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Key Takeaways

  1. Competition is a necessary component to the emergence of capitalist economies as it allows for dynamic exit and entry into markets. Economic growth, price adjustments, and changes in technologies depend on such limited barriers to potential competitors.
  2. Democratic participation can promote competition, but often restrains it somewhat towards social ends. Many consider placing limitations on competition under democratic political systems to serve the purposes of proving minimal living standards for employees, preventing the sale of dangerous goods/services, and protecting national interests.Democratic societies tend to exist somewhere between perfect competition and total protectionism.

Competition and Capitalism

Competition promotes efficiency among firms and individuals by pressuring them to either lower prices to match those offered by other firms or to innovate to produce new goods and technologies. Economists refer to perfect competition or a market condition where there is enough competition between sellers that no one seller can raise its price without losing all its customers to other sellers. In real life conditions, perfect competition is near nonexistent, although some markets in which there are many firms and goods are the same, as in agriculture, come very close to perfectly competitive as to pricing. Economists refer to firms in such competitive industries as price takers, as they take the current market price as given because their choices have little influence over it.1

Perfect competition also relies on three conditions external to the firms themselves. First, buyers need to be able to know which firms have the lowest price. Second, a firm needs to be able to choose to enter or exit an industry. Third, there cannot be anything preventing new firms from entering the market otherwise known as barriers to entry. These conditions within an economy promote competition between firms, which keeps prices relatively low. However, perfectly competitive markets are not necessarily optimal, especially in markets where differentiation, or improvement, of products is important (i.e. computer software, luxury cars, etc.). In these markets, differentiation limits the number of entrants because potential firms do not always successfully innovate to capture a share of the market. This gives remaining firms more power to adjust prices.2 Because of the necessity of innovation and risk taking in such markets, entrepreneurship is a significant part of competition in an economy.Entrepreneurs break with institutional consensus in ways that often fail, but which probe the boundaries of current knowledge within industries. Therefore, entrepreneurs’ successes cause innovation in technologies that allow for improvements of outputs and contribute to economic development. Consequently, limitations placed on the entry of potentially destabilizing entrepreneurs into an industry can cause stagnation and popular resentment of protected monopolies and governments.3

Competition and Democracy

Competition depends on political cultures that recognize and promote the freedom to engage in markets for given goods and services. Historically, most people have faced significant limitations in their ability to enter, and even to exit, markets. For example, guilds and legal monopolies long dominated craft industries whereby established members of certain industries held coercive power to prevent newcomers from competing.4 While the governments of modern capitalistic societies no longer place outright restrictions on a person’s ability to buy or sell in protected markets, the spirit of such restrictions does survive in many forms of regulation and protectionism common to democratic governments in the present day. Generally, these modern limits to competition usually have their basis in three ideas. These are: (1) protection of national industries, especially “infant industries” that would fail to develop without protection from international competitors; (2) regulation of an industry through the exclusion of those deemed unqualified, often through licensing, in the case of the medical and legal professions, for example; and (3) labor protection, by which governments grant minimum wage standards and prevent firing/layoffs, thus preventing workers willing to work for lower wages from entering and driving down the price of labor. While heavily debated among policymakers and economists, consensus among developed capitalist societies generally grants credence to these limitations on competition.

The means of legitimate authority over such limitations, legislation and internal regulations by government-sponsored labor unions, both depend on the policy of elected officials. Consequently, democratic participation often determines the degree of such intervention in market competition, but the position on such issues tends to differ drastically based on time and place. For example, at the end of the nineteenth, and beginning of the twentieth, centuries, the Federal Government of the United States provided little support for labor regulation and even provided police power to subdue labor strikes. In the influential 1905 Supreme Court Case of Lochner v. New York, the court struck down a New York statute imposing a sixty-hour limit on bakery employees’ work weeks. This set a precedent for the economic liberty of firms to set competitive standards for potential hires at the expense of those workers who would have to work hours that many found excessive. General consensus in federal government shifted in the New Deal era, where new laws expressed the perception thatunregulated free markets were not necessarily just, and therefore allowed for protectionism in not only markets for labor, but in those for manufacturing and financial securities.5 In an attempt to stave off outcomes of what many perceived as unrestrainedcompetition, a new democratic impulse placed new stipulations that any potential entrant to a market would have to meet mandated social standards.This tempered approach has survived as a norm to the present day, with competing electoral factions generally tilting the needle towards or away from placing limits towards competition. Such cases include democratic support for the protection of American fossil fuels against OPEC and other foreign competition, the general deregulation of American industrial competition in the 1980s under the Reagan administration, and the more recent “America First” democratic populism united under the premise of defending American industrial interests against competition from rapidly developing nations like China.6

Why It Matters

  1. Competition allows for improvements in an economy, but historically such positive changes have also produced social concerns. Determining how to balance economic growth with the welfare of citizens is a perennial political topic likely to prove important in the twenty-first century.
  2. Understanding the limitations on market entry imposed by legislators and courts is key to identifying healthy business environments for entrepreneurial activity. Some governments inhibit competition from potential risk-takers that challenge status quo assumptions in existing industries.


1 Walter J. Wessels, Economics. 5thed. (U.S.: Barron’s, 2012), 373-389.

2 Wessels, Economics, 421-451.

3 On the codependence of entrepreneurship, competition, and the market process, the work of economist Israel M. Kirzner is informative. See, for example, Israel M. Kirzner, Competition and Entrepreneurship, eds. Peter J. Boettke and Frédéric Sautet (1973; Carmel, IN: Liberty Fund, 2013).

4 For examples of historical regulation of tradesand economic statuses fixed by law, see J.H. Baker, An Introduction to English Legal History. 4thed. (Oxford, UK: Oxford University Press, 2007), 449-454, 458, 468-71; Carl Bridenbaugh, The Colonial Craftsman (1950; New York, NY: Dover Publications, 1990), 70-2, 84, 143-7.

5 Richard H. Fallon Jr., The Dynamic Constitution: An Introduction to American Constitutional Law and Practice. 2nded. (Cambridge, UK: Cambridge UniversityPress, 2013), 101-124.

6 On changes in the American federal government’s approach to regulation of industry over the course of the twentieth century, see Gary M. Walton and Hugh Rockoff, The American Economy. 13thed.(Boston, MA: Cengage, 2014), 464-539. Forrecent descriptionsof the connection between democracy and protectionism, seeIan Fletcher, “America was Founded as a Protectionist Nation,” Huffpost. September 12, 2010. https://www.huffpost.com/entry/america-was-founded-as-a_b_713521;Tom Fowdy, “As Biden embraces Trump’s America-first protectionism, foreign investors give up on the US and bet big on China, power has shifted,” RT. January 25, 2021. https://www.rt.com/op-ed/513542-biden-embraces-america-first-protectionism/.