Competition: Classical and Neoclassical

Abstract

The classical theory of competition is analysed as a dynamic process of rivalry in the struggle of units of capital (or firms) to gain the largest possible market share for themselves at the expense of their rivals. We argue that the classical dynamic theory of competition is characteristically different from the neoclassical static conception of competition as an end-state, where actual prices and quantities produced are compared to those that would have been established had perfect competition prevailed. In fact, the neoclassical analysis of competition is quantitative in nature for its focus is on the number (manyness or fewness) and also the size of contestants. After a comparison of the two characteristically different conceptualizations of competition, the analysis continues with deriving the laws of classical or real competition between and within industries and their integration with the mediation of regulating capital.

Marshall’s crime is to pretend to handle imperfect competition with tools only applicable to perfect competition.

Paul Samuelson (1974, Vol. 3)

This chapter draws freely on materials and information included in articles by Tsoulfidis and Tsaliki (2005, 2013), Tsoulfidis (2009, 2015).

Appendices

Appendices

1.1 Appendix 1: Dominant Technique and Regulating Production Conditions

The discussion on regulating capital and conditions of production makes us to take a closer look at the regulating capital which in one way or another is associated with the dominant technique in relative and not necessarily in the absolute sense of the term. The dominant technique is important in its own right for it is inextricably connected to the theories of value and distribution. Starting with the old classical approach, the dominant technique is identified, at least as a first approximation, with the commonly used technique in operation. In the neoclassical approach, Marshall’s concept of the ‘representative firm’ may be different from the average or the best kind of business in an industry, but it is broad enough to encompass those firms using the technique that dominates in the sense that it determines the equilibrium price and defines the rate of capital accumulation in a given industry.

The most comprehensive analysis of the concept of dominant (regulating) technique is found at a very abstract level of analysis in Capital I where the average technique determines the value or direct price of a commodity. At a lower (and therefore much more concrete) level of abstraction, the dominant technique is related to regulating or threshold (marginal) method, which could be linked to either higher production costs or lower production cost technique in an industry as long as this technique is accessible to new investors. Thus, the dominant technique is identified with the lower cost production technique generally accessible to new entrants in the industry and defines the regulating capitals where the acceleration or deceleration of investment activity takes place (Tsaliki and Tsoulfidis 2010, 2015). The dominant technique could match the best type of capitals (firms), if they were accessible to newcomers, or even the worst kind of capitals if they happen to be the only ones available for prospective investors (such as usually happens in agriculture and mining). The so-defined dominant technique in effect describes the production conditions of the regulating capitals in an industry which determine the socially necessary labour time required for the production of a commodity. Thus, at the very high level of abstraction in Capital I, the dominant technique is associated with the average capital, and the value (or direct price) is determined by using this average technique.²⁵According to Marx:

The labour-time socially necessary is that required to produce an article under the normal conditions of production, and with the average degree of skill and intensity prevalent at the time. The introduction of power-looms into England probably reduced by one-half the labour required to weave a given quantity of yarn into cloth. The hand-loom weavers, as a matter of fact, continued to require the same time as before; but for all that, the product of one hour of their labour represented after the change only half an hour’s social labour, and consequently fell to one-half its former value.

(Capital I, p. 39)

From the above it follows that a whole spectrum of techniques is in use within the same industry producing commodities of different unit values; if every of the produced commodities were sold at its unit value, that is, according to its labour embodied, then we would arrive at the absurd result that the least efficient producers would produce the most valuable commodities. This paradoxical result is resolved in Capital I, by hypothesizing the average technique as the dominant (regulating) one, in the relative sense of the term, namely, the production conditions associated with the production of commodities that embody the socially necessary labour time; the latter, in turn, determines the value or direct price that acts as a centre of gravity for market value. In fact, the market is indifferent to the deviations in the embodied labour time in each particular unit of commodity produced by individual capitals and treats all participants indiscriminately with the same market value. Thus, within the same industry, the individual values of backward producers are higher than the average, whereas the individual values of the more efficient producers are lower than the average. Finally, in Capital III where the inter-industry and intra-industry competition as well as the formation of the average rate of profit are introduced, Marx inserts into the analysis the concept of regulating capital as the more concrete expression of dominant technique and arrives at the conclusion that producers, with a unit value below the average or market value, extract surplus profits, whereas the converse is true for the less efficient producers (Capital III, p. 178).

