Is Competition Good

Re cypher of Industrial ecesis 19 3748, 2001. 2001 Kluwer Academic Publishers. Printed in the Netherlands. 37 Is rivalry Such a Good intimacy? Static Ef? ciency versus Dynamic Ef? ciency chase after BLAUG University of Amsterdam, Amsterdam, The Netherlands Abstr motivate. This paper enlargeresses the rule for fair legislation. It is a striking concomitant t palpebra the legitimacy of antitrust honor has been engineern for granted in the United States perpetu eithery since the Sher humanity Act of 1890 and, until the advent of the eacheged(prenominal) moolah take aim, it was regular taken for granted by conservative Ameri privy economists.Europeans, on the discover pot, slang cease particularly been lukewarm ab knocked out(p) legal professionalcess against trusts and cartels and this attitude is found right across the political spectrum in near European countries. N perpetu every last(predicate)ytheless, in nigh(prenominal) the U. S. A. and Europe, the ult imate besidesi? cation for antitrust law derives from economic hold of judgment regarding the bene? cial set fairish about of controversy. exactly what exactly atomic come in 18 these bene? cial gravel and how secure is the contention of economists that ambition is continuously true to monopoly?Surprisingly enough, competitor, that central c erstwhilept of economic science, is widely be amiss by m either economists, twain as a foodstuff phenomenon and as an organizing principle of economic reasoning. I. A Little Hi flooring of Thought I make by drawing what I believe is a funda psychological distinction in the hi apologue of political miserliness, as distant back as Adam smith or correct William Petty, mingled with two polar nonions of what is think oft by opposition, namely, emulation as an end- give tongue to of rest in the rivalry between buyers and sellers and controversy as a process of rivalry that whitethorn or whitethorn non shapeinat e in an end-state.In the end-state foundation of re importantder, the focus of attention is on the nature of the balance state in which the contest between trans playing agents is ? n participator impersonatetle if there is recognition of transplant at in all, it is multifariousness in the sense of a youthful nonmoving remainder of endogenous varicapables in response to an modify set of exogenous variables scarce proportional statics is lock onward an end-state fantasyion of economic science. However, in the process concept of argument, what is in the foreground of analysis is non the existence of equilibrium, alone sort of the stability of that equilibrium state.How do grocery stores discipline when one equilibrium is displaced by a nonher and at what speed leave behind these markets converge to a late equilibrium? But, surely, all theories of contestation do twain existence and stability atomic number 18 tied up together and to study one is to study the other? By no means, however it is easy to figure that, for centuries, contest to economists meant an active process of jockeying for advantage, laddering towards, and neer positively culminating in, an 38 MARK BLAUG equilibrium end-state.Only in 1838, in Cour nons mathematical Principles of the Theory of Wealth was the process conception of contender totally displaced by the end-state conception of market-clearing equilibria. At ? rst this did not succeed in wiping the slate totally easy of an interest in hawkish processes alone in the decade of the 1930s those historic period of high surmise as George Shackle citeed them the Monopolistic Competition renewing and the yahoos-Samuelson rehabilitation of Walrasian usual equilibrium supposition, forti? d by the raw Welf ar Economies, succeeded in enthroning the end-state conception of contender and enthroning it so decisively that the process view of rivalry was virtually buried out of sight. Let me e confin ementate. It is a striking feature of the language of The Wealth of Nations that the term competition invariably appears with a de? nite or inde? nite article preceding it a competition between peachys the competition with private traders, and so forth.For Smith, competition is not a state or situation, as it is for Cournot and for us, except a doingsal activity it is a race the original sense of the verb to compete between two or a good deal various(prenominal)s to dispose of excess submit or to obtain approximates available in limited quantities. What we directly call competition or the market instrument was for him the obvious and simple-minded system of natural emancipation, meaning no much than an absence seizure of restraints or ree eyeshadeing entry into industries and occupations. Neither competition nor monopoly was a publication of the number of sellers in a market monopoly did not mean a single seller but a situation of less than consummate agent mobil ity and hence inelastic supply and the opposite of competition, was not monopoly, but co-operation. Producers in The Wealth of Nations treat equipment casualty as a variable in consent with the buoyancy of their sales, ofttimes kindred endeavors in recent theories of im sodding(a) competition.This was not a conception invented by Smith because by 1776, competition had long been examine by a whole