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Some Thoughts On Economic Competition

July 2, 2010

Just yesterday Yamin and I were discussing some economic issues and I brought up the difficulties inherent in becoming a competitor in our modern economy.  I laid out some reflections on how difficult the barriers to entry can be and related my experiences from my years as an entrepreneur.

When I woke up I laid in bed for a moment and was thinking about these problems some more.  Then funny enough, as I went for my normal walk outdoors I was listening to Ludwig von Mises Human Action on my mp3 player.  I just happened to come to his chapter on the market economy and within it there is a section dedicated to economic competition.  I thought, “What great timing!”  He discusses the same issues and makes some great points.  I figured it’d be a great thing to just reproduce the contents of that chapter here and bold various important points.  So, here it is.

5. Competition

In nature there prevail irreconcilable conflicts of interests. The means of subsistence are scarce. Proliferation tends to outrun subsistence. Only the fittest plants and animals survive. The antagonism between an animal starving to death and another that snatches the food away from it is implacable.

Social cooperation under the division of labor removes such antagonisms. It substitutes partnership and mutuality for hostility. The members of society are united in a common venture.

The term competition as applied to the conditions of animal life signifies the rivalry between animals which manifests itself in their search for food. We may call this phenomenon biological competition. Biological competition must not be confused with social competition, i.e., the striving of individuals to attain the most favorable position in the system of social cooperation. As there will always be positions which men value more highly than others, people will strive for them and try to outdo rivals. Social competition is consequently present in every conceivable mode of social organization. If we want to think of a state of affairs in which there is no social competition, we must construct the image of a socialist system in which the chief in his endeavors to assign to everybody his place and task in society is not aided by any ambition on the part of his subjects. The individuals are entirely indifferent and do not apply for special appointments. They behave like the stud horses which do not try to put themselves in a favorable light when the owner picks out the stallion to impregnate his best brood mare. But such people would no longer be acting men.

Catallactic competition is emulation between people who want to surpass one another. It is not a fight, although it is usual to apply to it in a metaphorical sense the terminology of war and internecine conflict, of attack and defense, of strategy and tactics. Those who fail are not annihilated; they are removed to a place in the social system that is more modest, but more adequate to their achievements than that which they had planned to attain.

In a totalitarian system, social competition manifests itself in the endeavors of people to court the favor of those in power. In the market economy, competition manifests itself in the fact that the sellers must outdo one another by offering better or cheaper goods and services, and that the buyers must outdo one another by offering higher prices. In dealing with this variety of social competition which may be called catallactic competition, we must guard ourselves against various popular fallacies.

The classical economists favored the abolition of all trade barriers preventing people from competing on the market. Such restrictive laws, they explained, result in shifting production from those places in which natural conditions of production are more favorable to places in which they are less favorable. They protect the less efficient man against his more efficient rival. They tend to perpetuate backward technological methods of production. In short they curtail production and thus lower the standard of living. In order to make all people more prosperous, the economists argued, competition should be free to everybody. In this sense they used the term free competition. There was nothing metaphysical in their employment of the term free. They advocated the nullification of privileges barring people from access to certain trades and markets. All the sophisticated lucubrations caviling at the metaphysical connotations of the adjective free as applied to competition are spurious; they have no reference whatever to the catallactic problem of competition.

As far as natural conditions come into play, competition can only be “free” with regard to those factors of production which are not scarce and therefore not objects of human action. In the catallactic field competition is always restricted by the inexorable scarcity of the economic goods and services. Even in the absence of institutional barriers erected to restrict the number of those competing, the state of affairs is never such as to enable everyone to compete in all sectors of the market. In each sector only comparatively small groups can engage in competition.

Catallactic competition, one of the characteristic features of the market economy, is a social  phenomenon. It is not a right, guaranteed by the state and the laws, that would make it possible for every individual to choose ad libitum the place in the structure of the division of labor he likes best. To assign to everybody his proper place in society is the task of the consumers. Their buying and abstention from buying is instrumental in determining each individual’s social position. Their supremacy is not impaired by any privileges granted to the individuals qua producers. Entrance into a definite branch of industry is virtually free to newcomers only as far as the consumers approve of this branch’s expansion or as far as the newcomers succeed in supplanting those already occupied in it by filling better or more cheaply the demands of the consumers. Additional investment is reasonable only to the extent that it fills the most urgent among the not yet satisfied needs of the consumers. If the existing plants are sufficient, it would be wasteful to invest more capital in the same industry. The structure of market prices pushes the new investors into other branches.

It is necessary to emphasize this point because the failure to grasp it is at the root of many popular complaints about the impossibility of competition. Some sixty years ago people used to declare: You cannot compete with the railroad companies; it is impossible to challenge their position by starting competing lines; in the field of land transportation there is no longer competition. The truth was that at that time the already operating lines were by and large sufficient. For additional capital investment the prospects were more favorable in improving the serviceableness of the already operating lines and in other branches of business than in the construction of new railroads. However, this did not interfere with further technological progress in transportation technique. The bigness and the economic “power” of the railroad companies did not impede the emergence of the motor car and the airplane.

