Competitive Capitalism vs Monopoly Capitalism, B.Com B Com Notes | EduRev

 Page 1


                  Competitive Capitalism Vs Monopoly Capitalism 
 
                                 Institute of Lifelong Learning, University of Delhi 1 
 
 
 
 
 
 
 
 
 
 
 
Lesson: Competitive Capitalism Vs Monopoly Capitalism 
Lesson Developer: Vaishali Kapoor, Rakhi Arora Sharma 
College/ Department: DDU,Rajdhani College, Delhi 
University 
 
 
 
  
Page 2


                  Competitive Capitalism Vs Monopoly Capitalism 
 
                                 Institute of Lifelong Learning, University of Delhi 1 
 
 
 
 
 
 
 
 
 
 
 
Lesson: Competitive Capitalism Vs Monopoly Capitalism 
Lesson Developer: Vaishali Kapoor, Rakhi Arora Sharma 
College/ Department: DDU,Rajdhani College, Delhi 
University 
 
 
 
  
                  Competitive Capitalism Vs Monopoly Capitalism 
 
                                 Institute of Lifelong Learning, University of Delhi 1 
 
 
Table of Contents 
Lesson: Competitive capitalism Vs Monopoly Capitalism 
? Learning outcomes 
? Introduction 
? Survival of Capitalism 
 
? Creative Destruction 
 
? Competition Redefined 
 
? Schumpeter’s defense to Monopolistic Practices 
 
? Restrictive practices as safeguard mechanism 
? Survival of the fittest 
? Rigid prices are not evil 
? Conservation of capital is an illusion 
? Monopoly confines to theories 
? Benefits of Perfect Competition are misleading 
? Attack on Monopoly Capitalism 
? Classical conditions for economic growth-I 
? Classical conditions for economic growth-II 
? Classical conditions for economic growth-III 
? Classical conditions for economic growth-IV 
? How investment differs in competitive and Monopoly Capitalism? 
? Summary 
? Exercises 
? Glossary 
? References 
Page 3


                  Competitive Capitalism Vs Monopoly Capitalism 
 
                                 Institute of Lifelong Learning, University of Delhi 1 
 
 
 
 
 
 
 
 
 
 
 
Lesson: Competitive Capitalism Vs Monopoly Capitalism 
Lesson Developer: Vaishali Kapoor, Rakhi Arora Sharma 
College/ Department: DDU,Rajdhani College, Delhi 
University 
 
 
 
  
                  Competitive Capitalism Vs Monopoly Capitalism 
 
                                 Institute of Lifelong Learning, University of Delhi 1 
 
 
Table of Contents 
Lesson: Competitive capitalism Vs Monopoly Capitalism 
? Learning outcomes 
? Introduction 
? Survival of Capitalism 
 
? Creative Destruction 
 
? Competition Redefined 
 
? Schumpeter’s defense to Monopolistic Practices 
 
? Restrictive practices as safeguard mechanism 
? Survival of the fittest 
? Rigid prices are not evil 
? Conservation of capital is an illusion 
? Monopoly confines to theories 
? Benefits of Perfect Competition are misleading 
? Attack on Monopoly Capitalism 
? Classical conditions for economic growth-I 
? Classical conditions for economic growth-II 
? Classical conditions for economic growth-III 
? Classical conditions for economic growth-IV 
? How investment differs in competitive and Monopoly Capitalism? 
? Summary 
? Exercises 
? Glossary 
? References 
                  Competitive Capitalism Vs Monopoly Capitalism 
 
                                 Institute of Lifelong Learning, University of Delhi 1 
 
 
Learning outcome 
After studying this chapter, a student will be able to: 
? State relation between increase in output and capitalists operations. 
? Describe the phenomenon of creative destruction. 
? Distinguish between competitive capitalism and monopoly capitalism. 
? State features of monopoly capitalism 
? Contrast Schumpeter’s views from Baran’s views on monopoly capitalism. 
 
 
I.   Introduction 
Over the last fifty to eighty years, there has been a transition from competitive capitalism to 
monopoly capitalism. We refer to competitive capitalism when there are a large number of 
sellers competing in the market to sell their products. With the advent of big machines and 
plants, capitalists now are owners of large scale firms. Not all the capitalists of competitive 
phase could effectively remain as capitalists in monopoly capitalism phase. The reason for 
the same is that it required heavy capital requirements. So, a few firms became dominant in 
each line of production and world witnessed oligopoly or monopoly as inevitable form of 
capitalism. 
This chapter is broadly divided into five sections.   First section discusses the future of 
capitalism on the basis of the classical writer’s theories. In the second section, ‘perennial 
gale of creative destruction’ is explained. The third section provides alternative definition of 
competition. These three sections actually pave the way for fourth section; which is 
Schumpeter’s defense of monopoly capitalism. In the last section, Baran’s arguments are 
advanced which criticizes monopoly form of capitalism for there are in built mechanisms in 
monopoly capitalism that impede progress. 
 
II. Survival of Capitalism 
Schumpeter explored into the possibility of capitalism flourishing over next century from 
them. In his attempt to assess this, he explained how capitalism has survived and how its 
form is shaping away from perfectly competitive capitalism to monopoly capitalism. His 
mind was boggled with the following questions:  
i) How far increase in output, in last fifty years, can be attributed to capitalist 
order? 
ii) Has there been any increase in output at unprecedented scale? 
iii) Are there reasons as to why capitalism will not last for long? Or it won’t work 
well, as it did in past? 
Page 4


                  Competitive Capitalism Vs Monopoly Capitalism 
 
                                 Institute of Lifelong Learning, University of Delhi 1 
 
 
 
 
 
 
 
 
 
 
 
Lesson: Competitive Capitalism Vs Monopoly Capitalism 
Lesson Developer: Vaishali Kapoor, Rakhi Arora Sharma 
College/ Department: DDU,Rajdhani College, Delhi 
University 
 
 
 
  
                  Competitive Capitalism Vs Monopoly Capitalism 
 
                                 Institute of Lifelong Learning, University of Delhi 1 
 
 
Table of Contents 
Lesson: Competitive capitalism Vs Monopoly Capitalism 
? Learning outcomes 
? Introduction 
? Survival of Capitalism 
 
? Creative Destruction 
 
? Competition Redefined 
 
? Schumpeter’s defense to Monopolistic Practices 
 
? Restrictive practices as safeguard mechanism 
? Survival of the fittest 
? Rigid prices are not evil 
? Conservation of capital is an illusion 
? Monopoly confines to theories 
? Benefits of Perfect Competition are misleading 
? Attack on Monopoly Capitalism 
? Classical conditions for economic growth-I 
? Classical conditions for economic growth-II 
? Classical conditions for economic growth-III 
? Classical conditions for economic growth-IV 
? How investment differs in competitive and Monopoly Capitalism? 
? Summary 
? Exercises 
? Glossary 
? References 
                  Competitive Capitalism Vs Monopoly Capitalism 
 
                                 Institute of Lifelong Learning, University of Delhi 1 
 
 
Learning outcome 
After studying this chapter, a student will be able to: 
? State relation between increase in output and capitalists operations. 
? Describe the phenomenon of creative destruction. 
? Distinguish between competitive capitalism and monopoly capitalism. 
? State features of monopoly capitalism 
? Contrast Schumpeter’s views from Baran’s views on monopoly capitalism. 
 
 
I.   Introduction 
Over the last fifty to eighty years, there has been a transition from competitive capitalism to 
monopoly capitalism. We refer to competitive capitalism when there are a large number of 
sellers competing in the market to sell their products. With the advent of big machines and 
plants, capitalists now are owners of large scale firms. Not all the capitalists of competitive 
phase could effectively remain as capitalists in monopoly capitalism phase. The reason for 
the same is that it required heavy capital requirements. So, a few firms became dominant in 
each line of production and world witnessed oligopoly or monopoly as inevitable form of 
capitalism. 
This chapter is broadly divided into five sections.   First section discusses the future of 
capitalism on the basis of the classical writer’s theories. In the second section, ‘perennial 
gale of creative destruction’ is explained. The third section provides alternative definition of 
competition. These three sections actually pave the way for fourth section; which is 
Schumpeter’s defense of monopoly capitalism. In the last section, Baran’s arguments are 
advanced which criticizes monopoly form of capitalism for there are in built mechanisms in 
monopoly capitalism that impede progress. 
 
II. Survival of Capitalism 
Schumpeter explored into the possibility of capitalism flourishing over next century from 
them. In his attempt to assess this, he explained how capitalism has survived and how its 
form is shaping away from perfectly competitive capitalism to monopoly capitalism. His 
mind was boggled with the following questions:  
i) How far increase in output, in last fifty years, can be attributed to capitalist 
order? 
ii) Has there been any increase in output at unprecedented scale? 
iii) Are there reasons as to why capitalism will not last for long? Or it won’t work 
well, as it did in past? 
                  Competitive Capitalism Vs Monopoly Capitalism 
 
                                 Institute of Lifelong Learning, University of Delhi 1 
 
 
In search to answer his questions, he analyzed features of then prevailing economy was it 
conducive to the growth of economy and if yes, does it sufficiently explain this high growth 
pattern of under capitalism. Though the other way out is to deal with data, use statistics 
and regression and other techniques to do the same; but Schumpeter did apply the first 
method. 
Answer to (i) question: 
Let us rephrase the first question to: “Are there built in incentives to economic agents for 
increasing the output?” the answer is Yes. There are rewards and penalties for every type of 
performance in the economy. “Bourgeois society has been cast in a purely economic 
mold”. Making money becomes everybody’s motive and this is conferred upon all by the 
capitalist system. This is so because rewards of being party to this system’s scheme are 
promissory to success and those who don’t follow are left behind. 
For all those who are capable, work hard and are endowed with supernormal brains and 
innovate and invent are rewarded profits and benefits. Likewise, there are penalties of 
destitution to all who don’t run the race. The rewards accrue to small chunk of the society 
and prizes to be acclaimed are spectacular. These rewards are greater than they would have 
been in equal and just society. Somebody who is not receiving them is also lured to these 
big prizes and overrates their chances of winning them. To conclude, we quote, 
Schumpeter, “Bourgeois way of life asserts itself to dim the beacons of other social worlds.” 
Answer to (ii) question: 
“Does condition of capitalism imply increase in output”? In answer to this classical give two 
contradictory views: 
a) Within the framework of capitalism, capitalists self interest for 
maximum performance is in interest of all. Under laissez- faire 
capitalism, production is maximized. 
b) Simultaneously they maintain that increase in output is due to 
“beneficial legislation” such as removal or reduction of 
protective duties, implemented in nineteenth century. 
It seemed that second line of reasoning is to influence people in other lands so that English 
bourgeois class is put to advantage by removal of duties in other parts of the world. 
Classicalists believe that ‘money making deflects from its social goals.’ And all are at net 
loss but to whom private profits accrue. But economists refuted such arguments. The 
alignment of capitalists’ interests (of profit maximization) with social goal (of maximizing 
productive performance) is possible and former imply in most of the cases later. But it is yet 
not proven that if two converge. 
 
Marshall makes an attempt to answer this and elaborates that in case of perfect competition 
capitalists’ motive of profit maximization is synonymous to production maximization. Under 
perfect competition, a producer produces to the point where marginal cost is equal to the 
price they get i.e. they keep on producing additional units unless they run into the losses. 
Hence, profit motive of a producer is compatible with output maximization and cost 
minimization. 
Though it’s plausible under the conditions of perfect competition but perfect competition is 
an exception witnessed in agricultural mass production rather than a rule. In current times, 
Page 5


                  Competitive Capitalism Vs Monopoly Capitalism 
 
                                 Institute of Lifelong Learning, University of Delhi 1 
 
 
 
 
 
 
 
 
 
 
 
Lesson: Competitive Capitalism Vs Monopoly Capitalism 
Lesson Developer: Vaishali Kapoor, Rakhi Arora Sharma 
College/ Department: DDU,Rajdhani College, Delhi 
University 
 
 
 
  
                  Competitive Capitalism Vs Monopoly Capitalism 
 
                                 Institute of Lifelong Learning, University of Delhi 1 
 
 
Table of Contents 
Lesson: Competitive capitalism Vs Monopoly Capitalism 
? Learning outcomes 
? Introduction 
? Survival of Capitalism 
 
