Competition is one of the talismanic words in law and economics and American life. It is often hailed as an unqualified good and touted as a solution to what ails society. The value of competition is endorsed across the ideological spectrum: Conservatives decry the lack of competition in schools and taxi cab services, while progressives highlight the dearth of competition among multinational corporations and call for a revival of antitrust law. Notwithstanding this trans-ideological commitment, we should not privilege competition at the expense of alternative means of structuring a democratic and egalitarian political economy. Three examples illustrate how competition is deficient as a general social organizing principle and should be promoted selectively, not categorically.
First, a number of infrastructure services are natural monopolies and not conducive to market competition. Electricity, natural gas, and water distribution are examples of natural monopolies. Due to economies of scale, these services are generally best provided through a single publicly owned or regulated entity rather than through multiple competing entities. In concrete terms, building and operating a single set of electric wires is more cost effective than building and operating five parallel competing electric wires. Furthermore, the success of competition in, say, electricity at the retail level is dependent on a significant fraction of consumers having the ability, interest, and time to shop for this essential service—a questionable proposition.
Given these realities, competition in infrastructure services is not socially desirable and likely to lead to wasteful duplication and higher consumer prices. Past attempts at introducing competition into natural monopoly sectors call for deep skepticism toward such efforts going forward. So-called “deregulatory” programs have sometimes transformed publicly-regulated monopolies into unconstrained and highly extractive monopolies and oligopolies—recall the rampant manipulation in the California electricity market in 2000 and 2001 that led to dramatic price spikes and rolling blackouts.
Labor markets are another area that reveal the limits of competition. Specifically, unchecked competition between workers can lead to lower wages, the elimination of employment benefits, and increased precariousness. An extreme example would be to eliminate child labor laws in the name of promoting labor market competition. Karl Polanyi argued that treating labor as just another “commodity” and encouraging unrestrained competition among workers corroded the foundations of society in industrializing England. Over the past four decades, an increase in competition between workers in the labor markets has contributed to the diminished standing of labor. Due to the decline of unions and the associated atomization of the labor force, power in labor markets has shifted decisively in favor of employers. Even as labor productivity has increased, median wages have stagnated since the 1970s.
The postwar economic “golden age” for a segment of the working class in the United States was, in part, a product of significant labor market regulation and labor power. By unionizing, labor built countervailing power against employers. In particular, workers in heavy industry unionized, raising wages for themselves and also establishing general labor market norms that helped workers in non-unionized sectors as well. By restraining competition and fostering cooperation among workers, these institutional arrangements struck a more balanced bargain between labor and capital and yielded strong economic growth and a more equitable distribution of income. An illustrative fact: The poor and working class, in contrast to their experience in recent times, benefited more from economic growth than the wealthy did in 1980.
In government, competition between political entities, domestically or internationally, can yield destructive races to the bottom. For instance, cities and states may compete against each other to attract highly mobile corporations to set up or expand operations in their jurisdictions. This competition may take the form of generous tax holidays and public subsidies. As they entice corporations to relocate and expand, state and local governments deprive themselves of vital resources. Because they lack the fiscal autonomy of the federal government, states and cities that shrink their revenue bases and increase their expenditures through these carrots to big business may face serious budgetary constraints. They may have to cut vital public services and collect revenue through much less equitable means, such as draconian fines and penalties on the working class and poor.
The ongoing contest between cities and states to attract Amazon’s second headquarters is a dramatic example of this insidious political competition. By putting out a request for proposal for its second headquarters, Amazon has fully exploited inter-city and inter-state rivalry. Municipalities and states have pledged to shower Amazon with subsidies, infrastructure investments, and tax holidays and even transfer core functions of sovereignty to the online retail giant. For instance, Illinois offered to allow Amazon to collect and keep fifty percent of the income taxes that employees at the second headquarters would pay to the state. In exchange for the promise of 50,000 jobs and prestige, the winner of this contest may deprive itself of significant tax revenues and place itself in a fiscal straightjacket.
It’s true that competition between providers of goods and services can be a powerful force for equity and prosperity in light of the corporate monopolies and oligopolies dominating numerous industries. Due to a dearth of competition in a number of markets, monopolistic and oligopolistic corporations enjoy—and exercise—the power to prosper at the expense of consumers, workers, businesses, and citizens. The United States does need an antimonopoly program to protect the public from high prices for goods and services, depressed wages, and the overweening political power of large corporations. Yet, competition is not a sound general organizing principle for society and indeed has major limitations. In the provision of infrastructure services, the workforce, and government, competition is likely to have perverse effects. Injecting or increasing competition between utilities, workers, and cities can deepen existing immiseration, inequality, and insecurity. Rather than help us build social democracy, a blind promotion of competition across domains may, in actuality, accelerate the decades-long transfer of power and wealth from the many to the few.
A modified version of this post will be published under the title Competition can be socially corrosive and wasteful, as part of the article, Eleven Things They Don’t Tell You About Law & Economics: An Informal Introduction to Political Economy and Law, forthcoming in Volume XXXVII of Law and Inequality: A Journal of Theory and Practice (Law & Ineq.) of the University of Minnesota.