Competition is not unique to capitalism – it exists in all economic systems
2 November 2015
SUGGESTED
Energy and Environment
Healthcare
Economic Theory
11 November 2024
“The motives of fear and greed are what the market brings to prominence,” argues G.A. Cohen in Why Not Socialism? “One’s opposite-number marketeers are predominantly seen as possible sources of enrichment, and as threats to one’s success.” Cohen further notes that these are “horrible ways of seeing other people” that are the “result of centuries of capitalist civilization.” If only we had a different economic system where people viewed each other as brothers and sisters in a common effort rather than competitors trying to grab the largest share of the economic pie. Implicitly drawing on Marx’s idea that the forces and relations of production determine the ideas people have and the way they behave, this criticism imagines that competition is a contingent feature of human interaction caused by capitalism.
But is it? Are we only competitive because capitalism makes us so?
By contrast, consider a line in my class notes for the day we start talking about competition in my Introduction to Economics course: “Competition is not a product of living in a capitalist society — it’s a product of not living in heaven.” Despite the dreams of the socialists, competition is not going away any time soon. As long as resources are scarce and not all of our wants can be fulfilled, humans require some way of determining who will get which goods.
Competing Versions of Competition
Suppose for a moment that we want to figure out how best to allocate goods to consumers. In a market economy, we allow people to engage in competitive bidding to try to acquire the things they think are most valuable to them. But we can imagine other ways of allocating goods. Perhaps we ask people to line up. Or maybe we try to figure out who is more deserving. Perhaps we do it by the pure discretion of bureaucrats. Or we decide things Fight Club style. Would those end competition?
I don’t think so. All that those methods would accomplish is to divert competition into less productive forms. For example, if we distributed resources first come, first served, does anyone doubt that people would find new ways to compete for an early place in line? Or think of the people who camp out for sports or concert tickets and the opportunity cost of the time they spend waiting rather than doing other things.
Or if we did it by evaluating who is more deserving, wouldn’t people simply compete over what should count as the relevant moral criteria — and then compete to demonstrate that they deserve goods more than others do?
Imagine if a board of economic planners said they would distribute resources to the people who are most honest. It wouldn’t surprise us to see people then start to expend resources to convince the planners that productivity or intelligence were more important than honesty in distributing resources, nor would it surprise us for people to then compete to prove to the planners that they were the most honest, or productive, or intelligent. All of those forms of competition are wastes of resources compared to competing for consumers in the marketplace.
Or imagine goods distributed by government fiat. Wouldn’t people find new and creative ways to compete to persuade the relevant bureaucrats to favour them? In fact, isn’t this exactly what we see right now as lobbyists engage in competitive rent-seeking to persuade legislators and bureaucrats to allocate more government goodies in their direction? The rent-seeking that takes place in Washington and the state capitals is just another form of competition — appealing to politicians rather than customers.
Were resources distributed through might-makes-right, we can easily imagine the competition that would ensue for people to have the best weaponry or armour, or to hit the gym to get the strength and endurance they would need to survive the fighting. This, too, is competition, but of a very different sort.
As long as goods and services are scarce compared to wants, decisions will have to be made that involve some number of people not getting access to those goods. The fact of scarcity is what makes competition ubiquitous. And if there is a heaven, one of its defining characteristics is surely the absence of scarcity. Humanity has long dreamed of a Land of Cockaigne where roast chickens fly into our mouths without effort and where the seas are made of lemonade. Until that heaven arrives on earth, competition of some sort will rule the roost.
How Is Market Competition Better?
If we are going to have competition, then why prefer one sort over any other? The competition we see in the marketplace has the important advantage of creating benefits for the rest of society and not just the competitors.
Consider rent-seeking. It’s true that the exchange between a lobbyist and a politician is mutually beneficial. The rent-seeker, if successful, gets resources allocated in her direction, while the politician receives the free lunches and fawning attention from the rent-seeker — as well as some possible leverage over the rent-seeker down the road.
