Competition only is not Enough

 This is part of a series on a new paradigm for economics. Economics as yet is not a full fledged science like say physics. A true science has the capacity to not only explain phenomena but based on these explanations we should be able to predict what's going to happen. This allows us to control the things we are studying. There are still disagreements about the most basic issues in economics among the different schools of thought. This is our effort to unify all the streams of thought in economics to make it a true science that can actually predict.

 It is generally held that competition leads to better products and thus better outcomes for the society. As the different players in the market compete with each other to attract the customers they try to improve their product and give better service, better price and so on.

 But competition must have its limits. The limits are due to technological (this includes the human capital), social and political factors. Thus it doesn’t matter whether a group of car makers are in a perfectly competitive environment. After a certain point they cannot make a car better than the best car in the market, unless the technology or social situation or political climate changes for the better. This also means the converse is true. That is if the technology or social situation or political climate changes for the worse then the best car in the market now is actually worse than the best car earlier. 
A street full of restaurants in Yangshuo

 This has very serious implications. The most important is that even though we try to make the market more competitive, due to the war climate prevailing in politics and society the products will not improve. So in a certain place a lower state of equilibrium is reached than in another place. This explains why certain products are better in some areas of the same country and even the same city.

 The food is better and cheaper in a certain area of a city than in other places. The people maybe more trained here, the social situation maybe more conducive to restaurants and hotels. This area is at a higher equilibrium than other areas of the city when it comes to food. So unless these things change in the other areas of the city they cannot reach this higher equilibrium. They are stuck in their lower equilibriums even though they are operating in the same competitive environment as the better area.

 So instead of concentrating on just removing obstacles to competition we should also try to improve the attitudes, culture and most importantly the technology and skills of people.


Popular Posts