Freeman

ARTICLE

The Virtues of Competition

Competition Encourages Better Performance

JULY 01, 1996 by GEORGE C. LEEF

Competition is a universal and extremely powerful force.

Long before we began to record history, man was competing for food, mates, and territory. Later, we found ourselves competing for jobs, resources, customers, victories in athletic contests, and awards in many different fields of human endeavor. Competition in one form or another is inevitable as long as the things we desire remain scarce, that is, as long as there is not enough for everyone to have all that he wants.

Sometimes the nature of competition is peaceful, and when that is the case, the results are beneficial to mankind, even though the immediate losers may suffer for a time. Sometimes, however, the nature of competition is violent and then the results are harmful to mankind, usually leaving even the “winners” worse off when all the costs are taken into consideration.

As noted, competition is thrust on us by nature. Scarcity is a fundamental and inescapable fact of life. Whenever two or more people want the same thing, the necessary consequence is some form of competition to determine who will have it.

Violent competition is, of course, not virtuous. Nothing good comes from perfecting the talents for murder and plunder. When I speak of the virtues of competition, I refer exclusively to peaceful competition—the kind that comes about when people must act only in ways that do not violate the rights of life, liberty, and property, which all human beings possess. Peaceful competition impels each competitor to continually improve his skills, his efficiency, and the desirability of his product or service. It is understood by all that sloppiness, carelessness, waste, and indifference to the desires of others will be punished. Of course, the punishment is not physical, administered by a malevolent authority, but rather the punishment of not getting what one wants, or least not as much as one wants, because people have chosen to deal with others instead.

Everyone knows that competition reigns in the worlds of business, politics, and sports. The results of competition there are brought to our attention daily. What most people do not perceive is that competition also exists (usually, anyway) among nonprofit service institutions, and that when it does, those institutions are affected by it in the same beneficial way that more obviously competitive institutions are. Nonprofit organizations are impelled to operate as efficiently as possible lest they lose the support of their financial backers.

Competition and Charity

Consider private charitable organizations. We have a great many of them—dedicated to assisting needy people, to helping fight serious diseases, to achieving certain environmental goals, to promoting the fine arts, and so on. They are nonprofit institutions, but that only means that they must spend all their revenues. The fact that they are not trying to earn profits for stockholders, however, does not mean that they are not under competitive pressure. If a charitable institution earns a reputation for having lavish offices, high expense accounts and salaries for administrators, and other expenditures that do not help to achieve its stated goals, contributions will most likely decline. After all, people do not have unlimited funds to contribute and will redirect their money to other charities in which they have more confidence.

Just as sellers of products are competing for a limited number of consumer dollars, so are the administrators of charities competing for a limited number of contributor dollars. Poor quality products will probably cause sales to fall off, and for that reason, business managers are alert to quality problems and try to prevent them from occurring. It is in their self-interest to do so. By the same token, administrators of charities do not want to be perceived as running low-quality organizations. Self-interest motivates them to try to get the maximum amount of benefit from the dollars donated.

The parallel here is not exact because it is more difficult for contributors to get good information about how effectively the institutions to which they contribute are run than it is for consumers to get information on the quality of the products they purchase. The consumer directly experiences the products, whereas the contributor seldom directly experiences the endeavors of the charities he supports. Nevertheless, there is still some competitive discipline exerted on those who run charities. If they operate inefficiently, that information may leak out and be publicized. That has happened often enough that it presumably exercises some influence over the decisions of the administrators. The possibility of losing contributions to other organizations leads to greater efficiency in the pursuit of a charity’s objectives.

But what if charities were guaranteed a steady or expanding flow of revenue regardless of how well or poorly they perform their missions? The predictable result would be rising costs and falling efficiency. If there is no looming penalty for sloth and inefficiency, the human tendency will be to slide in that direction. We find exactly that in government-run charities, that is, welfare programs. By all accounts, welfare programs have significantly higher administrative expenses and are less adept at making sure that funds are spent effectively than are their private counterparts.

The difference is that while there is a direct link between contributions and private charities, there is no such link between taxpayers and welfare bureaucracies. The absence of that link gives the people who run those institutions the latitude to operate with a high degree of inefficiency and the luxury of not having to worry about it. Even though it is widely known that welfare fraud is commonplace, the administrators of welfare programs do not need to fear that their budgets will shrink because angry taxpayers decide to take their money elsewhere. They can’t. And that makes the administrators unaccountable and irresponsible.

