A Revision of the Theory of Perfect Competition and of Value

Abstract

This paper constitutes the synthesis of my two previous articles entitled “A Reconsideration of the Theory of Perfect Competition”1 and “The Fallacy of the Perfect Competition Theory”2 in a way that they are integrated, improved, fit and completes each other in order to present the complete view of the new revised theory.Firstly it is demonstrated and proved that the principal assumption of the classic economic theory about perfectly elastic (horizontal) individual demand curves for the firms is wrong and that the real individual demand curves for the firms are sloped and distribute evenly the total demand among the (like) firms at any price, thus summing up to the total demand curve, in contrast to what the classic theory states. The paper attempts also to historically trace this fallacy and detect the root causes that presumably led to it.The correction of the above wrong assumption and the adoption of a typical (sloped) demand curve for the firm entails a total and dramatic revision of the classic theory of Value, Perfect Competition and the associated theory of Social Welfare, since: it invalidates the famous principle of price determination at the intersection of total demand and total supply, as well as that of the equality of price to the minimum average cost in the long run, facts that move social welfare away from its optimum, as claimed by the classic economic theory; in addition, in the labor market labor is not paid according to the value of its marginal product but according to the marginal product revenue, which implies the monopolistic exploitation of labor and lower wage and employment levels and in fact worsens the previous social welfare's declination.The new theory covers in a single and integrated manner all types of market from monopoly to perfect competition and demonstrates the unavoidably monopolistic character of the market, even under perfect competition: The aggregate profit of the whole industry equals the profit coming from a monopolistic exploitation of the market and is equally distributed among the like firms, until in perfect competition the share marginally covers the cost of the firm, thus leading to zero economic profit; this happens due to the entry of new firms attracted by the extra profit, but also due to loss if a firm varied its production. This is the real reason for the stability of price in perfect competition and not the horizontal individual demand curve for the firms nor the large number of firms and the subsequent small individual production unable to affect the price; those prerequisites are not valid and have to be retired and the emphasis in perfect competition must be placed on the zero economic profit and the entry-exit of firms.