One reason why competition is good

Two days before Thanksgiving my washer broke. I went to Lowe’s to purchase another one.

It was to be delivered the day after Thanksgiving.

Lowe’s called us that day to let us know they didn’t have it in stock and wasn’t sure when they would get it.

On Monday, I followed up to see if they knew when it would be delivered. They still couldn’t give me a firm date.

I called another place. They had it in stock and could deliver on Wednesday. After it was delivered I went to Lowe’s to get a refund.

I clicked the link on my email receipt from Lowe’s to let them know about their service break. “Sorry, it has been more than 7 days since your purchase so this survey is no longer active.”

I had to laugh.

A few days after receiving the washer from the other place, I received a follow-up call from them to see how everything went.

I never heard from Lowe’s.

The Lowe’s service break was cascading errors that were four deep. Had any of those been caught and corrected on the spot, the experience could have been saved.

It’s with experiences like this that I’m thankful for competition.

It’s easy to get lured into the efficiency argument of a single provider for anything — just think how much overhead and redundancy that saves.

But, it also means you are at the mercy of that single provider when things don’t go well and you can’t just pick up the phone or visiting a competitor’s website to solve it, like I did.

“a system that did not ensure the survival of lucky accidents would lose most of its value”

In his book, Alchemy, Rory Sutherland explains Nassim Taleb’s Anti-Fragile well in terms of free markets (bold added):

It is never-mentioned, slightly embarrassing but nevertheless essential facet of free market capitalism that it does not care about reasons — in fact it will often reward lucky idiots. You can be a certifiable lunatic with an IQ of 80, but if you stumble blindly on an underserved market niche at the right moment, you will be handsomely rewarded. Equally you can have all the MBAs money can buy and, if you launch your genius idea a year too late (or too early), you will fail.

To people who see intelligence as the highest virtue, this all seems hopelessly unmeritocratic, but that’s what makes markets so brilliant; they are happy to reward and fund the necessary, regardless of the quality of reasoning. Perhaps people don’t ‘deserve’ to be rewarded for being lucky, but a system that did not ensure the survival of lucky accidents would lose most of its value. Evolutionary progress, after all, is the product of lucky accidents. Similarly, a system of businesses that kept empty restaurants, say, open through subsidy, simply because there seemed to be some good reasons for their continued existence, would not lead to happy outcomes.

The theory is that free markets are principally about maximising efficiency, but in truth, free markets are not efficient at all. Admiring capitalism for its efficiency is like admiring Bob Dylan for his singing voice: it is to hold a healthy opinion for an entirely ridiculous reason. The market mechanism is loosely efficient, but the idea that efficiency is its main virtue is surely wrong, because competition is highly inefficient. Where I live I can buy groceries from about eight different places; I’m sure it would much more efficient if Waitrose, M&S, Lidl and the rest were merged into one huge ‘Great Grocery Hall of The People’.

The missing metric here is semi-random variation. Truly free markets trade efficiency for market-tested innovation that is heavily reliant on luck. The reason this inefficient process is necessary is because most of the achievements of consumer capitalism were never planned and are explicable only in retrospect, if at all.

 

The competition to see who can best cooperate with consumers

That’s a great way to view competition between businesses.

Credit David Henderson’s post on EconLog, where he is justifiably annoyed at the use of battle terms in a Wall Street Journal article to describe competition between two airlines for consumers flying to and from Seattle. Henderson thinks the author, and many like her, neglect the benefits to consumers when framing business competition as a battle.

Also, credit a commenter on his post, Julien Couvreur, for pointing to and summarizing a Don Boudreaux post about the same thing. Couvreur writes:

…economists tend to talk a lot about competition, but it is competition for cooperation (who can cooperate best with consumers). This is hardly war.

 

What’s fair?

In the comments of this post, Wally posted a video about how actual wealth distribution differs from what a group of people feel like is the ‘ideal’ wealth distribution.

I think the video provides a good example of the dangers of convoluted reasoning disguised as something that sounds intelligent.

For instance, in one part of the video, the narrator says that CEOs make as much in one hour as their average employees make in a month and suggests that is unfair.

When framed this way, the unfairness seems plausible. However, this framing is like a distraction used in a parlor trick, or a red herring.

He implies that a CEO should make some multiple of the wages of an average worker, but he doesn’t tell you why. He figures you get it. But, do you?

Most of the average workers who have young children make several orders of magnitude more than those children.Is that fair? People with kids may now realize the distraction.

It’s not a question of fairness. They understand that there isn’t necessarily a relation between what they make and what their children make. They understand that what they make is based on the value they create for their employers or client and what others are willing to do that for, as well.

Now, don’t get me wrong. I think most CEOs are overpaid. But, I don’t base that opinion on nonlogic like what I think a fair multiple is between some unrelated job and their job, no more than I think what a nurse is paid should be some multiple of what a painter makes, or what a professional baseball makes should be some multiple of what the beer vendor in the stands makes. That’s nonsense.

I think most CEOs are overpaid in part because their decisions do not increase the value of their company enough to cover the risks they take and because Boards of Directors aren’t interested enough to get find truly good business leaders.

The whole video is a red herring. It basically compares ‘an ideal’ wealth distribution to the actual wealth distribution and implies that something is unfair. But, it takes more than a red herring to convince this guy.

Try to use some logic. Let’s talk about the value the people at the low, middle and high ends of the distribution create. Let’s talk about their financial behavior, their investments in human capital, decisions they’ve made.

