THE CLASSICAL THEORY OF FREE COMPETITION (A REINTERPRETATION)
IT is generally taken for granted that the sole concern of the classical economists was to show that free competition will lead to the most efficient allocation of the given resources of society among different industries according to the existing consumers' demand. This apparently well-established belief has not, however, been borne out by our more detailed inquiry into the classical ideas concerning the nature of the economic problem and the measurement of the national dividend. There we have seen that the classical economists were not in the habit of thinking in terms of a static framework where the available amount of resources is given once for all throughout the whole analysis. Smith and Ricardo assumed that the supply of labour can be increased by increasing saving, and Malthus was acutely aware that different volumes of employment might result from a given supply of labour. We have further seen that irrespectively of whether they approached the problem from the Cost side or from the Income side, they all agreed that the main determinant of the wealth of society is the total volume of economic activity in general, rather than its allocation in particular proportions among different industries.
In this chapter, we hope to show that (i) a purely "allocative" interpretation of the classical theory of free competition is based on very selective evidence and that (ii) it is only when free competition is further reinterpreted as an auxiliary instrument of dynamic economic progress that it fits in with the fundamental classical outlook on the economic problem and gives an organic unity to their theoretical system as a whole.
Our proposed reinterpretation, although it upsets the established current opinion, can be traced back to the works of the older generation of the Neo-classical economists (cf. Marshall, Principles, pp. 5-10; Pigou, Memorials of Alfred Marshall, pp. 9, 307; Allyn Young , "Increasing Returns and Economic Progress", Economic journal, 1928; Taussig, Principles, Vol. I, Chaps. III-IV). There it will be found that free competition, significantly described as "free enterprise", was not regarded as an abstract model of analysis