It is a common misconception that competitive markets produce efficient outcomes. While competition can lead to greater effort, that effort doesn’t have to be directed toward something productive. More competition also has a dark side: the tendency towards unnecessary duplication and waste. That competition can be problematic rather than efficient is an idea sometimes associated with investors today Peter Thiel, but the reality is that this view is hardly new. In fact, the idea that competition is wasteful revives a criticism economists made more than a century ago.
Thorstein Veblen argued in 1899 it was claimed that competition is driven by human instincts such as ‘fierce and cunning’. According to Veblen, “modern competition is in large part a process of self-assertion based on these traits of predatory human nature.” Predatory traits may benefit the individual who wins the competitive race, but they often do not directly advance the interests of the community as a whole. Veblen saw the competitive drive as arising from the fear of losing self-esteem if one fails to excel in society’s valued endeavors. Thus, competition is largely fueled by seeking the approval of one’s peers.
Joseph Schumpeter too wrote in 1942, “in capitalist reality, contrary to the textbook image, this is not the case [price] competition that only counts is the competition from the new product, the new technology, the new source of supply, the new type of organization.” In other words, what matters for economic progress is not competition along a narrow dimension such as price or the number of firms, but instead it is the abundance of different organizational structures, products and innovations that would be the focus of concern must be.
Veblen’s view may be closer to what you think of when you hear a phrase like “wasteful competition.” Imagine two equally qualified managers competing for promotion to CEO at the same company. They spend an enormous amount of time and effort trying to outdo each other, when realistically only one can get the job. In a sense, the unsuccessful candidate’s efforts were all for naught in this winner-takes-all scenario. Competition for promotions among employees is a lot like companies lobbying for government favors in a zero-sum game of rent-seeking. It would probably have been better for the number two to use his or her talents elsewhere, in a more specialized role that created new value.
As FA Hayek noted, competition is useful when “discovery procedure” to reveal knowledge about the best candidates, products and business models. But his argument may be exaggerated. Perhaps the key to unlocking knowledge about the best methods and candidates is simply to have a diversity of experiments and approaches, rather than multiple companies or employees imitating each other’s strategies in a crowded market space. Differentiation and specialization can therefore produce just as good, if not superior, ‘discovery procedures’ as competition.
Anecdotally, I have found that I produce my own best work when I focus on under-exposed topics for which there is high demand but low supply due to little competition. For example, I have had success researching regulatory reform topics in the US states. Working on a niche problem like this and developing a comparative advantage within it simply follows from the principle of division of labor. If there had been many competitors working on these issues, I doubt my work would have stood out to the same extent or been as effective.
Hypothetically, a perfectly efficient economy could exhibit “perfect specialization,” with each person and company having a monopoly in their own unique role. Competition can still stimulate efforts to overcome lethargy, but this role may not be as important as the one students read about in economics textbooks. Competition is downright inefficient if it encourages layoffs that come at the expense of creating distinctive added value for themselves or for the company. From this perspective, a monopoly is not so problematic if it is based on genuine uniqueness rather than barriers to entry.
Another source of wasteful competition is the academic arms race to gain entry to elite universities. Students compete on extra curricula such as SAT prep, sports and club memberships. But taken to the extreme, this becomes one unproductive signaling game to prove that you’ve jumped through more hoops than the next applicant. Again, some competition is healthy to provide a source of motivation and reveal merit. But the competitive process can quickly reach a point of diminishing returns as students engage in activities for the sake of padding their resumes rather than true value creation and human capital development.
In general, competition serves a valid purpose if it encourages people to be productive who would otherwise not be motivated. But preferably, people pursue excellence because they want to, not because they have to. In an ideally efficient economy, then, each person could be endowed with “perfect preferences” and be a self-starting monopoly, propelled by his own drive to create value for others. As Schumpeter would have wanted, competition would then be among the best ideas, not among the most cutthroat tactics.
In conclusion, economists cannot view all competition as a pure good. They must take seriously the potential for competition to produce waste and zero-sum jockeying for status, limiting rather than reversing production and innovation. The sweet spot may be a minimal amount of competition to drive effort, combined with strong intrinsic motivations and a high degree of specialization and experimentation. All in all, a world of fierce competition at all times has significant disadvantages compared to a world where people focus on excelling each in their own distinctive way.
James Broughel is a Senior Fellow at the Competitive Enterprise Institute with a focus on innovation and dynamism.