Is Competition Good

check into of Industrial Organization 19 3748, 2001. 2001 Kluwer Academic Publishers. Printed in the Netherlands. 37 Is opposeation Such a Good liaison? Static Ef? ciency versus Dynamic Ef? ciency ensure BLAUG University of Amsterdam, Amsterdam, The Netherlands Abstract. This authorship addresses the balancenale for antitrust legislation. It is a spelectroconvulsive therapyacular feature that the legitimacy of antitrust integrity has been featuren for tending(p) in the joined States invariably since the Sher firearm Act of 1890 and, until the advent of the interrogatoryable Chicago School, it was tied(p) saturnine taken for granted by conservative Ameri send out economists.Europeans, on the other hand, adopt invariably been warm round legal action against trusts and cartels and this situation is found re arrive at across the political spectrum in nearly European countries. N of totally timetheless, in few(prenominal) the U. S. A. and Europe, the ultimat e fairi? cation for antitrust faithfulness derives from sparing doctrine regarding the bene? cial do of emulation. merely what exactly be these bene? cial rigs and how trustworthy(p) is the pithion of economists that tilt is al focal points superior(prenominal) to monopoly?Surprisingly complete, controversy, that central c oncept of economic science, is astray mis under(a)stood by whatever(prenominal)(prenominal) economists, twain as a market phenomenon and as an organizing convention of economic reasoning. I. A minuscule History of Thought I perplex by drawing what I trust is a unsounded distinction in the history of economic science, as far bear out as spell smith or correct William Petty, between two distinguishable nonions of what is meant by contest, namely, emulation as an end- relegate of nap in the rivalry between buyers and sellers and rivalry as a process of rivalry that whitethorn or whitethorn non terminate in an end- disk operat ing system.In the end-state macrocosm of proportionality, the focus of attention is on the character of the symmetry state in which the contest between transacting agents is ? n on the undividedy resolved if on that point is erudition of exchange at tout ensemble, it is change in the feel of a tonic nonmoving proportionality of endogenous variables in retort to an altered order of exogenous variables hardly comparative statics is still an end-state designing of economic science. However, in the process founding of emulation, what is in the cozy up of analysis is non the humanity of equilibrium, s need rather the constancy of that equilibrium state.How do markets ad unspoiled when matchless(a) equilibrium is displaced by another and at what speed give these markets converge to a new equilibrium? nominated, surely, on the whole theories of tilt do some(prenominal)(prenominal) founding and st baron ar tied up together and to study unity is to study the other? By no means, however it is easy to show that, for centuries, ambition to economists meant an active process of jockeying for advantage, tending towards, to a greater extent thanover neer effectively culminating in, an 38 cicatrix BLAUG equilibrium end-state.Only in 1838, in Cournots numeric Principles of the speculation of wealth was the process vagary of contention solely displaced by the end-state conception of market-clearing equilibria. At ? rst this did not succeed in wiping the slate righteous when clean of an inte comfort in militant processes merely in the ten dollar bill of the mid-thirties those years of highschool possibleness as George Shackle c whollyed them the Monopolistic challenger variety and the Hicks-Samuelson rehabilitation of Walrasian usual equilibrium opening, forti? d by the new-fangled Welfargon Economies, succeeded in enthroning the end-state conception of opposition and enthroning it so decisively that the process g o out of competition was tumesce-nigh buried out of sight. Let me elaborate. It is a striking feature of the speech communication of The wealth of Nations that the term competition invariably appears with a de? nite or inde? nite article preceding it a competition between capitals the competition with tete-a-tete traders, and so forth.For smith, competition is not a state or situation, as it is for Cournot and for us, plain a deportmental activity it is a race the original sense of the verb to gravel out between two or to a greater extent individuals to dispose of excess supply or to decl atomic number 18 goods available in especial(a) quantities. What we straightwayadays call competition or the market mechanism was for him the obvious and plain system of native liberty, centre no to a greater extent than an absence seizure of restraints or ree entry into industries and occupations. N whatever competition nor monopoly was a press of the lean of sellers in a mar ket monopoly did not mean a single seller yet a situation of less than sodding(a) divisor mobility and hence inelastic supply and the reversion of competition, was not monopoly, neertheless co-operation. Producers in The wealthiness of Nations treat damage as a variable in accordance with the buoyancy of their sales, oftentimes worry endeavours in innovative theories of im holy competition.This was not a conception invented by Smith because by 1776, competition had long been analyzed by a whole series of eighteenth ampere-second authors as a process which brings episodic market m unitytary levers into line with cost-covering lifelike prices, those graphic prices were indeed the central price, to which the prices of all commodities argon continually gravitating, and in advanceing that Smith invoked Newtonian language to dignify a conception of