August 20th, 2015
Have A Question?
I get the impression these days that we are obsessed with avoiding failure. Recently, my kids were talking about their new grading system in school, Common Core (or what I now call “Common Score”), and why they have a hard time figuring out their actual grade for tests, projects, homework assignments, etc. The new system uses terms like “proficient” without providing the actual score (like “84%” or “B-“) leaving my kids with only a vague idea of how they are doing. In fact, when my wife was going over some incorrect test answers with my daughter, my daughter asked, “Why do we need to do this mom? I got ‘proficient,’ so that’s good enough.”
I’ve seen similar trends with kid’s sports; whereby teams are often sheltered from terms of “losing” or “winning” (I guess to keep anyone from feeling bad if they don’t “win”). I don’t mean to go off on a tangent here, but when did competing to win or be the best become a bad thing? How does someone excel if there are no measurable goals and metrics?
Competition is an important concept in economics. As I have pointed out, economics deals with the allocation of scarce resources (which have alternative uses). In a free market, these scarce resources are allocated to their most valuable uses when prices reflect the unique preferences of individual producers and consumers in the economy. The quantity of any product or service supplied (or demanded) by producers and consumers, is affected by price (higher prices induce producers to make more and consumers to want less) and lower prices (which induce producers to make less and consumers to want more). This dynamic process provides the incentives for prices to move toward the level at which supply meets demand (at which point the allocation of scarce resources has created the maximum amount of satisfaction for society).
Competition is both necessary and sufficient to achieve this! When two or more parties compete to earn the business of (economic exchange with) a third party, they must offer the most favorable terms to succeed. In the case of producers, they must compete for customers by offering a better product than their competitors (at the same price or lower price). In the case of consumers, they compete with each other for products and services, by offering a higher price when they want them more than other consumers. Competition is necessary for an economy to force adjustments in price and quantity, until supply equals demand.
Unfortunately, with true competition, there will be those who succeed and those who fail at any point in time. It is the “failures” that people find objectionable. Does anyone really need to lose? I don’t like to fail anymore than anyone else does; however, it is a part of life and if dealt with in a positive way, can actually be a good thing.
In the process of competing, businesses and customers learn valuable information; sometimes through trial and error, and sometimes through thoughtful planning and reflection. Those who succeed in competition, learn new ways of doing things that work better than before. Those who fail in competition, learn from their mistakes and can then make improvements to compete more successfully the next time.
Critics of competitive markets point out that time and effort is wasted when individuals compete against each other for the same things. Detractors also point out that competition can destabilize markets, when conditions change (due to new technology, a shock to resources or a change in consumer preferences). Lastly, competition puts some businesses “out of business,” when new conditions make them less competitive. Still, all of these “negatives” are simply a cost that society pays in exchange for the much greater benefits produced through competition: improved products, lower prices, innovation and higher standards of living.
Without the uncertainty of competition, no one would have an incentive to compete in the first place. Why waste the time and effort if you have no chance of winning (or losing). In centrally-planned economies, no matter how hard you strive, you come out the same as everyone else. This sounds good in theory (everyone works together for the common good and no one wastes energy in competition). With outcomes pre set, there is no competition—no winners or losers. However, the cost of a centrally-planned economy is that there is no innovation, no change, no progress, no growth and no improved standards of living. Do you think a pharmaceutical company would spend millions of dollars to create more effective medicines, if the incentive to win was removed?
That is why failure is so important to success! Failure teaches us what doesn’t work; it encourages us to improve upon our shortcomings; it shows us what our unique talents are.
Competition, while messy at times, brings out the best of what individuals can achieve. Protecting individuals from failure actually hurts them in the long run, as it inhibits their growth and improvement. After all, since no one likes to lose, it pushes one to create the very best product or service in order to compete. The end result is a better product or service, a happier consumer and a stronger economy.
Competition is essential to a growing economy. Embrace competition—and failure—it’s important for The Future of Your Wealth.