Important econ-101 point which I expect people reading the OP to be confused about: perfect competition destroys all economic profit, which is not the same as what "profit" intuitively suggests. It means that everybody has the same gains they'd have by taking some other option, not that nobody has any surplus at all. So, for instance:
Perfect competition destroys all producer surplus
That's completely wrong if we use the usual economic notion of "surplus" - roughly speaking, at least for producers, surplus is the accounting profit (revenue minus cost). Perfect competition does not drive surplus to zero, even in the most idealized theoretical models.
What perfect competition drives to zero is economic profits. That means that, in perfect competition, producers won't make any more profit than they would make by working in some other industry - they won't make any excess profit. That does not mean producers won't make any profit, in the usual accounting sense of revenue minus cost.
Which brings us to...
The worst case for consumers is if they are also the producers – a world fully given over to perfect optimization of some defined outcome. No matter how good prices of goods and quantities available might get, if you have zero surplus of any kind to spend on them, it doesn’t do you any good.
You get a Disneyland with no children.
This is completely wrong, for exactly the reason just discussed. Economic profit is not the same as profit in the usual sense. In a world of perfect competition, everybody makes exactly the same amount of profit working on any of their best options - zero economic profit, zero excess profit. They do not make zero profit, in the usual revenue minus cost sense of the word.
It would save a lot of trouble if the economists made up a different word, rather than using "economic profit", but sadly that boat has long since sailed.
I am not making the mistake here - as Jacob bets, I am well aware that what is happening is that producers make zero economic profits, and am referring to other things. Plus zero economic profits, in current reality, is pretty close to zero profits period (after labor costs, so some profit in some sense at least), and the more the system is perfectly competitive in other potential places to invest the more economic profits equal profits and I could write a whole additional post detailing this stuff and am going to try doing that now and see if it's worth doing.
But I can totally get how the way it is worded could lead readers, especially readers who don't know econ terms, to get the wrong impression, so I'm going to try and reword some stuff to be more careful. I do stand by the claims as I intended them.
EDIT/update: Page is now ready for re-importing, with some expanded text to hopefully clear up and prevent these confusions and make it clear what I mean here. I also think later parts will, if successful, make a lot of it more clear. I do not think an extra post is worthwhile, but I could change that opinion later.
So I see this update:
The Iron Law of Wages takes over, driving labor’s wage down to bare subsistence and capturing any efficiency gains from superior production. Capital demands and gets the risk-free rate, which quickly settles at or below zero.
This is still wrong - both the wage claim and the capital claim.
Iron Law of Wages doesn't actually work unless people have more kids whenever they have spare income. This hasn't been the case for two centuries; more income generally leads to fewer kids across most of the world today. (Though we could steelman the claim here and say that cultures which have more kids will eventually dominate the human population - then wages would drop to subsistence.)
On the capital side, I don't know of any model at all where the risk-free rate naturally settles at zero, other than in a scenario of massive abundance. If capital is scarce at all, it's going to settle to an above-zero rate of return in the long run.
The common theme in both cases: both wages-above-subsistence and capital returns only go to zero if the corresponding good (labor and capital, respectively) are massively abundant. Perfect competition is not sufficient for that to happen, except maybe if we mean "perfect competition between cultures" producing lots of babies.
Also...
Plus zero economic profits, in current reality, is pretty close to zero profits period (after labor costs, so some profit in some sense at least)
If we're talking about "Disneyworld without any children", the accounting profit made by labor is the only part that matters. Corporations making zero accounting profit (after capital cost) is fine, that's not a problem at all, and of course that's going to happen in any perfect competition scenario because starting a corporation is trivial in a perfectly competitive market. Corporations are massively abundant in this scenario, so of course the "price" of a corporation is zero. It's the labor cost which is actually interesting, and it's the laborers (including management etc) who actually get a profit, because there isn't an unlimited supply of laborers.
Bottom line: no amount of perfect competition will make economic profits equal to actual profits. Perfect competition just isn't a sufficient condition for that; it requires massive abundance of workers.
