Competition: The Birth of a New Science [Paperback]

I happened to pick up this book recently since it seemed to be at the junction between applied mathematics and economics. The author did not disappoint. He explores the world of economics through game theory and goes on to show how the current economic thinking has some serious flaws. It was very enjoyable and really opened my eyes to many common economic errors. For instance, conventional thinking is that when there are multiple vendors for a given product one has a much better chance of getting a lower price. The author shows how this is very unlikely. I used to be a big supporter of free trade and I am not any more. Excellent book and a must read for any intelligent person.

This book is actually as much about cooperation as competition. In fact it is at its most enlightening when pointing out the failures of competition, whether in fisheries, auctions, or modern economies. We get a nice peek into some good experimental economics and several simple mathematical models, especially from game theory and economics.

However I found it hard to find enough coherence in all this to call it a new science. Fortunately readers who find themselves getting bogged down in the math in the earlier chapters can skim or skip to the topics in the later chapters that interest them. They will be well rewarded.

James Case is at his best in his attack on "perfect competition", the holy grail of neoclassical economics. He shows that this is actually a rare phenomenon in real economies, and that corporate oligopolies earn the same kind of profits as true monopolies. That is, when there are only a handful of major players, they always seem to find someway to collude, competing through marketing instead of price.

He even goes so far as to make a virtue out oligopolies by suggesting the creation of a handful of giant farm cooperatives and of giant employment agencies, with legal protections. The employment agencies would replace unions and the farm cooperatives would replace farm price supports, both exercising countervailing market power to today's giant corporations. Government would impose tariffs and other protections to prevent foreign powers and outsourcing (think China & India) from wrecking this arrangement.

Case points out how "free trade" has not been the practice of most rising economic powers, including the US and Britain, and that the adoption of free trade policies by Britain in the middle of the 19th century and by the US in the middle of the 20th century has led to the industrial decline of both. Of course many other authors, such as Kevin Phillips, have noted how this exposes neoclassical economics, or market fundamentalism, as ideology, not science. Case uses even stronger language: "Orthodox economics is no more a science than creation science, because, it too, has already identified the `truth'." However, "the perpetrators of pathological science are not guilty of fraud but of self-deception" (p. 323).

Case notes that there are many schools of economics that don't buy into the reigning dogma, but these economists get no publicity and are shut out of top universities and journals. However I've found that even most progressive economists, except for a few like Herman Daly, are not aware of the foundational role of resources and environment for real-world economics. For example, Case himself anticipates the coming of totally automated factories, with soaring unemployment and inequality.

Yet such factories-of-the-future would be the end products of sophisticated science and engineering and highly complex industrial networks, all based on abundant resources, especially cheap energy. With oil already in decline and with the rapid degradation of the environment and the depletion of other key resources, the global economy is at the end of an era. Economic growth is giving way to stagnation and eventually decline. Within a generation abundance will give way to scarcity, with food surpluses and over-production a matter of history. A global struggle for survival will ensue, driven by the Malthusian nightmare. This is the grim reality told by the standard scenario, p. 169, of "Limits to Growth - The 30 Year Update". Lester Brown has been following actual food production and consumption, especially Chinese supply and demand, and it is right on the Limits to Growth track.

The good news is that the collapse of the global financial system is exposing the rotten economics that Case and others are now challenging. Even better news is that the way to transform theoretical economics into science has been staring us in the face for almost 40 years: it is precisely the non-linear dynamics of the Limits to Growth study, as vastly generalized and combined with empirical data along the lines of global climate modeling. What is needed is a Global Economic Modeling Institute, with massive databanks and supercomputers, led by legions of mathematicians, computer scientists, environmental and resource scientists, renegade economists, and experts on global business, finance, politics, etc. This kind of effort will show us how to deal with reality, rather than succumb to the kind of psychological denial that is leading us toward "Ecological Overshoot and Collapse".

By questioning the orthodoxy from a scientific point of view, James Case has taken us a step in the right direction.

Interesting empirical findings and theoretical arguments but not compelling enough to revolutionize microeconomic theory, offering a useful supplement to mainstream economic theories, pointing out the well-known limitations of competition in particular and rational-actor models in economics in general. It does a fine job pointing out anamolous distortions in various market outcomes but not in explaining them well. The book carries scant predictive weight and offers either ambivalent or erroneous policy prescriptions, leaving many more questions unanswered than did the neoclassical paradigm. It did not actually change my mind on issues. For example, I supported free trade prior to reading this book and still support free trade after reading it, and the existing serious research on this topic confirms that the net impact of free trade for the peoples of nations is positive and beneficial, even though there are "losers" who will be worst off - but excessive protectionist support to the "losers" is inefficient, very costly, and ultimately futile. Still, competition can produce perverse outcomes: for instance, although deregulation has been more beneficial than harmful (e.g lower prices, increased access to air travel to more people), the greater competition it has generally helped to foment has led to tighter markets in which shocks to production costs (e.g. rising fuel costs) cannot be easily passed onto air-travel consumers, so increased production costs have to be paid for through other means, such as reduced amenities (e.g. meals, leg-room) for lower-price consumers, longer wait times in ticket lines, baggage delays, increased congestion, etc. - the problems air-traveling folks have been recently complaining about. In the end, the book reluctantly understands that the benefits from competition (and I would say rational-actor modeling of mainstream economics) exceed its costs.