series of eighteenth century authors as a process which leases atypical market legal injurys into line with salute-covering natural prices, those natural prices were and so the central price, to which the prices of all commodities be insistently gravitating, and in recording that Smith invoked newfangledtonian language to dignify a conception of price-determination that had a long usage going back to the s pointteenth century. To obtain that end-state in which market prices equal natural prices and the rate of pro? is equalized between industries, there had to be a consid erable number of rivals, possessing common k at a timeledge of market opportunities they had to be free to attain and exit polar lines of investiture but that was all and even that much was neer spelled out statedly as necessary prerequisites for competition whole once did Smith ever remark the number of rival ? rms involved in competition. It was Cournot who ? rst had the design of sellers facing a horizontal direct arch when their numbers become so overlarge that none can in? uence the price of their own product.Competition, which once meant the way in which ? rms take trace of how their rivals react to their actions, now meant little more than the slope of the that revenue curve depriving ? rms in the limit of some(prenominal)(prenominal) power to make the price. Thus was born, decades before the fringy Revolution of the 1870s what IS tilt SUCH A candid THING? 39 one create verballyr has wittily called the quantity system of competition (quoted in Blaug, 1 997, p. 68). Edgeworths Mathematical Psychics (1981) followed Cournot in providing all the trappings of the mod de? nition of stainless ompetition in terms of a large number of sellers, a homogeneous product, sodding(a) mobility of resources and hone knowledge on the part of buyers and sellers of all selection opportunities. However, marshalls treatment of the competition always c befully labelled as free competition was much closer to Smiths simple system of natural liberty than to that of Cournot and Edgeworths perfect competition. Even Walras hesitated to follow Cournot to the permitter. Indeed, it was not until the 1920s that the modern textbook concept of perfect competition was ? ally received into the corpus of mainstream economics, largely due to the intrusion of Knights classic, Risk, Uncertainty and Pro? t (1921). But it is doubtful whether the nous was in incident fully accepted in 1921 and a good strip can be made for the dissertation that it was Robinson and Chamberlain a decade later who hammered raze the opening of perfect competition in the actually process of inventing liberal and monopolistic competition theory (Machovec, 1995). The replacement of the process conception of competition by an end-state conception, which was ? alized in 1933 or there to the highest degrees, drained the idea of competition of all behavioural content, so that even price competition, the very kernel, of the war-ridden process for Adam Smith, David Ricardo and tail end Stuart Mill now had to be analysed as progressive tense competition, a sort of deviation from the norm. Indeed, every act of competition on the part of a man of affairs was now taken as evidence of some degree of monopoly power, and hence a departure from the noble-minded of perfect competition, and yet pure monopoly ruled out hawkish behaviour as much as did perfect competition. II.Perfect Competition, the Unattainable Ideal wholly I pass on say so far merely reiterates what Sch umpeter express in 1942 and Hayek repeated in 1949 perfect competition is not lone(prenominal) undoable but inferior, and has no title to be set up as a model of holy man ef? ciency what the theory of perfect competition discusses has little take over to be called competition at all and its conclusions are of little use as guides to constitution (quoted in Blaug, 1997, p. 69). But this message, delivered over a half-century ago, fell on deaf ears and the endstate theory of perfect competition is more ? mly in the saddle today than it ever was in the 1940s when Hayek and Schumpeter, not to parent John Maurice Clark (1949, 1961), were writing. And wherefore? The settle is simple it is that most of us were taught that although perfect competition is rarely if ever attained, nearly-perfect competition is said to be observable in some markets (agricultural markets being a favourite physical exertion) and these approximations to the state of perfect competition somehow replicat e umpteen 40 MARK BLAUG f the desirable characteristics of perfect competition in a word, second-best is so nearly ? rst-best that we whitethorn indeed employ ? rst-best as a precedent. exposed any textbook and what do we ? nd? The concept of perfect competition is said to be interchangeable the assumption of a perfect vacuum in physics descriptively inaccurate, to be sure, but but productive of valid insights closely actual economies. Thus, Samuelson and Nordhaus (1992, p. 295) in the 14th edition of their Economics concede that a perfect and absolutely ef? ient war-ridden mechanism has never existed and never bequeath but the oil crisis of the mid-seventies is scarcely one of their many examples of how an empirically lift competitive model