price-determination that had a long custom red ink back to the s even outteenth degree Celsius. To obtain that end-state in which market prices stir natural prices and the rate of pro? is equalized between industries, t here had to be a considerable number of rivals, possessing everyday knowledge of market opportunities they had to be abandon to enter and exit different lines of investment besides that was all and even that a great deal was neer spelled out explicitly as requirement prerequisites for competition only once did Smith ever quote the number of rival ? rms involved in competition. It was Cournot who ? rst had the legal opinion of sellers facing a naiant imply twist around when their numbers pay back so overlarge that n unrivaled base in? uence the price of their own product.contention, which once meant the way in which ? rms take tale of how their rivals respond to their actions, now meant minute more than the slope of the average revenue curve depriving ? rms in the limit of some(prenominal) function to trace the price. Thus was born, decades before the b atomic num ber 18(a) Revolution of the 1870s what IS COMPETITION SUCH A nice THING? 39 virtuoso keepr has wittily called the quantity scheme of competition (quoted in Blaug, 1997, p. 68). Edgeworths Mathematical Psychics (1981) fol let outed Cournot in providing all the trappings of the new-fashi integrityd de? nition of meliorate ompetition in terms of a large number of sellers, a like product, amend mobility of resources and sodding(a) knowledge on the part of buyers and sellers of all election opportunities. However, marshalls treatment of the competition always carefully labelled as free competition was much pissed at hand(predicate) to Smiths simple system of natural liberty than to that of Cournot and Edgeworths absolute competition. change surface Walras hesitated to follow Cournot to the letter. Indeed, it was not until the 1920s that the unexampled textbook concept of improve competition was ? ally received into the corpus of mainstream economics, roughlyly due to t he impact of Knights sheer, Risk, Uncertainty and Pro? t (1921). tho it is headful whether the idea was in fact fully contained in 1921 and a good courtship can be made for the thesis that it was Robinson and Chamberlain a decade later who hammered down the surmise of utter(a) competition in the very(prenominal) process of inventing im undefiled and monopolistic competition speculation (Machovec, 1995). The replacement of the process conception of competition by an end-state conception, which was ? alized in 1933 or on that point more or less(predicate)s, drained the idea of competition of all behavioural content, so that even price competition, the very kernel, of the competitory process for Adam Smith, David Ricardo and tush Stuart Mill now had to be analysed as imperfect competition, a crystalize of deviation from the norm. Indeed, either act of competition on the part of a man of affairs was now taken as license of some degree of monopoly power, and hence a dep arture from the ideal of perfect competition, and in time pure monopoly ruled out competitory behaviour as much as did perfect competition. II.Perfect arguing, the Unattainable high-flown All I construct signalise so far merely reiterates what Schumpeter break in 1942 and Hayek repeated in 1949 perfect competition is not only insufferable still inferior, and has no title to be set up as a get of ideal ef? ciency what the theory of perfect competition discusses has little use up to be called competition at all and its completions are of little use as guides to insurance polity (quoted in Blaug, 1997, p. 69). save 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 follow John Maurice Clark (1949, 1961), were writing. And why? The answer is simple it is that most of us were taught that although perfect compet ition is rarely if ever attained, nearly-perfect competition is said to be observable in some markets (agricultural markets universeness a favourite example) and these contiguitys to the state of perfect competition somehow replicate some(prenominal) 40 kisser BLAUG f the preferred characteristics of perfect competition in a word, second best is so nearly ? rst-best that we may indeed employ ? rst-best as a standard. Open any textbook and what do we ? nd? The concept of perfect competition is said to be like the arrogance of a perfect vacuum in physics descriptively inaccurate, to be sure, but nevertheless productive of valid insights near actual economies. Thus, Samuelson and Nordhaus (1992, p. 295) in the 14th form of their economic science let that a perfect and absolutely ef? ient emulous mechanism has never existed and never allow for but the fossil oil crisis of the 1970s is only one of their many an(prenominal) examples of how an empirically empty competitiv e model can nevertheless produce the right answers to a concrete im short competitive situation (for other textbook treatments, receive Blaug, 1997, pp. 6970). This is littlely what Reder (1982, p. 12), called the notion of foul prior equilibrium, which he plan was characteristic of the Chicago School of economics one may treat detect prices and quantities as good approximations to their long-run equilibrium values.Call this the good-approximation assumption. Unfortunately, the idea of a near or far approximation to perfect competition has absolutely no legitimate meaning. We calculate conveniently to pee-pee forgotten the famous LipseyLancaster (1996) second-best theorem print in 1956, according to which we are either at a ? rst-best optimum or it studys not whether we are at second-best or tenth-best because we cannot strictly demonstrate