Competition and Education

Precisely the same analysis applies to schools. Private schools have to compete for financial support. Tuition dollars and donations cannot be taken for granted. If a school does not continue to satisfy parents, they can and will enroll their children elsewhere. If it pursues educational or non-educational ends that alumni disapprove of, it will probably experience a decline in support. That private schools must compete for students and money motivates the people who run them to put forth an educational “product” that is at least reasonably good and often very good.

Competition also motivates private school administrators to search for ways to improve so they might fare even better in the future. Entrepreneurial discovery is not unique to profit-seeking businesses. Private school officials are keenly interested in finding improved ways to deliver their services. Any improvement may translate into more satisfied customers. But any change will be carefully considered before it is implemented, and it will be monitored to see if it works as expected. Failed innovations are quickly dropped.

Government-run schools, in contrast, are insulated from the gusty winds of competition. Because their funding does not come directly from satisfied parents and willing donors, their administrators need not worry about adverse consequences of their actions. If students graduate who cannot read or write, that is no reason for concern—the money will flow anyway. In fact, the worse the performance, the better the chances that the authorities will be persuaded to increase the school budget to deal with the educational crisis the administrators created.

Government-school officials have a different view of innovation. Again, since their revenues do not depend on satisfying parents, the innovations they introduce will not likely be intended to satisfy them. Instead, innovations will aim at satisfying those who directly support them, chiefly politicians and certain special-interest groups. For example, an automatic test-scoring machine might be popular with the teachers union and therefore an attractive investment, despite the fact that such devices are apt to lead to tests with fewer or no essay questions and thus less attention to how well students write. Trendy curriculum changes such as “multicultural studies” programs are another example. They please politicians and special-interest groups, but mean less class time for learning what used to comprise the core of education. Many parents disapprove, but why bother with their concerns? They have no choice but to keep sending in their money.

Competition and Performance

I have discussed charitable organizations and schools, but this analysis applies, I submit, to all human institutions. Whenever any kind of institution is freed from the need to compete for revenues, the results we can expect are wholly undesirable: declining quality, increasing costs, irresponsible and high-handed management. Competition makes people feel insecure and that is a good thing. When people feel insecure, they strive to become more secure and that in turn causes them to do their utmost to serve those who patronize them. In the end, they reduce scarcity and lift society.

It follows that one of the worst mistakes we can make is to exempt an institution from competition. Once we do that, once we sever that vital connection between performance and revenue, we dramatically alter the incentives that people face. No longer must they focus their energies and abilities on doing their best to please customers or contributors. Now revenues and resources can and will be used to make life more comfortable for the administrators, including ongoing endeavors to preserve the cherished competition-exempt status. Alertness and efficiency inevitably decline. Society suffers.

Freedom and Competition

Competition is the natural state of affairs. Competing for jobs, promotions, customers, loans, donors, students, victories, mates, space in magazines, and many other things is unavoidable. Other people are constantly attempting to satisfy their desires out of a limited quantity of resources, and that means that each of us has to assert himself—to compete—to get the things we want. As long as others are free to pursue their objectives, whether they are self-interested or altruistic, we will find ourselves having to compete with them.

The attempt to escape from competition can therefore be accomplished only by using coercion to prevent others from pursuing their objectives. If the managers and workers of the U.S. Postal Service want to be free from competition in the delivery of mail, that can be accomplished only by threatening legal penalties, which is to say violence, against others who would like to deliver mail. If the public schools wish to be free from the competition of educational alternatives, that requires taxing people who do not want their money going to public schools. If domestic peanut growers want to be free from the competition of foreign peanut growers, that requires governmental force to prevent peanut transactions in excess of the arbitrary import quota set by federal law. It is only through a willingness to employ violence or the threat of violence, either personally or under the auspices of the State, that people or institutions can attempt to escape from the rigors of competition. But in fact, they merely substitute peaceful competition (the market) for the violent kind (politics). We must, therefore, choose: do we prefer a world of freedom and competition or one where the unscrupulous use coercion to stifle or eliminate economic competition where it benefits them to do so?

Conclusion

Most people understand that it is a good thing for businesses to have to compete. What I hope more people will appreciate now is that it is universally a good thing for people and institutions to have to compete. To eliminate the need to compete is to eliminate a host of beneficial incentives for optimizing performance and to embrace the dangerous idea that coercion is acceptable. That is always a bad idea.

ASSOCIATED ISSUE

July 1996

ABOUT

GEORGE C. LEEF

George Leef is the former book review editor of The Freeman. He is director of research at the John W. Pope Center for Higher Education Policy.

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