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Ludwig Von Mises

What is competition in the free market?

Competition simply means to strive to make better offers than everybody else for the goods or services we desire.

This process can be understood from a seller's perspective as well as from a buyer's one.

Sellers compete among themselves to make their goods or services more attractive to buyers. They do so through different means, only one of them being lower prices. Sellers routinely make better offers by adding extras or increasing the content or giving free service or more colour or different flavour choices and so on. Sellers attempt to provide more goods and services than everybody else for the same amount of compensation in terms of wealth (money being the typical example). The most common competition is through the lowering of prices, classically exemplified by price "wars" among supermarkets. In so doing sellers are acting against their own interests in the hope of achieving higher wealth through sales.

Buyers compete among themselves by increasing the amount of wealth they offer to sellers for given goods or services. Wealth being typically represented by money. In so doing they are acting against their own interests in the hope of achieving greater satisfaction or higher wealth. The most common example of buyer's competition is an auction. In it buyers increase the amounts of money they offer for a good or service in the hope of either achieving more satisfaction than just holding money (e.g. a painting for a collector) or achieving higher wealth through the re-sale of the purchase (e.g. buying a repossessed car for resale).

In this sense and in a free market, competition is symmetric and one type of actors in it cannot exist without the other type of actors. Buyers cannot exist without sellers and vice versa. But both types of actors obey the same rule:

In order to satisfy themselves they must strive to satisfy other people.

Evolution and types of competition

Markets and nature are evolutionary machines which operate on the basis of survival of the fittest. In nature only the fittest specimens survive. In markets only the fittest producers survive. In both scenarios specimens are in competition with each other.

In nature fitness is measured as the capacity to survive and procreate. In markets, fitness is measured as the capacity to satisfy other peoples' needs.

But there are crucial differences that can be classified in terms of two outcomes:

  • Death: In nature losing in this evolutionary process means the death of the specimen. In a market losing this process means the stoppage of the production system, not the death of its owners.
  • Defeat without death: In nature a defeat means submission to the winner's authority (i.e. a hierarchy is formed). In a market defeat simply means the decrease of the market share of the product.

As such, we can clearly see that there are crucial differences between Natural Competition (as in Nature) and Catallactic Competition (as in Markets). These differences are important because they have vast implications for freedom.

Markets, freedom and competition

Freedom can be defined as the capacity to do with our properties (including our bodies) as we see fit without any external involuntary influence.

In Natural Competition (excluding deaths) the specimen that loses the competition also loses its own freedom (or portion of thereof). This is so because this specimen is now under the submission of the winner who is higher in the ruling hierarchy. In other words, the losing specimen must obey certain orders from the winner. The losing specimen has lost some of its rights to its properties (including its body). In other words, the losing specimen has lost some of its freedom.

In Catallactic Competition (excluding the cessation of the productive process) the losing organization does not become subservient to the winner. The losing organization does not have to follow the orders of the winning one. The owners of the losing organization have not lost their freedom because they are still in full possession of their property rights. The difference is that their market share has shrunk thus their profits have decreased thus their purchase capacity has diminished and thus their "voting" ability in the market has also diminished. In other words, the owners of the losing organization have lost influence in the market but not more than that.

Also in a Catallactic Competition even when there is a complete cessation of a productive process (i.e. a company goes bankrupt also called the "death case"), the former owners of such company many lose all company assets but they do not become subservient to the winning company nor do they die. The former owners still retain their full capacity to deal with their properties as they see fit. They still remain free.

In a Natural Competition the loser loses its capacity to do as it wishes with its properties thus losing freedom. In a Catallactic Competition all property rights remain untouched thus freedom remains unchanged.

Praxeological freedom

Formally speaking, Praxeology defines the category "freedom" as:

The sphere in which an individual is in a position to choose between alternative modes of action.

Going back to the notions of means and ends, a person is considered free so long as this person can chose among different ends and different means to achieve those goals without involuntary interference.

The limits of freedom

In Praxeological terms our rights to our own properties are absolute. We can do with our properties as we see fit. However, our goals and means are not. They are limited by the physical world and the laws of the market. If this would not be the case, we would either be omnipotent or infinitely satiated or both. This is clearly an impossibility.

In terms of physical limitations the explanation is obvious. However enthusiastically we may want to do something, if it goes against the laws of nature we won't be able to do so. For example no matter how hard we may want to fly (goal), we humans did not evolve in such a manner as to be able to fly (lack of means). We can, of course, design a plane and fly with it, but then our goal has changed (we are now flying with the aid of a plane) and our means have also changed (we now have a plane).

In the first case our goal does not align with our means. This misalignment is due to us attempting to violate the laws of nature. Thus, it becomes impossible. In the second case we have altered our goals in such a manner that our means are now aligned with it and they obey the laws of nature. Thus, our goal becomes possible.

What this means is that our freedom (as expressed by our goals and means) is strictly limited by the laws of nature.

In terms of market limitations we have the same problem. However enthusiastically we may want to get something, if we do not have the resources to acquire it we won't be able to do so. For example, no matter how hard we may want that new car, if we don't have the money to buy it, we won't be able to buy it. The only way to achieve our goal is to save sufficient money to either buy the car or get a down payment and a loan.

Again, in the first case our goals are not aligned with our means. This misalignment is due to us attempting to violate market laws. Thus, it becomes impossible. In the second case we have altered our goals in such a manner that our means are now aligned with it and they obey market laws. Thus, our goal becomes possible.

Again, what this means is that our freedom (as expressed by our goals and means) is strictly limited by market laws.

Breaking market laws

Market laws are different from natural laws in the sense that we can break them. We cannot break the laws of nature; for example we cannot change the electric charge of the electron. However, we can get a gun and steal the new car we want.

The problem in so doing is that we are conspiring against ours and society's long term interests. Why is it so? Because we are interfering with their freedom by stealing their car and also because they will want to be compensated from the damage our behaviour created.

It is bad for them because we are diminishing their freedom and it is bad for us because they will want to restrict our freedom until the debt is fully paid. In the same manner as all free market transactions are win-win, going against market laws by breaking them is always a lose-lose proposition.

Furthermore, by breaking the laws of market we are jumping from a system where everybody has the same (absolute) rights over their own property to a hierarchical system where people at the top have more property rights than others. In our example, if we have a gun, our rights on that car are higher than the owner's rights because we are no longer operating in a free market. In other words, by breaking market laws we are regressing to Natural Laws and Natural Competition.

It is impossible to have the benefits of cooperation (such as a free market and the division of labour) and simultaneously behave in a manner that overrides cooperation (for example through coercion).

Therefore if we want freedom we can only achieve it in a peaceful system of social cooperation.

What Catallactics is saying is that in ultimate analysis to have a free market (thus freedom) is a choice. People may choose to be free or they may choose not to. Catallactics does not provide an ethical or moral judgement as to which one is better, it only points out the consequences of one choice or the other.

On the same topic, Catallactics does not provide any answers as to how to remediate deviations from either choice. For example, Catallactics does not suggest a police force to deal with thievery. The only thing that Catallactics points out is that there will be consequences whichever "correcting" system we choose. If we wish to remain free and in a free market, the policing force we implement will have to operate within the rules of the free market (which is not what current police forces do because they have overriding "legal rights" to other people's properties)..

Note: please see the Glossary if you are unfamiliar with certain words.

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