Let us now further illustrate the above by hypothesizing three producers (or groups of firms) activated in an industry, the better (A), the average (B) and the worse (C). The characterizations have to do with the type of technology employed by each type of producer and the associated productivities and unit values. Clearly, the better conditions correspond to a more leading-edge technology relative to the average, to higher than average productivity and therefore to lower than average unit value; whereas the worse conditions correspond to an outmoded technology, lower than average productivity and higher than average unit value. A graphical representation of the above three conditions is illustrated in Fig. 5.7, where we depict the three types of capital, A, B and C whose output x is shown on the horizontal axis; capital B’s individual value, P, measured on the vertical axis is closer, but it does not necessarily coincide with the market value, that is, the one associated with the socially necessary labour time. From this simple presentation, we can see that intra-industry transfers of value take place from the least efficient producer type C to the more efficient producers of types A and B in inverse proportion to their unit values, estimated for each particular industry as the sum of constant capital, c, variable capital, v, and surplus-value, s. It is important to bear in mind that the market value may coincide with the individual value produced by the average type of capital only by a fluke.

Fig. 5.7

Social value as an average (market) value

The difference between the individual from the market value and the associated possibility of gains in values of the more efficient at the expense of the less efficient producers is what really motivates technological change. Every unit of capital strives to undercut its unit cost by keeping wages low, extending the length of the working day and intensifying the labour process. But such methods have only limited impact on unit costs and, therefore, are by far inferior to those derived from the advancement in new technologies, which undercut the unit values below the average market value and bring about extra surplus-value for the innovators.²⁶

The second notion of market value is introduced in Chap. X of Capital III (p. 178), and it is associated with the type of capitals producing ‘the great mass’ of commodities in an industry. Figuratively speaking, this case of the bulk of commodities might be depicted in Fig. 5.8 below.

Fig. 5.8

Market value determined by the bulk of commodities

As the greater bulk of commodities is produced by type B capitals (or firms), it follows that these are going to determine the weighted average value and, therefore, the market value of commodities. As a result, a transfer of values takes place only from type C firms (or capitals) to those of type A, whereas type B capitals realize fully in the market the value they produce. Clearly, the two notions of market value which are determined either by the simple average or ‘the great mass average’ are expected to be close to each other.

The dominant technique associated with the average value is not, therefore, an engineering or purely statistical concept, but an economic one. State-of-the-art or outmoded techniques may coexist with the so to speak regulating or price-determining technique of production, which at this stage is an average (simple or weighted) of all possible techniques that are activated in a particular industry. It is important to emphasize at the outset that the use of the so-defined average technique is not necessarily a bad approximation to reality. That is to say, the average technique and the associated average value, in most cases, is a good first good approximation of the centre of gravity around which market prices fluctuate. However, when the analysis becomes more concrete, as is in Capital III where the competition of capitals is introduced, the notion of socially necessary labour time expands to account for the particular conditions characterizing each individual industry.

The determination of the value of commodities which is the basis for the formation of the regulating price (equilibrium price or price of production) of a commodity is specified in the sphere of production and is modified in the sphere of circulation, according to the difference between the expected and the realized demand. Thus, if the production of commodities in an industry exceeds the amount actually demanded, then two outcomes may occur:

• Less product will be sold at the current market price which coincides with the social value that encompasses the social necessary labour value.

• If all production is to be sold, the market price of the product should be less than its social value, in order for the supply to meet demand.

In both cases, the realized socially necessary labour time in the sphere of circulation deviates from that realized in the sphere of production. The same takes place for the total value of commodities produced which, however, does not disappear; in the first case, the value is just stored in the form of unsold commodities for future needs, whereas in the second, as we will discuss next, is transferred to other industries.

Until now the discussion was limited to the intra-industry competition and the LOOP; the inter-industry competition establishes a uniform rate of profit which allows the formation of prices of production or equilibrium prices (Capital III, p. 180). Together, inter-industry and intra-industry competition set up the regulating conditions (techniques) of production that determine the pace of expansion or contraction of accumulation in the industry. Figuratively speaking, we may distinguish three cases in inter-industry competition (Fig. 5.9). The different outcomes arise from the fact that each industry is characterized by different regulating production conditions and by extent dominant technique. Hence, in industry C the regulating capital coincides with that of group C, in industry B with group B and in industry A with group A.

Fig. 5.9

Market value determined by the marginal technique

Let us now assume that we deal with an industry in which the expansion or contraction of accumulation takes place in group C, that is, the least efficient firms set the market value of the commodity; hence, the dominant technique and by extent the regulating production conditions are defined by the capital with the higher per unit labour value. With a price of production determined by the least efficient producers, the more efficient ones sell at market value that secures profits in excess of their produced surplus-value; the additional surplus-value is transferred to them from other industries. This is a case usually identified with Ricardo’s analysis of agricultural and mineral production, where capital accumulation, usually, takes place in the least productive parcels of land or mines and the more efficient parcels of land give rise to differential rents. The size of differential rents equals the value transfers into the more efficient firms activated in the more fertile parcels of land.

