Recently, Donald Trump stated that Americans are too wealthy and that his tariffs will fix that:
Somebody said, ‘Oh the shelves are going to be open.’ Well, maybe the children will have two dolls instead of 30 dolls. And maybe the two dolls will cost a couple bucks more than they would normally.
Indeed, such a mindset has become dominant among Republicans, echoing Bernie Sanders’s earlier lament that Americans have too much deodorant and too many shoes.
There is a sort of economic logic to this scarcityist mindset. It harkens back to the arguments made for socialism by Oskar Lange: competition exists in order to determine how to produce a good/service at the most economic cost. Once that method is determined, then the good/service can be produced at that cost and sold at that price, resulting in perfect competition. Under perfect competition, there is only one version of the product; all goods made in that market are identical—no distinguishing characteristics whatsoever. Consequently, socialism (and Trumpism) can do away with wasteful competition by simply imposing the perfectly competitive method of production.
Perfect competition is sometimes treated as the “ideal” market structure because costs are minimized and price equals marginal cost at the lowest point on the average total cost curve. (I should note that the Sanders/Trump argument isn’t strictly for perfect competition, as in the perfect competition model, more of a good is being produced. They often argue, as in the Trump quote above, that both too much of a good is produced and that there is too much variety.)
Despite the fact that perfect competition is an ‘ideal type,’ I argue that it is an undesirable outcome. Why should one size fit all? People have all sorts of tastes and preferences. Some people like pepperoni on their pizza, some people like anchovies. Some people like opera and some people like heavy metal music. Sometimes you want a TV show that makes you feel good and sometimes you want one that will upset you. Variety, as they say, is the spice of life. But variety is, in economic terminology, imperfect competition. Product differentiation leads to “monopolistic competition,” where firms still earn no economic profit, but average total costs are not economized. Imperfect competition is, according to some, a “market failure” or an “inefficient market.” But, in reality, it is a more efficient market: people’s varied tastes are being met.
I love imperfect competition. It allows you to be you. That is an anathema to the central planners of the world (your Trumps, your Sanders, and your Navarros). Market liberalism means embracing the imperfect and celebrating the market, rather than making arbitrary decisions about what people should want.
READER COMMENTS
nobody.really
May 13 2025 at 10:19am
I still remember, with the pressure on, I’d throw the ball to first base to try to get the out–and I’d miss by a mile. The coach would try to cheer me up by saying that exact phrase. It didn’t cheer me up then, and it doesn’t cheer me up now.
Walter Boggs
May 13 2025 at 2:05pm
Markets exist to serve consumers, not to please government actors or to provide jobs. I’ve explained that to a lot of people, but there’s always another one ahead.
Jose Pablo
May 13 2025 at 5:25pm
I wouldn’t describe this as “imperfect competition.” Somehow, liberals have a tendency to undermine their own cause by choosing poorly thought-out names. They seem to assume that people will look beyond the label and engage with the underlying concept, but most people don’t.
Substitutes are undeniably a form of competition. In fact, differentiating products to create close substitutes, each tailored to specific consumer preferences, may not minimize production costs, but it does maximize consumer utility per unit of cost. It’s a kind of “allocative efficiency in preference space”, if you will.
So while monopolistic competition is “imperfect” in terms of cost minimization, it may actually be more “perfect” in aligning offerings with what consumers truly want.
Kevin Corcoran
May 14 2025 at 11:23am
Agreed – this is why I’ve had several different posts where I whinge about how terrible economists are at naming ideas. One of my favorite posts on here from Bryan Caplan was when he contrasted what it takes for economists to describe something as a market failure (when markets fall short of infinite perfection) compared to what it takes for political scientists to describe a government as a “failed state” (society collapses into irredeemable disaster). As he put it,
Jose Pablo
May 14 2025 at 8:20pm
That’s a very good one, Kevin!
Jose Pablo
May 15 2025 at 11:19am
Speaking of asymmetries, imagine the government’s reaction if the CEO of ExxonMobil accepted a $400 million gift from the Qatari royal family.
Just curious
john hare
May 14 2025 at 3:53am
I will suggest that some of our problems are caused by being the wealthiest society in history.