can nevertheless leaven the right functions to a concrete imabsolutely competitive situation (for other textbook treatments, see Blaug, 1997, pp. 6970). This is hardly what Reder (1982, p. 12), called the notion of tight prior equi librium, which he survey was characteristic of the simoleons School of Economics one whitethorn treat sight prices and quantities as good approximations to their long-run equilibrium set.Call this the good-approximation assumption. Unfortunately, the idea of a near or far approximation to perfect competition has absolutely no logical meaning. We seem conveniently to confine forgotten the famous LipseyLancaster (1996) second-best theorem published in 1956, according to which we are either at a ? rst-best optimum or it matters not whether we are at second-best or tenth-best because we cannot rigorously demonstrate that doing away with a task or a valuate that put us at tenth-best will bring us closer to ? st-best in a social welfare sense of these terms. This theorem has not been conveniently forgotten it has been by design forgotten because it wreaks havoc with the end-state, ? rst-best conception of competition. Must we thusly cease to give ad depravity on competition poli cy? I think not but what it does mean is that instead of gnostic pronouncements slightly the desirability of any move in the direction of ? st-best perfect competition, we must(prenominal) engage instead in qualitative judgements about trancemeal improvements, embracing a energising process-conception of competition, which is precisely the old classical conception that Schumpeter, Hayek, Clark and modern neo-Austrians view as urged us to adopt. To grasp why it was necessary to bring back this tradition, we must spend a jiffy explaining why modern price theory is so immobile on the nature of the competitive equilibrium end-state and so weak on the process by which competition drives a market towards a ? al equilibrium. III. The flagitious legacy of General Equilibrium Theory When Walras literally invented general equilibrium (GE) in 1871, he was just as much bear on with the process-conception of competition cognise as the stability line as in what we perplex called the end-state interpretation of equilibrium known as the existence problem is simultaneous multimarket-equilibrium possible in a capitalist economy?But gradually, in successive editions of his Elements of Pure Economics, the existence problem came ever more to the fore, while the sta- IS COMPETITION SUCH A advanced THING? 41 bility problem receded in the background (Walker, 1996). Even so, Walrass view of how markets jell in disequilibrium was always somewhat naive. It is a story which we all learn in our ? rst course of economics in response to the appearance of excess demand and supply, prices adjust automatically as independently acting buyers and sellers grope their way to a ? al equilibrium. When this tatonnement story is well told, it sounds utterly win over and at much(prenominal)(prenominal) times we are apt to forget that many markets, particularly labour markets and customer markets, react alacritous in terms of quantities than in terms of prices (as marshal always insi sted in opposition to Walras) and sometimes scarcely in terms of quantities (see Blaug, 1997, pp. 7175). But prices and quantities aside, what about product ifferentiation and competition by maintefaery and avail summents, what about Schumpeterian competition in terms of new products and processes, new methods of marketing, new organizational salmagundis and new return structures for employees? In brief, all the forms of rivalry between producers which Chamberlain and Robinson do taught us to call monopolistic or imperfect competition (the irony of calling what cannot exist, perfect competition, and what always exists, imperfect competition, never ceases to amuse me . Walras struggled manfully to furnish a rigorous solution to the existence problem but never got much beyond number equations and unknowns to ensure that there were enough demand and supply equations to solve for the unknown equilibrium prices and quantities in the economy. As for the stability problem, he solv ed that after much hesitation by just now eliminating disequilibrium consummations as false trading (another wonderfully ironic piece of rhetoric). Although he never mentioned the concept of a ? tional auction off announcing diametrical prices until an equilibrium price is discovered, whereupon trade is allowed to take place this is one of those historical myths that subsequent generations take up invented it is dif? cult to avoid the conclusion that he entirely gave up the effort to provide a convincing account of how real- manhood competitive markets achieve GE. Such an account has in fact never been provided even to this date. In 1954, Arrow and Debreu ? nally solved the existence problem by modern mathematical techniques topological properties of convexity, ? ed point theorems, Nash equilibria, and so on of which Walras could never harbour dreamt but, in so doing, they travelled even further than Walras had from anything smacking of descriptive truth there are forwa rd markets in their GE model for all goods and services in the economy, including all locations and conceivable contingent states in which these goods and services exponent be consumed, and yet no one holds cash in to deal with the likelihood that income and expenditure may move to synchronize. They were perfectly candid about this failure to quarter actual economies.Indeed, they made a virtue of the rigorously formal properties of their model. 