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Thursday, June 10, 2010

Competition and Cooperation

Two sides of the same coin.

At the end of last week’s column, I mentioned F. A. Hayek’s observation that the Greek root of “exchange” means “to search for together.”  That column on the parallels and differences between athletic and economic competition focused on the “search” part of that observation. This week I want to look at the “together” part.

Competition and cooperation are often juxtaposed, yet in the market they are two sides of the same activity.  One of the oldest observations by economists is the way in which the division of labor and exchange enables an uncountable number of people to contribute to the production of any given product.  Adam Smith used the example of a wool coat and all the people who were part of its production, from the owner of the sheep who produced the wool, to those who contributed to the dye, to those who made the buttons, to those who put it all together and those who sold it.

In our own era, Leonard Read’s classic essay, “I, Pencil,” captures this same idea.  When we consider the vastly more extensive division of labor in the 21st century, as compared to the eighteenth — particularly the elaborate communications and transportation processes — the number of people who contribute to the production of even the simplest product is beyond our ability to list.

What’s most fascinating about these stories is that they demonstrate the ways in which markets extend human cooperation.  We tend not to think about it this way, but it is accurate to say that modern goods and services are the product of immense cooperation among human beings.  The shirt I’m wearing today required the cooperation of millions of people to transform it from the most basic raw inputs into the finished product that was delivered to my house by UPS.  The extraordinarily fine and precise division of labor that characterizes modern markets means that we are very limited in what we can do for ourselves individually and therefore must rely even more heavily on the cooperation of others to obtain even the most basic of goods.  Cooperation is just the obverse of the division of labor.

Critics of markets might point out that this isn’t what we normally mean by cooperation because it’s not intentional, such as that which occurs among people who interact face to face, say, an Amish barn-raising.  That is the most common sort of cooperation we think of, but that does not mean it’s the only form that matters.  Cooperation is no less valuable if it is unintended.  Markets generate unintentional cooperation by harnessing the power of competition as it unfolds in the context of private property, sound money,  and the rule of law.  This is the invisible hand, or spontaneous order: people pursuing their own self-interest will satisfy the desires of others.

Competition in Anonymity

The other difference with the cooperation that takes place in markets is that it is anonymous.  Unlike the Amish barn-raising, where the participants likely all know each other, the cooperation that produced my shirt involves millions of people who had no clue about whom they were cooperating with, nor even that they were in fact cooperating.  Critics might say this is a weak form of cooperation, but one could equally argue that without markets much cooperation would never take place.  If we want humans to cooperate more, we can’t be too picky about the form it takes, and we should therefore cheer the extension of markets and exchange.  There was a reason that Ludwig von Mises considered the title Social Cooperation for the book that is now known as Human Action.

Even though this cooperation is anonymous and unintended, it creates the same sort of interdependence that intentional cooperation creates.  The more people we rely on to produce what we wish to consume, the more interdependent we become.  And the more interdependent we are, the more likely we are to behave civilly and peacefully toward others.  We have long known that where goods can’t cross borders, armies will and where goods can cross borders, armies won’t.  The same is true within countries: People who trade have far less incentive to use force against their trading partners, given their reliance on them.  This extension of cooperation and peace through exchange is what Mises referred to as the “Law of Association.”

Underlying all of this is competition.  The cooperative process that produces my shirt is also a competitive process.  It is competition among producers, within with the institutional structure of property rights and sound money, that enables them to figure out what contracts to create and what prices to charge in order to best serve customers and earn a profit.  That network of institutions and exchanges facilitates cooperation via competition, with the result being the progressive enrichment of humanity.

There is no need to push for more forms of intentional cooperation when we already know that markets, especially freed markets, are the foundation of the most extensive cooperation in history.  And the most beneficial as well.

  • Steven Horwitz was the Distinguished Professor of Free Enterprise in the Department of Economics at Ball State University, where he was also Director of the Institute for the Study of Political Economy. He is the author of Austrian Economics: An Introduction.