Markets Suppress Competition

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Markets suppress competition

Blair Fix:

"Our thesis is that between human groups there is a war of all against all. But within groups, things are different. To be stable, groups must foster cooperation among members. Put another way, stable groups must suppress competition.

Markets, I propose, are a cultural tool for suppressing competition within groups. When they function well, markets restrict competition to the rules of private property. Resources can’t be taken by force. They must be bought and sold. In other words, markets suppress outright theft and plunder. (I say “outright”, because I still have Pierre-Joseph Proudhon’s slogan “Property is theft!” ringing in my ear).

The main insight from group selection theory is that this suppression of competition must occur within a group. In other words, property rights do not just come from nowhere (although it appears that way in economic theory). Instead, property rights are culturally evolved. They developed within groups as a way to suppress competition.

It is nation-states, for instance, that enforce modern property rights regimes. And when these regimes break down (when states “fail”), competition doesn’t disappear. Instead, it takes a more severe form. Think civil war. Think roaming bands of mercenaries. Think warlords. Think terrorism. Think outright war. Markets maintain the stability of a group by suppressing violent competition within it. When markets fail, groups fail.

As an example of this process, think of Europe. Two centuries ago, European states were almost constantly at war with one another. This group conflict culminated in two world wars – the most violent events in human history. After World War II, European states finally managed to integrate into a larger group. The Eurozone market was born, and peace prevailed. Violent competition was suppressed, and war gave way to market competition.

Markets are, of course, one of many cultural tools for suppressing competition. But within modern states, they are probably the most important.

Firms suppress the market

Markets suppress violent competition within states. But this is just the first of a series of tools for limiting competition. Within states, there are subgroups we call “firms”. Their main role is to suppress the market.

This is, of course, not how economists treat firms. In fact, the existence of firms comes as a shock to economic theory. This is because economists assume that “perfect competition” (a market war of all against all) is the optimal way to organize society. To explain why firms exist, economists have to add auxiliary assumptions. The most popular auxiliary assumption was proposed by Ronald Coase (1937). He argued that firms minimize “transaction costs” – the cost of organizing using the market. But much like marginal productivity, transaction costs are unobservable (Nitzan and Bichler, 2009).

In contrast, an evolutionary theory does not need auxiliary assumptions to explain why firms exist. Our hypothesis is that humans are social animals who compete as groups. To be stable, these groups suppress internal competition. Firms, then, are subnational groups that compete within the confines of the market. And just as expected, firms suppress market competition internally.

How do firms suppress the market? They use hierarchy.

Inside firms, there is no bartering, no bidding, and no auctioning. Instead, firms have a chain of command. Superiors command subordinates, who command their own subordinates, and so on. Like property rights, this chain of command is a set of rules that limit competition. Employees, for instance, can compete for promotions within the corporate hierarchy. But once the position is filled, the competition is over. If the chain of command works well, subordinates will obey the newly promoted person. No such rule exists on the open market."