The competition associated with rent-seeking, however, does not benefit anyone else. In fact, the whole criticism of rent-seeking behaviour is that expending resources to generate transfers of wealth — not to create new wealth — is socially wasteful. We would be better off if those resources were used to produce new and better products rather than to persuade others to transfer wealth to us, or to reduce the wealth of others.
Similar arguments can be made about all other forms of nonmarket competition. They all involve expending resources in ways that do not benefit society as a whole because they do not create wealth. They just divert resources from other uses to become part of the attempt to transfer existing wealth to another person or group.
Why Price Competition?
The other problem with all of those other forms of competition is that they ignore the question of where resources come from. There is no connection between the distribution of resources (and the form of competition that generates) and the supply of those resources.
Put differently, how do any of those other processes create the knowledge signals and incentives needed to know what to produce and how to produce it to ensure that there are future supplies of goods? Think about Fight Club-style distribution. If everyone is busy pummeling each other to death to get existing resources, what incentive does that create for anyone to produce anything if they will have to spend even more resources to defend any wealth they might create? How would anyone know what to produce in such a world, and why would anyone want to produce it in the first place?
In a system where competition takes place through offering money to acquire resources, we get the emergence of prices, which serve as both the incentive for ongoing production and the information about what to produce. When buyers compete with buyers to acquire a good and thereby bid up the price, it tells existing and prospective producers that this good is more valuable and that they should produce more of it. Similar competitive bidding for the inputs into a production process informs other producers about what should and should not be used to make various goods and services.
Competition through money prices connects the competition over the distribution of goods with the production of goods in a way that no other form of competition does. In this way, market competition benefits not just the direct parties to the competition but all of us by encouraging the ongoing production of goods in ways that economize on resources.
Scarcity is a defining characteristic of the human condition, and scarcity means there will be competition over who gets what. Market capitalism has the great advantage of channelling that competition through the price system, which not only ensures an ongoing supply of goods but also encourages their efficient production.
We may not be in heaven, but the peaceful and socially beneficial competition of the market is downright heavenly compared to the alternatives.
Prof Steven Horwitz is Charles A. Dana Professor of Economics at St. Lawrence University and the author of Microfoundations and Macroeconomics: An Austrian Perspective. This article was first published by the Foundation for Economic Education (FEE).
But is it? Are we only competitive because capitalism makes us so?
By contrast, consider a line in my class notes for the day we start talking about competition in my Introduction to Economics course: “Competition is not a product of living in a capitalist society — it’s a product of not living in heaven.” Despite the dreams of the socialists, competition is not going away any time soon. As long as resources are scarce and not all of our wants can be fulfilled, humans require some way of determining who will get which goods.
Competing Versions of Competition
Suppose for a moment that we want to figure out how best to allocate goods to consumers. In a market economy, we allow people to engage in competitive bidding to try to acquire the things they think are most valuable to them. But we can imagine other ways of allocating goods. Perhaps we ask people to line up. Or maybe we try to figure out who is more deserving. Perhaps we do it by the pure discretion of bureaucrats. Or we decide things Fight Club style. Would those end competition?
I don’t think so. All that those methods would accomplish is to divert competition into less productive forms. For example, if we distributed resources first come, first served, does anyone doubt that people would find new ways to compete for an early place in line? Or think of the people who camp out for sports or concert tickets and the opportunity cost of the time they spend waiting rather than doing other things.
Or if we did it by evaluating who is more deserving, wouldn’t people simply compete over what should count as the relevant moral criteria — and then compete to demonstrate that they deserve goods more than others do?
Imagine if a board of economic planners said they would distribute resources to the people who are most honest. It wouldn’t surprise us to see people then start to expend resources to convince the planners that productivity or intelligence were more important than honesty in distributing resources, nor would it surprise us for people to then compete to prove to the planners that they were the most honest, or productive, or intelligent. All of those forms of competition are wastes of resources compared to competing for consumers in the marketplace.
