Indicators of competition in the framework of real competition

Given that competition is a central concern of real economics, I am wondering if there are good empirical indicators which gauge the level of competition itself. Theories of imperfect competition argue that competition depends on the number of firms, such that competition decreases as the number of firms diminishes through monopolization. This quantity theory of competition is repudiated in Capitalism: Competition, Conflict, Crises, however the theory of real competition would be even more convincing if it could provide its own, more accurate, indicator of the degree of competition. The level of competition is not constant, but varies over time and from place to place. For instance: a) the intensity of competition changes throughout the business cycle, becoming more intense during recessions b) following the end of the post-war boom, competition intensified under neoliberalism. There is theoretical support for the notion that competition intensifies in times of crisis in Marx: “As long as everything goes well, competition acts, as is always the case when the general rate of profit is settled, as a practical freemasonry of the capitalist class, so that they all share in the common booty in proportion to the size of the portion that each puts in. But as soon as it is no longer a question of division of profit, but rather of loss, each seeks as far as he can to restrict his own share of this loss and pass it on to someone else… and competition now becomes a struggle of enemy brothers. The opposition between the interest of each individual capitalist and that of the capitalist class as a whole now comes into its own, in the same way as competition was previously the instrument through which the identity of the capitalists’ interests was asserted.” [Capital, Vol. 3, ch. 15, section 3]. Here is one rough attempt at constructing an indicator of the degree of competition, which could doubtlessly be improved upon. As the mass of profit rises, the mass of investment also tends to rise. However, the growth utilization rate (investment/profit) falls as the rate of profit (profit/capital) rises. This is shown in Figure 1. At first this may seem counterintuitive- with a high rate of profit, you might expect a larger share of profit to be reinvested to take advantage of the large gains to be had. From a different perspective, however, it makes sense that as the profit rate falls, a larger share of profit needs to be reinvested (to cut costs and boost efficiency) as firms compete to remain in business. More generally, a rising growth utilization rate seems to be interrelated with the tendency for the rate of profit to fall (as investments in newer and more capital-intensive technologies are deployed, raising the organic composition of capital, as part of the competitive struggle to reduce costs and expand output). [See a comment posted below, with pdf outlining this connection.] Firms compete by investing (in technology, marketing, etc.) and the mass of investment is limited by the mass of profit. At the limit, to be optimally competitive, firms would reinvest all of their profit (not necessarily in expanding output, but to bolster other areas of business as well); conversely, firms which do not reinvest any profit would be the least competitive (and would be most likely to lose market share and go out of business). In periods of prosperity, with a high rate of profit, firms are able to get away with distributing profits and reinvesting relatively less of the total profit; in times of crisis, with a low rate of profit, unproductive consumption is a luxury firms cannot afford and firms are compelled to increase the growth utilization rate [this logic might break down in severe depressions, as hoarding money becomes prevalent]. Intensifying competition would be signified by moving up the trend line from right to left in Figure 1 and/or by shifting the trend line up. In this way, changes in the growth utilization rate could be an indicator of changes in the degree of competition. As shown in Figure 2, the growth utilization rate increases as the post-war boom draws to an end, and spikes with the recessions of the business cycle, which corresponds with the trends and fluctuations in the intensity of competition.

Notes on the Figures. Profit is defined as gross domestic income – (compensation of employees + consumption of fixed capital), BEA NIPA Table 1.10. Capital is defined as private nonresidential fixed assets, BEA Fixed Assets Table 1.1. Investment is defined as gross private nonresidential fixed investment, BEA NIPA Table 5.2.5. Figures cover 1946-2022. A limitation of the data presented is that the capital stock and investment only include fixed capital. Ideally, these would additionally include circulating capital. Since fixed capital tends to grow faster than circulating capital over time, part of the rise in Figure 2 is likely due to a changing composition of investment rather than purely a rise in investment relative to profit. Accordingly, the values in Figure 2 are a better indicator the more recent they are (as fixed capital approaches closer to 100% of total investment) and less accurate the more distant they are (as fixed capital formed a smaller proportion of the total investment).

Comments (6)

Shujun Tan

Jul 27

Hi Nathan, this idea is interesting. Do you have any papers on this topic taking a view from real competition theory?

Nathan Johnson

Aug 01

Replying to

As the concentration and centralization of capital progresses, unproductive consumption of profit would be expected to decrease in relative terms, leaving more profit available for investment. This is similar to the logic that workers spend nearly all their wages to survive whereas large capitalists would have a hard time consuming all of their profit.

For example, if the market had one million small capitalists, they would have to spend a large fraction of their profit to meet their consumption needs, but if the market was consolidated by one large capitalist, relatively less profit would need to be dedicated to unproductive consumption (even assuming a very high CEO-to-worker pay ratio), leaving more for investment.

Shaikh mentions in some lectures (citing Marx) that large firms are more competitive than small firms, given that they have the resources to be more ruthless in the struggle for profit/market share/survival. Multinational corporations are also more likely to be single-mindedly devoted to maximizing profit than, for instance, small community mom-and-pop stores. So the intensity of competition could increase over time as capitalism develops- firms grow larger and are compelled by competition to raise the growth utilization rate. To compete (and try to grow faster than the market), firms invest in new technologies, which tends to raise the organic composition of capital, contributing to the tendency for the rate of profit to fall (even as the mass of profit rises), and a falling rate of profit correlates with a rising growth utilization rate. The attachment addresses this in more detail.

While the theory of monopoly capitalism argues that monopolization demonstrates competition is decreasing, real competition would instead say that as competition intensifies relatively fewer firms can survive in the market (yielding monopolization). Ratcheting up the growth utilization rate, as new capital-intensive technologies are deployed, would drive out of business relatively uncompetitive firms (which are unable to reduce consumption in relative terms, to boost investment to the same degree).

Edited