Like johnswentworth, I also don't understand the leap to "Iron Law of Wages takes over". You seem to be at least making some unstated assumptions in that part. Besides, even if subsistence wages do obtain for labor, land should continue to be very valuable and be earning a lot of rent/surplus, so can't the landlords at least be considered "children in Disneyland"?
(I said I wasn't going to comment further here, but for Wei_Dai, who was likely absent for a while, I'm going to make a one-time exception, but not respond further here. If Wei wants to talk further I can be contacted elsewhere.)
That was a late edit to attempt to respond to comments, and I'm already regretting it. I made a last attempt to make this more clear. If it's still not clear, then once I've got to where I am eventually going, then we can revisit and see if there's a better way to go about this.
It's hard to know exactly which assumption is the important missing one, but my guess is it's that we're talking about thinking through all the implications of a fully perfectly competitive world, rather than an individual perfectly competitive market. Or, alternatively, the implicit assumption that a perfectly competitive world is static, so we are solving for the equilibrium, although I try to avoid pulling that trump card out at steps where one doesn't have to.
The labor market is fully competitive by assumption. Or, given undifferentiated labor, the only way to not have the Iron Law be true right away (other than frictions we are assuming away) is to have a labor shortage because demand for goods exceeds labor available to supply the goods. Now the question comes of where that excess demand is coming from.
On land: I understand in its historical context why land is distinct from capital in this kind of context, and it certainly can have different dynamics in some ways, but I've always wondered why land isn't just capital like any other capital, once it is properly valued. If we agree to assume the risk-free rate truly is zero, then the value of land is equal to the sum of its future income streams, which if things truly are permanently static means land is infinitely expensive - extremes do insane things. More realistically, land is just super expensive (see: SF, NYC, etc, only more so) so landlords have very high wealth, which they can spend for at least some time, but this doesn't 'get us out' any more than other sources of wealthy people get us temporarily out for that subset, which must be small.
(You could also say that land being valuable is actually a violation of perfect competition since it implies differentiation in costs, again extreme situations are weird.)
I've always wondered why land isn't just capital like any other capital, once it is properly valued. If we agree to assume the risk-free rate truly is zero...
This has never, ever been the case in the history of humanity. The risk-free rate of land is the one thing we actually have very good records for and ways of calculating over human history. It’s not zero, nor has it ever been close to zero. Somewhere around 3-5% on average is a reasonably good estimate without getting into specifics of region and era.
But if you’re basing your argument on land having a risk free return on zero, we’ll that’s something that can be quite easily looked up and disproven.
(This will be my last word in this thread, as I do think replying to this can be helpful in creating clarity, then I'm done here.)
The argument here is not based on 'there was a time and place, or is a time and place, where this scenario took place. It is an argument that given the assumptions, this is what would happen. It definitely hasn't happened in the past.
Agreed that the rate of return on land has never been zero until at least recently because returns to capital have not been zero until recently if ever.
But if returns to non-land capital are zero, and returns to land capital are positive, and land is alienable, then people bid up land until the returns equalize. If it's not alienable, as it sometimes isn't, asking what it is worth is weird but I'd assume you want to value it as if it was alienable anyway.
This brings me back to not understanding the land vs. non-land division absent laws about land ownership. Land is a capital good like any other, its return must be the same as all the others unless something is out of equilibrium.
All right, that's it. I sincerely wish I'd been able to convey the points in ways that didn't lead to these confusions, or found ways to skip over the confusing things and still get where I want to go, but what's done is done.
Given this (which I'd bet Zvi is well aware of), I'm quite confused about what the Disneyland sentence is supposed to mean; and I'd be curious for Zvi to clarify.
So, to summarize: Systems are a mix of a steady state plus exogenous shocks (disasters and whalefalls and sideways shifts); and within each system and subsystem, there is some balance of competition (Moloch) and slack (Elua). Steady state favors those which are most competitive, while shocks favor those with the most slack. More frequent, larger, and more varied types of shocks favor Elua, while less frequent, smaller and more predictable types of shocks favor Moloch. Since the world's rate of change and weirdness of changes has recently increased, slack are favored; under a narrative of increasing rate of technological progress, slack will continue being more favored over time.
