Sunday, June 29, 2008

One Standard Will Do Just Fine

Why do economists think of competition as being beneficial to society? For now, think only of the producer side. Firms, locked competition with each other, continuously discover ways to meet consumer needs, only to experience temporary profits and losses before their competitors match them in some dimension. The social benefits:
  • Production
  • Innovation (technological, product quality, etc)
  • Greater purchasing power of consumer incomes
  • Maximum efficiency gains (consumer and producer surplus is maximized
However, the term "firm" is just a linguistic shortcut used by economists. In reality, a firm is a collective of households, who may or may not know each other but interact through this collective entity that may have a purpose entirely different from their own. You cannot tax a firm. There is no entity like a Microsoft wandering around who can be taxed or punished. You can only do these things to households who are represented collectively as "Microsoft." For this reason, economists place equal weights on consumer or producer surplus and treat them as what they both really are...households.

Those who suggest a role for government in "solving" positional externalities miss this last point. They never seem to suggest that competition among producers is bad, but when some household buys a nicer car than his/her neighbor, thereby inducing their neighbor to try and buy a nicer car it is seen as some kind of social treadmill (as Robert Frank describes it). The households are locked into ever increasing workload without any real gain in relative social status. Therefore, they say, we should regulate the work week hoping to avoid this outcome.

This is a double standard. They will either have to wage a campaign against the concept of a competitive equilibrium maximizing social benefits or abandon the correcting of positional externalities altogether. What is the point of buying some cost saving technology when the competitors will just adopt it also, eliminating those gains? A grocery store that tries to compete customers away from its rival by increasing the number of hours it is open is no different from the neighbor who puts in overtime so that they can put nicer siding on their home. Even if competition eliminates their temporary gains, their production to the rest of the world leaves it a better place.

No comments: