In modern neoclassical economics, the benchmark of analysis from which real-world markets are judged is the model of perfect competition, in which a homogenous good is bought and sold by a large group of buyers and sellers, respectively, none of whom have an influence on the price. Moreover, under such conditions, there exists free entry and exit of sellers in the marketplace, defined by perfect information.
The narrative that is constructed and logically follows from this model is that observed deviations from perfect competition in the marketplace are indicative of imperfections, also known as “market failures”, associated with the existence of monopoly power, pervasive externalities, the provision of public goods, and macroeconomic instability. According to this narrative, government intervention is the deus ex machina that saves the market from its own “imperfections” through regulations, taxes, subsides, and other public policy measures. Why? To use a quote from Frank Knight often used by James Buchanan, “to call a situation hopeless is to call it ideal”. The narrative that is constructed is one in which, outside the conditions of the ideal of perfect competition, there is no hope but for government intervention to save the market from itself. Anyone who has taken an economics course is well aware of what I’ve stated thus far, and therefore this should not be surprising.
But what is the implicit meaning of the word “imperfect” that is baked into the narrative, which is constructed into the model of perfect competition? What is implied when we postulate that markets are “imperfect” in comparison to the benchmark of perfect competition is that markets are flawed, non-ideal, or otherwise sub-optimal, and therefore in need of correction through government intervention. Who could dispute the logic of this narrative?
However, if we simply reinterpret our understanding of the word “imperfect”, not only will it reframe the narrative being told about the marketplace, but also the public policy implications that flow from this narrative. If we analyze the etymology of the word imperfect, breaking it down from its Latin origins, you will learn that “im” expresses the negation, “per” comes from the Latin word meaning “thoroughly” and “fect” comes from the Latin verb “facere“, meaning “to do”. Thus, rather than saying that something, or some state of affairs, is flawed, suboptimal, or non-ideal, another way to interpret the meaning of “imperfect” is an act or process that is not thoroughly done, or incomplete. In fact, from a quick perusal of the Merriam Webster’s Dictionary, you will find a similar definition of the word imperfect: “constituting a verb tense used to designate a continuing state or an incomplete action” (emphasis added).
Rather than regarding the market as a flawed or sub-optimal state of affairs, a better understanding of an “imperfect market” reveals that the market is a process of continuous tendency towards perfection, or completion, where are all the gains from trade are exhausted and all plans between buyers and sellers are perfectly coordinated. As Ludwig von Mises states in his magnum opus, Human Action, the “market process is the adjustment of the individual actions of the various members of the market society to the requirements of mutual cooperation” (1949 [2007]: 258).
Thus, markets will always be imperfect, but that is precisely why markets exist in the first place! Markets never conform to the “ideal” of perfect competition, but this is completely irrelevant, since under such state of affairs, markets are unnecessary and redundant, since all resources are already perfectly allocated to their most valued uses. Market processes exist precisely because to generate the information necessary to better coordinate the plans and purposes of individuals in a peaceful and productive manner. The entrepreneurial lure for profit and the discipline of loss is what guides such imperfect processes in a tendency towards the creation of more complete information between buyers and sellers.
Rosolino Candela, “Are Markets Imperfect? Of Course, But That’s The Point!”, Econlib.org, 2020-05-18.
July 7, 2025
QotD: The mythological “perfect market” and “perfect competition”
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