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.