Introduction

Economic analysis suggests an ambiguous relationship between competition and economic performance. Schumpeter (1943) has pointed out that, although competition may be relied upon to bring about static efficiency, the prospect of monopoly profits may act as an incentive to investment and innovation. Hence, for Schumpeter, the existence of quasi-rents, based on temporary monopoly power, may lead to better dynamic performance. However, such a positive outcome is not guaranteed, since, as pointed out by Hicks (1935: 8), the ‘best of all monopoly profits is a quiet life’. The recent influential textbook on economic growth by Aghion and Howitt (1998) models both the positive and negative effects of product market competition on economic growth, pointing out that which effect dominates is an empirical issue.

Although Aghion and Howitt (1998: 205) conclude that, on balance, the relationship between product market competition and growth is positive, they cite only evidence relating to British manufacturing during the 1970s and 1980s, from Nickell (1996) and Blundell et al. (1995). It is more difficult to draw such an unambiguous conclusion from the three-way comparison between Britain, the United States and Germany over the longer period since the mid-nineteenth century. Restricting attention to the two-way comparison between Britain and the United States, there is indeed ample evidence to support the proposition that competition has been a spur to better economic performance.