When people who do not understand free markets talks about them, they usually make the error of equating free markets with competition. Furthermore, the competition they mean is usually direct competition, this is, two similar products competing for the same customer. What we say to them is that we don’t need no stinking competition, for free markets to operate… and we are going to tell you all about it.
This lesson is a follow up from Introducing Mr Free Market where we cut short the “competition” subject because it deserves its own lesson.
Let’s begin by saying that free markets do not require competition at all to function; at least not direct competition.
Consider this. People exchange goods and services because they want something they do not have and in exchange, they were willing to part with something they want less but have. Nowhere in this transaction can we see competition. This absence is the giant pink elephant in the room nobody wants to talk about. Yet, this is reality.
Free markets do not require direct competition to provide most of their benefits. Competition is a side effect of free markets. A further evolution in their improvement and a very successful one at that. Competition is not perfect, not by any stretch of the imagination, however, it fulfills the golden rule: it works better than anything else.
All free markets nowadays have a large degree of direct competition, which is very visible. Yet, most people do not seem to grasp the idea that competition is only important but not critical; politicians are particularly bad at it. This is so because politicians need to “manage” something or the horrible truth would come into the light: they are utterly useless. So politicians “manage” to “ensure” competition… of course, through this process the only thing they manage to ensure is that markets operate well below their optimum power and capacity.
COMPETITION CLASSES
To fully understand this point, there are several concepts we need to review. They are:
- Direct competition. This happens when two similar products compete for the same customer by providing the same function, for example two different brands of dishwashers.
- Substitute competition. This happens when two dissimilar products attempt to substitute one another in the eyes of a customer, for example Danishes and croissants for breakfast.
- Indirect competition. This happens to all market products since they compete for customers’ money. They offer completely different functions but they are all asking for the same money.
- Monopolies and oligopolies. This happens when only one or a limited few products exist, offering the same function.
- Anti-competitive Practices. This happens when politicians determine that something is “bad” for competiton.
This classification is arbitrary. Furthermore, each one of these types of competition overlaps the others to some degree, and products & services actually move from one class to the other quite regularly. We are going along with this classification simply because it is easier to make our points, but reality does not work like that. Reality is wonderfully messy and complex. In reality, competition is competition and all market participants are subjected to it, whether they like it or not.
GREED PURIFIES
This is an interesting quote from the movie “Wall Street” that got stuck in our brain. It did so because it is true. Of course, in the movie it was used with a dark connotation, which couldn’t be farther from the truth. Greed is a basic human instinct. It is written in our genetic code. Maybe in the future we will be able to change it… and become extinct in the process… but right now, we cannot. Any political-economic system declaring it can do so, is lying to you. Such a system can only spell lower standards of living at best and misery at worse.
Greed is important because the outcome of our very existence depends how we deal with it. The smart way to do it is to work with it as opposed to working against it. Of course, in politics and economics there is never a black and white answer. All answers are gray because they leave options open and convenient scapegoats at hand. All in the name of job security for politicians. But we are not politicians and do not have such a job! Hence, we can afford to be brutally honest.
Greed has no function other than create the drive to spread our genes into as many new people as possible. Originally, big, strong and powerful people had the upper hand. However, how do we go about being greedy is up to our brain…. which over evolutionary periods of time discovered that economic success is the great equalizer. Proto-humans realized that not too many were born big and strong and could not compete … unless… they used their brains to provide food and shelter. Whatever muscular strength and endurance was not gifted to them by nature, nature compensated in brain power. And so, economic success balanced out and overtook strength and stamina. Economy was the original equalizer.
It is important to understand what greed is. Greed has absolutely nothing to do with morality, religion or some definition of good or evil. Greed is. Get used to it.
Greed is important because, in ultimate analysis, greed is the engine that drives competition. We want… and in a world where most people are not born big and strong, being clever in trade is the way to get.
Being the best at trades is subject to a simple rule: those products & services who best satisfy customers’ needs will rewards manufacturers or purveyors. Those who do not, will punish them by generating loses
Note: please see the Glossary if you are unfamiliar with certain words.
Continue to We don’t need no stinking competition - Part 2