? Creative Destruction 
 
? Competition Redefined 
 
? Schumpeter’s defense to Monopolistic Practices 
 
? Restrictive practices as safeguard mechanism 
? Survival of the fittest 
? Rigid prices are not evil 
? Conservation of capital is an illusion 
? Monopoly confines to theories 
? Benefits of Perfect Competition are misleading 
? Attack on Monopoly Capitalism 
? Classical conditions for economic growth-I 
? Classical conditions for economic growth-II 
? Classical conditions for economic growth-III 
? Classical conditions for economic growth-IV 
? How investment differs in competitive and Monopoly Capitalism? 
? Summary 
? Exercises 
? Glossary 
? References 
                  Competitive Capitalism Vs Monopoly Capitalism 
 
                                 Institute of Lifelong Learning, University of Delhi 1 
 
 
Learning outcome 
After studying this chapter, a student will be able to: 
? State relation between increase in output and capitalists operations. 
? Describe the phenomenon of creative destruction. 
? Distinguish between competitive capitalism and monopoly capitalism. 
? State features of monopoly capitalism 
? Contrast Schumpeter’s views from Baran’s views on monopoly capitalism. 
 
 
I.   Introduction 
Over the last fifty to eighty years, there has been a transition from competitive capitalism to 
monopoly capitalism. We refer to competitive capitalism when there are a large number of 
sellers competing in the market to sell their products. With the advent of big machines and 
plants, capitalists now are owners of large scale firms. Not all the capitalists of competitive 
phase could effectively remain as capitalists in monopoly capitalism phase. The reason for 
the same is that it required heavy capital requirements. So, a few firms became dominant in 
each line of production and world witnessed oligopoly or monopoly as inevitable form of 
capitalism. 
This chapter is broadly divided into five sections.   First section discusses the future of 
capitalism on the basis of the classical writer’s theories. In the second section, ‘perennial 
gale of creative destruction’ is explained. The third section provides alternative definition of 
competition. These three sections actually pave the way for fourth section; which is 
Schumpeter’s defense of monopoly capitalism. In the last section, Baran’s arguments are 
advanced which criticizes monopoly form of capitalism for there are in built mechanisms in 
monopoly capitalism that impede progress. 
 
II. Survival of Capitalism 
Schumpeter explored into the possibility of capitalism flourishing over next century from 
them. In his attempt to assess this, he explained how capitalism has survived and how its 
form is shaping away from perfectly competitive capitalism to monopoly capitalism. His 
mind was boggled with the following questions:  
i) How far increase in output, in last fifty years, can be attributed to capitalist 
order? 
ii) Has there been any increase in output at unprecedented scale? 
iii) Are there reasons as to why capitalism will not last for long? Or it won’t work 
well, as it did in past? 
                  Competitive Capitalism Vs Monopoly Capitalism 
 
                                 Institute of Lifelong Learning, University of Delhi 1 
 
 
In search to answer his questions, he analyzed features of then prevailing economy was it 
conducive to the growth of economy and if yes, does it sufficiently explain this high growth 
pattern of under capitalism. Though the other way out is to deal with data, use statistics 
and regression and other techniques to do the same; but Schumpeter did apply the first 
method. 
Answer to (i) question: 
Let us rephrase the first question to: “Are there built in incentives to economic agents for 
increasing the output?” the answer is Yes. There are rewards and penalties for every type of 
performance in the economy. “Bourgeois society has been cast in a purely economic 
mold”. Making money becomes everybody’s motive and this is conferred upon all by the 
capitalist system. This is so because rewards of being party to this system’s scheme are 
promissory to success and those who don’t follow are left behind. 
For all those who are capable, work hard and are endowed with supernormal brains and 
innovate and invent are rewarded profits and benefits. Likewise, there are penalties of 
destitution to all who don’t run the race. The rewards accrue to small chunk of the society 
and prizes to be acclaimed are spectacular. These rewards are greater than they would have 
been in equal and just society. Somebody who is not receiving them is also lured to these 
big prizes and overrates their chances of winning them. To conclude, we quote, 
Schumpeter, “Bourgeois way of life asserts itself to dim the beacons of other social worlds.” 
Answer to (ii) question: 
“Does condition of capitalism imply increase in output”? In answer to this classical give two 
contradictory views: 
a) Within the framework of capitalism, capitalists self interest for 
maximum performance is in interest of all. Under laissez- faire 
capitalism, production is maximized. 
b) Simultaneously they maintain that increase in output is due to 
“beneficial legislation” such as removal or reduction of 
protective duties, implemented in nineteenth century. 
It seemed that second line of reasoning is to influence people in other lands so that English 
bourgeois class is put to advantage by removal of duties in other parts of the world. 
Classicalists believe that ‘money making deflects from its social goals.’ And all are at net 
loss but to whom private profits accrue. But economists refuted such arguments. The 
alignment of capitalists’ interests (of profit maximization) with social goal (of maximizing 
productive performance) is possible and former imply in most of the cases later. But it is yet 
not proven that if two converge. 
 
