Why the Marketplace Is Not a Zero-Sum Game

Last update December 26, 2020

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Gary Galles December 26, 2020 SNB & CHF

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Summary:
Twenty-twenty marks the twenty-fifth anniversary of a book that has had an expanding influence on the public conversation about market competition. Robert Frank and Philip Cook’s 1995 The Winner-Take-All Society argued that there are an increasing number of markets in which small differences in performance give rise to enormous differences in rewards. As John Kenneth Galbraith described it in a review of that book, the consequence is that “the one who wins gets it all.” Since then, I have seen multiple articles that reflected the winner-take-all, “a few win at the expense of others” rhetoric as an accurate description of competitive markets, sometimes even accepting that its core claim was so well-established that it could be used as a scapegoat for an

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Twenty-twenty marks the twenty-fifth anniversary of a book that has had an expanding influence on the public conversation about market competition. Robert Frank and Philip Cook’s 1995 The Winner-Take-All Society argued that there are an increasing number of markets in which small differences in performance give rise to enormous differences in rewards. As John Kenneth Galbraith described it in a review of that book, the consequence is that “the one who wins gets it all.”

Since then, I have seen multiple articles that reflected the winner-take-all, “a few win at the expense of others” rhetoric as an accurate description of competitive markets, sometimes even accepting that its core claim was so well-established that it could be used as a scapegoat for an ever-expanding host of social problems.

However, even if technology has greatly increased the possible leverage or “amplification” of human talents (such as current worldwide markets for entertainers or large international businesses that multiply the economic impacts of superior corporate management), that leverage creates greater benefits for consumers, evidenced by consumers’ shifting of who and what they patronize toward what they consider better. Consequently, even if “star performer” incomes rise sharply compared to others, that doesn’t mean “the one who wins gets it all,” because that overlooks the far larger positive effects on consumers.

That selective blindness to consumer gains is crucial, since, as Leonard Read emphasized in “A Consumer Looks at Freedom” (in his 1971 book, Then Truth Will Out), people share most in common in their role as consumers. Consequently, consumers’ interests should be the focus of public policy, rather than the growing incomes of the producers who provided those greater benefits to consumers. For instance, Bill Gates got very rich from his software successes, but the gains to users enabled by using his products vastly dwarfed his gain, and those consumer gains negate any attempt to claim or insinuate that the rest of us lost in the process.

A competitive sports analogy adds to the analytical confusion about competitive markets (i.e., voluntary arrangements people make with one another). In Galbraith’s words, “As in sports, so generally in the modern economic world.”

When we judge sports from the perspective of those on, or hoping to be on, medal stands, the rewards seem to only go to a very few “winners,” even when their superiority may be minuscule (e.g., winning a race by only a hundredth of a second). That perspective can be interpreted as implying that most participants are losers. However, the victor celebrated on a medal stand or achieving far fatter earnings is substantially different from the victory for others that results from market competition.

For the competitor aiming for the medal stand, the relevant “output” rewarded is being better, regardless of how much better. But that view ignores the gains to others as a result of the competition. A more accurate analogy to the gains from competition in market arrangements is the improvement in results for customers.

That is, who won the race is far less important to consumers (who aren’t just watching the race) than the improvement in the results. If the result of the competitive process is that products or processes become 10 percent better in some dimension over time (as with longer distances, greater weights, faster times, etc.), those gains are largely passed on to consumers. And such gains are a result of the competitive process, whether party A or B supposedly “won it all.” The core question then becomes whether the competitive process at work produces better results than other mechanisms. And open market competition has no peers at producing better results.

Competition and emulation of what reveals itself in superior performance in the eyes of consumers make all of us able to achieve certain tasks better over time. Such increased capabilities mean more can be produced, and that increased production, in a world of scarcity, benefits the rest of us in society. That makes it a positive-sum game, not a zero-sum game. Society gains massively from the “positive externality” of increased and improved outputs created by competition, which makes overlooking that fact a means of massively misleading yourself.

Seeing through the surface of “winner take all” arguments requires that we keep our analytical eye on what others commonly overlook—the expansion of benefits for others as competition induces increased productivity. The rest of us are not losers when someone outcompetes rivals; we all win as consumers when any producer wins through better ways of doing things.

Instead of the usual misguided analogy between sports competition and market competition, we would benefit from a better description of the process. And in this perhaps Ludwig von Mises provided the clearest guidance on what he called the “catallactic competition” of markets in his monumental Human Action:

Catallactic competition must not be confused with prize fights and beauty contests…to discover who is the best boxer or the prettiest girl….Its function is to safeguard the best satisfaction of the consumers attainable under the given state of the economic data.

[This article is adapted from a chapter in Gary Galles’s latest book, Pathways to Policy Failures (2020), just published by the American Institute for Economic Research.]