Now let's consider Hayek's writings on competition
which provide some of his most important ideas.
The title of this piece is simply "The Meaning of Competition,"
and it comes from a 1946 lecture.
Hayek is starting with a question here,
And that question is simply, "What is competition?"
Competition is a fundamental notion in economics,
yet we don't always have a good and clear understanding
of what it's supposed to mean.
Many economists use a quite specific concept
called "perfect competition."
This refers to a particular market structure
where there are many small sellers.
There is a homogeneous product.
Firms cannot influence price at all.
So, for instance, if a firm tried to raise its price,
there's so much competition, that firm would lose all of its business.
And in general, there is complete information about the market:
The qualities of products, their prices, where they're available, and so on.
As for an example of perfect competition, consider, perhaps, wheat markers,
where there's a large number of different wheat farmers who sell their product.
No one of those farmers can control market price.
And, in general, many economists consider this case of perfect competition
to be a kind of analytical ideal.
Precisely because there is no monopoly power or market power,
it is believed that perfect competition maximizes the gains to consumers
from market competition.
In terms of a graph, perfect competition can look like this.
So here is the demand curve facing the individual firm,
and that firm has to set a price at this level.
At any higher price, the firm will not sell any more.
And the firm has that demand curve intersecting with marginal cost,
and quantity is determined here.
You can think of this as a static picture of what problem the firm faces
When there're are many sellers in the market
and knowledge is, again, more or less complete.
Everyone knows where this curves are
and then the final outcome is predetermined.
This model of perfect competition can be analytically quite useful.
but for Hayek, it is not the essence of what competition is really about.
In his essay, Hayek wrote that competition is
"by its nature a dynamic process whose essential characteristics
are assumed away by the assumptions underlying the analysis."
In this essay, Hayek also wrote "the theory of competitive equilibrium
assumes away the main task
which only the process of competition can solve."
And this is one of the most important points
in Hayek's entire body of work.
For Hayek, the meaning, and indeed virtues, of competition
are how you come to discover what the economic problem is.
It's not a static picture where you have complete knowledge and then maximize.
It's how you get to the point of that knowledge being uncovered,
keeping in mind that you never arrive at the final resting place,
but you're always discovering more and more knowledge,
and that's a more dynamic picture of the meaning.
So for Hayek, an essential feature of competition is this idea of discovery,
how it is you ever come to know anything about market processes.
Hayek also stresses the notion of rivalry and competition.
That is, it is one firm or one business person
competing against another in some kind of active way,
struggling or fighting for market share.
Again, instead of that static picture of a world of perfect competition
where market share is already curved out.
As for the practical lesson, Hayek wrote this:
"We should worry much less about whether competition in a given case is perfect
and worry much more whether there is competition at all"
For instance, that should mean you should look at whether or not
there is a discovery mechanism working at all
to uncover information about costs, innovations, market preferences,
and don't worry too much about, say, the exact number of firms in a market
or whether price is exactly equal to marginal cost.
So, here, Hayek is offering some potential policy advice.
Think in terms of knowledge, innovation, and discovery,
not counting the number of firms or market structure.
But again, I think the methodological lesson of this essay
is really the important point, more so than the practical recommendation.
When we're trying to understand markets and the virtues of markets,
the key is this point about discovery and generating new and novel information.