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Thursday, June 3, 2010

Competition and the Limits of Sports Analogies

There's winning and then there's winning.

The problem with markets for many critics is that competition puts people at odds with one another.  If only we could have an economic system based on cooperation.  Wouldn’t that be better for everyone?  Instead of winners and losers, all would gain by working together.

Beneath such complaints lies a view of competition as a zero-sum game.  For every winner there must be an offsetting loser.  I suspect this view of competition comes from another realm of competition: athletics. When I teach about economic competition, I often use sports analogies, but this is where those analogies break down.  In sports there is a winner and a loser (excepting the rare NFL and soccer tie, of course), but this is not quite the case in market competition. That kind of competition is a positive-sum “game” that benefits us all.

True, when firms compete some are driven out of business, thus appearing to be analogous to a losing sports team.  However, there are two important differences between economic and athletic competition.  First, the firm that goes out of business does not disappear into dust.  As many people pointed out at the height of the financial crisis, if General Motors were to declare bankruptcy, its assets wouldn’t vanish. Rather they would be sold off.  Those reallocated assets would contribute to the creation of wealth, although perhaps differently from before. A bankrupt firm’s computers, for example, could create value almost anywhere.  The autoworkers certainly wouldn’t disappear;  they would eventually find new jobs, creating value in new ways.

The point is that unlike in sports, where for every win there is a loss, in economic competition a win by one firm is not completely offset by a loss for another.  In fact, the reallocation process is something of a win-win situation.  If one firm is so good at meeting its customers’ wants that it drives a competitor out of business, the loser’s assets will be reallocated to products consumers value more highly.  In other words, the “win” of one firm teaches us how the assets of the other can be used in a more “winning” way.

Serving Customers

The second difference between economic and athletic competition is implied by the first: The real beneficiaries of economic competition are not the firms that win but the customers they serve.  This is the point most overlooked by competition’s critics.  In athletic competition there is nothing intrinsic that creates benefits for other people.  Two hockey teams compete to determine which is better, and hockey is still hockey whether people are watching or not.

In economic competition, by contrast, the whole point is that the rivals are competing over how best to serve other people.  When Mazda, Subaru, Ford, and the others compete, it’s not an abstract “game” called “make more cars.” They are trying to produce cars people will want at a price they wish to pay.  The main beneficiaries are not the winning competitors but the public at large, which gets better and cheaper products as a result.  In contrast to the popular idea that “capitalists” benefit most from “capitalism,” the reality is that genuine competition in a free market makes firms work harder to please their customers.  If competition is so great for firms, why do so many ask the government to protect them through regulations or grants of monopoly privilege?

Recall Horwitz’s First Law of Political Economy:  No one hates capitalism more than capitalists.

Despite these differences, economic and athletic competition share one very important commonality: Both are discovery processes.  It is only through economic competition that we can find out how best to allocate resources.  Abolishing competition would deprive us of the learning necessary for economic progress.  In sports, competition enables us to discover which team is better.  There is no way to find out definitively except by playing the game or the series.  If there was, why bother playing?  One might have an opinion about which is the better team in the Stanley Cup playoffs, but only playing the games can tell us with certainty.

It is in this sense that both economic and athletic competition are consistent with a point Hayek made decades ago when he noted that the Greek word for competition also means “to search for together.”  All competition is a form of learning, but in sports that learning does not provide benefits to people outside the activity in the ways that markets do.  Market competition creates positive spillover effects for everyone, and so economic competition is not the zero-sum game the critics imagine.  It is a positive-sum game in which the losses of some are far outweighed by the benefits to all.  And therein lies the limits of the analogies from athletic competition.

  • 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.