There's a big caveat, though, which is that in the long run, only those types of slack which can be deployed to respond to shocks count. This means that interconvertibility of stocks and flows is very bad, and that anything which can be sacrificed permanently during a temporary shock is very much at risk.
User feedback to Zvi: I skimmed the first half of the post and then quit because it seemed to be just reiterating standard Moloch stuff. But this comment excited me a lot and now makes me want to read the post again to get more detailed models behind Jim's summary.
Jacob: Good feedback. I will note that I think there's a lot of 'yes, you know this already' here in your case especially in the first half. I need the background for later (and even for the later part of this post).
One could even argue this has already begun – that people in many nations having less than the replacement level number of children represents competitive forces so strong that young people no longer have the surplus to be comfortable having enough kids.
That doesn't sound right. Usually people in poorer countries have more kids, and poorer people in each country have more kids.
Agreed. Zvi's proposition also simply doesn't align with first-world people's motivations, as far as I can tell. In short, first-worlders have a lot of other interesting ways that they can use their time.
Pinging about this particular point. (I'm about to go around pinging on comments in the Moral Mazes sequences that I don't recall being particularly addressed)
Can one even make the claim that perfect competition, and so P = MC obtains, mathematically proves all value is destroyed? I must be missing something but what happened to all that inframarginal value -- basically all the consumer and producer surplus? It's not like we're talking about flat MC curves and some type of point/fixed Q demand.
Consumer surplus isn't directly wiped out - that's not the argument being made, although with sufficiently widespread perfect competition any consumer surplus is then captured from them by the Iron Law of Wages. Producer surplus under perfect competition is only that they make zero economic profits, which with only PC markets available soon means zero or worse profits.
But that's not what I meant by destroys all value. Value != profit. We are asserting the Value is Fragile claim, and pointing out that the act of sufficiently powerful optimization will optimize against all Ys where Y is a value that is not helping in efficiently producing the perfectly competitive good set X. And we claim that at least one such Y will be destroyed and this will destroy all value (e.g. at the end of the original Meditations on Moloch, the Y is our consciousness itself, but there are many other possible choices for Y.)
If you can compactly define the set of optimization targets Z that allow said production of X, then it is easy to see that there must exist important value Y not in X and that this Y will be destroyed.
A reasonable response to this is to claim that value is not fragile, or that no proof of this has been offered. If you do not accept the Value is Fragile claim, we can go about this via the Iron Law and the inability to survive shocks or sustain reproduction of people slash social capital, or what have you, and be more concrete that way, or go to a specific Y that you can accept, such as Scott's example in Moloch.
(Also, of course, one can make any claim one likes, even false claims. That's how claims work.)
Zvi, okay, I'm seeing the discussion much better (I think). I still don't think it is a correct position -- economic profits and their pursuit as only one of the margins humans will maximize on so other values will also persist. But this is perhaps something of biased view for me. I came to the view long ago that some see economics as explaining all human and social actions, which I reject. I think this discussion seems to include that underlying assumption/belief (economics encompasses all that is human/social).
Still, I suspect there are still some interesting thought to be expressed and discussions about how we think about the world and it's workings. I just hope the economic models and metaphors don't hide too much that is important.
I did enjoy your parenthetical comment! lol.
Fragility of value is used correctly only to make very different points from what you are stating here, that must result from how different the preference orderings you obtain are from the original preference orderings if you make changes to the complex computation that the values are. Consumer preferences in general equilibrium theory are a real-valued function whose domain is the consumption set, a subset of a full commodity space. This function can be used to define an order relation that represents the consumer’s preferences, each represented by any of an infinity of functions since you can compose them with any strictly increasing function. Consumer preferences are not the same thing as agents’ preferences or values, which are not at all related to commodity bundles, and don’t have a consumption space as domain, even though they too can be used to define order relations. You cannot make this argument confusing goods and values. The values that are fragile are not the consumer preferences. As far as the actual preferences determine consumer preferences over commodity bundles, they determine the customer’s demand function according to prices and consumer endowments or wealth and translate into buying and selling decisions, and that is relevant to perfect competition. The rest of the preferences is entirely orthogonal to perfect competition—if it wasn’t, then it would, contradicting our assumption, have contributed to determining consumer preferences.