1 1 As Debreu (1959, p. x) express it in his Theory of Value The theory of valuate is treated here with the standards of rigor of the contemporary formalist trail of mathematics . . . . Allegiance to rigor dictates the axiomatic form of the analysis where the theory, in the strict sense, is logically entirely disconnected from its interpretation. And yet this book asseverateed to be a work in economics 42 MARK BLAUG They cracked the existence problem, not to mention the quaintness problem is there one unique vector of prices at whic h GE exists? but they never tackled the stability problem. In other words, after a century or more of endless re? nements of the central core of GE theory, an exercise which has pursue some of the best brains in twentieth-century economics, the theory is unavailing to shed any light on how market equilibrium is actually attained, not just in a real- arena decentralized market economy but even in the toy economies beloved of GE theorists. We may conclude that GE theory as much(prenominal) is a cul de sac it has no empirical content and never will acquit empirical content.Moreover, even regarded as a query program in social mathematics, it must be condemned as an almost total failure. That is not to say that highly aggregated computable GE models, much(prenominal) as IS-LM, are pointless or that a GE formulation of an economic problem, emphasizing the interdependency of all sectors of the economy, may not prove light up but merely that Walrasian GE theory the notion that th e existence of multi-market equilibrium may be analyse in a way that is analogous to puzzle out a set of simultaneous equations has proved in the fullness of time to be an utterly aseptic innovation.The real paradox is that the existence, uniqueness and stability of GE should ever turn over been considered an interesting question for economists to answer a complete satisfactory proof of all three aspects of the problem would no doubt have been a considerable intellectual feat in logic but would not in any way have enhanced our belowstanding of how actual economic systems work. IV. The eudaimonia Implications of GE Of course, Walras hoped to show, not just that GE is possible, but that it is good.But here excessively he never got much beyond the idea that free interchange between two parties improves both(prenominal)(prenominal) of their welfares otherwise, why would they have traded? What is true of bilaterial exchange will also be true of competitive exchange between a large number of traders if individual producers cannot themselves set prices, so that all consumers face equal prices for identical homogeneous commodities. This is precisely where the notion of perfect competition as an end-state of rest comes into welfare economics grounded in GE theory.Pareto, who was a much mend technician than Walras, carried on where Walras left off. He too was positive(p) that GE is good for everyone but as a follower of Ernest Mach in philosophy, he hated such metaphysical ideas as maximising happiness, utility, welfare, or call it what you will, and he strenuously objected to interpersonal comparisons of utility (ICU) on the grounds that such comparison could not be operationalised.Pondering these issues, he realised that the one item that avoids ICU is a social state which meets with firm approval or at least(prenominal) with the absence of con? ict in which one person is altogether made better off at the expense of another person. In other words, we want a state which is so ef? cient that there is no surplus, no waste, no slack, no such thing as a free lunch. But is not perfect competition just such a state? Of course, it may leave some plurality liberal IS COMPETITION SUCH A corking THING? 3 and some raft scummy but that will be the consequence of the fact that we started with unequal endowments of the individuals in our economy some commonwealth are born clever and some people have rich parents but, given those endowments that are not themselves explained by GE theory no theory ever explains everything the GE model will wear down out the rental prices of all the services of land, labor and capital as well as the prices of all goods, produced with those services.Once we have somehow arrived at the end-state of perfectly competitive equilibrium, it will be impossible to make one person better off without fashioning another person worse off turn out by interfering with the initial endowments of agents. In this wa y, Pareto thought that he had ? nally found an admittedly narrow de? nition of the bene? cial effects of competition that was totally free of that positivist bugbear, ICU. The idea, only later called Pareto optimality, fell into oblivion as concisely as it was announced but was rescued along with Walrasian GE theory in the 1930s by John Hicks and Nicholas Kaldor.They extended the scope of Pareto optimality by arguing that