Inequality and competition
Catallactics noticed that we are all different, however, from its point of view we are different in terms of the tasks we can perform, the goals we choose and the means we are capable of using to achieve said goals. Additionally, Catallactics also takes note that everybody has or is capable of, different wealth and incomes.
However, same as before, Catallactics is incapable of making moral or ethical judgements as to this inequality being "good" or "bad". The only thing that Catallactis is capable of, is highlighting the relationship between inequality and competition. It does so by reverting to first principles and studying the relationship between inequality and human action.
Praxeology tells us that human action happens as a result of humans attempting to satisfy their needs. But in a free market the available choices for satisfaction are going to be incomplete and flawed because they are provided by humans who are incomplete and flawed. This creates opportunities for different providers to create better satisfactory solutions, solutions that are more complete and less flawed. However, in so doing, these new providers (or producers) will be competing against previous providers for the same customers. This is the origin of competition.
Competition can only take place because people are all different. If all people would be the same, no person would be able to come up with better solutions that would satisfy customers' needs. All such solutions would be exactly the same. It is precisely because people are different (i.e. unequal) that competition arises.
It is because of the existence of inequality (including wealth and income) that we can reap the benefits of competition. Strangely enough, inequality gives rise to prosperity as opposed to suffering and poverty as socialist or communist systems dictate.
Competition and freedom
People compete in trying to satisfy other peoples' needs because in so doing they receive bigger rewards from the market to satisfy their own needs. But as you can see, the market only offers incentives to people to satisfy other people's needs. The market does not compel nor force people to do so. As such, this process does not guarantee that people will in fact exert maximum effort to satisfy other peoples' needs. The market only guarantees that people will have the tendency to use their differences and limitations (i.e. inequalities) to their maximum to achieve other peoples' satisfaction. But providing alternative solutions to the satisfaction of people's needs is at the essence of freedom. This is so because without alternative choices freedom is not possible.
Thus, at the minimum we can say that competition enhances freedom and at the maximum we could say that competition is the origin of freedom.
As competition depends on inequality, instead of inequality leading to oppression it leads to freedom.
Freedom and order in free markets
We have stated before that freedom can only be achieved in a peaceful system of social cooperation. We have also stated that whichever method we select to ensure this state of affairs. it will have to comply fully with market rules under penalty of decaying into Natural Competition which is incompatible with freedom.
But in the vast majority of the cases we may not need to choose a method to ensure order. This is the case because a peaceful system of social cooperation is built on order. Without order there can be no cooperation. And so the question arises; has the free market a built-in process to safeguard order? The answer is yes: competition.
The success or failure of every entrepreneur in the market depends of their ability to satisfy other people's need. If one entrepreneur can't do it, somebody else will. But this ability is based on the reputation of every provider and their products. Consumers tend to prefer products with better reputations over products with lower or unknown reputations. This is so because customers want solutions and when they acquire these solutions they have no way of knowing it they will be effective or not but nevertheless they have to pay in advance. Thus, they need to trust providers. But the trust of each provider is based on reputation. Bad reputation means no trust and no trust means no sales.
Provider's reputations are in the list of people's wants. Where there is a want, sooner or later there will be a provider that will provide a product to satisfy the want. In the case of reputations we have all kinds of product review services, credit rating agencies, testing companies, and so on. These services existed long time before the advent of the Internet, but they have since accelerated geometrically.
In other words, producers strive to have good reputations but those reputations are judged by other people. As producers depend of these reputations they strive to correct them if judged deficient because they affect their profits. Technically speaking this process is called a negative feedback loop and it creates extremely stable dynamic systems.
What all this mumbo-jumbo means is that this reputation-judgement system is self-correcting. One of the more damaging disruptions to a reputation is a person or organization breaking contracts or not respecting other peoples' rights of property. In other words, people or organizations acting in a disorderly fashion through fraud or thievery. Thus, market participants would not resort to disorderly tactics because these tactics would have severe negative impacts in their profits. In other words, the free market system provides incentives for maintaining order through self-policing.
In this section we have mentioned "producers" and "entrepreneurs" but it would be a mistake to equate those terms with "businessman". Every person strives to satisfy their needs through satisfying other people's needs. Some do it through the creation of typical goods or services; food, clothing, pharmaceuticals, legal or medical services and so on. But other people do it through their labour as their labour is their product. In this sense we are all "producers" and "entrepreneurs" and "workers" and "owners" thus subjected to the reputation-judgement system.
Returning again to the concept of inequality, it now becomes clear that inequality is the driver behind the creation of spontaneous order instead of the bringer of destruction and chaos.
Breaking the rules
The competition mechanism in the free market is very powerful indeed. Most people are subjected to this mechanism, even in existing (e.g. managed) markets. Most people are perfectly happy with it because it works.
But as we mentioned before, there are always people who will break market rules. This minority is impervious to competition-created order because they are not interested in providing solutions to other people's needs. These people operate outside market rules and therefore they are not subjected to them. However, symmetrically, people being afflicted by this minority have no reason to deal with them using market rules either. This is so because affected people receive no benefits from satisfying this minority's needs.
Think of it this way. Let's say that you operate in a truly free market. You walk through the street and you get robbed at gunpoint. Would you attempt to obtain a profit by helping your robber to get away with your money? Of course not. There is no profit in helping your robber. Therefore in this case you are not bound by market rules and other correcting processes may apply. Which correcting process? As we mentioned before, neither Praxeology nor Catallactics offer an answer to this precisely because such behaviours are outside the Praxeological domain. In order to obtain an answer to this question we must step outside and look for a political (not economic) theory.
Political order and violence
In free markets order develops spontaneously based on incentives. But, as we mentioned before, this is not always the case. If we choose to implement solutions for the minority of people breaking free market rules but still strive to maintain a free market, those solutions must also operate within free market rules.
However, the maintenance of order can also be achieved through coercion; this is through brute force by regressing to Natural Competition which originates hierarchies. This is exactly what governments do. Governments impose order through the application of violence by hierarchies. But in a hierarchical system and by definition we are not free. We cannot dispose freely of our property as we see fit. We are only allowed certain choices which are defined by other people. We may agree with some of these restrictions but we may not agree with others.
The problem is that by definition governments are hierarchical systems which are based on majorities which automatically implies that there is no 100% agreement. This lack of 100% agreement is passed down to producers and consumers. These groups are restricted to choices they do not agree with. But if they are restricted in their choices by laws other than Nature's and Market's then they are not operating in a free market. It is for this reason, because governments destroy free markets by definition, that free markets are incompatible with governments.
In other words, the only manner in which Governments can impose order is through violence and violence is incompatible with free markets and capitalism.
Governments = Violence
Note: please see the Glossary if you are unfamiliar with certain words.