Things sometimes get bad. Once things get sufficiently bad that no one can deviate from short-term selfish actions or be a different type of person without being wiped out, things are no longer stable. People cheat on long term investments, including various combinations of things such as having and raising children, maintaining infrastructure and defending norms. The seed corn gets eaten. Eventually, usually when some random new threat inevitably emerges, the order collapses, and things start again. The rise and fall of civilizations.
I'm wondering if you're thinking of https://slatestarcodex.com/2019/08/12/book-review-secular-cycles/ . I think that was what made me realize things worked this way, and it was indeed a big update on the standard narrative. I still haven't decided whether this is just a quirk of systems that have certain agriculture-related dynamics, or a more profound insight about systems in general. I look forward to reading more of what you have to say about this.
I think my answer (not yet written up) to why things aren't worse has something to do with competitions on different time scales - if you have more than zero slack, you want to devote a small amount of your budget to R&D, and then you'll win a long-run competition against a company that doesn't do this. Integrate all the different possible timescales and this gets so confusing that maybe the result barely looks like competition at all. I've been having trouble writing this up and am interested in seeing if you're thinking something similar. Again, really looking forward to reading more.
I was not thinking of that particular example/implementation of the concept, there are definitely differences, but the two have a lot in common. Related pieces of the same puzzle, I'm assuming.
My central answer to why things aren't worse should be clear in post three, which is that competition is very imperfect - and Mazes are a case where suddenly that imperfection is stripped away and you instead have super-perfect competition, and suddenly things are in fact really bad.
We also both have a key place in the model for time scales and shocks, where anyone who runs too close to the edge becomes fragile.
Intuitively, there's also after the fact R&D to keep up with your competitor's improvements (implementation) which is distinct from before the fact R&D (what's a good idea + how do we do it).
I think you really have to address differing individual goals/preferences in order to explain this. People don't want the same things - we care about ourselves more than each other. This means one person's moloch-ian competition (destroying all the producer surplus) is another's Eleu-nian dream (consumer surplus maximized by supplier competition). Every transaction has a buyer and a seller.
It's obvious enough to be an adage that competition is great when it forces others to do their best, and sucks when it forces you to sacrifice.
I am going to stop engaging with the comments on this post, at this point. I think any further engagement will tempt me to make the post increasingly worse rather than better, so I'm doing one last 'can I make this more clear without making it outrageously long or giving up important points' pass, probably change very little, and then stop. Also, I'd rather get more of the sequence finished while I can, that seems more useful by a lot. Note that the disagreements don't actually matter to the later parts of the sequence.
Mods, you can reimport now, at this point I'm not going to make more changes unless distinct new things come to light. Also fixed a typo in previous post.
I do thank the people who gave the pushback, because I understand better where they are coming from and why they view the economic model presented as false. It certainly is not the standard one that uses these terms, makes more implicit assumptions slash includes more implicit steps that are more important to its conclusions than I first realized, and most importantly those are implicit things that the standard economic models choose to completely ignore, for understandable complexity-minimizing reasons and because they're not useful on the margin, so they're not relevant to the normal reasons one learns and uses those tools.
In the future, if this comes up again as I expect it to, I need to either figure out a better way to use the concepts in these ways in writing, or decide to accept the price. It's a question for another day.
I think the Immoral Mazes sequence overall has been a big part of my worldview shift from 2019. I'm interested in reviewing the sequence holistically, but also interested in reviewing individual subsections of it.
I think this was among the more controversial subsections, which would be worth revisiting.
One of the things that originally bothered me about this post is that it treated system shocks as outside-the-systems as opposed to as selection pressures in a yet bigger system that would move towards a state of Molochian competition. I thought to myself, This is missing the point, Moloch is still winning--just on a longer time-scale. Then I read this for the third time:
The practical danger to this system, that is on the rise now, is the temptation to not let this cycling happen. Preventing the cycle stops short term pain and protects the powerful. In the places things are getting worse or on pace to start getting worse, where Moloch is locally winning, this is a key mechanism.
Now I realize that I was missing the point -- because there are actually two different ways that Moloch wins and one of them could happen on a super-fast time-scale (I wonder if this is what Zvi means by "Moloch's Army"?). Here are the specific mechanisms I have in mind:
#1. The slow, theoretically true way: Elua (an antifragile, high slack, high human-value system) is just what Moloch (a system encompassing all human societies that introduces existential shocks into them) has found to be most competitive. Eventually, Moloch will find a system Elu-nah (ie a society that figured out how to trade-off a lot of human value for more slack) that outcompetes Elua and doom us all.
#2. The super-fast actual thing that could be happening right now: Human beings, for personal reasons completely unrelated to the way that Moloch selects between Elua and other worse societal set-ups like Elu-nah, are actively trying to convert Elua antifragile high-human-value societies into super-antifragile low-human-value Elu-nah societies to preserve their current positions in power. And they use the theoretical justification of #1 to pretend like they're not responsible.
And distinguishing these two mechanisms is really important. As humans, we can engineer situations where it takes an extremely long time for #1 to happen (ie by designing hard-to-destroy mechanisms that fight potential Elu-nah societies) so it's really not so bad in the short-term and could potentially turn out okay over extremely long time-frames. In contrast, #2 is something that is happening right now, and could very quickly get us into a permanent Molochian equilibrium which would take #1 millions of years to achieve.
Things sometimes get bad. Once things get sufficiently bad that no one can deviate from short-term selfish actions or be a different type of person without being wiped out, things are no longer stable. People cheat on long term investments, including various combinations of things such as having and raising children, maintaining infrastructure and defending norms. The seed corn gets eaten. Eventually, usually when some random new threat inevitably emerges, the order collapses, and things start again. The rise and fall of civilizations.
Uneasily looks at CO2 concentration and global average temperatures graphs for the last decades
The problem is also that in this sense the interests of the civilisation - as a single entity - and the interests of the individuals inside can be dramatically misaligned. Shocks, well, tend to kill people in droves, and make others' lives miserable (while, arguably, in some cases, they probably also do make some lives better, if the fallen system was oppressive to them). Just like mass extinctions create biodiversity and reshuffle the genetic deck in the long term, but also kill a lot of living beings. So the hypothetical solution for the steady state future in which shocks aren't a thing any more - how do we just allow for some slack to exist anyway? - are relevant before it too, because they could be applied to give some ability to a civilisation to drift away from its path of pure optimisation, sacrificing productivity in the name of resilience and flexibility. Which might prevent those shocks in the first place, when they're caused by the civilisation's own stupid rigidity. If we're able to learn to do that, then we can do better now and do better in that future. If we can't, we're doomed to be at the mercy of catastrophes of our own creation now, and if we ever make it to that future at all (having survived the dangers of climate change, nuclear weapons, nanotechnology, AI, and who knows what else that we could totally turn on ourselves through that sort of sheer civilisation-wide single-mindedness), then we're doomed to fall prey to perfect optimisation and just do the same dull things forever. Which by the way is something I think we're worryingly seeing signs of in the political sphere. While we don't have the power to control the forces of nature, we do have increasingly more power to control other humans, and that power is being turned more and more towards enforcing homogeneity and paralysing change by those who hold it. See for example China's experiment in social scores and such. A people rising up in revolution - the political/human equivalent of a shock - is always less likely, because of both weapon technology and because of these methods of micromanagement of consensus and dissent. You could easily end up with perfectly stable technocratic or authoritarian governments that just do nothing except perpetuate themselves, bringing about another form of stasis that can only harm humanity long term.
