Handbook on Contemporary Austrian Economics

The competitive market is a process of entrepreneurial discovery 91
take place) is what separates traditional market theory from the Austrian
view. The market is central in the Austrian approach because it is a
process. Understanding the market as competitive is to understand the
market as a process.
7.3 Competition
The second important concept of the proposition under study is that of
competition. The evolution of the concept of competition has followed the
move from the first view of market to the second one. There are fundamentally
two meanings behind the concept of competition in economics.
The first meaning refers to competition as a state of affairs as developed
by Frank Knight in the 1920s. The second meaning refers to competition
as a process of entrepreneurial discovery as developed by Mises, Hayek,
and Kirzner. 3 It is important here to mention that I am not arguing about
the definition of competition. As in the case of the concept of market,
economists of various schools are free to define competition as they please.
My goal here is to emphasize the existence of the market process as a key
aspect of competition that should not be ignored.
The meaning of competition among nineteenth-century economists was
pretty clear. Competition meant rivalry among people for the attainment
of certain ends. To compete is what people did when they haggled over
prices in fairs or when they offered cheaper and better products to their
customers. This view changed in the twentieth century, as the meaning of
competition evolved, following upon the ideas of Knight, from "rivalry"
to "a (static) state of affairs" (Machovec, 1995).4 In the state of affairs
approach, a competitive situation exists when neither producers nor consumers
can individually influence the final result of the market. Market
actors have little or no capacity to choose how to compete. The outcome
of the market is not the result of choices that individuals make with
regard to price and quantity. In other words, the competitive order that
emerges is independent of the choices (in terms of prices and quantities)
actors make. 5 Individual actors are too "small" to influence the market
outcome.
There is something very powerful in this view of competition, as it
depicts the interconnectedness of every actor in the market. However,
it rests on an ideal understanding of the market, as it relates only to an
already attained equilibrium where competition (as market process) is
absent. 6 The interconnectedness of every actor in the market is in fact
illusory because the pre-reconciliation of plans assumes it from the outset
(instead of explaining it). Instead, Austrian economists have argued
that it is, paradoxically enough, thanks to the introduction of the creative,
unpredictable entrepreneurial element that many features of actual