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The Meaning of Competition

April 13, 2010

Tags The EntrepreneurFree MarketsInterventionismMonopoly and Competition

Bruegel, 'PeasantWedding'

It is disturbingly easy for arguments originally employed on behalf of the free market to be turned against it. In this article I hope to redeem the concept of competition, which perhaps more than any other has been corrupted into the service of the state.

Rather than being seen as a peaceful, cooperative, and ordered network, the free market is maligned as a brutal Darwinian struggle, wherein all must wrestle tooth and claw for continued existence. Rather than as a dynamic wellspring of innovation and wealth, the free market is seen as a hegemony of powerful monopolists. In the first of these views, the free market is seen as being too competitive, and in the other it is seen as not competitive enough. Both views may be held simultaneously, and in both cases the proposed solution is government intervention.

Finally, it may be asserted that, insofar as competition is a good feature of the free market, bringing competition into the government bureaucracy would be a way of improving the government; in this way people who once favored shrinking the state are lured into believing that it can instead be restructured into a more benign form.

How might we safeguard the concept of competition against these interpretations? To answer this, we must look at how competition specifically applies to the free market as opposed to a system of state intervention.

As far as I can see, there are three kinds of competition on the free market. First, there is competition within ourselves among all our desires. We can only ever pursue a limited set of our desires, so we must always decide which are the most important. Second, there is competition among everyone for the available consumable goods. These kinds of competition will exist in any economy, whether capitalist or socialist. To describe these kinds of competition is merely a restatement of the universal fact of scarcity.

Competition on the Free Market

Finally, there is competition between producers to serve the desires of consumers. This kind of competition only exists only on the free market. When people interact by force, they do not, by definition, have any interest in serving one another.

Only on the free market, where people must cooperate in order to achieve their goals, do people wish to satisfy the desires of others. Here they must compete to satisfy one another because there are only a limited number of people to please. This is a superficial sort of competition; it is not a struggle to defend one's own life against predators but a competition over who can be the best cooperator, over who can benefit the most people.

"The free market is not a struggle to defend one's own life against predators but a competition over who can be the best cooperator, over who can benefit the most people."

Since all producers are after the same thing, namely money, of which there is only so much to go around, all producers are necessarily in competition with one another.[1] The assumption that bakers compete only with other bakers is therefore false: as I noted above, all our desires are in competition with one another, and it is up to every producer to convince us that his service is the one that will bring us the most happiness.

To some extent, all consumer goods can substitute for one another, and there is no reason to suppose that the nearest substitute for my most desired goal resembles it in the slightest. Our ability to adjust our goals based on costs and benefits means that very dissimilar goods can be substitutes. If I decide to watch my favorite show, but find that it isn't on today, I might decide to watch another show, go make dinner, read a book, go out jogging, play a computer game, or any number of other things having little to do with television. All of these activities are therefore in competition with one another to be my highest priority, and therefore the producers of all of them are in competition to provide the greatest satisfaction.

The Specter of Monopoly

In short, the competition between producers is universal. But what exactly is a producer? Most production requires the cooperation of many people, who organize themselves into firms so as to coordinate their work. Is it more correct to use "producer" to refer to one of these firms, or to the individuals that comprise them?

I have implicitly defined producers to be those who attempt to earn money, and this definition applies only to individuals, not to the organizations they create. A firm is not animated by a single will, but exists only because its individual members find it convenient to belong to it as a means to their own desires. They work together under the same plan for the time being, but fundamentally they are all still in competition to earn as much as possible of a limited supply of money.

They organize themselves because they are each better off being in competition to be the most important contributor to a single product, rather than in competition to sell separate products. The firm itself is simply an illusion, an abstraction, and for our purposes a distraction that prevents us from seeing what is really happening.

People are misled into believing that competition primarily operates between firms rather than between individual people, because their choice when they shop is between products made by several firms, not between individual producers within those firms. These products exist, however, because of the desire of the individual producers to surpass one another in earnings. If they had not been in competition with one another, they would not have assembled into firms in the first place.

Under this view of competition it is immediately apparent that there is no threat from monopoly on the free market. Since all goods are interchangeable to some extent, there is an insurmountable problem of identifying a monopoly in the first place;[2] even if a firm's product is unique, the producers in this firm are still in competition with all other producers. Their product must provide a superior satisfaction to all others in at least some cases if it is to be sold.

"A firm is not animated by a single will, but exists only because its individual members find it convenient to belong to it as a means to their own desires."

Regardless of the size of a firm's market share (granting, for the sake of argument, that this is even a meaningful measure), all producers within that firm are still in competition with one another, so whether or not a market is dominated by a single firm has nothing to do with whether that market is competitive.

Within a firm, competition can be expected to make the firm more efficient, just as does competition with other firms. The profitability of not only the firm as a whole, but of each department, and of each employee, can be calculated by the price system. Each part can be judged against the standard of profitability, and those that measure up can expect to be rewarded, promoted, or given increased budgets, and those that do not can expect the opposite.

A firm is only capable of remaining large and dominant if its organization allows for more efficient production than would be possible for two or more separate firms. Without providing this service, the firm would necessarily lose its position because there would be profits available for any entrepreneur who started a similar firm. Indeed, few involved in the larger firm would have any reason to stay. The owners would wish to sell their stock to invest in a smaller business with better prospects, and the employees, for the most part, would be willing to leave the firm for a better deal with a more profitable firm elsewhere.