I suspect that super-competition exists in many areas far more than needs to happen, caused by people's tendency to over-value sank cost to enormous proportions.
This includes everything from competing for professorship. Ivy League spots. Big-4 accounting jobs.
In fact, I will go further and say that, many things that comes with "prestige" and "status", has some elements super-competition when viewed from a more rational point of view that ignores "prestige". It happens far more than people realize.
This has been mentioned in other comments, but I'm concerned that the author is missing the problem. The misuse of the term "value" is not a minor thing, and in fact invalidated the entire article (the article argues that perfect competition is bad but for various reasons it doesn't exist; this is completely wrong, perfect competition is good and would be better than the status quo). You're right that economists sometimes use value in a specific way and your usage would be valid in that context, but that's not how you're using the word in this article. I think the point where this article goes from confusing to explicitly wrong is here:
No matter how cheap prices of goods and quantities available might get, if you have zero surplus of any kind to spend on them, it doesn’t do you any good.
Before this you were very specific to use economic terms, but here you're suddenly using "surplus" to mean "everything of value". This equivocation is all over the post but becomes unmistakable here.
I think a big part of the problem is focusing on weird industries like VC funded redistribution schemes like Uber instead of real businesses. Look at farms, manufacturing, etc. - businesses that are trying to make a profit.
If I open the world's first apple orchard in a world of orange orchards, I can charge monopoly prices, earning a surplus on my sales, and use that money to buy more stuff than people who grow oranges. If suddenly the seeds go out and anyone could grow apples, in this articles terms, we would suddenly have closer-to-perfect competition and Moloch would destroy all "value".. leading to more apples being produced, more affordable food variety, and a decrease in work/income inequality.
We don't need to explain how competition isn't perfect and actually things are fine because roving barbarians burn down random orchards every year. Periodically destroying orchards is just bad and producing things more fairly is good.
I'm guessing the counter-point would be that in high-capital businesses like manufacturing, perfect competition destroys the economic surplus you need to build or maintain factories, but this is misusing terms in a different way. The cost of the factory isn't surplus and if your competitors are selling below cost, the problem is irrational competitors, not the fact that there's competition.
Previously in Immoral Mazes sequence: Moloch Hasn’t Won
Perfect Competition
In Meditations on Moloch, Scott points out that perfect competition destroys all value beyond the axis of competition.
Which, for any compactly defined axis of competition we know about, destroys all value.
This is mathematically true.
Yet value remains.
Thus competition is imperfect.
(Unjustified-at-least-for-now note: Competition is good and necessary. Robust imperfect competition, including evolution, creates all value. Citation/proof not provided due to scope concerns but can stop to expand upon this more if it seems important to do so. Hopefully this will become clear naturally over course of sequence and/or proof seems obvious once considered.)
Perfect competition hasn’t destroyed all value. Fully perfect competition is a useful toy model. But it isn’t an actual thing.
Some systems and markets get close. For now they remain the notably rare exceptions. Often people despair because they are intuitively modeling things as effectively perfect competition, at least over time.
This causes many people to think that everything must by default become terrible, likely right away, such as in the examples that open Meditations on Moloch, and Raymond’s kingdoms. And thus, that everything in general must become terrible.
The anticipation of perfect competition, rather than actual perfect competition, is often what causes things to become terrible. Anticipation of perfect competition creates perfect competition the same way that cooperation in a fixed-length iterated prisoner’s dilemma has a backward induction problem.
Fighting this instinct is important. Responding instinctively with the detailed explanation, that competition is imperfect is not sufficiently quick or emotionally resonant. Two quick intuition pumps for when someone thus despairs, or argues for despair, are that this argument proves too much, and that, again, when you look around, many things are insanely great.
Remind Me: What Exactly is Perfect Competition?
Perfect competition is defined as a market with large numbers of buyers and sellers, homogeneity of the product and marginal costs of production, free entry and exit of firms, perfect market knowledge, one market price, perfect mobility of goods and factors of production with zero transportation costs, and no restrictions on trade. This forces the price to become equal to the marginal cost of production.
