C is for competition

March 14th, 2014 at 3:00 pm by David Farrar

The does C is for Competition:

To understand competition, you should visit a tropical rainforest. To most visitors, rainforests, with their impressive fauna and flora, may look like places of abundance. The truth is quite different: the quality of the soil is often poor, and hardly any sunlight reaches the floor – scarcely the best conditions for opulent vegetation.

The reason why rainforests are nevertheless impressive ecosystems is the competition that they promote. The trees only grow so tall because they are competing for precious sunshine. Thousands of highly specialised plants, birds and insects compete for nutrients. The result is a thriving place of biodiversity.

In many ways, markets are just like rainforests. They bring together scarce resources and virtually unlimited wants. It is through competition between these different wants, and competition between different ways of satisfying them, that markets create prosperity out of scarcity.

In economic thinking, competition has two main functions. First, it spurs companies to try harder and be better than their rivals. They do so, of course, in order to make a bigger profit for themselves. As a most welcome by-product for society, products get better, new ones get invented and prices fall thanks to competition for the customers’ business.

The second function of competition is its disciplining effect. In a competitive world, you can never be too sure of your position. If a rival has a better idea or a better product, your days as a market leader are numbered. Competition is the best antidote to complacency, arrogance and laziness.

Competition is always both a discovery procedure and a tool of disempowerment. Both these functions are crucial for a market economy – but not only there.

Competition is equally desirable in many other places. Where cities compete for residents and their taxes, people will get better public services. Where teachers compete for promotion based on performance, their students will get a better education.

Unfortunately, many economists have trouble distinguishing between the results of competition and competition itself. However, the distinction should be quite easy: competition is always the rivalrous behaviour of competitors, not the number of competitors nor the prices they charge.

To promote competition, the most important things regulators can do is to just let it evolve. Competition does not need encouragement, nor does it need to be mandated. It is just what happens naturally when scarce resources meet unlimited demands. Rainforests do not need gardeners, either.

Rainforests do not need gardeners – I love it!

Next week is D for debt.

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34 Responses to “C is for competition”

  1. gump (1,685 comments) says:

    Competition is a double-edged sword. Once a company reaches a size at which it can dominate a market, it becomes more profitable to establish monopoly control by engaging in anti-competitive behaviour.

    While rainforests don’t need gardeners, markets need regulators to ensure that aggressive weeds don’t become monocultures.

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  2. RRM (10,104 comments) says:

    And what’s your life expectency in the rainforest, before something bigger and angrier than you bites, stings, eviscerates or otherwise eats you?

    Yes the rainforest is a good example of a centipede-eats-rat free market at work.

    I don’t know if it’s the perfect role model for civilisation though…?

    (PS: Google ‘centipede eats rat’… ;-) )

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  3. dime (10,222 comments) says:

    “Once a company reaches a size at which it can dominate a market, it becomes more profitable to establish monopoly control by engaging in anti-competitive behaviour.”

    especially when they can lobby politicians to protect their business, make barriers of entry too hard for new competitors etc

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  4. Miritu (31 comments) says:

    “Once a company reaches a size at which it can dominate a market, …….establish monopoly……… engaging in anti-competitive behaviour”

    Monopolies are aided by excessive regulation which create barriers to entry for new competition. A true free market will have minimal anti-competitive behaviour.

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  5. Reid (16,740 comments) says:

    Once a company reaches a size at which it can dominate a market, it becomes more profitable to establish monopoly control by engaging in anti-competitive behaviour.

    Well said gump. Industries can also dominate the regulators, as Wall Street showed with the repeal of Glass-Steagall. And while the media is supposed to be the watchdog, it doesn’t do its job, as evidenced by the fact it stood aside while the GFC unfolded through the 90’s and noughties.

    C is also for corruption and there’s a lot of that in capitalist economies. That doesn’t happen in rainforests either, but it does happen a great deal in human societies more so when greed is seen to be good: e.g. the popularity of the Wolf of Wall Street.

    Edit: snap, dime.

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  6. burt (7,436 comments) says:

    What staggers me is the loopy left seem to think that state run monopolies are good yet all other monopolies are bad. It’s a funny world they live in where the intentions of the political party they trust are seen to be lasting forever irrespective of the government in power at the time.

    KiwiPower is a good example… The fruit loops acknowledge that as a monopoly it could completely shaft consumers for state revenue but they discard that because they don’t think “their team” will do that. They are too short sighted to think past the next 3 years. (well actually too short sighted to look past the political campaign BS).

    Look at the profits Labour took from state generators – state entities established for “the common good” years ago misused to enable excessive state spending.

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  7. unaha-closp (1,067 comments) says:

    Good to see SkyCity got its 35 years of no competition guaranteed in law.