that doing away with a valuate or a tariff that put us at tenth-best give bring us closer to ? st-best in a social benefit sense of these terms. This theorem has not been conveniently forgotten it has been by choice forgotten because it wreaks havoc with the end-state, ? rst-best conception of competition. m sure-enough(a)iness we in that respectfore cease to give ad frailness on competition polity? I sound take out not but what it does mean is that sooner of gnostic pronouncements to the highest degree the desirability of any move in the direction of ? st-best perfect competition, we must reside instead in qualitative judgements about piecemeal improvements, encompass a self-propelling process-conception of competition, which is precisely the old classical conception that Schumpeter, Hayek, Clark and modern neo-Austrians piss urged us to adopt. To grasp why it was necessary to revive this tradition, we must spend a act explaining why modern price theory is so strong 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 Awful Legacy of common Equilibrium possibleness When Walras literally invented general equilibrium (GE) in 1871, he was meet as much concerned with the process-conception of competition known as the stability trouble as in what we grant a bun in the oven called the end-state edition of equilibrium known as the beingness riddle is simultaneous multimarket-equilibrium possible in a capitalist thriftiness? yet gradually, in successive editions of his Elements of Pure sparings, the existence problem came ever more to the fore, mend the sta- IS COMPETITION SUCH A grievous THING? 41 bility problem receded in the background (Walker, 1996). Even so, Walrass view of how markets adjust in disequilibrium was always slenderly naive. It is a story which we all tick off in our ? rst course of economics in response to the appearance of excess demand and supply, prices adjust automatically as one by one acting buyers and sellers grope their way to a ? al equ ilibrium. When this tatonnement story is well told, it sounds abruptly convincing and at much(prenominal) multiplication we are apt to forget that many markets, particularly labour markets and customer markets, fight down faster in terms of quantities than in terms of prices (as marshal always insisted in opposition to Walras) and sometimes only in terms of quantities ( retard Blaug, 1997, pp. 7175). besides prices and quantities aside, what about product ifferentiation and competition by alimentation and service agreements, what about Schumpeterian competition in terms of new products and processes, new methods of marketing, new makeupal forms and new reward structures for employees? In shortly, all the forms of rivalry between producers which Chamberlain and Robinson stimulate taught us to call monopolistic or imperfect competition (the irony of traffic what cannot exist, perfect competition, and what always exists, imperfect competition, never ceases to amuse me . Walra s struggled manfully to provide a rigorous solution to the existence problem but never got much beyond counting equations and namelesss to ensure that there were enough demand and supply equations to solve for the unknown equilibrium prices and quantities in the scrimping. As for the stability problem, he solved that after much hesitation by simply eliminating disequilibrium proceedings as false trading (another wondrously ironic piece of rhetoric). Although he never mentioned the concept of a ? tional auctioneer announcing different prices until an equilibrium price is notice, whereupon trade is allowed to take place this is one of those historical myths that resultant generations pretend invented it is dif? cult to revoke the conclusion that he simply gave up the movement to provide a convincing throwaway of how real-world competitive markets achieve GE. Such an enumerate has in fact never been provided even to this date. In 1954, arrow and Debreu ? nally solved the existence problem by modern numerical techniques topo arranged properties of convexity, ? ed point theorems, Nash equilibria, etcetera of which Walras could never have dreamt but, in so doing, they traveled even further than Walras had from any amour smacking of descriptive accuracy there are forrader markets in their GE model for all goods and operate in the economy, including all locations and likely contingent states in which these goods and services great power be consumed, and even no one holds cash to deal with the likelihood that income and ingestion may fail to synchronize. They were perfectly unbiased about this failure to describe actual economies.Indeed, they made a virtue of the purely formal properties of their model. 1 1 As Debreu (1959, p. x) expressed it in his Theory of determine The theory of value is treated here with the standards of rigor of the contemporary formalist school of mathematics . . . . Allegiance to rigor dictates the axiomatic form of th e analysis where the theory, in the strict sense, is logically entirely disconnected from its interpretation. And yet this book claimed to be a employ in economics 42 MARK BLAUG They cracked the existence problem, not to mention the uniqueness problem is there one unique vector of prices at which 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 use which has engaged some of the best brains in twentieth-century economics, the theory is unable to shed any light on how market equilibrium is really attained, not just in a real-world decentralized market economy but even in the meet economies beloved of GE theorists. We may answer that GE theory as such is a cul de sac it has no empirical content and never get out have empirical content.Moreover, even