![The Return of Wasteful Competition](https://www.econlib.org/wp-content/uploads/2024/07/DALL·E-2024-07-09-09.26.54-A-vibrant-scene-depicting-the-CEO-Olympics.-The-setting-is-an-outdoor-stadium-with-cheering-crowds.-Several-CEOs-in-business-attire-are-participating-.jpeg)
It is a common misconception that competitive markets yield efficient outcomes. While competition can spur increased effort, that effort need not be directed toward anything productive. More competition has a dark side as well—the tendency to produce unnecessary duplication of efforts and waste. That competition can be problematic rather than efficient is an idea today sometimes associated with investor Peter Thiel, but the reality is this view is hardly new. In fact, the idea that competition is wasteful resurrects a critique made by economists more than a century ago.
Thorstein Veblen argued in 1899 that competition is driven by base human instincts like “ferocity and cunning.” To Veblen, “modern competition is in large part a process of self-assertion on the basis of these traits of predatory human nature.” Predatory traits may benefit the individual who wins the competitive race, but they are often not directly advancing the interests of the community as a whole. Veblen saw the competitive drive as stemming from a fear of losing self-esteem if one fails to excel in the prized endeavors of society. Thus, competition is largely fueled by seeking the esteem of one’s peers.
Joseph Schumpeter also wrote in 1942, “in capitalist reality as distinguished from its textbook picture, it is not [price] competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization.” In other words, what matters for economic progress is not competition along a narrow dimension like price or number of firms, but instead it is the abundance of different organizational structures, products and innovations that should be the focus of concern.
Veblen’s view may be closer to what one thinks of when one hears a phrase like “wasteful competition.” Consider two roughly equally qualified executives competing for promotion to CEO at the same company. They devote immense time and effort to outshining one another, when realistically only one can get the job. In a sense, the unsuccessful candidate’s efforts were all for naught in this winner-take-all scenario. The competition for promotions amongst employees looks a lot like firms lobbying for government favors in a zero-sum game of rent seeking. It arguably would have been better for the runner-up to apply his or her talents elsewhere, in a more specialized role that created new value.
As F. A. Hayek noted, competition is helpful as a “discovery procedure” to reveal knowledge about the best candidates, products, and business models. But his argument may be overstated. Perhaps the key to unlocking knowledge about the best methods and candidates is simply having a diversity of experiments and approaches, as opposed to having multiple firms or employees imitating each other’s strategies in a crowded market space. Differentiation and specialization, therefore, may yield just as good, if not superior, “discovery procedures” as competition.
Anecdotally, I’ve found I produce some of my own best work when I focus on underserved topics for which there is high demand but a low supply due to little competition. For example, I’ve found success researching regulatory reform topics in the U.S. states. Working on a niche issue like this and developing a comparative advantage in it simply follows from the principle of division of labor. If there had been a lot of competitors working on these issues, I doubt my work would have stood out to the same extent or been as effective.
Hypothetically, a perfectly efficient economy might feature “perfect specialization,” whereby each person and firm is a monopoly in their own unique role. Competition still has a place to spur effort to overcome listlessness, but this role may not be as important as the one students read about in economics textbooks. Competition is downright inefficient when it encourages redundancies that come at the expense of carving out a distinctive value-add for one’s self or company. From this perspective, a monopoly isn’t so problematic if it is built on genuine uniqueness rather than barriers to entry.
Another source of wasteful competition is the academic arms race to get into elite universities. Students compete on extra curriculars like SAT prep, sports, and club memberships. But taken to extremes, this becomes an unproductive signaling game of proving you jumped through more hoops than the next applicant. Again, some competition is healthy to provide a source of motivation and reveal merit. But the competitive process can quickly reach a point of diminishing returns if students pursue activities for the sake of resume padding rather than genuine value creation and human capital development.