If even one of the assumptions listed above breaks down, price will no longer necessarily be equal to marginal cost of production.
The linked-to definition calls it a ‘theoretical market structure’ for good reason – this is a useful way to model some things, but never actually holds fully true and is not actually a thing.
When I Googled for an example of perfect competition, this was the top result, the thing that came up in the box at the top:
Here is how much perfect competition is a theoretical construct: Farmers’ markets were already, before noticing this on a later editing pass of the sequence, my first and most detailed example, in the next post, of highly imperfect competition.
Note that perfect competition is in important ways less competitive than imperfect competition, because there is no competition for differentiation, for iteration or improvement, or for long term concerns.
Super-Perfect Competition
We will define super-perfect competition as competition that mostly has most of the elements of perfect competition, but lacks free entry and free exit, which creates more production than there would be at equilibrium (and thus, also, a lower price). In particular we assume effective homogenization of products. The market coerces this production through some combination of trickery, force, mandates, exploitation of biases, false perceptions, cost of exit, rapid technological or regulatory change, predatory competition in pursuit of future market power, or other means.
Perfect competition destroys all the producer surplus.
More precisely, it sets their economic profits to zero and takes away all their freedom of action – capital invested in such production is risk-free in pure perfect competition so it earns the risk-free rate. Which in the real world right now is basically zero. In a closed economy of only perfectly competitive markets, there are no alternative investments to establish a positive risk-free rate, so as long as there is not a capital shortage across markets, the risk-free rate will be at most zero.
Super-perfect competition destroys more than all producer surplus. The saving grace of free ability to exit has been removed.
Producers in both cases also have no slack or freedom. They must follow exactly the ‘optimal’ short-term strategies. Anything else is sacrificed.
As a system approaches perfect competition, producer surplus is destroyed, producer slack is depleted, and freedom of action dies.
Perfect competition is at core a special case of perfect optimization, in this case of homogenized commodity production.
Again, perfect competition is an abstraction. It’s not a thing. But being very close to perfect competition in some places is totally a thing.
Super-perfect competition is totally a thing.
Perfect competition is where you can’t win. Super-perfect competition is where you can’t break even and can’t even quit the game.
On a scale where 0 is full monopoly with price discrimination and 1 is perfect competition, super-perfect competition is values greater than 1.
A clean example of super-perfect competition would be the market for rideshares on the internet. Another would be the airline industry, at least at some times in the past. The dollar auction works via super-perfect competition. Many of Scott’s other examples in Meditations on Moloch also involve similar situations, with players forced into participating.
In each case, super-perfect competition exists because market participants paid the cost of entry in anticipation of capturing a future market with levels of competition that would allow them to enjoy a producer surplus and make profits. When too many people make that same calculation, they become wrong.
Traditionally all of this is viewed as great for consumers, since they get the best possible price.
If all the consumers want is to cheaply consume a fungible commodity today, as optimized to simple metrics, they are in luck. Or at least they are in luck for now, since super-perfect competition often paves the way for future oligopoly. If they want anything else, this market won’t help them get there, because producers won’t give them anything else.
Thus, rideshares and the airline industry.
Universal Perfect Competition
The worst case for consumers is if they are also the producers – a world fully given over to perfect optimization of some defined outcome.
This is an incredibly strong and alien assumption to be making, and it has lots of strange consequences that are rightfully ignored in standard econ-101 models that are for thinking on the margin.
No matter how cheap prices of goods and quantities available might get, if you have zero surplus of any kind to spend on them, it doesn’t do you any good.
This is isomorphic to the standard Molochian future outlined in Meditations on Moloch. Standard Moloch-winning consequences follow.
The Iron Law of Wages takes over. Right away rather than eventually, since everything scales perfectly so there can’t be a labor shortage. This drives labor’s wage down to bare subsistence and capturing any efficiency gains from superior production.
Capital demands and gets the risk-free rate, which quickly settles at zero. Easiest way to see this is capital supply over time must be constant.