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  8. mikenmild (12,446 comments) says:

    SkyCity must be a very special kind of tree. Or maybe it’s more like the kind of creepr that chokes the life out of other trees in the forest.

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  9. Nigel Kearney (1,100 comments) says:

    And what’s your life expectency in the rainforest, before something bigger and angrier than you bites, stings, eviscerates or otherwise eats you?

    The analogy is intended to be with businesses. A business that is unable to compete effectively and dies a quick death is not such a problem, though people will still be affected.

    The real problem with the rain forest example is that it’s hard to show the organisms that succeeded, did so by adding real value to the whole forest rather than just enriching themselves.

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  10. Nick R (522 comments) says:

    I think the most interesting thing about rain forests is that in a competitive free market they get cut down for timber and farming.

    But it’s nice that an economist will be able to remind us how wonderful they were before they got turned into pasture and palm oil plantations.

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  11. burt (7,436 comments) says:

    unaha-closp

    Good to see SkyCity got its 35 years of no competition guaranteed in law.

    I agree this is totally wrong, disgraceful in fact – but ultimately no more wrong than using legislation to create a single power company monopoly.

    But I know, it’s good when Labour/Green’s do it !

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  12. dime (10,222 comments) says:

    “I agree this is totally wrong, disgraceful in fact” – yep! open it up! auckland can look like vegas for all i care!

    but wont someone think of the children? and the people who cant control themselves! gambling is a disease blah blah

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  13. unaha-closp (1,067 comments) says:

    I think the most interesting thing about rain forests is that in a competitive free market they get cut down for timber and farming.

    The Green lobby in the USA/EU gives $billions subsidies for biodiesel, making sure socialism plays its part in denuding Borneo.

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  14. uncle_tom (14 comments) says:

    The NZ Initiative clearly have a very weak understanding of rainforest ecology. Yes competition is important but so too is another c word; cooperation (mutualism and interdependence). No tree stands on its own; it’s existence is deeply interconnected with the myriad of life that surrounds it. Competition by itself is only part of the story. Some of the greatest evolutionary leaps are thought to have been a result of cooperation (between and within species). A market built on competitive cooperation can achieve so much more than one built on only competition.

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  15. Manolo (14,179 comments) says:

    Long live the market economy!

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  16. James Stephenson (2,268 comments) says:

    I think the most interesting thing about rain forests is that in a competitive free market they get cut down for timber and farming.

    It’s certainly an analogy that should give any supposedly right-leaning politician pause for thought before words like “too big to fail” pass their lips.

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  17. simonway (387 comments) says:

    You only need a little understanding of biology or game theory to know that trees in the rainforest are “too tall”. Every tree would be better off if they were all shorter, but the evolutionary arms race leads to trees growing much taller than is necessary, lest they be blocked from sunlight by taller trees. This goes on until the hard limits imposed by circulation and energy stop it. Some way of preventing the trees from competing with each other would result in a much more efficient allocation of resources.

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  18. unaha-closp (1,067 comments) says:

    Some way of preventing the trees from competing with each other would result in a much more efficient allocation of resources.

    Most of the resources would be allocated to the thing keeping them from competing?

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  19. burt (7,436 comments) says:

    right – so some form of social engineering to protect the trees from themselves… Labour are your nanny party for that !

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  20. doggone7 (850 comments) says:

    “A true free market will have minimal anti-competitive behaviour” would make a good moot for a debate.

    I love it when those who say there should be a true totally free market with no regulations, further down the line also say, “Yes, but you’d have to….” then add stipulations. These would commonly be called rules, regulations and the thing they always despise, ‘social engineering’.

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  21. mjw (401 comments) says:

    Right – the law of the jungle. Haven’t we found there are a few problems with that?

    Actually, I think these arguments for pure competition are a bit incoherent. Ten thousand years ago we started with pure competition (backed by force), and government and regulation evolved from that pure competition.

    So it is hard to criticise government as interfering with market forces, when it is in fact the outcome of market forces.

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  22. RRM (10,104 comments) says:

    Thousands of highly specialised plants, birds and insects compete for nutrients. The result is a thriving place of biodiversity

    Indeed – every one of them desperately hungry and perpetually fighting to stay alive.

    The early humans found this way of life so unendurably shit, that at the earliest opportunity they developed agriculture and trade and civilisation as a way of getting the fuck out of there.

    Political idealogues who extoll the law of the jungle as a good thing should line up over there –> a huge Malay tribesman will be along shortly to deliver a kick in the dick.

