For a long time, the neoclassical economic model of perfect competition has been used as a basis for the development of policies and structure of economic models. However, the model of perfect competition makes many assumptions that have been tailored to make it work, many of which have been questioned and heavily criticized. Some of these assumptions include no barriers of entry or exit to firms in the market, perfect distribution of information, the homogeneity of products, and the fact that no single buyer or seller is big enough to influence the overall market price of their product. While this model serves as a servable base to further understand more complicated behaviors, some of the assumptions the model has the need to be either eliminated or modified and some new ones need to be implemented.  The implementation of entrepreneurship principles and the power of consumer expectations into this model would render it theoretically and empirically realistic. If models of political economy implement an entrepreneur element in their policies, then that would mean that many of the assumptions used by the perfect competition model wouldn’t prove to be erroneous or naive.

Perfect competition implies that there is perfect information across the market and everyone has access to the same technology. If there is perfect information, then as soon as there is a profit maximizing opportunity, firms will enter the market in an attempt to maximize their profits and an equilibrium will be reached. Having perfect information would also mean that firms are aware of any possible future changes in preferences and consumption, any future new knowledge will be dispersed evenly and agents can seek to maximize their profit based on the available information. However, the validity of the assumption of perfect information has been questioned. How is it possible to determine changes in knowledge that are required to offset any given change of tastes or resources to maintain an equilibrium set of prices? Our ignorance of the future invalidates any theory where the model relies on a future long-run market clearing equilibrium.

The idea of entrepreneurship needs to garner more weight than just a factor of production, rather they should be thought of as the managers of said factors of production. Entrepreneurs act as managers of the market that attempt to identify its tendencies in order to exploit them. They try to manage the available resources in the world to make profits or try to develop new technologies that will either start a new market or give them an edge over their competitors in an already existing market. On a macro level, the government has the ability to enact policies on the basis of entrepreneurship ideas; they have the power to allocate resources where they think the market needs help and is an opportunity for profit. Policies like tax breaks or subsidies towards environmentally friendly projects, and fines on companies that emit over a specified legal amount of pollutants, may sway entrepreneurs to invest in clean energy rather than other types of fuels.

The inclusion of entrepreneurship as more than just a factor of production would invalidate the largely questioned assumption of long-run profits being zero because a key characteristic of being an entrepreneur is innovation and the ability to discover and respond to new economic opportunities.  These individuals have a talent for scanning the market and recognizing how they should respond to different economic shocks. They are also adept at recognizing what the market demands are, and if there are any unexploited markets to discover. If there is perfect information, like the contemporary theory of perfect competition assumes, then entrepreneurs are sure to find a way to exploit any discrepancies in the market or create a new market themselves. Therefore a unique and perfect equilibrium could not be reached, having instead multiple equilibria that are ever changing. Therefore, innovation should be thought of as a constant perturbation of the system that will soon adapt to reach a new equilibrium. Therefore, the perfectly competitive model must adapt a disequilibrium approach where possibilities of new combinations continuously arise. A theory that includes entrepreneurship cannot abstain from this central issue.

Realistically, the government continuously meddles with the free market that leads to many fluctuations in the business cycle. In a world where there is perfect information, and the government announces any fiscal or monetary policy changes, entrepreneurs are sure to act in a way that will benefit them and might lead to the reverse effect of the intended policy. This is especially true when the Fed acts under a discretionary policy and announce what they’ll do instead of following a rule. Asset markets are inherently restless and equilibrium prices established in them reflect nothing but the daily balance of expectations. Fed policies are forward-looking and don’t necessarily have an immediate impact so there is ample time for consumers to take advantage of the Feds intentions. If the federal government targeted the interest rate and wanted to lower it (reduce the amount of money in the market and therefore increase the interest rate) consumers and entrepreneurs might want to hold on to the money that they have and then try and lend it at a higher interest rate to garner some sort of profit. In essence, a policy that was aimed at boosting consumption only ended up slowing it down. The self-fulfilling prophecy of expectations and the attempt of entrepreneurs to profit from their future expectations could lead to different equilibrium and undesired economic shocks.

If anything, once an entrepreneur finds a possible scenario in the market where they can increase their profits, it is in their best interest to keep such information quiet until they themselves actively target it. Only then would other firms know of the possible profit situation. New knowledge may originate from technological progress or discovery of new resources by alert minds. But, entrepreneurs and consumers alike have different ideas and expectations on how the market might shape up, and therefore different conclusions on where the long-term equilibrium will end up. The different conclusions that arise from different interpretations of the world, and the constant pursuit by entrepreneurs to achieve profits through different mediums would necessarily prevent a general long-term resting equilibrium from ever coming. Competition is process, and it reflects continuous changes in the patterns of knowledge. This also necessarily takes into account people’s expectations more than their tastes as a determinant of demand. Therefore, it can be said that markets for individual goods may reach an equilibrium for a time, but the economic system never does. Our different perspectives and interpretations of the market reflect the market as a continuous process with no end, fueled by the interaction of equilibrium forces and forces of change.

A Neo-Perfect Competition Model That Maybe Isn’t so Perfect

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