Hayek (103) believes that when economists overemphasize the importance of perfect competition, they are actually ignoring the solution when the situation is imperfect. In fact, the concept of competition is even more important when the market is imperfect so they should strive at offering a solution to that situation.
A good solution to an economic problem should be one that gives answers to problems as they are and not as they should be. To this end, any prescriptions that start from the situation as it should be would not be very useful. For instance, in perfect competition, it is assumed that the products and services in the market are identical.
However, this is quite untrue in reality; people’s needs and knowledge vary tremendously so suppliers must respond by offering heterogeneous products. Additionally, human skills will keep varying from time to time with a high number of them changing for the better.
This means that the nature of services and goods will also alter in response to these skills changes. In essence, no two doctors can ever be the same and the services they offer may not always be the same. Therefore, studying a theory that assumes these doctors to be the same would be very appropriate academically but would not be very useful in the real economic environment.
Hayek (106) believes that competition is all about the spread of information. If people are aware of the possibilities within a certain market then they will be motivated to make efficient use of the resources. However, for that to happen, then the information being taken around must be constantly altered.
Economists advocate for a theory that presumes that these factors do not change and this defies the very essence of competition. In this regard, it may not be wise for economists to continue depending on the perfect competition model which must always leave all factors constant.
In order to place a certain argument in context, it is always crucial to understand the agents involved in the matter and time frame affecting them (McNulty, 81). For example, economic theories and models were created and propagated by certain individuals who analyze their economic environments within a certain timeframe. In essence, what this implies is that the theories they had created may have ceased to be relevant because the times and the environments they were analyzing may have altered.
Human behavior is never really constant so certain theories may soon become outdated or passed with time. Hayek’s argument that competition is always altering indicates that most of the information collected by economists would simply be outdated even within the span of one day. This casts doubt on a perfect competition model that presupposes no change in the market (Rizoo & White, 43).
The market is never filled with absolutes. In other words, it is rarely characterized by monopolistic conditions or perfectly competitive conditions. The former term refers to one end of the spectrum where no competition exists. Such a firm would be the only one offering a certain service and its output curve would be equivalent to the demand curve. However, such a situation rarely continues for long because other firms will leverage on the technology and methods used by the monopolistic firm in order to get a reasonable market share.
This implies that a producer may only be a monopoly for a while because other players in the field will always be willing to get involved. On the other side of the scale is perfect competition where new volume purchases for the products offered by each firm are quite low. The conditions for this to occur are: freedom to enter or exit the market by market players and offering homogenous products amongst other things.
The real market rarely falls in either one of these scales. Most of the time, suppliers will find themselves in between. Most of them seek monopolistic situations hence explaining why they always in engage in the process of research and development. On the other hand, when a near monopoly appears in the market, it is often the laws of competition that will intervene in order to let an organization know that there are certain advantages to be enjoyed through the use of technology.
Consequently this balancing of interests between the concerned groups eventually leads to a mixture of companies that are neither actual monopolies nor perfectly competitive firms (Ackerlof, 4). It should be noted that in a highly dynamic market, there are always challenges of developing a product or service that would be sufficient for monetary monopolistic tendencies. In other words, firms would simply need the conditions of a monopoly to last for an adequate period.
This would allow for the completion of a certain transaction. A new condition or prerequisite for being a monopoly may arise but at least this had allowed an organization to continually improve. Most organizations are often created as profit ventures. In other words, their major aim in the long run is to bring in profits. However, the perfectly competitive model assumes that in the long term, firms make negligible profit. This implies that most of them will not have an incentive to exist in the perfect competition model.
There would be no point for companies to use their creative genius in order to improve because there would be no profits to accompany these changes in the long run. When economists assess the market using a mechanical and unchanging method then they are largely ignoring the dynamic character of it. Effective solutions always tend to be those ones that embrace the continuum of firms between being perfectly competitive to being perfectly monopolistic.
This creates a flexible and creative way of solving the problems of the market. In fact, when the market is thought of as an open system then chances are that there would be greater accuracy in offering solutions. What this implies especially for today’s dynamic systems is that the market would be better understood when handled that way than when handled in the neo classical or traditional manner.
Hayek therefore believes that the free market in itself possesses the ability to deal with its imperfections. Therefore, contrary to certain understandings by adherents to economic models, it is possible to still handle the inconsistencies and dilemmas that arise out of an imperfect model of competition.
Hayek believes that this is best done through price. He claims that price contains an indication of practical knowledge within any specific market. Most often, this is related to the optimum costs of the goods and hence the actual optimum prices that they need to be (Stolyarov, 50).
In essence, neo classical economists who rely on the perfect competition model may have failed in their most central quest- to give actual solutions to real problems. Hayek (106) believes that it would be better to be more concerned with the analysis of the imperfect scenario because this would reflect actual facts. When economist can determine ways in which diversity in the market is combined with gaps in skills and information then that would be a more feasible direction.
Also, when economists can know how to tackle mistaken notions and their corrections in imperfect competition then this would also be more applicable. Finally, because the market possesses so many players with various expectations, it would be more informative to demystify the process of uniting these differences. In essence, when the market is thought to be a process instead of a system, then more tenable answers may be found.
Stolyarov, George. Austrian economics and Hayek’s view of the market process. Western man journal, 63(2005): 50
Hayek, Friedrich. Individualism and economic order. Chicago: University of Chicago press, 1948
Rizzo, Mario & White, Lawrence. Foundations of the market economy. London: Routledge, 1996
Ackerlof, George. Uncertainty, quality and market mechanisms. Economics journal, 5(1970): 4
McNulty, Paul. A note on the history of perfect competition. Columbia: Columbia University press, 1967