Mr. Paine and Rationalisation: A Note

Abstract

IN the course of his very interesting article on Rationalisation and the Theory of Excess Capacity (ECONOMICA, February, 1936), Mr. C. L. Paine has occasion to criticise a doctrine of my own. In dealing with the output and constitution of an industry subject to purely imperfection of competition, I have stated that the reproduction of the conditions of the average degree of competition [wllich prevails in industry in general] is what is required.' Mr. Paine finds this doctrine a difficult one to swallow, and prefers to fall back on the common-sense view that if competition would not be imperfect but for the imperfection of knowledge, then the reproduction of the conditions of perfect competition ought to be the objective of any scheme of intervention.2 The argument which Mr. Paine criticises is, as he himself points out,3 best illustrated by imagining a completely symmetrical world in which an equal degree of irrational imperfection of competition prevails in the production of every cominodity. Then, by symmetry, the value of the marginal product of each factor of production would be the same in every use, and any diversion of resources would result in a net loss to society. Mr. Paine rejects the argument by an appeal to common sense. But what common sense tells us is that if all commodities were produced under conditions of perfect competition the ideal arrangement of resources would be established. Now the very same distribution of resources is established in a world in which an equal degree of imperfection of competition prevails everywhere. It follows that in such a world inLerference has no part to play. The reproduction in all industries of the conditions of perfect competition would leave the situation just as it was before, so far as concerns the arrangement of resources and the national dividend. On the other hand, the reproduction in some industries and ntot in others of the conditions of perfect competition would result in a mal-diversion of resources, and the national dividend would suffer. The trouble with Mr. Paine's argument is that, associating imperfection of competition with ignorance, he is eager to quell it wherever it may appear. He fails to realise that unless he succeeds in disposing of it on every front, he may cause a serious distortion to the horizontal structure of production.