Full text: Expansion, Stagnation und Demokratie - 1982 Heft 2 (2)

been an emphasis on equilibrium. But it seemed to me that it was a
different kind of equilibrium. If not exactly dynamic, it was none the
less seen as a process, the market-place was the scene of struggle.
Competition was a battle with winners and losers. Hayek and Mises
were pro-market not because of the assumptions of perfect competition
and perfect knowledge, which would have been equally applicable to
perfect planning, but precisely because the real world was füll of
uncertainty and risk. An entrepeneur, it seemed evident, had an
entrepreneurial function, and so had the firm. "Pareto" optimality
would seem to be a concept inapplicable to a competitive market,
because quite plainly the success of any competitor meant damage, loss,
borne by the less successful. Can anything of significance be done
without damaging someone's interest?
Instead I found myself face-to-face with some strange-looking con-
cepts. Perfect competition, it seemed clear, was not competition at all,
since its assumptions were inconsistent with any process; no battle,
winners, losers, more or less efficient firms. Profits in equilibrium
tended to zero, because in fact, on the assumptions underlying what
purported to be the "theory of the firm", there was no reason why firms
should exist at all, and no real function (or, logically enough, reward) for
entrepreneurship . . . Comically enough, this dry-as-dust construction
was described by some Marxists as "apologetics for capitalism",
although, apart from its inherent unreality, it proposed no real role for
capitalists, and treated everyone, capitalists and workers alike, as
automats reacting to Stimuli under conditions unknown in any world
yet known. One example of our teaching may be worth quoting. I once
was visiting in Oxford and was asked to discuss a draft thesis with a
mature graduate Student who was working on Yugoslavia. He had
argued that, under certain circumstances, a Yugoslav firm would act in
such-and-such a way. I objected that they would not do so, because, if
they did, their competitors would gain at their expense. The Student
replied, coldly, that under the assumption of perfect competition, the
firm would be quite indifferent to the actions of its competitors! (So it
would, so it would ...).
Many a reader will be saying to him or herseif by now: this is too
much, everyone knows that these abstract theories are not directly
applicable to the real world, and their authors know this too and
frequently say so. Quite right. But I will try to show that, none the less,
certain theoretical simplifications do in fact influence advice that is
given in real-world situations, partly because the fashionable mathema-
tical apparatus requires these simplifications, partly because the relaxa-
tion of certain convenient assumptions stands in the way of desired
quantification. In many instances, the problem is not a denial that
certain real-world situations and complications exist, but rather an
under-emphasis, or no mention at all of matters of evident importance
which would disturb the elegance or rigor of formal models.
Much of this paper will relate to advice given about the running of
nationalized industries. I shall try to demonstrate that conventional

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