Let us now hypothesize the other extreme situation which coincides with Mill’s argument, where the dominant technique is associated with the most efficient producers (industry A), who set the market value (lowest market value in Fig. 5.9). Under these circumstances, there is no transfer of surplus-value into the industry, and the less efficient producers for such a low market value are either eliminated, or a portion of their surplus-value is transferred to other industries, since in the market they manage to realize less value than that brought. In these conditions, the dominant technique is also the one dominating absolutely because of its association with the most efficient producers. Finally, industry B in Fig. 5.9 presents the case where the average conditions of production are the regulating (dominant) ones in the industry. In this case, due to competition between and within industries and the formation of the corresponding laws, LOOP and tendential equalization of profitability, we may have both inter-industry and intra-industry transfers of surplus-value.

An increase (or decrease) in demand raises the market price higher (lower) than the market value, and so there is excess (deficient) profitability that accelerates (decelerates) capital accumulation; this change in profitability determines the type of regulating capital and the associated with it dominant or price-determining technique. In general, if demand keeps rising for a particular industry, because of capacity constraints, surplus profits will be transferred towards this industry, and a larger number of less efficient firms will manage to survive. The converse is true for a contracting demand which makes more and more difficult the survival of the less efficient firms by squeezing the excessive profits transferred to the more efficient ones.²⁷

The departure from the notion of average to that of the marginal conditions and techniques of production is a great advancement of classical economists and Marx, which has not received the attention that it deserves. Despite the differences, the idea of marginal analysis is indispensable in both classical and neoclassical approaches. In neoclassical theory, the marginal analysis is explicitly incorporated through the use of calculus. In effect, the notion of substitutability, absolutely necessary for neoclassical theory, makes the infinitesimal changes decisive both in consumers’ choice of demand for goods and the producers’ choice of cost-minimizing technique. By contrast, in the classical analysis, the term ‘marginal’ is used to signify the changing conditions which may be associated with pretty substantial changes, e.g. in agriculture or mining, new parcels of land are brought into cultivation, and in manufacturing new quantities of capital may be invested. These changes are by no means infinitesimal, because in the classical thinking, consumption patterns and technology are rigid and, therefore, insensitive to infinitesimal small changes in prices. Furthermore, in the classical analysis, the concept of the marginal is being used in order to establish limits which in turn determine the range of possible variations in variables, such as normal price and output produced.

However, when it comes to practical matters, most of the empirical literature, neoclassical or classical in the absence of data on marginal variables, often resorts to the (weighted) average of variables, in the statistical sense. The notion of ‘best practice technology’ (Salter 1966) in business and input-output literature (Miller and Blair 2009) is essentially an effort to differentiate between average and dominant technique. In the same spirit is the concept of the ‘survivor technique’ which avoids both the problems of valuation of resources and the hypothetical nature of the technological studies (Stigler 1969).

The implications of the analysis regarding the dominant technique along the classical lines can be found in the discussions on the choice of technique which usually refers to the most efficient (minimum cost) technique. As we discussed, this assumption is not necessarily realistic, in as much as the minimum cost technique, for a number of reasons, may differ from the dominant technique. Moreover, it is important to stress at this point once more that by restricting to the average instead of the more appropriate dominant technique does not necessarily introduce substantial biases, for example, in the estimation of direct or prices of production; but, at the same time, one should not abandon the idea of further concretisation of the notion of dominant technique. The discussion on dominant technique and domestic competition extends to international competition in Chap. 7.

1.2 Appendix 2: The IROR and Marginal Efficiency of Capital

There is a close relationship between the IROR and the marginal efficiency of capital or rather marginal efficiency of capital (MEC) or investment. In effect, starting with the well-known definition of the MEC, d

$$ {I}_{t-1}=\frac{\pi_t}{1+d}+\frac{\pi_{t+\mathbf{1}}}{{\left(1+d\right)}^2}+\dots $$

where I is the investment expenditures on the supply price of capital according to Keynes (1936, Chap. 11), S is the expected profits and t is time. The first derivative of investment with respect to d is

$$ \frac{{\mathrm{d}I}_{t-1}}{\mathrm{d}d}=-\frac{\pi_t}{{\left(1+d\right)}^2}-\frac{2{\pi}_{t+1}}{{\left(1+d\right)}^3}-\dots $$

In turn, if we assume that π_t = π_t+1 =  …  = π, a usual and realistic assumption, then investment will be less attractive as the time horizon of the entrepreneur extends. In other words, the marginal return on capital systematically encourages short-run investment. If now, based on the myopic expectations of investors, we define the analysis to 1 year, we get

$$ d=\frac{\pi_t}{I_{t-1}}-1. $$

Once investment is financed from profits, then both profitability indicators, the incremental rate of return on capital (ρ) and the marginal efficiency of capital (d), are very closely related to each other, and one does not expect to find huge differences in their evolution over time.²⁸