The only group that might not want to leave would be the high-level managers, those who deal in large-scale organization and who directly benefit from the size of the firm. They could not expect to find better employment in smaller organizations. However, their choice is only to improve the efficiency of their firm and make its bulk useful, or else to accept that their responsibility must shrink.

Competition could either promote smaller or larger firms, depending on whether the degree of organization in the industry is too great or too little. For any kind of production in a given economy, there will be an ideal degree of organization to carry it out. Competition will drive firms toward this ideal size. There is no particular reason that this ideal size should be small, and once it is reached, it is quite possible that only a single firm will remain to produce a given thing.

Being the sole producer of a given good on the free market gives no special ability to profit denied to other firms, for on the free market there is always the risk that consumers will switch to a different product or that an entrepreneur will start a similar firm.[3] The position of a large firm is only as secure as its ability to produce efficiently what consumers want.

If it is to truly escape from imitation, an organization must not only produce a unique product, but must prohibit imitation. Only in this way can it grow beyond the point where further centralization is no longer useful. Even better, it must not give people the choice of buying something else, but instead require people to buy it. Only in this way can it raise its profits without risk. Only in this way can it escape competition from other producers. This sort of monopolist, however, is not a business — it is a government!

Competition over the Power to Tax

Within the government hierarchy, people still compete for money, but no longer must they satisfy the consumer to get it. Since there is no objective concept of profit and loss in government enterprises, there is no bottom line against which everyone may be measured.

"There is no threat from monopoly on the free market. Since all goods are interchangeable to some extent, there is an insurmountable problem of identifying a monopoly in the first place."

The powers of government can persist as long as they are seen as being unique, imbued only in a single organization in a given territory. Beyond this, there is nothing in particular that must be done. The greatest gain, therefore, goes to those who are most successful at expanding government power and directing it to their own benefit.

To gain responsibility over the largest part of the budget, bureaucrats, politicians, and lobbyists all compete for the favor of their superiors and for responsibility over the largest projects. This is true all the way up the hierarchy, up to the elites who control the budget. They, in turn, attempt to control the greatest share of the budget and to gain the largest number of underlings. Everyone gains by increasing the overall budget because more is potentially available for him.

The result of this form of competition is deceit, intimidation, inequality, and waste. The government promotes disorder and anarchy so as to create an apparent need for further intervention. By fighting wars, creating black markets, and interfering with the economy, it incites chaos it can then blame on outside sources.

People are led to believe that this is the natural state of things. Government propaganda brings attention to the problems and makes them appear as fearsome as possible. Once the government controls the schools, it presents a false history making it out to be society's savior. The government promotes theories that make its power seem inevitable and desirable, as is the case with the theories of Hobbes, Marx, and Keynes. The weight of everything in this complex system of fraud finally convinces people to submit more and more to the control of the state.

Competition within the government bureaucracy, or among private individuals for government money, will necessarily worsen these problems. An organization becoming more or less competitive does not change the nature of the competition; to increase the competition of government will therefore only make its evil more effective and insidious. As Hoppe says, "competition in the production of goods is good, but free competition in the production of bads is not."[4]

Many who have some understanding of the benefits of the free market have been put under the impression that competition is beneficial no matter what form it takes, and therefore propose to bring more competition to the government bureaucracy without altering the monopolistic powers of government. Rather than insisting that taxes be made voluntary and that others be permitted to compete to provide government services, they instead advocate the expansion of the state into a kind of pseudo market.

This is what happens, for example, with a school-voucher system. Since under a voucher system, schools compete for money from the state; even if they receive it by a circuitous route, they have the same incentives of any government department and they will soon be turned to serve the growth of the state as much as any other beneficiary of tax money.

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To subsidize an industry is to change the circumstances under which it thrives. No longer must it satisfy the consumer, but rather it must promote the aggrandizement of the bureaucrats in charge of its project. However, the industry is still seen as a representative of the free market rather than another wing of the government, so when it fails due to the problems of central planning, the government can simply blame the free market for its failure.

Conclusion

The concept of competition is a treacherous tool to use in the name of liberty. Competition is no less a feature of the state bureaucracy than of the market, but its effect is very different in each context. Although I have tried in this article to show how discussions of competition may be prevented from being misleading, it may often be best to emphasize instead the cooperation of the market, for this is the more fundamental feature of a capitalist order, and this is what competition on the free market promotes.

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Notes

[1] See Hayek, F., "The Meaning of Competition," Individualism and Economic Order, 1958, for a discussion of perfect-competition models and why they are an impossible and harmful ideal for the real economy.

[2] See Rothbard, M., Man, Economy, and State: A Treatise on Economic Principles, With Power and Market: Government and the Economy, Ludwig von Mises Institute, 2009, for a further elaboration of this problem in the mainstream theory of monopoly.

[3] See Reisman, G., Capitalism: A Treatise on Economics, Jameson Books, 1998, as well as Block, W., "Total Repeal of Antitrust Legislation: A Critique of Bork, Brozen, and Posner,"Download PDF Review of Austrian Economics, vol. 8, no. 1, 1994, pp. 35–70 for detailed refutations of many arguments on the supposed dangers of monopoly.

[4] See Hoppe, H., "Why Bad Men Rule", 2004, for the source of this quote as well as a more detailed discussion of the incentives of the elite who control the state than that summarized here.


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