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

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.