We have just finished the Olympic Games, the quadrennial search for the best in the world in a dizzying array of sports, even if only by a fraction of an inch or a hundredth of a second. But especially in those photo finishes that provide audiences so many thrills, the differences in rewards (e.g., gold vs. silver medal) seem far greater than the differences in performance.
That can lead to serious misunderstanding when people reason by analogy from sport competitions to market competition (the voluntary arrangements people make with one another).
Olympic rewards seem to go only to a very few “winners,” which could be taken to imply that most of the participants were losers (the most cynical version is that second place means “first loser”). Translated to markets, this becomes the “winner take all,” argument, implying the process leaves everyone else worse off. Unfortunately for clarity, however, that is a highly misleading view of who the winners are, though it can discolor many people’s understanding.
Instead of recognizing that specialization and exchange benefits all parties to voluntary arrangements, as in free markets, the idea that market competition rewards are unfairly disproportionate to performance is used to advocate a host of statist interventions, in the name of fairness, that do little to advance fairness but can greatly deal undermine the benefits we all derive from market competition.
We must recognize that the victory celebrated on the medal stand is substantially different from the victory for others that results from market competition.
On the medal stand, the relevant “output” achieved and rewarded is victory, regardless of the speed, height, etc., by which it was achieved. But a more accurate analogy to the gains from competition in market arrangements is the improvement in results (greater heights, longer distances, faster times, etc.).
Competition leads to people achieving certain tasks better over time, both through innovative “winners” and through emulation by others of what works most successfully. The result is that those of us in society get more productive at those tasks. More can be produced. It is a positive-sum game. And that fact is the often-missing link in people’s understanding of competition.
Society gains from increasing what is produced with our resources, because competition to offer more of what other people desire makes them improve (as when record times fall), as opposed to the zero-sum conception of winning at others expense. And that fact – that more of what others value is produced as a result of market competition – which can be overlooked in medal stand thinking, is why all participants will gain.
Further, it is why people seek out those arrangements voluntarily without anyone one having to coerce them. That is also the reason why, when the heavy hand of government intervenes in those affairs (as with price controls, entry restrictions, taxes, regulations, mandates, subsidies, licensing requirements, ad infinitum), it destroys improvements – wealth – that would have occurred without its coercive interference.
If we wish to avoid the misleading winner-loser view of competition that people can infer from focusing only on medal stands, we need to focus elsewhere. We need to keep our analytical eye on the expansion of benefits for others as individuals get better at providing what they value. That is just the generalization of the fact that running a mile in three minutes and 48 seconds rather than four minutes allows someone to achieve a given result with 5% less time (fewer resources, more generally).
The better we recognize this, the fewer people will be convinced by misleading attacks on voluntary arrangements. The political payoff to such assaults will fall and government will abuse our wealth-creating relationships less. We will produce more benefits for others as the means to benefit ourselves. And as we continue to discover ways to improve our performance, our contribution to others grows. There may not be medals awarded, but that is the gold standard for social organization.
Gary M. Galles is a professor of economics at Pepperdine University.