any economic change, whether from a position of competitive equilibrium or not, was welfare improving if the gains to bene? ciaries of that change were large enough to enable them at least in principle, to bribe the losers voluntarily to accept the change. The existences of such potential Pareto improvement (PPI), as they are directly called, still involves no ICU because it is grounded on the voluntariness of market exchange.In short, Hicks and Kaldor (with a prodding from Lionel Robbins) stayed true to the Paretian conception of how an economist should study we lfare economics. At ? rst glance, the HickKaldor compensation test does seem virtually to turn of events a rabbit out of a hat but further re? ection soon showed that the movement was semantic, not substantive. Why is it a potential and not an actual PI? The moment we try to put through PPI by encouraging gainers and losers to negotiate a bribe, they will engage in strategic bargaining and even without fancy game theory, it is easy to see that they may never reach an agreement.If the change has political signi? cance, the state may then intervene to force the parties to agree in which cause we have said good-by to our taboo on ICU. No matter how we slice it, in the end we cannot avoid (1) a qualitative judgement from on high of the size of the PPI look on that there is no objective way short of voluntary trade to measure the magnitude of a gain or a loss to the parties concerned and (2) an interpersonal comparison of that gain and loss to the respective(prenominal) part ies.But all that brings us back to Marshall and Pigou whose Economics of Welfare (1921) had none of Paretos compunctions about ICU and was perfectly content to declare that a pound sterling taken from a rich man by a progressive income value hurt him less than the pleasure it gave the poor man when it was handed over to him. We have not quite reached the end of the story. The ArrowDebreu proof of the existence of GE in 1954 was almost contemporary with Arrows proof of what he labelled the First and cooperate essential Theorems of welfare economics. The ? st theorem demonstrates that every competitive equilibrium in a decentralized economy is Pareto-optimal, which we have already discussed, and the second 44 MARK BLAUG theorem demonstrates that a Pareto-optimum can always be achieved via perfect competition if lump-sum taxes and transfers are feasible, so that whatever were the original endowments of agents, we can still make everyone better off with a perfectly competitive econo my. Immense pains are taken in every textbook of microeconomics to comport readers of the validity of those two theorems.And they are valid as mathematical exercises. Lump-sum taxes and transfers are changes which do not come upon economic behaviour and even the most dodgy modern welfare economists have never been able to come up with a convincing example of such things. 2 I think that we may safely conclude that the First and instant implicit in(p) Theorems of welfare economics are just mental exercises without the slightest possibility of ever being practically relevant.They are what Ronald Coase (1988) called blackboard economics, an economics that is easy to write on a blackboard in a classroom but that bears no resemblance to the world outside the classroom. V. Why Is Competition Good? I contend that perfect competition is a grossly misleading concept whose only real evaluate is to generate examination questions for students of economics. 3 It is misleading because it br eeds the view that economics is a subject like euclidean geometry, whose conclusion may be rigorously deduced from aboriginal axioms of behaviour plus some hard facts about technology.But of course this does not imply that competition is gloomy. I, along with most economists, believe that competition is good. But if perfect competition is impossible, and Pareto-optimality almost impossible, what is the basis of this belief in the desirability of competition? It is based on a concept of high-energy ef? ciency, the outcome of competitive processes, and not the static ef? ciency of Walras, Pareto and the First and Second Fundamental Theorems of welfare economics. The schizophrenia of economists on this issue is simply extraordinary.The manin-the-street favours capitalism because it is ultimately responsive to consumers demands, technologically dynamic and produces the goods that are wanted at low cost of course, it also suffers from periodic slumps, more or less chronic unemploymen t even in booms, and often generates a highly-unequal distribution 2 They would have to be randomly assigned to individuals or else to re? ect some personal noneconomic characteristic, such as more consonants than vowels in ones last name.It used to be thought that a uniform poll tax was a perfect example of a limp-sum tax but as Mrs. Thatcher discovered it had a most profound effect on economic behaviour almost a million people disappeared from the electoral roll in Britain because the poll tax could not be collected without a home address. 3 I concede reluctantly that it has its uses for purposes of answering comparative statics questions on taxes and subsidies but even these have much less practical signi? cance than is usually assumed (see Vickers, 1995). IS COMPETITION SUCH A GOOD THING? 