The Myth-Busting Economist by Larry Malone

The Myth of ‘Perfect Competition’

For 130 years the cornerstone of an introductory college economics course has been the concept of “perfect competition.” That term describes a market where buyers and sellers have no influence or power and there is no government regulation whatsoever. Perfect competition did a good job explaining buyer and seller behaviors in big city farmer markets in the late 1800s. But today, even absent a living example of a perfectly competitive market on Earth, the economics profession continues to stick with its myth. Why is that the case?

One answer is that the idea of perfect competition elevates capitalism to the status of a religion, where unregulated free markets are believed to bring the greatest possible well-being to the greatest number of us.

To see why the guarantee of such prosperity is also a myth, we need look no further than to current labor market trends. In my last column I described Joseph Schumpeter’s argument that capitalism constantly brings forward new technologies, new ideas, and new ways of organizing work and production. But those innovations simultaneously destroy what comes before them in a process that Schumpeter called “creative destruction.”

Schumpeter said that innovations also arrive in waves, resulting in busts following economic booms. Unfortunately, it’s workers who pay the ultimate price when their job is destroyed as capitalism moves through continuous cycles of boom and bust.

In contrast, the idea of perfect competition assumes that new jobs are created when existing jobs are destroyed by innovation. Workers are unharmed as they move “freely” from a vanishing job to a new one.

Anyone who has been unemployed knows that this is not how the labor market works in the real world. And there is plenty of evidence that our current economy is destroying jobs and making the journey to the next job, at no loss in pay, a rough one.

Despite a low unemployment rate of 4.3 percent, last year was horrific for college graduates seeking their first full-time job. The current unemployment rate for 20- to 24-year-olds is 8.2 percent, and a big part of the reason is that as artificial intelligence destroys existing jobs it does not create good paying jobs to replace them.

The current labor force in the U.S. consists of 172 million workers. Last year the U.S. economy created fewer than 15,000 new jobs a month, making 2025 one of the worst years on record for new job seekers. Such poor job creating performance in the labor market begs the question of why the unemployment rate has remained so low.

We don’t know the answer to that question yet, but I can suggest where to start looking for it.

One possibility is something also well-known from our personal experiences, but difficult to quantify. It’s called underemployment, which is when you work at a job that you are overqualified for based on years of experience and education. Folks who are underemployed have often lost their previous job but can only find employment in a lower paying/lower skill job. They take the job, though, to make ends meet. And, as we also know from experience, making ends meet is more difficult in a high inflation economy.

A second possible place to look at why new jobs are not being created goes hand in hand with the war on immigration. If recent immigrants, legal and illegal, are deported or driven into the shadows and leave their jobs, it’s possible some workers who’ve lost their jobs are moving into those jobs. This would keep the unemployment rate low as underemployed workers take up those roles. In the case of 20- to 24-year-olds, with their 8.2 percent unemployment rate, more of them might be joining the labor force as underemployed workers.

Both possibilities come into play if we consider the top seven occupations in the U.S. with the largest shares of foreign-born workers. Most of the jobs in these occupations are low skill/low pay and have been heavily staffed by legal and illegal immigrants. They are: (1) food preparation and service, (2) buildings and grounds maintenance, (3) construction, (4) transportation, warehouse, and materials handling, (5) healthcare aides and support, (6) production workers, and (7) agricultural workers.

These occupations are also protected from Schumpeter’s creative destruction brought on by the introduction of AI into high skilled/high paid workplaces. That’s because these occupations all require the use of hands, feet, and minds and cannot yet be replaced by AI or robotic automation.

But does having more underemployed workers forced to shift into low skill/low pay jobs help Make America Great Again?

Larry Malone is professor emeritus of economics at Hartwick College.