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Saturday, March 30, 2019

Confusion over Our “Winner-Take-All” Society

We need to focus on the expansion of benefits for others as competition induces increased productivity.

Image credit: George W. Bush White House

On March 20, the Los Angeles Times ran an opinion piece titled “Our winner-take-all society fostered the admissions scandal.” I found it striking that it not only accepted winner-take-all’s “a few win at the expense of others” rhetoric as an accurate description of competitive markets, but also that it was considered so well-established as a fact that it could be blamed for an ever-expanding host of social problems. 

Is a “Winner-Takes-All” Society Bad? 

The emphasis of such analysis is that, as Robert Frank and Philip Cook argued in their 1995 book, The Winner-Take-All Society, there is an increasing number of markets in which small differences in performance give rise to enormous differences in rewards. As John Kenneth Galbraith described it in a review of that book, the consequence is that “the one who wins gets it all.”

Unfortunately, even if technology has greatly increased the possible leverage or “amplification” of human talents, that leverage allows more consumers greater benefits from them. Consider Bill Gates. He got very rich from his software, but the gains to users enabled by using his products vastly dwarfed his gains. Consequently, even if “star performer” incomes rise sharply compared to others, that doesn’t mean “the one who wins gets it all” because that overlooks the far larger positive effects on consumers. That is important, since as Leonard Read emphasized in “A Consumer Looks at Freedom” in his 1971 book Then Truth Will Out, people share most in common in their role as consumers, so that a consumer’s interest should be the focus of policy. Bill Gates offers an illustrative example. He got very rich from his software successes, but the gains to users enabled by using his products vastly dwarfed his gains.

This error is exacerbated by the use of an analogy from competitive sports to competitive markets (voluntary arrangements people make with one another). As Galbraith summarized it, “As in sports, so generally in the modern economic world.” Judging from medal stands, the rewards seem to only go to a very few “winners,” sometimes only better by a hundredth of a second, which can be taken to imply that most are losers. However, in fact, the victor celebrated on a medal stand or achieving far fatter earnings is substantially different from the victory for others that results from market competition.

On the medal stand, the relevant “output” rewarded is being better, regardless of how much better. But a more accurate analogy to the gains from competition in market arrangements is the improvement in results (longer distances, faster times, etc.) that are produced.

Not a Zero-Sum Game

Competition and emulation of what reveals itself in superior performance make people able to achieve certain tasks better over time. Such increased capabilities mean more can be produced, and that increased production, in a world of scarcity, benefits the rest of us in society. That makes it a positive-sum game, not a zero-sum game. But that “game-changing” fact—that society gains massively from the “positive externality” of increased and improved outputs created by competition—is, unfortunately, often overlooked.

Accurate evaluation requires that we keep our analytical eye on what others overlook. We need to focus on the expansion of benefits for others as competition induces increased productivity. We are not all losers when someone outcompetes rivals; we all win as consumers when any producer wins through better ways of doing things.

Instead of the usual misguided analogy between sports competition and market competition, we would benefit from a more accurate analogy offered by Ludwig von Mises in his monumental book Human Action:

Catallactic competition must not be confused with prize fights and beauty contests…to discover who is the best boxer or the prettiest girl…Its function is to safeguard the best satisfaction of the consumers attainable under the given state of the economic data.

  • Gary M. Galles is a Professor of Economics at Pepperdine University and a member of the Foundation for Economic Education faculty network.

    In addition to his new book, Pathways to Policy Failures (2020), his books include Lines of Liberty (2016), Faulty Premises, Faulty Policies (2014), and Apostle of Peace (2013).