --> 00:40:48.700 So the Austrian is not prepared to assume that everything takes care of itself 379 00:40:48.700 --> 00:40:52.700 and that somehow or other we know everything, everybody knows everything, 380 00:40:52.700 --> 00:40:56.700 and somehow or other we are already in a pretty competitive equilibrium situation. 381 00:40:56.700 --> 00:41:02.700 We would like to focus attention on precisely what happens during this equilibrium phases 382 00:41:02.700 --> 00:41:10.700 In fact, we are interested in the market process, whereas competition is then not a state of 383 00:41:10.700 --> 00:41:18.700 affairs, and the market is relevant, not primarily as a set of equilibrium conditions, whereas 384 00:41:18.700 --> 00:41:28.700 competition is a rivalrous process, and markets are relevant, precisely, in the systematic 385 00:41:28.700 --> 00:41:37.580 movement, which market price tends to display as a result of the discovery process, which 386 00:41:37.580 --> 00:41:46.700 is set in motion by rival of competition, where in a world of a single commodity, Howard 387 00:41:46.700 --> 00:41:53.260 and Austrian wrote the analysis, and they would say, in the beginning, there is no single 388 00:41:53.260 --> 00:42:10.540 In the beginning, no one of us knows what the market price is, no one of us knows what 389 00:42:10.540 --> 00:42:14.300 the equilibrium market price is. 390 00:42:14.300 --> 00:42:15.300 We begin to grope in the dark. 391 00:42:15.300 --> 00:42:20.300 Some of us offer to sell apples at high prices, some of us offer to sell apples at low prices, 392 00:42:20.300 --> 00:42:30.300 Some of us offer to buy apples at high prices, some of us offer to buy apples at low prices. 393 00:42:34.300 --> 00:42:42.300 Some of us discover that we bought apples at a price higher than what our neighbor bought apples at. 394 00:42:42.300 --> 00:42:48.300 Some of us discover that we sold apples at prices which are lower than the price which our neighbor sold apples at. 395 00:42:48.300 --> 00:42:51.300 We won't make that mistake again. 396 00:42:51.300 --> 00:42:56.300 We revise our estimations of what the eagerness of buyers is to buy and what the eagerness 397 00:42:56.300 --> 00:42:57.300 of sellers is to sell. 398 00:42:57.300 --> 00:42:59.300 The point is, in the beginning, we don't know. 399 00:42:59.300 --> 00:43:00.300 None of us know. 400 00:43:00.300 --> 00:43:03.300 And the market process is a process of discovery. 401 00:43:03.300 --> 00:43:08.300 We discover how eager other people are to buy and or to sell by interaction, by market 402 00:43:08.300 --> 00:43:09.300 experience. 403 00:43:09.300 --> 00:43:16.300 Some of us discover that we refuse to buy apples at a low price because we thought there 404 00:43:46.300 --> 00:43:53.220 This is a process of learning by experience, of learning by experience with other market 405 00:43:53.220 --> 00:43:54.220 participants. 406 00:43:54.220 --> 00:43:59.260 It's a process which is systematic, because one learns that one's information yesterday 407 00:43:59.260 --> 00:44:03.220 or one's guesses yesterday were perhaps wrong, or one guesses the direction in which a revision 408 00:44:03.220 --> 00:44:06.220 is required. 409 00:44:06.220 --> 00:44:10.660 One has discovered that the market was not as eager as he thought, or one has discovered 410 00:44:10.660 --> 00:44:13.660 the market was more eager than he thought. 411 00:44:13.660 --> 00:44:29.660 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. 412 00:44:29.660 --> 00:44:40.660 And this process of discovery, this process of learning about the preparedness of other market participants to offer interventions and to bid, 413 00:44:40.660 --> 00:44:50.620 This experience is a systematic one which leads to equilibrating pros and cons, generalizing 414 00:44:50.620 --> 00:45:03.300 from the single commodity market to a market for many markets, to markets linked horizontally, 415 00:45:03.300 --> 00:45:10.780 To markets linked vertically, to the relationship between factor markets, markets for resources, 416 00:45:10.780 --> 00:45:21.700 commodity markets, markets for produced products, one realizes that the process is exactly the 417 00:45:21.700 --> 00:45:23.820 same type. 418 00:45:23.820 --> 00:45:32.380 If the sum of resource prices necessary to produce some product is lower than the price 419 00:45:32.380 --> 00:45:49.380 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. 