Let’s talk about the absolute wealth at each end. Should I care than Bill Gates doesn’t fit on his chart, if I’m living a life unimaginable by my even fairly recent ancestors?

Update: ‘Dude Where’s My Freedom”s comment reminded me of the lyrics from Tenacious D’s song, City Hall. After starting riots to overthrow government and now ruling, Jack Black and KG are issuing their decrees. Their third decree is,

No more rich people and poor people. From now on, we’ll all be the same…ummm…I don’t…I gotta think about that.

Funny and true.

Cans of corn

In the comments to this post, we had what I thought was a good discussion regarding fairness and how government interference usually causes unfairness rather than fixes it.

Wally asked if unfair processes exist outside government. I responded that they do but that there are better feedbacks and choice outside of government to help with that.

Don Boudreaux just wrote a fantastic column, Competitive regulation, in the Pittsburgh Tribune addressing how much better feedbacks and choices, which derive from competition, work in a free market work than the regulations from government.

I particularly love this part:

No one asserts that competitive regulation works perfectly. But perfection isn’t the appropriate standard. The claim, rather, is that competitive regulation works pretty darn well.

Want evidence? Go to the supermarket and then to the mall. You’ll find astonishingly wide offerings of high-quality and affordable goods: food and drink products, detergents, kitchenware, clothing, furniture, consumer electronics and on and on and on. You’ll also find stores manned by clerks and managers who generally would be distraught to lose their jobs.

Nearly none of what you see is the result of government regulation. No regulator ordered Safeway into business. And no regulator tells it what to offer for sale. If Safeway wished, it could — as far as the government is concerned — stock only cans of corn and nothing else. It could refuse to pay any of its workers wages higher than the legislated minimum. It could open for only 15 minutes daily. It could use pencils and paper, rather than electronic scanners or cash registers, to tally its customers’ grocery bills.

But it does none of these things. Competing with Kroger, Wal-Mart and other supermarkets, Safeway voluntarily chooses — for its shareholders’ own good — to spend tens of millions of dollars annually to keep its shelves stocked with a vast assortment of items, to pay most of its employees wages well above the legislated minimum, and to undertake all the other countless activities that it must undertake to turn a profit.

I continually find it amazing how much a part of life these feedbacks and choices are and how little people recognize it.

People simply don’t recognize that free market and competition provides them with so many choices. How often do we complain about not getting what we want with stuff that comes to us by way of generally free markets like restaurants, shoes or deodorants? How often do we complain about things from government?

Sure, there are complaints about products. As Boudreaux says, no one says the market is perfect. But, there are entire TV and radio channels dedicated to complaining about government.

The same people go to Target and to the DMV. I can’t figure out why they never seem to think “I want more of what brought me Target and less of what brought me the DMV”.

Things fail

Here’s an interesting post from Arnold Kling on EconLog. 

In it, he discusses federalism and cartel federalism. Few people consciously view government in these terms, but should.

Federalism is the idea that governments compete for citizens, much like how companies compete for customers. When people are free to move, they tend to move to areas that offer governments they find more attractive.

As a small example, when I was ten years old, my parents moved seven miles to exit a poorly performing school district to a better school district.

Cartel federalism is when political elites, driven by similar motivations as business people, try to reduce competition between governments by colluding to offer similar types of government.

Bastiat reminds us to “treat all economic questions from the viewpoint of the consumer, for the interests of the consumer are the interests of the human race.”

For the same reason, we should treat all political questions from the viewpoint of the citizen.

When I studied engineering, they taught us to avoid designing systems that have a single point of failure. Why? Because things fail.

No matter how durable and reliable we believe something to be, we don’t possibly know enough to know with certainty it will not fail.

We forget that when it comes to governments. Enron failed and hurt a small portion of the economy. The Soviet Union failed and took down the whole economy. That’s a single point of failure.

Even with governments, it’s good to have choice and competition. Why? Because things fail.

Exit is more powerful than voice

In this post, I wrote about how competition and choice is important for encouraging bottom-up innovation. When we say things like “roads are socialized” we gloss over something very important. There isn’t a single road department. There are many. We have Federal highways, state highways, county roads and city roads.

Each department operates somewhat independently and tries different things to solve the problems they face. Every now and then, one happens across an improvement that works well and other road departments can choose to adopt it. That type of innovation would not happen as often if there was a single road department that pushed one set of standards.

Alex Tabarrok of Marginal Revolution makes this point well in this post about how education was rebuilt in New Orleans after Katrina, when describing the source of innovation in education:

What really drives innovation, however, is not a simple substitution of private for public but a system substitution of competition for monopoly.

I agree. In the comments of his post, I suggested re-framing this in terms of the benefit to the user (edited slightly here):

It is not a simple substitution of a choice between free-to-the user public and cost-to-the-user private, but a system substitution of more choice by the user.’

We often get hung up on the public/private distinction. That doesn’t matter as much as how free the users — the direct beneficiaries — are to make a choice.

The freer the users are to choose to exit their current option if it isn’t working for them, the better.

This dynamic drives innovation. Why, you might ask? Because the freer your users are to leave you, the harder competitors will try to give your users what they want to encourage them to leave and the more honest soul-searching you may do to figure out why your users are leaving you. If you can’t figure it out, you end up going away.

My parents decided to move to exit a school district that wasn’t giving them what they wanted. That choice was much more powerful than their voice would have been had they decided to stay and try to change the direction of the school district.

So, whenever we think about why one system works and another doesn’t, maybe we should think in terms of how free users are to choose.