Today people assert the same with regard to various branches of big business: You cannot challenge their position, they are too big and too powerful. But competition does not mean that anybody can prosper by simply imitating what other people do. It means the opportunity to serve the consumers in a better or cheaper way without being restrained by privileges granted to those whose vested interests the innovation hurts. What a newcomer who wants to defy the vested interests of the old established firms needs most is brains and ideas. If his project is fit to fill the most urgent of the unsatisfied needs of the consumers or to purvey them at a cheaper price than their old purveyors, he will succeed in spite of the much talked of bigness and power of the old firms.

Catallactic competition must not be confused with prize fights and beauty contests. The purpose of such fights and contests is to discover who is the best boxer or the prettiest girl. The social function of catallactic competition is, to be sure, not to establish who is the smartest boy and to reward the winner by a title and medals. Its function is to safeguard the best satisfaction of the consumers attainable under the given state of the economic data.

Equality of opportunity is a factor neither in prize fights and beauty contests nor in any other field of competition, whether biological or social. The immense majority of people are by the physiological structure of their bodies deprived of a chance to attain the honors of a boxing champion or a beauty queen. Only very few people can compete on the labor market as opera singers and movie stars. The most favorable opportunity to compete in the field of scientific achievement is provided to the university professors. Yet, thousands and thousands of professors pass away without leaving any trace in the history of ideas and scientific progress, while many of the handicapped outsiders win glory through marvelous contributions.

It is usual to find fault with the fact that catallactic competition is not open to everybody in the same way. The start is much more difficult for a poor boy than for the son of a wealthy man. But the consumers are not concerned about the problem of whether or not the men who shall serve them start their careers under equal conditions. Their only interest is to secure the best possible satisfaction of their needs. As the system of hereditary property is more efficient in this regard, they prefer it to other less efficient systems. They look at the matter from the point of view of social expediency and social welfare, not from the point of view of an alleged, imaginary, and unrealizable “natural” right of every individual to compete with equal opportunity. The realization of such a right would require placing at a disadvantage those born with better intelligence and greater will power than the average man. It is obvious that this would be absurd.

When you look at nature, everything is always diverse and different.  It’s a survival technique.  For example, every one of us has a slightly different DNA sequence, slightly different immune system, different temperaments and personalities, and so on.  Evolution tries out all kinds of combinations and those best suited to survival live on.  I think our social system is also based around this diversity.  Our species is evolving (albeit very slowly) into a complex social structure, with different people preparing for different roles; kind of like how termites have a soldier class which defends, whereas others are workers and take care of the queen.  I think in time our social structure will have a biological underpinning where each person enjoys his or her role in society and wouldn’t have it any other way.  Society is just such a new thing for mankind that the complex system has yet to fully evolve and develop.

Economic competition as opposed to central planning takes advantage of this same diversification strategy.  If you’re living under a regime of central planning, and those plans enforced fail, all hell breaks lose.  Take when the Soviets implemented unorthodox farming techniques, hoping to make their seeds survive the cold by freezing them.  Some of their quackpot scientists theorized that they’d be more likely to endure harsh weather and didn’t want to believe genetic research going on at the time.  This led to massive crop failures and starvation.  But if they’d had a more “anarchic” farming model, with each farmer doing his own thing, that diversity would’ve protected them from this.

I think people’s personalities are different so that society can progress in this way.  Adventurous types would have been willing to try the new farming model and would’ve failed.  More cautious personalities would’ve looked at it all with skepticism demanding proof before attempting it.  That being the case, their crops would’ve came out just fine and society could fall back on them for food.  This diversity allows society to try new things yet not be destroyed when something fails.

So whatever type of person you are, embrace your uniqueness.  Love who you see in the mirror, regardless of how you look, your personality type, your dreams, etc.  It’s ok to be you.  I think nature made us the way we are for a reason, even though most of us are too shallow minded to see beyond our own personality type.

We live in a world where everyone’s divided.  You’re less of a person if you don’t hold a college degree.  Anyone who doesn’t believe our religious inclinations is a “heathen” and immoral.  We’re scared of people with different sexual preferences and ethnicities.  We need to let go of all that.

Mises points out that the free market tends to push us into positions where we’re better suited to serve the consumer.  Each of us being unique, we’re each better suited to serve one area of the economy than another.  Even though in this model we’re pushed around by consumer demand, I’d far prefer this to state planning with the government telling me where to work and what to do.

As for the arguments I made about difficult barriers to entry, Mises believes this tends to push investment and capital resources into new areas which would be more productive to society.   Unfortunately, as he also points out, creating something new requires “brains and ideas”.

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