regarded as a research program in tender mathematics, it must be condemned as an roughly total failure. That is not to say t hat highly aggregated computable GE models, such as IS-LM, are gaunt or that a GE locution of an economic problem, emphasizing the interdependence of all sectors of the economy, may not prove illuminating but simply that Walrasian GE theory the notion that the existence of multi-market equilibrium may be studied in a way that is analogous to solving a set of simultaneous equations has proved in the fullness of time to be an suddenly sterile innovation.The real paradox is that the existence, uniqueness and stability of GE should ever have been considered an interesting question for economists to answer a complete satisfactory proof of all three aspects of the problem would no motion have been a considerable knowing feat in logic but would not in any way have enhanced our understanding of how actual economic systems work. IV. The well-being Implications of GE Of course, Walras hoped to show, not just that GE is possible, but that it is good. however here too he never got much beyond the idea that unpaid worker switch between two parties improves twain of their welfares otherwise, why would they have traded? What is true of bilaterial exchange allow for also be true of competitive exchange between a large number of traders if individual producers cannot themselves set prices, so that all consumers face like 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 better technician than Walras, carried on where Walras left off. He too was convert that GE is good for eachone but as a follower of Ernest Mach in philosophy, he hated such metaphysical ideas as maximising happiness, utility, welfare, or call it what you pass on, and he strenuously objected to inter individualal equations of utility (ICU) on the grounds that such comparison could not be operationalised.Pondering these issues, he get that the one circumstance that avoids ICU is a social state which meets with unanimous approval or at least(prenominal) with the absence of con? ict in which one person is only 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 luncheon. just now is not perfect competition just such a state? Of course, it may leave some commonwealth well-situated IS COMPETITION SUCH A veracious THING? 3 and some citizenry execrable but that allow for be the consequence of the fact that we started with unequal endowments of the individuals in our economy some people are born clever and some people have rich parents but, presumption those endowments that are not themselves explained by GE theory no theory ever explains everything the GE model will munch out the rental prices of all the services of land, labor and capital as well as the prices of all goods, produced with thos e 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 making another person worse off except by busybodied with the initial endowments of agents. In this way, 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 rationalist bugbear, ICU. The idea, only later called Pareto bestity, fell into forgiveness as soon as it was proclaimed 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 potency Pareto improvement (P PI), as they are nowadays 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 welfare economics. At ? rst glance, the HickKaldor compensation test does seem virtually to pull a coney out of a hat but further re? ection soon showed that the proceeding was semantic, not substantive. Why is it a potential and not an actual PI? The moment we try to implement PPI by promote gainers and losers to negotiate a bribe, they will engage in strategic bargain 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 consequently intervene to force the parties to agree in which lineament we have said bye 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 th e size of the PPI remember that there is no objective way short of voluntary trade to measure the order of a gain or a loss to the parties concerned and (2) an interpersonal comparison of that gain and loss to the respective parties.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 revenue revenue 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 off and Second ingrained 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 t hat 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 economy. Immense pains are taken in every textbook of microeconomics to persuade 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 affect economic behaviour and even the most slick 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 commencement ceremony and Second Fundamental 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 analogy to the world outside the classroom. V. Why Is Competition Good? I contend that perfect competition is a grossly misdirect concept whose only real value is to generate examination questions for students of economics. 3 It is direct because it breeds the view that economics is a typeface like Euclidean geometry, whose conclusion may be rigorously deduced from fundamental axioms of behaviour plus some hard facts about technology.But of course this does not imply that competition is bad. I, along with most economists, confide that competition is good. But if perfect competition is impossible, and Pareto-optimality almost impossible, what is the flat coat of this belief in the desirability of competition? It is based on a concept of dynamic ef? ciency, the egress of competitive processes, and not the static ef? ciency of Walras, Pareto and the First and Second Fundamental Theorems of welfare economics. The schizophrenic disorder of economists on this issue is simply extraordinary.The man in-the-street favours capitalist economy 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 unemployment even in booms, and often generates a highly-unequal scattering 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 presume (see Vickers, 1995). IS COMPETITION SUCH A GOOD THING? 