Is competition good?

by toonalfrink4 min read10th Sep 201923 comments



From Thiel's Zero To One:

The problem with a competitive business goes beyond lack of profits. Imagine you’re running one of those restaurants in Mountain View. You’re not that different from dozens of your competitors, so you’ve got to fight hard to survive. If you offer affordable food with low margins, you can probably pay employees only minimum wage. And you’ll need to squeeze out every efficiency: that’s why small restaurants put Grandma to work at the register and make the kids wash dishes in the back. Restaurants aren’t much better even at the very highest rungs, where reviews and ratings like Michelin’s star system enforce a culture of intense competition that can drive chefs crazy. (French chef and winner of three Michelin stars Bernard Loiseau was quoted as saying, “If I lose a star, I will commit suicide.” Michelin maintained his rating, but Loiseau killed himself anyway in 2003 when a competing French dining guide downgraded his restaurant.) The competitive ecosystem pushes people toward ruthlessness or death.

Scott Alexander replies:

So monopolies’ advantages include being better for employees, more socially responsible, and able to engage in long-term thinking. The classic examples of this (which I don’t think Thiel brought up) are Bell Labs and Xerox PARC. Two monopolistic companies with more money than they knew what to do with started super-basic-blue-sky research centers that ended up creating many of the technologies that shaped the modern world
On the other hand, all of the classical disadvantages of monopolies are still there. Monopolies remove the pressure to do a good job – whether that’s in keeping prices low, keeping working conditions tolerable, or in keeping products and service high-quality. They lower the diversity of an industry, making it more likely to get stuck in an evolutionary blind alley it can’t get out of; they increase the risk of merging with government into a crony capitalism. A wolf sheltered from survival-of-the-fittest for too long becomes a Chihuahua; Amazon sheltered from survival-of-the-fittest for too long becomes the DMV.

And does a mythical take on it:

I don’t think this is one of those issues that’s going to get decisively solved in a few paragraphs. Moloch and Slack are the new yin and yang, the new chaos and order; their interplay creates the Ten Thousand Things. Err too far towards competition and everyone works themselves to death in garment sweatshops; err too far towards monopoly and everyone sits at a desk filling out forms and backstabbing each other until the lights slowly go out. It’s only in the collision zone between the two that anything interesting ever happens.

This post will attempt to decisively solve it in a few paragraphs.

You have a restaurant. It's a local monopoly, and you're running decent profits. A new restaurant opens down the street. Some of your customers are diverted, so you lower your prices. You can no longer buy that sweet Ferrari.

You have a restaurant. It's a local monopoly, and you're running decent profits. A new restaurant opens down the street. Some of your customers are diverted, so you lower your prices. You have to cancel most of your donations to AMF.

In the first example, we can be reasonably sure that competition increased value. In the second example, we can be reasonable sure that competition decreased value.

So here's a lemma: low competition is a good thing iff the increased profits are spent on something more valuable than distributing it among customers. Or let's put it this way: more resources to people that create above-average value is good. Let's call this type of person a "good" person.

What makes a "good" person?

Let's assume that "goodness" is largely dependent on incentives. There might be some residual factors like nature and habits, but these are generally small variations on the status quo that is dictated by the incentive landscape.

Incentives can be instrumental and terminal, and the terminal ones are usually called "needs". Maslow was a pioneer in this field, but the most up-to-date list of needs that I can find is this 2011 paper. It says:

  • There is indeed an ordering of needs, so that humans tend to take one at the time in an order that is roughly the same across people.
  • The needs identified, in order of priority:
    • Basic (being able to afford food and shelter)
    • Safety (feeling safe walking alone, not having anything stolen, not being assaulted)
    • Social (experiencing love, having others to count on in an emergency)
    • Respect (feeling one is treated with respect, being proud of something)
    • Mastery (having the experience of learning, doing what one does best at work)
    • Autonomy (choosing how one's time is spent, experiencing freedom in life)

The idea of hierarchical needs is that, as long as you don't have need i satisfied, you won't really care about needs {i+1, ..., n}. Someone who is struggling to gain respect, won't care as much about autonomy. Someone who is trying to feed themselves, won't care as much about safety.

You have a restaurant. You're hardly getting by. A new restaurant opens down the street. Some of your customers are diverted. You need to survive, so you lower your cost price by secretly dumping your excess waste into the river.

Conversely, even if your needs are satisfied up to i, you will not be able to allow things that threaten these needs:

You have a restaurant. It's a local monopoly, and you're running decent profits. Many people in the neighborhood love and respect you for providing them with this service. You lobby with the local council to make sure no one else can open a restaurant near you.

So an incorruptible person is one that has all of their needs met, but doesn't depend on anything for it. They can always make the moral choice, because no choices are incompatible with the foundation of their well-being.

Which needs lead to altruism?

Of the needs listed, I imagine that "respect" is the one that is most important for making people altruistic. It seems to me that respect is mostly a matter of fitting into the values that your local culture celebrates. Now this could be owning a Ferrari, or it could be donating to AMF.

A culture can be seen as an agent, with its values being its operating system. A culture which values altruism will do better. This is one way in which altruism tends to make you better off: it will make you gravitate towards the people that value it too, surrounding you with altruistic people. This is a Darwinian process: altruistic cultures win, and cultures that win grow. Those that are invested in it grow along with it. But your investment only pays off when you are actually valued by the culture. This is, in my model, why people care about altruism at all.

When is competition good?

You have a restaurant. It provides you income. People love and respect you for it. Working in the kitchen gives you a sense of mastery. You're free to do it your way. A new restaurant opens down the street. Without your restaurant you are as good as dead, so you compete to the death. You dump your waste into the river, use the cheapest ingredients that are super toxic, put out annoyingly flashy ads for your restaurant. If all else fails, you are ready to have your opponents killed.

You have a restaurant. It provides you income, but you could opt for a basic income programme instead. Your local community has a culture that values unconditional love. It also cares a lot about consequentialist utilitarianism, and by fitting in that belief system you get your respect. You get a sense of mastery out of your hobbies. A new restaurant opens down the street. You find that customers like it better. You put some effort into upgrading your service, but to no avail. You congratulate the owner and thank them for improving upon your work. You set off to find a new job that creates value. The kind of value that your community recognizes.