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Monday, May 30, 2016

Competition and Cooperation Are Not the Same Thing

Why Rivalry Matters

Against the claim that market competition is incompatible with social cooperation, defenders of free enterprise rightly point out that that competition and cooperation are actually quite compatible. But some go further and claim that competition and cooperation are the same thing, which makes it hard to explain exactly how these concepts do correctly relate to each other.

Competition and cooperation are each an expression of freedom, but they are not the same thing.

To a degree, I understand what they mean, but to communicate how markets work, it’s not helpful to say that competition and cooperation are two sides of the same coin. In the way that most people understand the terms competition and cooperation, they cannot be same thing.

My friend and libertarian author Sheldon Richman provides an example in “Competition Is Cooperation”:

What is the relationship between competition and cooperation? Competition is what arises when people are free to choose with whom to cooperate. Sam wants shoes. Manny, Moe, and Jack sell shoes. Each wants to cooperate with Sam. So each strives to win his patronage by offering higher quality, lower prices, a better selection, or some combination of these. That the sellers expect to gain from the cooperation is no valid objection. Parties to cooperative efforts always expect to gain somehow.

Manny, Moe, and Jack each indeed want to cooperate with Sam by selling him shoes. But Manny, Moe, and Jack aren’t cooperating with one another — they’re competing against one another.

I’ve argued before (see “3 Mistakes Free Marketers Often Make,”, November 26, 2015) that one of the errors free-market supporters make is to say that “buyers and sellers compete against each other.” They don’t. A buyer who wishes to buy shoes competes against other buyers who would like to buy shoes, by offering a seller the highest price she can afford to pay; and a seller of shoes competes against other sellers to sell that product to a buyer at the lowest price he can. What competition does, then, is to set the terms of trade — that is, the highest price buyers are able and willing to pay and the lowest price sellers are willing to accept — within which buyers and sellers may then bargain with each other cooperatively.

Freedom results in a social order where competition and cooperation reinforce each other.

Another example is from Timothy Taylor’s essay “The Blurry Line between Competition and Cooperation”:

In short, competition and cooperation are not polar opposites. Competition refers to a situation in which people or organizations (such as firms) apply their efforts and talents toward a certain goal, and they receive results based substantially on their performance relative to each other. The true opposite of competition would be a situation in which those who strive to meet a certain goal experience outcomes that have little or nothing to do with their actual performance, as occurs when government overrides the process of competition by offering subsidies to loss-making firms.

The point of this passage, as I understand it, is that competition takes place when people in an organization, such as a business firm, work together toward a common goal and are rewarded based on how successful they are in achieving that goal, while the opposite of competition is when government divorces rewards from outcomes. So competition prevails when there is no government interference that would, say, privilege some against others, but intervention replaces competition as a coordinating principle if government drives a wedge between goals and rewards. (I’m not sure what happens if the firm mistakenly tries to satisfy a demand that isn’t there, in which case the market itself will drive a wedge between the firm’s mistaken goal and the actual outcome.) This passage strains too hard to identify competition as cooperation.

In his classic essay “I Pencil,” Leonard Read brilliantly explains how millions of strangers cooperate anonymously to produce a simple lead pencil. He tells the story of how a complex structure of capital goods — carbon, dye, wood, etc. — forms spontaneously as a result of countless entrepreneurial decisions to provide consumers with an end-product no single person could have produced alone. Read rightly emphasizes how the owners of those complementary inputs (unintentionally) cooperate, but it’s also the case that they are encouraged to do so in a free market because rival sellers of wood, say, fiercely compete against one another to sell wood and rival buyers vigorously compete against one another to buy wood.

Let me try to clarify the relationship between competition and cooperation in a free market.

The Yankees and the Sox

One of the great rivalries in Major League Baseball is between the New York Yankees and the Boston Red Sox. Each team agrees to the rules of the game and umpires enforce those rules. In that important sense, the teams do cooperate. But from the first pitch to the last play of the game, what happens on the field is not cooperation but competition, as we commonly understand those words. Again, the teams are cooperating insofar as they agree to play the game, but the playing of the game itself is deeply rivalrous.

In the same way, competition and cooperation are each an expression of freedom in a free society, but they are not the same thing. In order to compete, there must be enough agreement among buyers who compete against other buyers and among sellers who compete against other sellers to play by the same rules: property rights, norms of fair play, and so on. But, again, competition of buyers against buyers and of sellers against sellers sets the terms of trade so that a buyer and a seller, whether of consumer goods or of capital goods, can cooperate for mutual gain. A buyer and a seller cooperate according to how most people understand that word. Rival buyers or rival sellers do not cooperate in that sense.

(Some buyers may cooperate with buyers by colluding with one another to limit the sales options of a seller in order to pressure her to lower her price. Similarly, sellers of the same product may cooperate with one another by colluding to limit options to a buyer in order to pressure him to buy at a higher price. But I’m pretty sure that’s not what supporters of free enterprise mean by the claim that “cooperation is competition.”)

Complements and Substitutes

Another way to think about cooperation and competition is to relate them to the ideas of complements and substitutes. Cooperation tends to take place between owners of complementary goods — that is, goods that are used together – such as labor and capital (between buyers and sellers). Competition tends to take place between owners of goods that can substitute for one another, such as iPhones and Android phones or rival phone buyers.

Still, the sentiment of those I’m gently taking to task here is sound: freedom and free enterprise result in a social order that may not be perfect but is one where competition and cooperation reinforce each other. Market competition encourages cooperation among owners of complementary goods, such as car owners and gas owners or employers and employees in a company who work together to compete against rival companies.

There’s nothing vicious about competitive rivalry, as long as it’s peaceful.

There’s nothing virtuous in cooperation per se when the result is to conspire to harm others, and there’s nothing vicious about competitive rivalry per se, as long as it’s peaceful. Whether we can characterize a social order as one largely of conflict or of peaceful and prosperous coexistence depends on the underlying rules of the game. If the rules of the game say there are no property rights and it’s okay to take whatever you want, whenever you want, you’ll tend to get, as Thomas Hobbes describes it, a war of everyone against everyone. Whereas if the rules say that property rights must be respected and wealth acquired only through voluntary trade, the consequences will tend to be more harmonious.

But please let’s keep the central concepts of competition and coordination straight. They are not the same thing. And conflating the two doesn’t clarify; it confuses.

  • Sanford Ikeda is a Professor and the Coordinator of the Economics Program at Purchase College of the State University of New York and a Visiting Scholar and Research Associate at New York University. He is a member of the FEE Faculty Network.