Any actions that are not optimal permanently deplete your stored capital. You cannot invest in optional assets, such as slack or creating the next generation, because those willing to not do so are competing (perfectly!) with you for a job.
You get a Disneyland with no children.
One could even argue this has already begun – that people in many nations having less than the replacement level number of children represents competitive forces so strong that young people no longer have the surplus to be comfortable having enough kids.
Worlds given fully over to perfect or super-perfect competition, by default, lose all value to those within them.
That last clause of ‘to those within them’ is important! They can have value to those outside that world, if they can get their hands on some of the stuff being produced. Creating almost-perfect or super-perfect competition within a compact space, ideally containing few if any humans or other moral agents, can be a great way to efficiently produce an important fungible good. Not every system of the world needs to have surplus and enjoy economic profits.
Over time, many systems that are not monopolies move in the direction of perfect competition, if nothing changes and no one does anything to stop this effect.
An increasingly static world, drawn towards its permanent equilibrium, would by default look increasingly like some combination of perfect competition, pure monopoly, and other inadequate equilibria.
This is a lot of where the ‘Moloch wins because essentially perfect competition’ intuitions originate. Take a system. In that system, assume that underlying conditions are permanently static, except for the participants. Assume the participants won’t meaningfully coordinate. Assume that participants who do better beat out those who do worse and expand and/or replicate and/or survive marginally better.
Extrapolate.
The fact that this hasn’t happened yet gets viewed as a ‘temporary respite’ from the inevitable triumph of awfulness.
And in the very long run, given sufficiently advanced technology, maybe that’s true. It depends. We don’t yet know the rules of that game. Details matter.
But even old Malthusian traps don’t work this way.
Things sometimes get bad. Once things get sufficiently bad that no one can deviate from short-term selfish actions or be a different type of person without being wiped out, things are no longer stable. People cheat on long term investments, including various combinations of things such as having and raising children, maintaining infrastructure and defending norms. The seed corn gets eaten. Eventually, usually when some random new threat inevitably emerges, the order collapses, and things start again. The rise and fall of civilizations.
The rise and fall of corporations or other organizations is often not so different.
Shocks are Inevitable
In the steady state, there needs to be enough surplus around to raise the next generation and deal with negative random shocks. And as per Scott’s second reason things might not get too bad, the horrible nightmare systems mostly aren’t actually efficient ways to get useful actions out of human beings. Neither is starving the people of resources too far. Things can only get so bad for so long.
If you make things sufficiently bad, before too long you get wiped out.
For now at least, poor folks still smile.
That’s not to say that this is a good solution. Our modern solution centers on robust competition and an industrial revolution. We let corporations and others drive each other into bankruptcy or dissolution. This can be because they get too far gone, or because outside improvements through technological and productivity growth create a superior alternative.
In the increasingly static and more technologically advanced future that is more of a true steady state and approaching its permanent equilibrium, both technologically and otherwise, shocks may cease to be inevitable and thus this danger would become much stronger. That’s a huge problem that needs more attention. It’s also beyond scope. It is important for us to remember that it is beyond scope and a different problem.
The practical danger to this system, that is on the rise now, is the temptation to not let this cycling happen. Preventing the cycle stops short term pain and protects the powerful. In the places things are getting worse or on pace to start getting worse, where Moloch is locally winning, this is a key mechanism.
This leads to another perspective on how people get to the ‘Moloch wins’ intuition.
Those that visibly follow Moloch here and now seem to prosper, here and for now, if no one is punishing them for it (and also, as per my not-yet-justified claim last time, Moloch’s Army is in effect rewarding them for these intuitions and punishing others for lacking them).
The things that exist and are big or visible, and thus seem important, are mostly steadily getting worse most of the time. Despite this, things overall kept getting better on almost all fronts for a long time, whether or not that is continuing recently.
But it’s tough to see that blossoming forest for the rotting individual trees.
That question again. How does Elua pull off all these unfortunate accidents?
One key reason is that Elua is antifragile. Accidents and disorder are good for business.