Perfect Competition and the Transformation of Economics.

• Author: Heath, Will Carrington

This well-researched treatise by Frank Machovec makes the case, not originally but thoroughly and convincingly, that the classical understanding of market activity differed fundamentally from the neoclassical paradigm. Machovec challenges the dominant interpretation of neoclassical economics in general, and the model of perfect competition in particular, as a mathematically formalized rendering of the classical vision. "[T]he model of perfect competition should more aptly be characterized as a mutation," the author argues, "for its genes bear little resemblance to those of its presumed parents."

Professor Machovec does more than challenge the continuity assumption by which neoclassical theorists link present-day equilibrium analysis to classical economics. He goes on to argue that the modern paradigm misrepresents the market in ways that result in maldirected economic policy. To the extent that neoclassical orthodoxy rests on the assumption of perfect competition and ignores the Hayekian problem of knowledge, it inevitably leads, Machovec insists, to interventionist policy which is at once complicated and naive.

If the neoclassical model of perfect competition is a "mutation," as Machovec characterizes it, when did this mutation occur? And why did leading economists eventually embrace it so warmly? Machovec traces the model of pure competition back to Cournot's Researches Into the Mathematical Principles of the Theory of Wealth, where it first appeared in 1838 and languished virtually unnoticed for several decades. (During the first few years of its publication, apparently not a single copy was sold.) Stanley Jevons was an early proponent of the Cournotian approach to market structure, and predicted that it would triumph over the process-oriented approach. History would prove him correct, but not immediately.

By the turn of the century Walras's general equilibrium model was rapidly gaining adherents among the more technically proficient economists around the world, and with this model came the need for a more formal derivation of equilibrium conditions under perfect competition. But Machovec maintains that the decisive turning point in the history of competition theory, the revolutionary coup d'etat, occurred later, with the 1921 publication of Frank Knight's Risk, Uncertainty and Profit. More than anyone else it was Knight, Machovec argues, who transformed the substance of competition theory from an understanding of "process" in the...