The idea of economic competition is a peculiar case: widely believed in, but rarely fully practiced. It is essential for a functioning economy. Any sector that is governed according to monopoly practices will stagnate. Sectors that are competitive drive economic growth and technological progress in ways that benefit everyone.
We know this from sports. Competition is its lifeblood, providing the metric by which excellence is judged and the comparisons necessary to motivate improvement. We know it from games too, whether chess or video games. The competitive spirit is within all of us, an inner drive to get better.
It’s even more important in economics because the hustle and bustle of trading and industrial rivalry generates the data necessary for accounting, which is the means by which efficiency is assessed.
One only needs to observe the work of Elon Musk’s companies. His SpaceX company has achieved the seemingly impossible with a booster landing that snatched the world’s heaviest piece of equipment out of the air and prevented damage so that it can be reused. His achievement has shown up every bureaucracy. The same person has led the market in EVs and self-driving transportation, plus rescued social media from the censors. He might have created the first home robot (not that I want one).
Elon loves and welcomes competition. That’s all he has ever asked for: the freedom to innovate. In the process, he has shown up NASA, legacy car makers, captured social media, and even all news organizations. He isn’t just trying to show off. He has long been seized by a vision of a better world, and wants to use his every waking minute to realize that vision for everyone.
Yes, it has made him very rich, but that is not the motivation. It is the sign and seal of a job well done. It’s usually this way with history’s greatest innovators. The profits are the reward, as an indication of success, but not the driving purpose. The primary purpose is to realize a dream of a better world. Just imagine if Elon truly does head a new commission to bring innovation, efficiency, and competition to government itself!
If competition is so great, why is it that it is so resisted? There are whole sectors of U.S. economic life that are ever more monopolized and insulated from competitive pressure. They include medicine, law, academic publishing, pharmaceuticals, utilities, legacy media, law, security, and so much more. Each of them shows signs of withering from a lack of dynamism. The consumer suffers and so does society at large.
History’s main source of resistance against market competition has always been the same: established business interests.
In the days following the defeat of Germany in World War II, reformers sought to reform German economic life. The finance minister appointed to do the job was Ludwig Erhard, an economist of the old liberal school. He was striving to free the market from cartels and controls as imposed by the Nazi Party.
“The market economy therefore cannot be separated from a system of free competition; it cannot do without the function of free prices. Whoever wants to exclude the function of free prices—and it does not matter whether it is done by Government initiative or by industrial organizations through cartels—kills competition and allows the economy to stagnate.
“In pursuing these thoughts to their logical conclusion I have regarded it as my most noble and important task, since the day of currency reform, to limit and reduce the many Government measures in respect of price formation. Since, therefore, everyone knows that I have based my economic policy on the principle of freedom, then a truly organic and harmonious order can only be guaranteed in a guided free market by a free competition of labour and a free formation of prices.
“While I firmly oppose every kind of bureaucratic dirigisme and State controls, I am equally firm in refusing to allow other forms of collective economic influence. There is no difference in principle or in function between State and industrial economic planning. If we want to have a free economic and social order, we must not allow anyone or any group to have the right to interpret freedom according to individual taste, and then to limit it. In my view a free economy is synonymous with free economic enterprises. Entrepreneurs do not know what they are doing when they fight the system of a competitive economy.
“As far as I am concerned, freedom is indivisible. In my view, political, economic and human freedoms are a complex unit. It is impossible to detach one part without making the whole collapse.”
The Nazi economic experience from 1934 through wartime was about the creation of cartels formed according to state priorities and doled out as political favoritism. The party wanted no one who was not with the program to thrive. Granting industrial favors was one thing that the party could do in order to realize full political control. Industrial interests were not thrilled about the crazed ambitions of the party but they went along for purposes of survival.
The process of denazification involved dismantling the industrial cartels, but entrenched interests did not want to face the cold winds of market realities. They had grown accustomed to their guaranteed revenue streams and did not want to give them up. It was the greatest challenge that the reformers faced: convincing the industrialists to go along. They succeeded for the most part and drove forward what came to be called the German Economic Miracle.
The struggle for competitive institutions dates back to the advent of liberalism in the late Middle Ages. After the fall of Rome, and for the next thousand years, the system of production in Europe came to be known as feudalism. The aristocracy owned the land and farmed it using the workers and peasants who were paid in kind with security, food, and housing. It was an improvement over chaos and early death, but only produced a subsistence level of wealth.
The next stage of economic development came with the entrenchment of the guild system, industrial cartels with fixed prices and high barriers to entry in every profession. The people had money for the first time, but their choices were limited due to cartels and fixed prices. Children followed the professions of the fathers and stability predominated over progress and wealth creation. The guilds were famously possessive of their monopolistic control, which was in turn guaranteed by the local authorities who made revenue-sharing arrangements with the cartels.
What came to be called capitalism had one major feature that distinguished itself from every previous form of economic order. It instantiated and entrenched low barriers to entry into professions and imposed competitive discipline on the producers. It was called capitalism (much later) because it guaranteed private property in the produced means of production, but its central principle was that the consumers were ultimately in charge of production decisions.
Consumers would effectively vote for how resources would be used through their decision to buy or decline to buy. Through this mechanism, efficient and innovative companies would thrive and inefficient and un-innovative companies would be weeded out. Crucially this system relied on double-entry accounting, with costs and revenues carefully recorded on ledgers to indicate profitability as a sign of success.
The system of competition was never entirely welcomed by the producer sector or the industrialists, and various methods of re-institutionalizing the guild system were attempted. They included the patent, trade protectionism, licensing, price controls, and other forms of regulation. For several centuries these were kept at bay for the most part and competition as a rule dominated economic life.
The 20th century saw changes in the other direction, away from competitive markets toward industrial monopolies, public-private partnerships, captured agencies, and entanglements between governments and industries. Dwight Eisenhower tried to warn us about the military-industrial complex, but his warnings went unheeded; instead the combination has expanded to a full range of civilian sectors.
The answer now for the United States is the same as it was in Germany in 1948. We desperately need a restoration of competition as a market principle, complete with free-floating prices, low barriers to entry, and a deregulated environment that includes every would-be competitor under the principle of free to try. This is true for education, health care, and commerce generally. We need more Elon Musks and the best way to unearth them is through freedom in the commercial sphere.
