It is a common misconception that competitive markets produce efficient results. Although competition may cause more effort, that effort should not be directed toward anything productive. More competition has a dark side too—it tends to produce unnecessary duplication of effort and waste. That competition can be problematic rather than successful is the idea today that is sometimes associated with the investor Peter Thiel, but the truth is that this idea is not new at all. In fact, the idea that competition is wasteful revives criticisms made by economists more than a century ago.
Thorstein Veblen it was argued in 1899 that competition is driven by human instincts such as “violence and cunning.” For Veblen, “modern competition is largely a process of self-identification based on these aspects of human predatory nature.” Extortionate practices may benefit the individual who wins a competitive contest, but they often do not directly advance the interests of society as a whole. Veblen saw competitive drive as a result of the fear of losing self-esteem if one fails to succeed in socially valued endeavors. Thus, competition is primarily fueled by seeking the respect of peers.
Joseph Schumpeter too he wrote in 1942, “in capitalist reality as distinguished from their book image, it is not [price] significant competition without competition from a new product, a new technology, a new source of supply, a new form of organization. ” In other words, what is important for economic progress is not competition in a narrow area such as price or the number of firms, but rather the abundance of different organizational structures, products and innovations to focus on.
Veblen’s view may be close to what one thinks of when one hears the phrase “wasteful competition.” Consider two equally qualified managers competing for a promotion to the position of CEO in the same company. They spend a lot of time and effort to outdo each other, when in fact only one can get the job. In a sense, the unsuccessful candidate’s efforts are all for naught in this winner-takes-all scenario. Competition for promotion among workers looks a lot like companies lobbying for government benefits in a zero-sum game of rent-seeking. It would undoubtedly be better for a successful athlete to use his talents elsewhere, in a specialized role that creates new value.
As FA Hayek noted, competition serves as “discovery process” to reveal information about the best candidates, products, and business models. But his argument may be overstated. Perhaps the key to unlocking knowledge about best practices and candidates is to simply have a variety of tests and methods, rather than having multiple firms or employees mimicking each other’s strategies in a crowded marketplace. Thus, uniqueness and specialization may produce “knowledge acquisition processes” that are as good, if not more competitive, as competition.
Arguably, I’ve found that I produce my best work when I focus on underserved topics where demand is high but supply is low due to low competition. For example, I have found success researching regulatory reform topics in US states. Working on a niche issue like this and developing a comparative advantage in it simply follows the principle of division of labor. If there were more competitors working on these issues, I doubt my work would be as prominent or successful.
Theoretically, a highly efficient economy may exhibit “perfect technology,” in which the individual and the firm are independent in their respective roles. Competition still has a place in motivating the effort to overcome inequality, but this role may not be as important as that which students have learned about in economics textbooks. Competition is ineffective if it encourages unemployment at the expense of creating a unique value for the individual or the company. From this perspective, monopoly is less problematic if it is built on genuine differences rather than barriers to entry.
Another source of wasteful competition is the academic arms race to get into top universities. Students compete in extracurriculars such as SAT prep, sports, and club memberships. But if taken to extremes, this becomes i unproductive signing game to prove that you have jumped through more hoops than the next applicant. Also, some competition is healthy to provide a source of motivation and expression of worth. But the competitive process can quickly reach the point of diminishing returns if students pursue jobs for resume padding instead of creating real value and human development.
In general, competition serves the right purpose when it motivates people to produce what they would otherwise not sacrifice. But best of all, people pursue beauty because they want to, not because they have to. In a well-functioning economy, everyone may be given “absolute preferences” and become a self-starter, driven by his own drive to create benefit for others. As Schumpeter would have it, competition would be between the best ideas, rather than the most cutting edge tactics.
Therefore, in the end, economists should not treat all competition as an absolute good. They must take seriously the competitive forces of waste production and zero-sum jockeying for position, reduce emissions and innovate rather than retreat. The sweet spot may be a small amount of competition to encourage effort, combined with strong internal incentives and a high level of expertise and evaluation. We have already told you, the world of fierce competition at all times has an important downside related to when people focus on succeeding each in their own unique way.
James Broughel is a Senior Fellow at the Competitive Enterprise Institute focusing on innovation and power.
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