In general, competition serves a valid purpose when it incentivizes people to be productive who wouldn’t otherwise be self-motivated. But preferably, people pursue excellence because they want to, not because they have to. In an ideally-efficient economy, then, every person might be endowed with “perfect preferences” and be a self-starting monopoly, propelled by their own drive to create value for others. As Schumpeter would have wanted, competition would then be amongst the best ideas, rather than the most cut-throat tactics.
So in conclusion, economists shouldn’t treat all competition as an unalloyed good. They should take seriously the potential for competition to produce waste and zero-sum jockeying for status, limiting output and innovation rather than the reverse. The sweet spot may be a minimal amount of competition to incentivize effort, combined with strong intrinsic motivations and a high degree of specialization and experimentation. All told, a world of fierce competition at every turn has significant downsides relative to one where people focus on excelling each in their own distinctive way.
James Broughel is a Senior Fellow at the Competitive Enterprise Institute with a focus on innovation and dynamism.
READER COMMENTS
Roger McKinney
Jul 9 2024 at 11:04am
There are no perfect solutions, only tradeoffs. But history has proven that competion is far less wasteful than the lack of it.
Jon Murphy
Jul 9 2024 at 11:19am
Good stuff. In the management literature, we see that some forms of competition can actually make outcomes worse. For example, some competition among consultants can result in them becoming overconfident, and thus reducing the quality of their advice. I’m working on a paper now with Roger Koppl and Maria Miniti where we show that the instituional arraingements of the competition matter in explaining these differences in outcomes.
So, I think you’re right that we economists should be a little more careful about the word “competition.” We should explain that the institutional arraingements influence whether competition will be beneficial or not. When you have institutions that encourage wasteful competition (eg protectionism, regulatory capture, etc), you’ll get more harmful competition.
David Seltzer
Jul 9 2024 at 1:50pm
Jon: Reading Coase’s The Nature of the Firm it seems competition in institutional arrangements is viewed from two perspectives. The market and the firm. The transaction costs to using the market suggests firms are better when they produce internally so as to reduce or avert those costs. Redundant internal competition could result in decreasing marginal returns. BTW. Good luck on your research.
James Broughel
Jul 10 2024 at 9:36am
These are great points Jon. I couldn’t have said it better myself.
Richard W. Fulmer
Jul 11 2024 at 12:29pm
How does competition between consultants make them overconfident? Do they express an assurance they don’t really feel in order to sell their solution to the client? If so, could the client address such “false advertising” by adjusting the terms of the contract and demanding specific guarantees?
Jon Murphy
Jul 11 2024 at 5:10pm
Correct. Basically, if I want you to “buy” my advice versus my competitor’s, and if I think you cannot tell the quality of advice yourself, I may be more confident than worth in order to signal to you that my advice is worthwhile. Basically, I use confidence as a proxy for quality.
Yup, that is one way the client can deal with the problem.
john hare
Jul 9 2024 at 6:46pm
Anecdotally, I’ve found I produce some of my own best work when I focus on underserved topics for which there is high demand but a low supply due to little competition.
I think you found one of the more effective competitive strategies. Taking on things that others are not, or don’t want to is quite effective.
Richard W. Fulmer
Jul 9 2024 at 8:40pm
I don’t think that this is a great example. While the researcher who specializes in an underserved area benefits from his “monopoly,” wouldn’t society be better off if more economists were researching regulatory reform?
Richard W. Fulmer
Jul 9 2024 at 9:01pm
Competition can be ruinous in “tragedy of the commons” situations. However, in such cases the problem isn’t competition per se but poorly defined or enforced properly rights.
In the example of two people competing for the position of CEO, is the competition truly wasteful? Without it, how is the best candidate to be chosen? Selecting a good candidate can mean the difference between the company thriving or going under.
On the other hand, there is a difference between candidate A trying to outperform B and A trying to undermine B or make B look bad. In the latter case, the problem isn’t the competition itself, but the fact that someone like A is a candidate at all. The key question is how did that happen? Did, for example, the system select for candidates like A?
Finally, what is the source of the waste in the competition between students vying for limited slots at a prestigious university? Could it be that irrelevant or even misleading metrics were chosen by those doing the selecting?
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