420 00:45:49.380 --> 00:45:53.380 This, of course, is where the entrepreneurial profit motive comes in. 421 00:45:53.380 --> 00:46:02.260 is the motive, which is on the alertness of different individuals to opportunities that 422 00:46:02.260 --> 00:46:05.260 others have to overlook. 423 00:46:05.260 --> 00:46:14.980 Well, I've gone on for a little too long, let me try and sum up very briefly. 424 00:46:14.980 --> 00:46:21.940 The Austrian approach to competition in the market process is that these two are inseparable. 425 00:46:21.940 --> 00:46:30.340 is a notion which relates strictly to market process. Market process can be fluctuated 426 00:46:30.340 --> 00:46:36.340 to appear in a systematic way only under the force of rivalries and competition. 427 00:46:36.340 --> 00:46:41.860 The kinds of revisions which Austrian economists would like to see in a standard price theory 428 00:46:41.860 --> 00:46:50.660 is then the relegation of perfectly competitive theory to a much more subordinate position 429 00:46:50.660 --> 00:46:57.500 is a special case where, as a result, presumably, of some discovery process, we are entitled 430 00:46:57.500 --> 00:47:06.500 to analyze the state of affairs that might eventually perhaps emerge when discovery, 431 00:47:06.500 --> 00:47:13.300 as a result of Riper's competition, has successfully been carried out to completion. 432 00:47:13.300 --> 00:47:25.300 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. 433 00:47:25.300 --> 00:47:35.300 We 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. 434 00:47:35.300 --> 00:47:42.300 Professor Kirzner has to leave promptly at 3 p.m. to catch an airplane, but we have 10 435 00:48:35.300 --> 00:49:01.940 The change of emphasis from equilibrium economics to process economics requires a concomitant 436 00:49:01.940 --> 00:49:12.440 If we deal with the state of affairs, then the crucial question is, is the state of affairs 437 00:49:12.440 --> 00:49:19.660 an efficient one or an inefficient one? That is, could one conceivably devise an alternative 438 00:49:19.660 --> 00:49:26.460 configuration of production, utilization of resources that would in some sense make society 439 00:49:26.460 --> 00:49:53.460 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. 440 00:49:53.460 --> 00:50:06.960 This 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. 441 00:50:06.960 --> 00:50:13.960 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, 442 00:50:13.960 --> 00:50:22.960 but rather would require us to focus attention on the flexibility of decisions and the responsiveness of decisions 443 00:50:22.960 --> 00:50:33.960 The ability of decisions to detect, discover, and move to correct existing inefficiencies, which at any one time certainly would exist. 444 00:50:33.960 --> 00:50:34.960 Yes? 445 00:50:34.960 --> 00:50:42.960 Does the government have the right to involve in the construction of new points of revenue? 446 00:50:42.960 --> 00:50:45.960 Yeah, that is it. It plays no role. 447 00:50:45.960 --> 00:50:51.960 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. 448 00:50:51.960 --> 00:51:02.960 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. 449 00:51:02.960 --> 00:51:20.960 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. 450 00:51:20.960 --> 00:51:41.480 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 451 00:51:41.480 --> 00:51:49.980 If one wishes to evaluate the relative usefulness of these alternatives, government or market, 452 00:51:49.980 --> 00:51:55.980 an important question would be what do markets do, as opposed to what the government does. 453 00:51:55.980 --> 00:51:59.980 What I would argue is that if you want to understand what the market does for whatever purposes, 454 00:51:59.980 --> 00:52:04.980 including the particular purposes of pairing it with alternatives and institutional arrangements, 455 00:52:04.980 --> 00:52:10.980 you have to understand what I would argue to be the important functions and contributions 456 00:52:10.980 --> 00:52:20.820 in the market, namely its ability to initiate systematic processes rather than its ability 457 00:52:20.820 --> 00:52:28.780 somehow or other to faultlessly grind out equilibrium solutions. 