This article was published in Scientific American’s former blog network and reflects the views of the author, not necessarily those of Scientific American
Though the free-market faithful have long preached that competition creates efficiency, as if it were a law of nature, nature itself teaches a different lesson. The seductively simple story of the virtues of competition contains some general theoretical truth, but execution is how theory dies, and we can’t let blind faith prevent us from seeing the deviling details of how it operates in practice. Unregulated competition in nature regularly delivers disaster. And ignoring nature’s lessons for our economy would have us be as dumb as trees. Competition frequently creates foolish costs and undesirable outcomes.
Richard Dawkins, a noted explainer of nature, tells us, “Tree trunks are standing monuments to futile competition.” In his book The Greatest Show on Earth, he makes the necessary distinction between a “designed economy” and an “evolutionary economy,” using the fable of the “Forest of Friendship.” “In a…mature forest,” he writes, “the canopy can be thought of as an aerial meadow...raised on stilts…gathering solar energy...but a substantial portion of the energy is ‘wasted’ by being fed straight into the stilts, which do nothing more useful than loft the ‘meadow’ high in the air, where it picks up the same harvest…as it would—at far lower cost—if it were laid flat on the ground.”
No tree can afford to not compete in the height competition. However, if somehow the trees could arrange a pact of friendship to limit their heights, each tree, and the forest as a whole, could save energy. This is obviously not possible for trees, but if it were, Dawkins concludes, the “Forest of Friendship [would be] more efficient as a forest.”
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Systems of self-interested agents, responding only to local incentives, can easily evolve energy-wasting, unfruitful competitions. Dawkins doesn’t make the obvious connection between free- market theory and freely evolved systems, but you should. Once a way of competing is established, it’s very difficult for individuals not to play along. If we let our economies imitate trees, and the majority of nature, in practicing unguided free competition, the results will often be suboptimal, for each and for all. Worse, we will miss the main benefit of being human, which is to use reason to coordinate better outcomes.
Enormous ill-suited “monuments to futile competition” exist at the heart of our health-care system. A 2008 study found that pharmaceutical companies spend 24% of their revenue on marketing and promotion (versus 13% on research and development). Drug prescription decisions should be based on objective medical criteria, and data on performance and side effects is publicly available. So why on earth would it make sense for pharmaceutical companies to spend so much on the armies of sales reps that visit doctors with such relentless regularity? The local logic at work is that no individual company can risk not playing the game. However, a neutral body with the power to enforce adherence to agreed-upon limits could change these dynamics, collecting the information that companies seek to provide to doctors and making it available online. This would cost a trivial fraction of the monumental $62 billion wasted by the current free market approach (based on latest pharmaceutical revenue in U.S. $260 billion). It would also prevent nonmedical distortions in prescription decisions.
The way wasteful competition gets entrenched is a worrying example of an entire class of errors in which what passes for rational decisions can create undesirable outcomes. These include the tragedy of the commons, Prisoner’s Dilemma-type games, and Nash equilibria. Applying a narrowly self-maximizing logic yields suboptimal results for everybody. But tackled as coordinated action problems, with monitoring and enforcement— they’re easily solved to greater benefits to each and all. Precisely the lack of this complex cross-agent coordination prevents “the market” from increasing efficiencies in our unintelligently evolved U.S. health-care system. Competition’s benefits are created by constraints. Creative responses to designed and guided limits can work better than “natural constraints” in avoiding negative-sum games.
Free competition does not magically lead to the best outcome in nature. Nor does it in economics. The magic of markets isn’t like the magic of science; it’s more akin to stage magic, where the effect is achieved by misdirection. A selective spotlight story focuses our attention, on the one hand, on the benefits of unbridled competition, but draws attention away from the other, invisible hand, as it's busy externalizing costs or in other ways causing harm. This oversimplifying and oversold story has outlived its fitness. Our choice is either to be as dumb as trees, or to guide competition for better outcomes.
Some are waking up to nature’s lessons for economics, for example, Robert Frank author of The Darwin Economy. But much work remains to be done to overcome old myths. Too many parables that have been proven wrong are still peddled by politicians. For example, voucher plan for Medicare is built on this error—an unfounded faith in unguided competition’s creed.
PHOTO credit: Public domain, by David Wagner