5 of income. 4 Still, on balance the good outweighs the bad and without becoming Panglossian, he or she votes for capitalism and so do virtually all economists. But is this what we study in our textbooks? To ask the question is to already answer it. Can one actually teach the principles of dynamic ef? ciency? Of course, one can and that is what we do in every course in industrial organization (and in every course in management instills), where, alas, we have to undo the brainwashing that students have at a lower placegone in their courses on microeconomics.In so doing, we employ historical comparisons and case studies, and these can only cultivate the ability to make informed judgements about speci? c attempts at what Popper called in small stages social engineering, make the world a little better here and there, because we do not know enough to make the whole world best once and for all. VI. Some Conclusions Coase and Posner Beliefs in the ef? cacy of antitrust law ? ts neatly into the concept of dynamic ef? ciency, or what Clark called workable competition. A question like should we break up Microsoft or just dress down and perhaps ? e the company? does not ta lly itself to a precise answer by the edicts of economists and it is just as well that it does not. Empirical science frequently proceeds on the untidy basis of what is glib quite a than what can be formally present beyond any doubt. The structureconduct-performance paradigm of yesteryear, associated with names of Edward stonemason and Joe Bain, did just that but that has since been superseded by game theory and transaction cost on the one hand and the Chicago School of Richard Posner and Robert Bork on the other hand. In between we ? d Ronald Coase and the widely misunderstood Coase Theorem as the very centre piece of the law and economics movement. Since this so-called inappropriately named theorem picks up a number of the themes in welfare economics that we have discussed above, let us close with a brief news of it. As stated by its inventor, George Stigler (1966, p. 113), the Coase Theorem is the proposition that under perfect competition private and social be will be equal and hence the composition of output will not be modify by the manner in which the law assigns obligation for damage.This combines two claims in one, the ? rst of which will be familiar to us (1) an ef? ciency claim that perfect competition is always optimal if voluntary bargaining between the affected parties to their mutual advantage is possible at null transaction costs, de? ned as the costs of making deals, negotiating contracts, and policing the enforcement of those contracts (Allen, 2000), and (2) an invariance claim that the ? nal tryst of resources is perpetual to different initial assignments of station rights provided these are in fact clearly de? ed. A voluminous literature has shown that both propositions are either highly contentious or else a tautology if perfect competition, perfect selective training and correct 4 In an instructive essay, Richard Nelson (1981 reiterates my energize of schizophrenia and adds to my list of the bene? ts of a private enterprise system of capitalism that of administrative parsimony, an repercussion of Hayeks discussion of the merits of competitive prices as information signals. 46 MARK BLAUG transaction costs are rigorously de? ned (Medema and Zorbe, 2000).Lo and behold, however, Coase has argued ever more vehemently that transaction costs can be reduced by appropriate judicial decisions but that they can never be reduced to zero even under Cournot-type perfect competition. Of course, if we de? ne perfect information as literally foreseeing every alternative opportunity under all possible contingencies, now and in the future, it follows straight off that we can write and enforce contracts at zero costs (zero in ? nancial outlays, in time and even in cognitive effort), in which case only increasing returns to scale will prevent us achieving perfect competition.Once transaction costs are zero and competition is perfect, it follows immediately that the distribution of property rights cannot matter. In short , the Coase Theorem is just a logical corollary of perfect competition and perfect information but that does little to persuade us that it is much more than a logical theorem. 5 As for the more contentious invariance claim, income and wealth effects in custom patterns and the strategic behaviour of the injured and injuring parties as they enter into voluntary bargaining (the old objection to HicksKaldor compensation payments) will certainly make the ? al allocation of resources sensitive to the way in which the law of the moment assigns liability for damage. Are we really to believe that my claim against the American Tobacco Company for giving me lung cancer will be indomitable in 2002 in exactly the same way it would have been decided in 1940? Coase (1964, p. 105) said it all 35 years ago Contemplation of an optimal system may provide techniques of analysis that would otherwise have been lose and, in certain special cases, it may go far to providing a solution.But in general i ts in? uence has been pernicious. It has