Cournot, Competition, Supply and Demand, Price

Another of the continental economists is credited with a criti­cism of the classical emphasis upon free competition which al­though milder in form has done much to shake the faith of modern economists in the ability of competition and the law of supply and demand to preserve equilibrium in the economic order. Augustin Cournot (1801-1877) was a French econ­omist who attempted to describe economic behavior in mathe­matical or quantitative terms. He is looked upon by many authorities as the herald of the mathematical school if not its actual founder. He questioned the ability of competition to guide the activity and set the goals of the economic system. Cournot very fairly asked what was the social good to which competition was leading? In Cournot's opinion neither the classical school nor any other group of thinkers knew what the social good really was. However, since the question of the final good could not be an­swered, Cournot did not believe that classical economists could assume that competition would inevitably produce this undefined good. He did not because of this view despair of all improvement. He believed changes for the better could be introduced in various parts of the economic structure one at a time and with care not to disturb other related parts of the system. To achieve such a purpose, state intervention would almost certainly be necessary. Another of Cournot's important innovations in the analysis of economic activity was concentration upon exchange value or price as the truly significant aspect of economics. He disregarded the relation of utility to demand and emphasized only the visible aspects of supply. He did not say that utility had no bearing upon demand, but he assumed that investigation of it was impossible, and furthermore the important items to be considered were the concrete data of the market. Cournot accepted completely the operation of the law of supply and demand, but instead of start­ing his description with the assumption of a freely competitive market in which supply and demand operated freely, he recog­nized the imperfections of the market. Consequently, he first analyzed price when it was determined in a market controlled by one seller or monopoly; then in a market controlled by two sellers, or duopoly; and finally in a perfectly competitive market. It had been the contention of Smith, Ricardo, and Mill that the forces of supply and demand would in the long run produce equilibrium, when the forces themselves just balanced. In other words a price would be set at which the effective demand would be satisfied and the supply taken from the market. Cournot was able to show that when a manufacturer was able to expand his production and at the same time reduce his cost of production per unit, no stability was possible; for the producer was under compulsion to increase his output, lower his cost, and thus in­crease his profit. While not fully developed Cournot's ideas did much to turn the attention of the economists who followed him toward a more realistic analysis of the the processes of exchange.