The Law and Perfect Competition: Recipe for Growth in a Global Recession

Many countries are struggling to maintain sustainable and efficient growth, and many large corporations do not seem to have a convincing answer for the creation of widespread wealth for the majority of people, in the modern global economy. It can be argued, that with economic growth slowing in India, the United States, Europe, the Middle East and Asia, on a consistent basis over the last ten years (since the 2008 crisis), there does not seem to be a clear leader emerging (except China perhaps), in terms of setting the pace for economic growth. Political divides, and trade wars have also created larger fractures in the global economic system. Protectionism is once again on the agenda for many countries, who are looking to restrict, rather than encourage trade with foreign countries. For example, India has recently banned exports of onions, due to a supply shortage. The US-China trade war is also well known. In light of the economic difficulties facing the world, is there anything we can learn from the law and economic fundamentals which can help alleviate some of this suffering?

The Idea of Perfect Competition

The concept of Perfect Competition in Economics is an idea which suggests that under certain conditions, an economy will function at peak efficiency, where the optimal price will be charged to the consumer, reflecting the full and true cost of production. In addition, growth and innovation will create conditions of better service at lower prices for consumers, and an engine of efficient growth can be maintained.



The perfect competition model is based on five key factors: 1. Lots of Homogeneous (or similar) products/services in a market, 2. Limited or no barriers to entry for labor and other resources required for production 3. Limited or no barriers to exit for participants in the market, 4. Easy access to,and the availability of accurate information, related to services/products available, and 5. a more or less uniform market price.

The theory behind this model assumes that due to a large number of participants in the market, who are free to enter and exit, many producers will supply the market demand, as long as it is profitable. As consumers will have full access to information concerning the products/services and their price, any sellers offering services above market rate will be unable to offer their products very long. If one seller develops a competitive advantage which allows them to enhance profits or offer better services, other sellers will be able to access such information and replicate such efforts, bringing any price margin earned in the short term back to the equilibrium (uniform price). The idea is that an equal playing field will generate healthy and “fair” competition, creating the best environment for consumers, in terms of selection and quality of service.

It can be argued that innovation will also be encouraged, as sellers will face intense competition to get ahead of the market in offering better services or goods to their customers. However, any innovation will directly result in better prices and services for customers, as sellers will be unable to sell above the uniform price. Some argue that innovation may become stifled, however, by intense competition, as larger companies have more resources available to invest in research and development. Intense competition can lead to intense pressure, and less time spent on development. The counter argument for this, however, is that only practically useful goods and services actually sell successfully. Therefore, the first iteration of new goods and services may have additional value, and demand a higher price, which will effectively make up for the cost of innovation. Thereafter, once the information about the new product or service becomes available in the market, then others will be able to duplicate it, thereafter bringing the price back to its equilibrium level, at the best or most competitive rate. This competitive rate ensures that resources are theoretically utilized in the optimal manner.

This is because intense competition requires sellers to keep prices at the levels which consumers are able and willing to pay, and therefore, can only charge the reasonable costs of producing the service or good (including the cost of their own living), rather than inflating their prices (i.e. like with large fees, bonuses or premiums collected by monopolistic and large companies, such as banks).

The Law and Perfect Competition

If we look at modern economies and each of these five factors, step by step, we will see that regions such as the Americas (US, Canada, Mexico, Brazil, and the rest of South America) , the United Kingdom, Europe, the Middle East, and Asia, are on a very different track. In fact, it can be said that much of the world’s governments are not doing much to encourage “perfect competition.”

For one, protectionism is at an all time high. Think of any major profession, such as medicine, law, engineering, and even IT, and there will be underlying legislation restricting membership or participation in these professions. Some legislative efforts even restrict participation to a certain class of people, based on nationality and ethnicity! In addition, with Brexit, the Trump Trade wars, and an increasing trend of nationalism seen across the world, few governments are encouraging more open trade policies.

Immigration procedures are also more complex than ever. One hundred years ago, in the time of the British empire, movement between countries and even empires, was far easier, even though planes, cars and boats may have been physically slower! Perhaps the use of basic economic principles served the empire well in its multi-century existence.

All of these barriers interfere quite clearly with the first three conditions needed for “perfect competition,” being many similar products/services, and limited barriers to entry/exit in a market.

When it comes to information, the fourth factor, many countries are also falling well short. For example, in the United States, student debt and tuition rates are at an all time high! Despite living in the information age, social media companies and global search engines are easily manipulated by paid for advertising, which has created the “fake news” phenomenon. Therefore, information available to consumers is far from accurate or “perfect.” With imperfect information available, the next factor of price uniformity is almost impossible to achieve, with some companies charging almost fraudulent prices, exploiting contractual loopholes or “brand image.” For example, in the United States, the cost of an emergency ambulance visit to a patient is estimated at USD $2500 per visit. This amount is being paid to private companies, from insurance companies. In turn, premium holders and taxpayers are paying the insurance companies to do this.

Legal Policy for Economic Growth

Academic papers can be written on this subject, however, based on the brief information provided by this article, it could be said that if governments tried to implement the concept of “perfect competition” through legal policy, it may help reduce economic hardships. Unfortunately, as is seen above, many governments are still looking for political points by creating laws and policies which favor certain groups based on arbitrary factors, such as nationality, gender, ethnicity, profession, or social class membership.

If we take lessons from past empires, regimes and governmental systems, we can suggest that the backbone of their success was free and fair trade. The British Empire profited from horrors such as the slave trade and colonialism, however, its subjects could theoretically move and trade freely throughout its territory. There were also fewer restrictions on professional practice, with the basic requirement of being “qualified to practice” set as the baseline (in contrast, before even being allowed to enter a course of study, most academic programs in the professions today require a candidate to clear a number of entry exams. This was historically not the case). Another great empire, being the Ottoman empire, unified a vast amount of territory under one system of governance, and also benefited greatly from free and unimpeded trade within their territory. This trade spurred innovation, cultural development and the patronage of the arts as well.

Unfortunately, the modern global economy does not seem to have a uniform agenda, except in creating an unlimited set of barriers to free trade and perfect competition. One can only hope that with time, these policies will be reversed.