Market Analysis

Laboring Through Summer, Part 2

On the eve of Labor Day weekend, Part 2 of MarketMinder's look at the economics of labor.

In the spirit of summer's unofficial close signified by Labor Day, yesterday MarketMinder explored labor from the perspective of free flow of capital and open trade. Today, we'll explore how competition affects labor.

Samuel Johnson wrote one of the first comprehensive English dictionaries in 1755. In it, he describes "competition" as "the act of endeavoring to gain what another endeavors to gain at the same time; rivalry; contest."

That's a pretty good elementary definition. Competition is a big part of life: sports, business, politics, you name it. But why is competition so important for capitalism? More importantly, shouldn't competition, by definition, be harmful to workers—forcing them to constantly compete for job stability and wages?

Until recently, competition was viewed as a social meme—a feature of life arising from culture. Now, scientists and experts in the social sciences have begun considering competition as a natural phenomenon, that is, a feature of all life.

Every living organism, ultimately, is defined by competition. It's what makes evolution possible—every bug, tree, and animal on the earth is competing for scarce resources. Survival of the fittest is the way of life. As organisms adapt to their environment, others must also adapt or be left behind. Life is competition.

Now reread the preceding paragraph. If we replaced the words "bug, trees, and animals" with "businesses" and "individuals," isn't this also a rudimentary definition of capitalism?

Free market capitalism, at its core, is evolution in action—it's the economic system most closely resembling the competition of life. And while this is true enough, very often the concept is misinterpreted and misapplied.

After all, just because capitalism is in some way comparable to evolution doesn't by itself mean we should engage in it. Doesn't evolution do away with a lot organisms…and rather violently? Is that what we should want for our society? From these questions, it's often implied that workers suffer from competition and are left behind as industries move and develop across the world.

Actually, capitalism over time benefits entire civilizations—those at the top and bottom, and more effectively than any other economic framework in history.

Most folks approach capitalism as if it were a "zero-sum game." That's economist-speak for a situation where a person's gain is exactly balanced by the loss of the other person. For instance, cutting a cake is zero-sum because taking a larger piece for yourself reduces the amount of cake available for others. So, if a factory moves operations from Detroit to China, then the US loses jobs and China gains them.

Even today, many experts approach economics as zero-sum. But that's wrong and dangerous thinking. Capitalism is wealth-creating, that is, it creates a bigger pie for everyone, not just a system for divvying wealth between competitors. Going back to our example, when jobs move to China it's often because there are better and more efficient uses of labor and resources here in the US. The US economy is developing, innovating and creating more jobs.

James Case's new book on the supposed "science" of competition is a clear example of this misunderstanding. As is the wont of many scientists and mathematicians, Mr. Case makes an attempt to reduce competition to a series of mathematical equations—better known in economics as game theory.

Competition: The Birth of a New Science
By James Case

Mr. Case says those who champion capitalism and competition are wrong because the reality of competition is not the same as the theory of competition. In other words, competition might sound great in theory but doesn't work in practice.

These are big words considering most of this book is dedicated to reducing competition to a set of mathematical theories. Game theory and economics in general are good for conceptualizing reality, not predicting or fully explaining it. It's a rhetorical and logical fallacy to believe we can cram reality into theories. Theories do not drive behavior, they help describe it.

That should be evident by the simple observation that global participants of capitalism and competition over the last hundred years have raised up entire civilizations. (See yesterday's commentary, "Laboring Through Summer, Part 1," for details.) Through our supposed "flawed" market-based economy, the US and other capitalistic economies are by far the wealthiest nations in the world per capita with relatively low unemployment. Without competition, improvements in standards of living would crawl or decline.

The competitive features of capitalism may indeed be imperfect, but they're by far the best wealth creating system for all. And while it may seem harsh at times, competition is a boon to labor in the end by creating new opportunities for wealth and work—challenging us always to improve our lives in the spirit of innovation. That, truly, is a reason to observe and celebrate.

Have a great Labor Day weekend.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.