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.”