Policy Analysis No. 18

Competition, Regulation, and the Market Process: An “Austrian” Perspective

By Israel M. Kirzner
September 30, 1982

Executive Summary

To the layman untrained in economics, the market economy presents a bewildering face. It consists of numerous individuals each intent on his own goals, giving no concern to the overall social implications of his pursuits. No central coordinating agency controls or even monitors the innumerable independent production and exchange decisions made by these countless individuals. It is no wonder that the market economy seems to be nothing but a jungle of clashing, discordant individual activities. From this perspective, government regulation fills a simple and obvious need: to introduce a modicum of coordination into these otherwise chaotic conditions. What is obviously needed to save people from the disastrous results of their working at cross-purposes is the guidance of an agency equipped with the necessary power, knowledge, and motivation to foster harmony.

Ever since Adam Smith, of course, economists have rejected this untutored view of the market. Despite drastically differing assessments of the usefulness of government regulation, economists have, within a variety of paradigms, been compelled to take at least some account of those regularities in markets which, for Smith, reflect the benign results of the “invisible hand.” In the modern debates over regulation the best-known criticisms of government regulation have come to be associated with one particular (“neoclassical”) paradigm. This article, too, will offer a view seriously questioning the functions of regulation, but one that emerges from a second, “Austrian” paradigm. We shall have to spell out more carefully some of the differences between these two perspectives, but we may put the essence of the difference quite concisely. From the better-known neoclassical perspective, government regulation is suspect because the unconstrained results of the operation of free markets are, in some sense, benign. From the Austrian perspective, on the other hand, regulation is challenged on the basis of insights concerning the (relevantly) benign character of the free market process. Although both dismiss the naive view of the market as chaotic, there is a world of difference between these two types of challenge to government regulation. It should be noted that for both, whether based on “benign results” or on “benign process,” the general criterion for benignity is held to be the extent to which satisfaction of individual goals is achieved. There are indeed troublesome theoretical ambiguities embedded in this criterion, but for our purposes these may be set aside. The point is that in questioning government regulation, the economist makes no claim for the ultimate moral benignity of market process, or of its results; the relevant issue is strictly the effectiveness with which the system serves the goals of its individual participants.

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Israel M. Kirzner is professor of economics at New York University. He is the author of Competition and Entrepreneurship; Perception, Opportunity, and Profit; andThe Perils of Regulation: A Market-Process Approach.