It goes back to the old Invisible Hand theory. Adam Smith claimed that competition in the marketplace would force producers to produce only what people want (so they can sell it). They would also produce at the lowest possible cost without undue profit to keep prices down (so competitors can’t steal their customers). These are perfect results, as if guided by that old benevolent Invisible Hand.
This produced, in theory, a perfect Cooperative Community where selfish producers are forced by market discipline to serve the public selflessly. One could complain that selfish people forced to be selfless by circumstances are not the solution, and that we’d be better off in a society of actual (not fake) selfless people. But those who worshipped Adam Smith claimed that human beings are irrevocably selfish by their very nature (so-called Economic Man) — so the very best we can do is create an economy that polices them by means of the free market. From that, the Theory of Perfect Competition and Libertarian Economics took form in the ensuing decades.
But the faithful followers of Adam Smith missed one thing. The Invisible Hand was not Adam Smith’s chief contribution to Economics. In fact, he spent a lot of time describing how it doesn’t really work in practice. His main contribution was his analysis of the Division of Labour. Build a bigger factory so you can divide up the work, giving each worker only the tasks they do well, and you’ll really cut down your costs of production.
Economists ignored that in their their textbooks, partly because they were so blindly in love with the Invisible Hand. But in larger part it was because the Division of Labour wrecked their theory. If the Division of Labour holds, then bigger is cheaper. If you manage to get bigger than your competitors, you can undercut them and drive them out of business. In theory, that will not stop until there’s only one monopoly firm left. The Cooperative Community under Perfect Competition turns into Predatory Competition under more realistic conditions. We all know that story.
By the way, Economics textbooks have a clever way of ignoring the whole issue. Look in the first chapters of any advanced textbook and you’ll see: “Let us assume Constant Returns to Scale”. That means a big auto factory is no cheaper than you are making cars in your basement. They assume that partly because linear mathematics just can’t handle economies of scale. But more tellingly, it’s assumed because that allows them to draw their mandatory conclusion — that competition is inherently stable and capitalism works perfectly.
In the past century, some economists tried a different way to make it more realistic. They adopted Game Theory. They analyzed how two people trying to outsmart each other in a game will strategize their moves. John Nash analyzed the precise conditions under which both gamers come out as satisfied as possible — a stable equilibrium. A little like a market, eh? Hooray — market theory, recast as Game Theory, also yields perfect results.
Game Theory also allowed them to analyze cooperation more rigorously. They’ve shown that, under the right conditions, players will come out more satisfied if they make cooperative moves like taking less initially. In fact under certain theoretical conditions taking less in every move, while your opponent does the same, yields more in the end for everyone. A Competitive Game produces a Cooperative Community, just like Perfect Competition.
Of course, it doesn’t solve the problem of fake selflessness — self-seeking people being herded by the rules of the game into seemingly selfless behaviour. But, hey, that’s the best we can expect from Economic Man, eh?
Here’s another issue. Two players do not a market make — nor three nor four nor 100. So game theorists made a mathematical model of infinite players and — guess what — the mathematics was identical in every detail to the mathematics of Perfect Competition. Congratulations all ‘round — except — that means Game Theory markets are just those ridiculous Perfectly Competitive markets from a different angle. And if Economies of Scale destroy Perfectly Competitive markets, then they destroy Game Theory markets too.
But we still don’t have any models of real selfless behaviour. For that I turn to the Franciscan Friaries. No Economic Man there. They’re all (at least the classical ones) dedicated to consuming as little as possible without starving to death. So the farm (if it’s a farm) easily produces quite enough to feed and clothe them, plus some surplus to give to the poor outside the gates. No need for Economics. That’s needed only when Economic Man‘s greedy behaviour outstrips resources making it necessary to ration scarce goods through markets.
It’s a theory that needs a little work — especially when having to live alongside market predatory competition outside the walls complicates it all enormously. But the Capuchin Franciscans and others are working on the models (which they call the Fraternal Economy) — so we’ll have something to consider when we’re dismayed by the silliness of market dogma.