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  23. questions (209 comments) says:

    Next week: D is for Drones.
    For our model of the economy and society to work as we describe, all humans are identical, with identical, easily measured, deterministic and rational preferences, these humans are otherwise known as…

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  24. Miritu (31 comments) says:

    “I love it when those who say there should be a true totally free market with no regulations, further down the line also say, “Yes, but you’d have to….” then add stipulations….”

    Wrong, true capitalists don’t add any stipulations. A free market is based on voluntary exchange of goods and services. Unlike regulated markets, there is no force, coercion or violence involved. Regulators think they know more than the market, in other words they think they know more than thousands of people voting with their dollar.

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  25. nasska (12,111 comments) says:

    Can you think of any modern day examples of true capitalism Miritu?

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  26. griffith (1,111 comments) says:

    Science 13 December 1968:
    Vol. 162 no. 3859 pp. 1243-1248
    DOI: 10.1126/science.162.3859.1243

    Articles

    The Tragedy of the Commons

    Garrett Hardin

    Every new enclosure of the commons involves the infringement of somebody’s personal liberty. Infringements made in the distant past are accepted because no contemporary complains of a loss. It is the newly proposed infringements that we vigorously oppose; cries of “rights” and “freedom” fill the air. But what does “freedom” mean? When men mutually agreed to pass laws against robbing, mankind became more free, not less so. Individuals locked into the logic of the commons are free only to bring on universal ruin once they see the necessity of mutual coercion, they become free to pursue other goals. I believe it was Hegel who said, “Freedom is the recognition of necessity.”

    https://www.sciencemag.org/content/162/3859/1243.full

    Well worth a read for those of you examining the rain forest analogy

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  27. All_on_Red (1,751 comments) says:

    http://quadrant.org.au/magazine/2014/03/dangerous-return-keynesian-economics-five-years/

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  28. Miritu (31 comments) says:

    Nasska, sadly no

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  29. Reid (16,740 comments) says:

    When I think of competition and how it relates to people in this society I think of people like Bob Jones who to many personifies the jovial, successful competitor to which many would in this society aspire.

    However among other things, Bob lacks compassion, as illustrated by his reaction in his own column to the news someone had killed themself at his suggestion. Sure, he didn’t mean to do that. Sure, that person took his own life, Bob didn’t take it. But the fact he felt free to write about it some thirty years later in a joking manner, illustrates he hasn’t learned this important lesson, which transcends societies and history, and remains a lesson of humanity that competitive society is yet to learn:

    He who has not learned how to be gentle, or giving, loving and happy, has learned very little, great though his book-learning and profound his acquaintance which the letter of Scripture may be, for it is in the process of becoming gentle, pure, and happy that the deep, real and enduring lessons of life are learned. Unbroken sweetness of conduct in the face of all outward antagonism is the infallible indication of a self-conquered soul, the witness of wisdom, and the proof of the possession of Truth. – James Allen

    And you don’t find that in a business meeting when you’re trying to find ways to put your competition on the back foot or more usually, out of business. Do you.

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  30. SGA (1,276 comments) says:

    It reads as though Chauncey from “Being There” is now writing for the NZ Initiative :-)

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  31. Ben Dover (526 comments) says:

    Have you ever been in a Rainforest (lately) I have one
    near my house nearly as good as just as good as the Amazon
    it is that good

    This is drivel

    You need to spend some time in one because there is more to nature than a bane economist
    single minded view of “Competition”

    Nature is more sophisticated than you could ever realise

    If you people had your way

    THERE WOULD BE NO FORESTS ANYWHERE

    YOU WOULD CUT THEM DOWN TO RUN SHEEP

    FOR ECONOMIC REASONS

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  32. Ben Dover (526 comments) says:

    Rainforests do not need gardeners

    C is for C R A P

    the land my local “Rain Forest” is on and it is a “Rain Forest”
    was put away in trust over 100 years ago by “VISIONARIES”
    to be

    a Sister Reserve to one of the most beautiful places on the Planet

    Various people have stood guard over this place to ensure the vision is fulfilled
    for 100 years

    Re Soil
    Trees and plants Create their own environment and a Forest is in fact a “super organism”

    Most economies are really just petri dishes of various competing Bacteria
    that have various labels (socialism Capitalism and any other ism you free market ism)

    IF you apply a microscope to them it is just the Same disease mutating and each ideology is a
    mental disease that falls into and out of fashion

    What germ is going to COMPETE to win and make everyone sick this time

    Who knows?

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  33. Sam Buchanan (501 comments) says:

    The New Zealand Initiative always amuses me for its simplistic little homilies about the wonders of capitalism. Their writings are so dumbed down you could drive a truck through the resulting logical holes. They’ll be scripting capitalist nursery rhymes with moral messages next.

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  34. Ben Dover (526 comments) says:

    C is for Chicken poop it makes things grow

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