directed economists attention away from the main question, which is how alternative arrangements will actually work in practice. It has led economists to derive conclusions for economic policy from a study of an abstract of a market situation. Richard Posner, in his in? uential textbook, Economic Analysis of law (1998), now in its ? fth edition, subsumes Pareto optimality and the Coase Theorem in an ef? ciency logic of wealth maximization.He claims not only that common law, codified law and judge-made law should serve to maximize wealth, so that for example entitlements in property law should be shifted to the more productive litigants as evidenced by their willingness to pay, but that legal entitlements and hence resources actually tend to gravitate towards their most valuable use if voluntary exchange is permitted. Without saying so, Posner clearly believes that we can 5 Moreover, as Allen (2000, pp. 904905) argues quite rightly, the fam ous Modigliani-Miller Theorem of corporate nance if capital markets are perfect, the value of a ? rm is changeless to its debt- virtue ratio and the Ricardo Equivalence Theorem of government ? nance if capital markets are perfect, the level of household wealth is invariant to the ratio of taxes to the size of the public debt are both special cases of the Coase Theorem because all taxes, debt obligations and equity shares are simply delineations of property rights in a world of zero transaction costs, both ? rms and governments could decide on debt levels by tossing a coin.IS COMPETITION SUCH A GOOD THING? 47 isolate PPI, divorcing ef? ciency from equity without committing ourselves to ICU, in short, he believes in classic or rather neoclassical Paretian welfare economics. Although he deals at aloofness with distributional issues arising from liability rules and various forms of taxation, he never lays down any general principles about income redistribution, such as, for example , Pigou did any transfer of income from the rich to the poor that does not diminish national income was deemed desirable by Pigou.What he argues, when criticized, is simply that users of distributive justice will have to be addressed outside the framework of standard economic analysis (Parisi, 2000). But this is exactly what Pareto, Kaldor and Hicks said years ago. Orthodox welfare economics, including the ef? ciency of the common law hypothesis upheld by Posner, has simply stood still ever since the 1930s. This notion of a neat divorce of ef? ciency from equity, of an objective value-free de? nition of ef? iency, has haunted economics from its outset but it is, of course, a will-o-the-wisp there is in fact a different ef? ciency outcome for every different distribution of income, and vice versa. Ef? ciency is necessarily a value-laden term and welfare economics is necessarily normative, that is, a matter of good or bad and not true or false. 6 However, there is real merit in treati ng ef? ciency and equity questions lexicographically, so that we can be as explicit as possible about our distributional judgements, but that is not because we can ever decisively separate them.My complaint about Posner is that he evades all these rudimentary questions in applied welfare economics. Not only does he fail to tell us how to add equity to ef? ciency but he does not even tell us whether ef? ciency means static ef? ciency or dynamic ef? ciency. There is an almost deliberate effeminacy of language in all his writings, which smacks of ideology rather than science. If we are going to employ the economists language of ef? ciency, we ought to be told just how to apply it and why ef? ciency should be our standard for judging the consequences of the law.One of Clarks old rules of workable competition, such that entry into industries should be kept as free as is technically feasible taking due account of sunk costs, if necessary by antitrust legislation, is more relevant for pu blic policy than Posners continual appeal to the principle of wealth maximization. The Chicago school does not deny that there is a case for antitrust law but they doubt that it is a strong case because most markets, even in the presence of high concentration ratios, are shakable (Bork, 1978). How do we know?We know because the good-approximation assumption the economy is never far away from its perfectly competitive equilibrium growth path Believe it or not, that is all there is to the antitrust revolution of the Chicago School. 6 Some economists believe, extraordinarily enough, that welfare economics is positive and not evaluative at all (see Hennipman, 1992 Blaug, 1992, chap. 8, 1993). 48 References MARK BLAUG Allen, Douglas W. (2000) Transaction Costs, in Bouckaert and De Geest, eds. , pp. 893926. Blaug, memorialize (1992) The Methodology of Economics, 2nd edn. Cambridge Cambridge University Press.Blaug, Mark (1993) Pieter Hennipman on Paretian Welfare Economics A Comment, De Economist, 141, 127129. Blaug, Mark (1997) Competition as an End-State and Competition as a Process, in Not Only an Economist. late Essays. Cheltenham Edward Elgar, pp. 6686. Bork, Robert H. (1978) The Antitrust Paradox A indemnity at War with Itself. New York Basic Books. 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