The Fallacy of the Perfect Competition Theory
25 Pages Posted: 25 Feb 2016
Date Written: February 22, 2016
My previous paper "A Reconsideration of the Theory of Perfect Competition" dealt with the fallacy of the Economic Theory regarding the perfectly elastic (horizontal) individual demand curve for the product of a firm; the correction of this fallacy involved a total and dramatic revision of the classic theory of Value, Perfect Competition and the associated theory of Social Welfare. The paper also included a mathematical proof for this fallacy, besides the conceptual validation, as well as the fundamental implications of it on Economics.
The present paper aims to provide further support for the previous one with new arguments and findings and attempts to historically trace the fallacy and detect the reasons and root causes that presumably led to it. Specifically, this fallacy is attributed to a misinterpretation of a related Cournot's phrase regarding the perfect competition, while it is now in this paper completely reasoned that the real individual demand curves for the firms are sloped and distribute evenly the total demand among the (similar) firms for any price and thus they sum up to the total demand curve, in contrast to what the classic theory states. This unavoidably results in the monopolistic character of the market, even under perfect competition. The total profit of the industry is equally distributed among the similar firms, until the share marginally covers the fixed cost of the firm, due to the entry of new firms which are attracted by profit. This is the real reason for the stability of price in perfect competition and not the horizontal individual demand curve for the firms nor the large number of firms and the subsequent small individual production of each; those prerequisites are not valid and have to be retired and the emphasis in perfect competition must be placed on the zero profit and the entry-exit of firms.
This revision of market equilibrium covers all types of market from monopoly to perfect competition and totally negates the classic theory of value and of perfect competition, as well as other fundamental outcomes of Economics, since: it invalidates the infamous principle of price determination by the intersection of total demand and total supply, as well as that of the equality of price to the minimum average cost in the long term, facts that move social welfare away from its optimum, as it is claimed by the classic economic theory; in addition, in the labor market labor is not paid according to the value of its marginal product but according to the marginal product revenue, which implies the monopolistic exploitation of labor and lower wage and employment levels and in fact worsens the previous social welfare's declination.
Keywords: revision of theories of value, perfect competition and social welfare, sloped instead of horizontal individual demand curves for the firms, monopolistic nature of perfect competition
JEL Classification: B12, B13, B21, D21, D41, D42, D43, D46, D50, D60, E10, E13, E30
Suggested Citation: Suggested Citation