Monday, March 2, 2015

Six Reasons Why Economists Should Say Less About "Competition"

A short essay of mine titled "The Blurry Line Between Competition and Cooperation," was published a month ago at the Library of Economics and Liberty website.  I argued that the rule-based competition in economic markets is inextricably intermingled with of cooperative behavior. Paul H. Rubin takes a stronger positino in his 2013 Presidential Address to the Southern Economic Association titled "Emporîophobia (Fear of Markets): Cooperation or Competition?" It is published last year in the April 2014 issue of the  Southern Economic Journal (80:4, pp. 875-889). Many readers will have access to the Southern Economic journal through a library or personal subscription, but an version of the paper is also available on SSRN here.

Rubin's argument is that both competition and cooperation are used in a metaphorical sense when discussing markets. He makes a case that if economists are choosing between these metaphors, cooperation is not only a metaphor with more positive connotations when explaining or defending markets to noneconomists, but also that "competition" itself is a poor metaphor for describing economic actions and decisions, and how the economy works. In one section of the paper, he offers six reasons why economists in the name of accuracy should stop referring to competition. Here is a sampling.

"First, there is no economic act that is itself competitive." 

Rubin writes: "In their economic lives, people produce goods and services and exchange these goods and services for others. Both the production of goods and the exchange of goods for other goods are
cooperative acts. There is no competition in these actions. The motive for some acts may be
competitive, but the actions themselves are cooperative. ... Unless an agent is willing to
engage in illegal actions (for example, burning a competitor's factory) or willing to go outside
the market (e.g., complaining to the Federal Trade Commission about a competitor), any
competitive act is actually performed through cooperative behavior. "

"Second, theprototypical economy, the purely competitive economy, involves no competition."

Perfect competition as taught in the textbooks is made up of "price-takers" selling identical products, who can sell their complete output at a market price that they cannot affect. Indeed, one correspondent to my earlier piece pointed out that farmers, who are often viewed as in a real-world situation similar to the textbook version of perfect competition, often do not view themselves as competing with their neighbors, and instead often stand ready to share the risks and fixed costs of farming by helping neighbors where possible.

"Third, in other market structures acts may sometimes be viewed as competitive, but not always."

What about market structures that are not perfect competition? Rubin writes: "There may be competition to become the monopolist, but tlais is either competition through being a better cooperator or political competition, for example, by lobbying for exclusive licenses. ... Again, motives may be competitive but the actions themselves are cooperative."

"Fourth, principles of cooperation (through specialization and division of labor) are at least as important to economists as competition."

"Adam Smith is the father of competitive analysis. But he is also the father of
cooperative analysis. Specialization is the mother of cooperation. The pin factory is a masterful
analysis of cooperation. Somehow we economists have made the competitive analysis in Smith
the basis for our discipline and have made cooperation into something of a stepchild."

"Fifth, competition is a tool, not the end purpose of the economy."

"The purpose of an economy is to generate consumer surplus, which occurs through cooperative acts such as transactions and exchanges. Competition is a powerful tool for improving the functioning of
transactions by making sure that in each case the transactors are the best possible partners and
that transactions take place on the best possible terms. That is the purpose of competition. In other
words, the competition that occurs in an economy is competition for the right to cooperate. The
gain comes from the cooperation, not from the competition. Of course, competition is essential,
since it leads to the optimum terms for cooperation and selects the best parties to cooperate, but
nonetheless competition is a tool whose function is to facilitate cooperation. Society is willing to
tolerate markets because of their cooperative benefits, not because they are competitive."

"Sixth, competition is ubiquitous in human interactions, and so competition is not a way of
distinguishing market economies from other economies."

"Economies based on custom also have competition. For example, more successful hunters in a hunter-gatherer economy reap benefits, including access to women. In an exploitive economy success may be measured by exploiting the population and rising through the oppressive hierarchy. This is much more "competitive" than the path to success in a market economy. The unique feature of an economy organized through markets is that the competition that exists is competition for the right to cooperate, but it is the cooperation that is the defining feature of the market economy."

Ultimately, Rubin's argument is that "emporîophobia," his term for "fear of markets," would be reduced if economists put the language of cooperation front and center in their vocabularies.  Here's Rubin's example of how economists might talk about Wal-Mart:
If we focus on competition rather than cooperation, then we think of winners and losers. We feel sorry for the losers and may view the winners as cheaters. At the least, there is a tendency to favor underdogs and the losers from competition may be viewed as underdogs. We may also believe that a world with winners and losers is in some sense unfair. By our emphasis on competition, economists must take some blame for this error. But if we think about cooperation, then the losers are those who are less successful at cooperating, Wal-Mart succeeds not because it has beat up its rivals and driven them out of business. It succeeds because it has done a better job of cooperating with consumers, by offering them stuff they want at the lowest possible prices. Of course, economists
know this, but since non-economists begin with the competition model, economists must be defensive and try to dissuade citizens of their prior beliefs. If the default way of thinking was cooperation, then the critics of markets would be on the defensive.
I'm not fully persuaded by Rubin's argument, in large part because I agree with a clause in the preceding paragraph that "non-economists begin with the competition model." As long as this is true, economists who speak too purified a language of cooperation are in real danger of sounding out-of-touch. Also, economists must then immediately confront the problem that bargaining positions in the economy are not always the same, and the "cooperation" of a minimum-wage worker taking what feels like the only available part-time job before the monthly rent becomes due doesn't look quite the same as the "cooperation" of a chief executive officer receiving a large annual bonus.

But precisely because "non-economists begin with the competition model," it is useful for economists to be concrete and specific about the very specific sense in which they use the term "competition." After all, having many firms "competing" to offer a mixture of prices and qualities that consumers prefer is quite a bit different from having firms "competing" to defraud customers. And in many economic contexts, the form of competition of which free-market economist speak approvingly quickly shades into cooperative behaviors.