|Reviewer(s):||Hall, Thomas E.|
Published by EH.NET (May 2000)
Michael Perelman, The Natural Instability of Markets: Expectations,
Increasing Returns, and the Collapse of Capitalism. New York: St. Martin’s
Press, 1999. xiv + 188 pp. $39.95 (cloth), ISBN: 0-312-22121-5.
Reviewed for EH.NET by Thomas E. Hall, Department of Economics, Miami
University, Oxford, Ohio.
Economists have long known that competition has some ugly side effects. In
competitive industries, firms go out of business. The competitive process
exhibits Schumpeter’s creative destruction as new technologies come along which
displace existing industries. Workers lose their jobs, and firm owners lose
wealth. This is all very unpleasant for the people who are adversely affected
by these changes, but in the net society is better off by reaping the benefits
of economic efficiency. At least, that is what economists generally believe
about the competitive outcome. This is why most economists argue that (with the
exceptions of a few cases such as public goods and natural monopolies) a policy
of enhancing competition is desirable.
Michael Perelman challenges this conventional economic orthodoxy by arguing
that the economic instability caused by competition may be so large that it
outweighs the beneficial effects of economic efficiency. In fact,
competition is so awful that “the tendency of the competitive process is to
lead to depressions” (p. 62). Perelman does not argue that monopolies are the
solution, instead he contends that society’s welfare is enhanced by having an
industrial structure that is neither too competitive, nor too concentrated. The
optimal structure lies somewhere in between, where the gain in economic
stability resulting from a less than perfectly competitive structure exceeds
the loss to society of lower economic efficiency.
It’s an interesting argument, but one that isn’t well enough documented for
most people to accept. Too much of Perlman’s discussion focuses on what’s wrong
with competitive markets, and too little on the benefits they create.
Yes, the competitive process can cause wrenching changes in society, but what
about the lower prices we pay, the wider variety of goods and services we
choose among, the improved quality of products…? These considerations are
given short shrift compared to the evils of “instability.”
A serious weakness of the book is its lack of a discussion on the role of
demand. For example, Perelman considers economic depressions to be the
intensification of the competitive process. While most of us would agree that
competition among firms is more intense during economic recessions,
would we extend the argument by saying that competition caused the downturn? I
don’t think so. Economic recessions are typically caused by slowdowns in
aggregate demand growth. As spending growth slows, firms have to compete more
intensely for scarcer sales. Thus, we observe more competition during
downturns, but competitive pressures hardly caused the recession.
Perelman also argues that high wages during recessions are good since “high
wages represent a healthy stimulant to the economy . . . because high wages
will encourage productivity” (p. 121). This efficiency wage argument has merit,
but taken to extremes it could cause major problems. After all, if promoting
high wages is such a great idea, during the next recession let’s be sure to
raise the minimum wage to $1 million per hour and see how well that stimulates
We often tell students not to get caught looking at the trees when they should
be concentrating on the forest. I think the opposite applies to this book.
Several of Perelman’s trees, i.e., the specific cases he discusses to buttress
his argument, are quite interesting. For example, there is an informative
history of entry and exit in the automobile industry, an excellent discussion
of x-efficiency, and a summary of estimates of the costs of unemployment in
terms of numbers of suicides, homicides, and such that would be useful to
instructors of macroeconomics principles classes.
However, I am considerably less enamored with the forest, the idea that
competition creates more problems than it solves.
Thomas E. Hall is the coauthor (with J.D. Ferguson) of The Great Depression:
An International Disaster of Perverse Economic Policies
(University of Michigan Press, 1998).
Subject: V, W Geographic Area: 7 Country/Region: U.S.
Time Period: 8, 9
|Subject(s):||Markets and Institutions|
|Geographic Area(s):||North America|
|Time Period(s):||20th Century: WWII and post-WWII|