Competition, for Marx, was Not Neoclassical Perfect Competition

Sometimes the view is expressed that Marx’s theory, while perhaps applying to an earlier, competitive version of capitalism, has little relevance to the era of ‘monopoly capitalism’ in which we supposedly live today. This view seems to result from mistaking ‘competition’ in Marx – and classical political economy, more generally – with neoclassical ‘perfect competition’.

Competition in Marx (and the classicals) means free movement of investment flows in and out of sectors in search of the highest return. That’s basically all it requires. There are no assumptions of many small firms or price taking.

For Marx and the classicals, if investment is free to go wherever returns are highest, there is said to be competition and there will be a tendency (that would never be realized in actuality, even under competitive conditions) for rates of return to equalize across sectors. On the criterion of capital mobility, capitalism has become more competitive, not less, since Marx’s day.

The tendency toward equalized rates of return is inhibited to the extent that there is monopoly or rent. Monopoly and rent arise when investment flows are in some way restricted. If, for some reason, there is a barrier to additional investment flowing to a high-return sector, above-normal profits will persist unless and until the barrier is removed.

Competitive pressure may work to break down an instance of monopoly or rent over time, but in the meantime there will be above-normal profitability in some sectors. And new instances of monopoly or rent can emerge by the time the old have disappeared.

There was never some early capitalism in which everything was completely competitive, whether in Marx’s sense or in the neoclassical sense. Marx never argued this. He argued that total surplus value depends solely on the amount of surplus labor performed, and that any above-normal profits enjoyed in some sectors due to monopoly or rent come at the expense of lower profits in other sectors, with total profit unaffected. There would simply be a different distribution of total profit among industries.

It is not even a question of whether “capitalism has changed” such that Marx’s analysis has become less relevant. To the extent competition prevails, Marx’s analysis of competition applies, and to the extent there are monopoly and rent, his analyses of monopoly and rent apply. That was the case in early capitalism, and it is the case today.

None of this necessarily means that Marx was right, of course. It just means that the applicability of his analysis does not depend on the degree of competition that happens to prevail at a particular stage of capitalism.

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2 thoughts on “Competition, for Marx, was Not Neoclassical Perfect Competition

  1. Great post Pete,

    People with some knowledge of neoclassical economics has that very bad habit of transplanting modern notions into older theories.

    The same happens, for instance, with marginal productivity and Ricardo’s, Malthus’ and Torrens’ marginal ideas about land. There are some similarities, to be sure. But neoclassical marginal productivity is based on the notion of adding one more unit of a homogeneous “factor of production” (i.e. land, capital, labour) given all other factors remain constant.

    By contrast, Ricardo’s, Malthus’ and Torrens’ marginal ideas about land –which Marx adopted and complemented, btw– assumed that land was heterogeneous: more fertile (or better located) land would be farmed first; as demand for agricultural products rose, more marginal (i.e. less productive, less well located) land would be incorporated. It was the heterogeneity of land that caused the fall in output/increase in costs (not some kind of “saturation effect”, as in neoclassical marginal productivity). In fact, they did not believe a similar effect applied to capital and/or labour: Smith with his division of labour idee fixe probably would have said that increases in labour would lead to a greater division of labour (and hence to higher productivity).

    MP is both short-term and long-term. Ricardo’s, Malthus’ and Torrens’ marginal ideas about land are about the long-term.

    ———-

    Incidentally, the notion that modern perfect competition depends on small firms is not as clear cut as critics of neoclassical economics believe. Even large firms could be price-takers in some markets, either as supplier or as consumer.

    The critical idea in this sense is that firms are price-takers, either as sellers of their output or as buyers of their inputs.

  2. Good points, Magpie. Totally agree with you on all of them.

    Thanks especially for pointing out the distinction between the marginal land in classical political economy and the modern notion of marginal productivity. You’ve explained that much better and more succinctly than I could have.

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