Marshall makes an attempt to answer this and elaborates that in case of perfect competition 
capitalists’ motive of profit maximization is synonymous to production maximization. Under 
perfect competition, a producer produces to the point where marginal cost is equal to the 
price they get i.e. they keep on producing additional units unless they run into the losses. 
Hence, profit motive of a producer is compatible with output maximization and cost 
minimization. 
Though it’s plausible under the conditions of perfect competition but perfect competition is 
an exception witnessed in agricultural mass production rather than a rule. In current times, 
                  Competitive Capitalism Vs Monopoly Capitalism 
 
                                 Institute of Lifelong Learning, University of Delhi 1 
 
 
production undertaken by capitalists tends not to be homogeneous but differentiated. 
Capitalists undertake restrictive practices and manipulate prices. 
 
Answer to (iii) question: 
‘Would capitalist system keep on functioning smoothly as it did in past fifty years?’ Adam 
Smith cast doubts on prevalence of perfect competition and assumes that in capitalist order 
monopolistic competition prevails. If this is correct, then there are two implications of 
arising out of such an assumption: 
a) There is no stable achievable equilibrium under oligopoly and one could only observe 
‘endless sequence of moves and countermoves’ and equilibrium would confine to 
only theoretical model with no substantial empirical evidence. 
b) Not only it is difficult to attain but much more difficult to maintain equilibrium under 
oligopolistic competition. Competition has changed its form from ‘beneficial’ or of 
increasing efficiency type to ‘cut throat’ competition which simply would imply social 
wastes which emerge due to cost of advertising and campaigns, patents and so on. 
The equilibrium, even if achieved, would be at less than full employment level of 
output, because of adoption of profit-conserving strategy. 
Conclusion- Schumpeter calls that conclusions drawn up to now that were based on 
Classical writers; other economists’ theories etc are false. They all view a fragment of 
capitalists’ society and had modeled them correctly; but have failed to draw conclusion 
about capitalist society as a whole. ‘Capitalism is an evolutionary process as Karl Marx 
rightly recognized. This is discussed in next section. 
 
III.  Creative Destruction 
 
Capitalism is dynamic and always under constant change. Capitalism is an evolutionary 
process and has never been and will never be stationary. What brings changes in 
economic conditions? Is it the social and natural environment? Or is it the automatic 
increase in population? Or is it our monetary system? The answer is NO.  The engine of 
capitalism is kept in motion by new consumer goods, new means of production, new 
forms of industrial organization, new markets, changing demand patterns and tastes and 
preferences of consumers and all these are created within the capitalist structure. 
To quote a few examples of changes in capitalist structure: crop rotation with three field 
system in medieval society, introduction of steam engines facilitated expansion of long 
distance trade and commerce, the productive apparatus are now manufactured in iron 
and steel industry etc. These all technological inventions and innovations changed 
economic conditions. The opening of new markets, technological advancements and 
organizational developments and as Schumpeter puts it- ‘incessantly revolutionizes the 
economic structure from within, incessantly destroying the old one, incessantly creating 
a new one.’ This process of creative destruction is at the heart of capitalism. Every 
capitalist is expected to live in this ever evolving economic environment.