Competition, Assumptions

Newton’s three laws of classical mechanics provide a model that describes much of the world we see around us, the world of macroscopic objects traveling at well below the speed of light, very well. Put another way – they apply under certain assumptions. If those assumptions are not appropriate, if you’re trying to describe something that doesn’t match the assumptions at all, you need another model. Now, are the assumptions ever “true?” Well, no. But they can be close enough. A competent physicist will know, for example, when not to use the classical model, and instead

The same is true in economics. Consider the perfect competition model. It indicates that left to its own devices, a market outcome will be perfectly efficient. While there is no such thing as a perfectly competitive model in the real world, we tend to implicitly take for granted that most of the assumptions of the perfectly competitive model hold, and thus, allowing for competition will lead to the best outcomes.

I note that the perfect competition model is not the only one that produces optimal outcomes. Given a benevolent all-seeing dictator, you can end up at the same outcome. But while we all know that a benevolent all-seeing dictator is clearly ridiculous, all-seeing homogenous atomistic firms (to name some of the stated assumptions of the perfect competition model) apparently are not.

But what if the assumptions of the perfect competition model are ridiculous? For example, here’s an article that points out that “there are very few poor students at America’s top colleges, and a large and growing number of rich ones”. I don’t think that’s a surprise to anyone.

Now, it is evident that there is nothing resembling equality of opportunity. So scratch homogenous among the assumptions. In fact, scratch atomistic – someone whose family can donate a library to a school has some market power, and it really doesn’t matter what market we’re discussing. And perfect information is a bad joke.

Now, most of us are perfectly to willing to accept that the idea of a benevolent all-seeing dictator is stupid. What does it take to reach the same conclusion about the competition model? For what its worth, let me add – I believe in competition, but as Gandhi said about Western Civilization, I think it would be a good idea, not one that has ever been tried. I say let everyone start from the same point, and let those who are smarter, faster, more talented, willing to work harder, or whatnot, come out on top. But I don’t think that’s what the folks who like to beat their chest and say they’re in favor of competition have in mind.