God, this review is hack-work. But it does make me want to buy the book .....
>
>Michael Perelman. _The Natural Instability of Markets:
>Expectations, Increasing Returns, and the Collapse of Capitalism_.
>New York: St. Martin's Press, 1999. xiv + 188 pp. $39.95 (cloth),
>ISBN 0-312-22121-5.
>
>Reviewed for EH.NET by Thomas E. Hall <HALLTE at muohio.edu>,
>Department of Economics, Miami University, Oxford, Ohio
What the hell is the Miami University economics department doing in Oxford, Ohio? Get back to Miami already!
>
>Economists have long known that competition has some ugly side
>effects. In competitive industries, firms go out of business. The
>competitive process exhibits Schumpeter's creative destruction as
>new technologies come along which displace existing industries.
A complete non-sequitur. The process of technological development is not part of the competitive process. In a model of competitive destruction, competition is the means by which new technologies are introduced to the market.
>Workers lose their jobs, and firm owners lose wealth. This is all
>very unpleasant for the people who are adversely affected by these
>changes, but in the net society is better off by reaping the
>benefits of economic efficiency. At least, that is what economists
>generally believe about the competitive outcome.
"Economists" in this context is being used in Krugman's sense, meaning "me, and at a pinch, people who agree with me". It certainly doesn't include Schumpeter, for example, whose name is simply being invoked here as if he were a minor Pagan deity. If one were to actually read Schumpeter, it is crystal clear that his view of technological innovation is not that it is something that is driven by an ideally competitive market. In fact a "Schumpeterian theory of innovation" is taken by "economists" to mean one in which innovation is correlated to average firm size; one in which innovation can only be carried out by firms of sufficient size to support an R&D budget. A quick web search ( http://www.google.com/search?q=schumpeterian+theory+of+innovation&hl=en&saf e=off&start=60&sa=N) reveals that I am not bullshitting, and indeed, the reviewer is.
This is why most
>economists argue that (with the exceptions of a few cases such as
>public goods and natural monopolies) a policy of enhancing
>competition is desirable.
"Most economists" is again being used in the Krugman sense. Anyone who had remotely been following the Microsoft trial would know that pukka industrial economists do not hold any such simplistic maxim; Tirole's book certainly wouldn't support this conclusion.
>
>Michael Perelman challenges this conventional economic orthodoxy by
>arguing that the economic instability caused by competition may be
>so large that it outweighs the beneficial effects of economic
>efficiency. In fact, competition is so awful that "the tendency of
>the competitive process is to lead to depressions" (p. 62). Perelman
>does not argue that monopolies are the solution, instead he contends
>that society's welfare is enhanced by having an industrial structure
>that is neither too competitive, nor too concentrated. The optimal
>structure lies somewhere in between, where the gain in economic
>stability resulting from a less than perfectly competitive structure
>exceeds the loss to society of lower economic efficiency.
>
>It's an interesting argument, but one that isn't well enough
>documented for most people to accept.
It's documented to hell and beyond, with equations and diagrams to support in Tirole's "Handbook of Industrial Organisation", among others. The reviewer's own ignorance of the literature should not be projected as a fault in the book. Of course, Tirole isn't taught in the "Economics 101" courses beloved of those people who like to spout off on "competition" and "what economists believe", so the review may have missed it.
Too much of Perlman's
>discussion focuses on what's wrong with competitive markets, and too
>little on the benefits they create. Yes, the competitive process
>can cause wrenching changes in society, but what about the lower
>prices we pay, the wider variety of goods and services we choose
>among, the improved quality of products...? These considerations
>are given short shrift compared to the evils of "instability."
>
>A serious weakness of the book is its lack of a discussion on the
>role of demand. For example, Perelman considers economic depressions
>to be the intensification of the competitive process. While most of
>us would agree that competition among firms is more intense during
>economic recessions, would we extend the argument by saying that
>competition caused the downturn? I don't think so.
just as an aside, when did valley-girl-speak become the official language of economic journalism (see this, plus the "duh" in that review of Francis Wheen's Marx book, plus innumerable other examples. I don't know the answer to this, but suspect that Krugman may be to blame for this one as well.
Economic
>recessions are typically caused by slowdowns in aggregate demand
>growth. As spending growth slows, firms have to compete more
>intensely for scarcer sales. Thus, we observe more competition
>during downturns, but competitive pressures hardly caused the
>recession.
A more interesting point, but highlights the weaknesses in the reviewer's concept of "competition". Do firms introduce new products during recessions? Do they invest heavily in new productive technologies? In fact, competition here is being used to mean "cutting prices and reducing the required return on capital", without noting that this is a completely different sense to the "Schumpeterian" one above. The problem here, methinks, is that competition is being discussed by someone who has never been in business.
>
>Perelman also argues that high wages during recessions are good
>since "high wages represent a healthy stimulant to the economy . . .
>because high wages will encourage productivity" (p. 121). This
>efficiency wage argument has merit, but taken to extremes it could
>cause major problems. After all, if promoting high wages is such a
>great idea, during the next recession let's be sure to raise the
>minimum wage to $1 million per hour and see how well that stimulates
>recovery!
Obscuring an argument out of a desire to make a poor joke is a fault of mine, so I'm not going to comment on its use here.
>
>We often tell students not to get caught looking at the trees when
>they should be concentrating on the forest. I think the opposite
>applies to this book. Several of Perelman's trees, i.e., the
>specific cases he discusses to buttress his argument, are quite
>interesting. For example, there is an informative history of entry
>and exit in the automobile industry, an excellent discussion of
>x-efficiency, and a summary of estimates of the costs of
>unemployment in terms of numbers of suicides, homicides, and such
>that would be useful to instructors of macroeconomics principles
>classes. However, I am considerably less enamored with the forest,
>the idea that competition creates more problems than it solves.
>
> Copyright (c) 2000 by H-Net, all rights reserved. This work
> may be copied for non-profit educational use if proper credit
> is given to the author and the list. For other permission,
> please contact H-Net at h-net.msu.edu.
>
>
>Louis Proyect
>Marxism mailing list: http://www.marxmail.org/
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