Alfred Marshall Attacks the “Perfect Knowledge Assumption,” BUT Sees Horizontal Demand Curves as a “Ruling Fact” in the Economy

Alfred Marshall, on this as in on so many other issues, was an eclectic tangle of confusions and inconsistencies, varying in his editions of his Principles (1st ed., 1890). There were two basic and conflicting strains in Marshall here. On the one hand, he had a position close to the classicists: considering free competition as a broad relationship holding throughout the market, and not feeling the need to make the definition of competition narrow and rigorous. In fact, he expressly attacked the doctrine of “perfect competition” in his eighth edition, and said that a negatively sloping demand curve to a firm was compatible with competition. The term “monopoly” was used but not precisely defined, but presumably referred to a single seller of a commodity.

On the “perfect knowledge” assumption in perfect competition, Marshall was properly caustic: 

we do not assume that competition is perfect. Perfect competition requires a perfect knowledge of the state of the market.... [I]t would be an altogether unreasonable assumption to make.... The older economists, in constant contact as they were with the actual facts of business life, must have known this well enough; but, partly because the term “free competition” had become almost a catchword... they often seemed to imply that they did assume this perfect knowledge.

On the other hand, Marshall, too, was influenced by mathematical economists to some degree, and therefore by Cournot. In the third edition of his Principles, he introduced the Cournot idea that the horizontal demand curve for the firm was the ruling fact in the economy, and that the falling demand curve was the exception. Here was the disastrous concession that perfect competition, or pure competition (the horizontal demand curve), while perhaps not necessary to the whole economy or even ideal, was the ruling case in the economy. This position appeared particularly in Marshall’s famous Mathematical Appendix, which was heavily influenced by Cournot.

—Murray N. Rothbard, “Competition and the Economists,” Quarterly Journal of Austrian Economics 15, no. 4 (Winter 2012): 403-404.