Keeping young people in school for 14 years (pre-K, K, 1-12) that have limited learning and the expectation that they can cruise through life just as they did through school. In a less affluent society, most of them would be working from a quite early age and developing some appreciation of being productive.
Credentialism requiring college degrees for jobs that are clearly unnecessary. Which also waters down the respect and support for the professions that do require advanced education.
The abandonment of self reliance in favor of government support for various forms of welfare.
Building codes that prevent inexpensive housing.
Anti-business regulatory issues.
It’s not all bad of course. I think an obesity epidemic is preferable to a famine.
Jose Pablo
May 14 2025 at 11:12am
some of our problems are caused by being the wealthiest society in history.
The problems that arise from that, including the ones you’ve mentioned, are ultimately the result of choices, whether made individually or collectively.
That’s a major difference compared to poorer societies, where problems aren’t a matter of choice.
And if you truly feel that way, you’re always free to move your family to Chiapas, they’re generous enough that illegal immigration isn’t much of a concern there.
And of course, you’re mistaken: we do need to be made wealthy again.
john hare
May 14 2025 at 8:08pm
I think we are already wealthy. Chiapas couldn’t afford some of our problems. That I see some problems does not mean that somewhere else is better for me. My wife being from Mexico tends to inform me on a different level of affluence. We occasionally send a little financial help. little to us that is.
David Seltzer
May 14 2025 at 11:41am
Jon: There are profits in imperfect markets because of uncertainty. Profits are the incentive that compensates one for innovation or doing business in an uncertain milieu. There is no such incentive in the long run in perfect competition because perfect information implies certainty. The burr under my saddle is the the galactic arrogance coupled with ignorance that these deep thinkers display when they tell me what I can and can’t choose. I have two words for them.
Knut P. Heen
May 15 2025 at 10:11am
The concept “ideal type” comes from the real sciences. It refers to ideal in the sense that it follows a simple mathematical law. For example Boyle’s ideal gas follows a simple mathematical law. Real gases follows more complicated mathematical laws.
The perfect competition model is an ideal type in the same sense. The monopoly model is also an ideal type in this sense. Everything in between is more realistic, but somewhat more complicated mathematically.
Ideal type does not refer to ideal in the sense that perfect competition is something to aim for. With a limited amount of people in the world and many professions, we cannot have an infinite number of competitors in any profession. Moreover, more competitors in one profession, necessarily must imply fewer competitors in another profession.
Pierre Lemieux
May 15 2025 at 10:31am
Jon: You write:
I wish to push back on this, at the theoretical level. Perfect competition implies a very large number of consumers and producers, which is why none of them exerts an influence on prices. In goods space, consumer preferences are mapped along a large number of dimensions (axes). Depending on elasticities of substitution, consumers will demand more or less variety. As variety rises, the marginal cost curve of a firm shifts to the right, and average cost up, as resources (labor and land in the short run) are bid up. How far this movement will continue depends on the intensity of demand for diversity, that is, on the elasticities of substitution. (It is the market that circumscribes what a good is.) When equilibrium is reached, production still occurs at the minimum of average cost curves, and consumers get the degree of diversity they are willing to pay for.
Or look at it from another point of view. If efficient variety was not possible in the perfect competition model, only one good would be produced at the limit (or perhaps two in order to fit the textbooks’ graphical representations!).
All this, of course, does not imply that perfect competition exists in reality. It’s a model (useful, I think). Outside of it, there is room for Schumpeterian firms and monopolistic competition.
Richard W Fulmer
May 16 2025 at 10:11am
Competition having done its job, is now superfluous and can be eliminated. Production simply continues along the lines established during the (necessary but distasteful) competitive phase. Perfection from here until forever.
Unless, of course, something changes. Like a hurricane or tsunami that wipes out a town or key factories and alters supply and demand. Or maybe there’s a demographic shift due to a baby boom or an aging population. Or perhaps, despite the lack of competition, somebody working in their garage at night develops a world-changing product. Or maybe a Putin decides to invade a neighboring country, or a Trump decides to launch a trade war, disrupting global trade and supply chains.
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