458 00:52:28.780 --> 00:52:36.820 The market sometimes been described as a computer, market as a computer analogy, and there is 459 00:52:36.820 --> 00:52:47.820 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. 460 00:52:47.820 --> 00:52:54.820 And if you start out by assuming that everything is known, then all that is required is a computation of the relevant solutions. 461 00:52:54.820 --> 00:53:00.820 Whereas in the market, the initial assumption must be that in fact no one knows everything, 462 00:53:00.820 --> 00:53:14.820 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, 463 00:53:14.820 --> 00:53:25.820 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. 464 00:53:25.820 --> 00:53:39.820 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. 465 00:53:39.820 --> 00:54:02.820 What 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? 466 00:54:09.820 --> 00:54:17.340 In a framework of competitive equilibrium, advertising has no role, it has no role because 467 00:54:17.340 --> 00:54:27.060 everyone is assumed to know everything, there's no information required, there is no rival 468 00:54:27.060 --> 00:54:33.500 competition required, and in fact advertising is perceived as a violation of competitive 469 00:54:33.500 --> 00:54:42.060 Advertising is then labeled as being monopolistic. In fact, I think you and I know that the way 470 00:54:42.060 --> 00:54:46.500 you compete, one of the ways you compete is advertising. Advertising is one of the avenues 471 00:54:46.500 --> 00:54:52.420 for competitive activity, for rivalries to competitive activity. Now, I think the inability 472 00:54:52.420 --> 00:54:57.780 to see the market process as a rivalries process, to see competition in that sense, being responsible, 473 00:54:57.780 --> 00:55:04.780 was responsible for a long time in a complete misunderstanding of the role of advertising in a market economy. 474 00:55:04.780 --> 00:55:10.780 This does not justify advertising as such or justify advertising in messages. 475 00:55:10.780 --> 00:55:17.780 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. 476 00:55:17.780 --> 00:55:21.780 Not anti-competitive. It's the way in which one competes. 477 00:55:21.780 --> 00:55:32.780 Another implication of standard economics would be its attitude towards, I thought, the anti-trust. 478 00:55:32.780 --> 00:55:44.780 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. 479 00:55:44.780 --> 00:55:53.780 And, in fact, if there is a small number of sellers, then the assumption is that competition doesn't exist, 480 00:55:53.780 --> 00:55:56.780 because you don't have the conditions for competition. 481 00:55:56.780 --> 00:56:04.780 But surely competition, in the rivalry sense, does not evaporate simply because you have few numbers. 482 00:56:04.780 --> 00:56:07.780 Now, few numbers may lead to collusion, certainly. 483 00:56:07.780 --> 00:56:11.780 But unless collusion occurs, and if you have collusion, of course you have an opposite. 484 00:56:11.780 --> 00:56:26.780 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. 485 00:56:26.780 --> 00:56:30.780 Competition in the process sense is fully consistent with the small numbers. 486 00:56:30.780 --> 00:56:38.780 This brings this, I think, throws an entirely different light on the social function of antitrust. 487 00:56:38.780 --> 00:56:45.620 If one sees the task of antitrust to restore competition and understand by competition 488 00:56:45.620 --> 00:56:50.860 the state of equilibrium, the state of fairly competitive equilibrium, you're likely to 489 00:56:50.860 --> 00:56:56.060 frustrate, you're likely, first of all, to overlook the rivalrous processes that are by 490 00:56:56.060 --> 00:56:57.060 no means eliminated. 491 00:56:57.060 --> 00:57:04.060 It may be, in fact, accelerated in the market where you have a few firms, we have price 492 00:57:04.060 --> 00:57:08.660 wars and so forth, where competition is extremely vigorous, and it's that kind of competition 493 00:57:08.660 --> 00:57:13.660 which we rely on, surely, to discover opportunities and to eliminate slack. 494 00:57:13.660 --> 00:57:19.660 These will be examples of implications and an approach which I think Austrian economics will tend to escape. 495 00:57:19.660 --> 00:57:21.660 Thank you very much, Professor Kirk.