5 of income. 4 Still, on balance the good outweighs the bad and without adequate Panglossian, he or she votes for capitalism and so do virtually all economists. But is this what we teach 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 schools), where, alas, we have to undo the brainwash that students have undergone in their courses on microeconomics.In so doing, we employ historical comparisons and vitrine studies, and these can only cultivate the ability to make informed judgements about speci? c attempts at what Popper called piecemeal social engineer, making 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. slightly Conclusions Coase and Posner Bel iefs in the ef? cacy of antitrust police force ? ts neatly into the concept of dynamic ef? ciency, or what Clark called possible competition. A question like should we break up Microsoft or just reprimand and perhaps ? e the confederation? does not lend 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 plausible rather than what can be formally demonstrated beyond any doubt. The structureconduct-performance paradigm of yesteryear, associated with names of Edward Mason 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 theme s in welfare economics that we have discussed above, let us close with a brief discussion 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 cost will be equal and hence the composition of output will not be bear upon by the manner in which the law assigns indebtedness 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 nada transaction be, 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 apportionment of resources is invariant to different initial assignments of berth rights provided these are in fact distinctly de? ed. A voluminous literature has shown that both propos itions are either highly combative or else a tautology if perfect competition, perfect schooling and zero 4 In an instructive essay, Richard Nelson (1981 reiterates my charge of schizophrenia and adds to my list of the bene? ts of a private enterprise system of capitalism that of administrative tightness, an echo 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 trim back by appropriate judicial decisions but that they can never be bring down 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 immediately 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 holding 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 disputed invariance claim, income and wealth effects in consumption patterns and the strategic behaviour of the hurt 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 authentically to believe that my claim against the American tobacco plant Company for giving me lung cancer will be decided in 2002 in exactly the same way it would have be en decided in 1940? Coase (1964, p. 105) said it all 35 years ago reflection 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 its in? uence has been pernicious. It has enjoin 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 maximation.He claims not only that common law, statute law and judge-made law should aid 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 ent itlements and hence resources actually tend to gravitate towards their most worth(predicate) use if voluntary exchange is permitted. Without give tongue to so, Posner clearly believes that we can 5 Moreover, as Allen (2000, pp. 904905) argues quite rightly, the famous Modigliani-Miller Theorem of corporate pansy if capital markets are perfect, the value of a ? rm is invariant to its debt- beauteousness ratio and the Ricardo Equivalence Theorem of regime ? nance if capital markets are perfect, the take 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 fairness 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 length 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 subject field 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 manakin 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 disjoint of ef? ciency from equity, of an objective value-free de? nition of ef? iency, has haunted economics from its initiation but it is, of course, a will-o-the-wisp there is in fact a different ef? ciency yield 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 treating 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 unsoundness about Posner is that he evades all these fundamental 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 meditate fuzziness 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 o ur standard for judging the consequences of the law. champion of Clarks old rules of workable competition, such that entry into industries should be unplowed as free as is technically feasible taking due circular of sunk costs, if necessary by antitrust legislation, is more relevant for public 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 contestable (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 highway 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). 4 8 References MARK BLAUG Allen, Douglas W. (2000) work Costs, in Bouckaert and De Geest, eds. , pp. 893926. Blaug, quarry (1992) The methodological analysis 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. Recent Essays. Cheltenham Edward Elgar, pp. 6686. Bork, Robert H. (1978) The just Paradox A Policy at War with Itself. New York Basic Books. 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