The Seeds of Its Own Destruction

Twenty-five years ago, when the Soviet Union imploded, I remarked that ‘Communism carried the seeds of its own destruction:’ the Communists worked really hard at educating their own people (when in the past education had been limited to the very wealthy and to royalty), and after a couple of generations, the newly educated people realized that they didn’t want to be Communist.  The Reagan Republicans were so proud that they had defeated Communism, and while they doubtless accelerated events, the writing was on the wall before they started.

As I’ve been watching a lackluster economy muddle through the last few years, I’m starting to wonder if capitalism doesn’t carry the seeds of its own destruction, as well.  I always understood capitalism as somewhat of a competitive sport, and competition brings the need for optimization: why do X when Y is easier/better/cheaper/faster?  If you don’t optimize, your competitors will.

But what if optimization leads to destruction?

The other day, my wife was watching a speech by Peter Thiel, the founder of PayPal and the first outside investor in Facebook.  (The introduction and the graphics are in Korean, but the speech and the Q&A session afterward are in English.)

And about five minutes in, I heard something that was jaw-dropping:

People mistakenly think that ‘capitalism’ and ‘competition’ are somehow synonyms.  I think they are antonyms.

On one level, of course, Thiel is right.  The most profitable businesses are those that don’t have to compete.  The ideal case is a monopoly, but running an enterprise subject to heavy government regulation (which has the effect of making competition impossible) or being a member of a cartel (so that you don’t have to compete on price) is almost as good.  Once an enterprise gets to a certain size, it can lobby the government to enact regulations to ‘protect the public’ (that sounds good!) but more practically serve to entrench the enterprise and preclude competition.

Moreover, competition is, well, wasteful.  It means that companies must do things that won’t always succeed, and will sometimes lose.  If we could optimize away the need for competition, the waste could be turned into profit.

While that may be a charming thought, competition is what keeps capitalism dynamic.  Capitalism without competition is… something else.  It may be corporatism, or fascism, or even feudalism.  Capitalism without competition is the fat, dumb, and happy getting fatter, dumber, and happier, and the rest of us getting screwed over.

And there is the nub: in optimizing past the need for competition, capitalism has defeated itself.  It no longer does the things we expect capitalism to do: it doesn’t provide opportunities on a broad scale; it doesn’t inspire us to do better and try harder.  Unless you have connections or are spectacularly lucky, post-competitive capitalism has nothing to offer you.

4 thoughts on “The Seeds of Its Own Destruction”

  1. An excellent essay. There is no doubt that this is where we are today ‘economically’. The reason is the development of inexpensive, and powerful computing. It allowed companies to ‘game the system’. The same has happened in sports with the development of ‘Performance Enhancing Drugs’ (PEDs). This ruins the goal of the economic system, and the sports business to reach their respective desired ‘outcome’ for which their respective ‘rules’ where designed. And, thus we have the explanation of why we are in the mess we are in today!

  2. Btw Thiel is a bad guy, he questions the idea of women getting the right to vote. Anyway, there are many things that happened that affected all of us. Monopolies are bad for the most part.

  3. The sweet spot for a company is where they do not have to compete, have high demand for their product at a high price and have their operating costs subsidized. An example of this situation is NFL stadiums. Owners often threaten to move the team if the city or state doesn’t build them a new stadium. Nevada taxpayers will have to put up $750 million toward the new Raiders stadium.

    Another anti-competitive practice is collusion. Once it became known that Donald Trump would try to withhold the final payment to construction contractors in Atlantic City, they learned to pad their bids by 50% or so to ensure that they would at least break even without that final payment.

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