Or imagine goods distributed by government fiat. Wouldn’t people find new and creative ways to compete to persuade the relevant bureaucrats to favour them? In fact, isn’t this exactly what we see right now as lobbyists engage in competitive rent-seeking to persuade legislators and bureaucrats to allocate more government goodies in their direction? The rent-seeking that takes place in Washington and the state capitals is just another form of competition — appealing to politicians rather than customers.
Were resources distributed through might-makes-right, we can easily imagine the competition that would ensue for people to have the best weaponry or armour, or to hit the gym to get the strength and endurance they would need to survive the fighting. This, too, is competition, but of a very different sort.
As long as goods and services are scarce compared to wants, decisions will have to be made that involve some number of people not getting access to those goods. The fact of scarcity is what makes competition ubiquitous. And if there is a heaven, one of its defining characteristics is surely the absence of scarcity. Humanity has long dreamed of a Land of Cockaigne where roast chickens fly into our mouths without effort and where the seas are made of lemonade. Until that heaven arrives on earth, competition of some sort will rule the roost.
How Is Market Competition Better?
If we are going to have competition, then why prefer one sort over any other? The competition we see in the marketplace has the important advantage of creating benefits for the rest of society and not just the competitors.
Consider rent-seeking. It’s true that the exchange between a lobbyist and a politician is mutually beneficial. The rent-seeker, if successful, gets resources allocated in her direction, while the politician receives the free lunches and fawning attention from the rent-seeker — as well as some possible leverage over the rent-seeker down the road.
The competition associated with rent-seeking, however, does not benefit anyone else. In fact, the whole criticism of rent-seeking behaviour is that expending resources to generate transfers of wealth — not to create new wealth — is socially wasteful. We would be better off if those resources were used to produce new and better products rather than to persuade others to transfer wealth to us, or to reduce the wealth of others.
Similar arguments can be made about all other forms of nonmarket competition. They all involve expending resources in ways that do not benefit society as a whole because they do not create wealth. They just divert resources from other uses to become part of the attempt to transfer existing wealth to another person or group.
Why Price Competition?
The other problem with all of those other forms of competition is that they ignore the question of where resources come from. There is no connection between the distribution of resources (and the form of competition that generates) and the supply of those resources.
Put differently, how do any of those other processes create the knowledge signals and incentives needed to know what to produce and how to produce it to ensure that there are future supplies of goods? Think about Fight Club-style distribution. If everyone is busy pummeling each other to death to get existing resources, what incentive does that create for anyone to produce anything if they will have to spend even more resources to defend any wealth they might create? How would anyone know what to produce in such a world, and why would anyone want to produce it in the first place?
In a system where competition takes place through offering money to acquire resources, we get the emergence of prices, which serve as both the incentive for ongoing production and the information about what to produce. When buyers compete with buyers to acquire a good and thereby bid up the price, it tells existing and prospective producers that this good is more valuable and that they should produce more of it. Similar competitive bidding for the inputs into a production process informs other producers about what should and should not be used to make various goods and services.
Competition through money prices connects the competition over the distribution of goods with the production of goods in a way that no other form of competition does. In this way, market competition benefits not just the direct parties to the competition but all of us by encouraging the ongoing production of goods in ways that economize on resources.
Scarcity is a defining characteristic of the human condition, and scarcity means there will be competition over who gets what. Market capitalism has the great advantage of channelling that competition through the price system, which not only ensures an ongoing supply of goods but also encourages their efficient production.
We may not be in heaven, but the peaceful and socially beneficial competition of the market is downright heavenly compared to the alternatives.
Prof Steven Horwitz is Charles A. Dana Professor of Economics at St. Lawrence University and the author of Microfoundations and Macroeconomics: An Austrian Perspective. This article was first published by the Foundation for Economic Education (FEE).
SHARE
