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Perfect competition and the Australian car industry

By David Long - posted Friday, 27 December 2013

We live in an age when it is not only fashionable but scientifically correct to answer almost every economic question with 'don't interfere with the market'. Fashionable, because people who have studied one unit of economics and two years of statistics are as equally likely to cite the market mechanism as people who are professors of economics and it doesn't matter whether those professors are positivist capitalists or positivist Marxists; the market is the mechanism that allocates resources efficiently and any interference with the market means that people are not as happy as they would otherwise be.

Like the professors, however, politicians also like the idea of leaving the market to its own devices. Sir Winston Churchill, probably the most illustrious politician of the 20th Century, was a well known believer in free trade. That did not, however, prevent him from appointing the only non-positivist economist in the UK at the time, Maynard Keynes, to take charge of the British economy during WW2, a time when free markets theory was largely ignored.

In a nutshell, Keynes's and Churchill's idea of free markets was very different from the positivist economist's idea; just as their idea of human happiness was entirely different. The political problem is human happiness; the political problem is not the efficient allocation of resources. This means that the political problem can not be solved by economic science unless the two sorts of happiness are identical.


The happiness with which economic theory is concerned is based on utilitarianism. It is incorporated into the science of economics by way of the maximising assumption in the theory of perfect competition – that is everyone acts so as to maximise their satisfaction. Perfect competition as a theory is the epitome of capitalism where every one is as happy (economically speaking) as possible because everyone has maximised their happiness. The problem with that theory is that it is a nonsense which contains the ultimate irrationality: a tautology. (see here)

When ordinary people speak of happiness in a commonsense way, we speak of a state of political activity which we are able to maintain because the politicians we appoint who are able to adapt policies to suit the current circumstances. Thus, politically, while it is acceptable to speak of free markets, meaning by this term, the ordinary business of ordinary people engaging in exchange; that in itself imposes a priority on any policy that it ensures people are employed.

If employment is the chief priority for any government, then the market (politically understood) is simply one means among many to achieve that end. The extent to which a government endorses, proscribes, uses, tempers or stimulates the market is the measure of that government's understanding of the political art.

The recent announcement by General Motors that it was withdrawing from the Australian economy as a manufacturer, has caused political ideologues of the free market to declare any offer of incentives to the car builder to remain in this country as an unwarranted interference with the market mechanism. In saying that, they repeat, parrot fashion, the theory of the market and perfect competition and all the falsehoods it carries. The criteria for any industry or indeed the incentives must be the common good which is inextricably bound up with the national interest.

A number of important considerations should be taken into account before a decision is made; but the ability of a nation to replicate those skills once the industry is gone; the significance of an industry to the defence of the nation; the capacity of the remaining industries to absorb the displaced labour without a loss of skills and finally, the cost to the economy of losing that industry. There are of course many others, including what is achievable at this particular time.

We know that the incentive payment made by the previous government to GMH was transferred without deduction to Detroit as a royalty payment. In other words, GM has not done Australia any favours despite the payment yet that payment, properly negotiated should have carried conditions that obliged Detroit to see beyond its principal shareholders. It is not too late to obtain those conditions from Toyota and to retain Toyota in this country.


Economists pride themselves on having a theory that is objective with no hint of any values . For that very reason, it can not tell us what every other thinking man and woman knows, that Australia needs a large scale manufacturing industry like the car industry. Not only that, but that a nation without the capacity to mass produce such large scale heavy items is in dire peril if it ever needs to do just that.

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About the Author

David Long is a lawyer and writer with an interest in classical political philosophy and Shakespeare. He has written previously for The Bulletin and The Review.

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