Competition and the Creation of Wealth

This is a continuation of the brief piece about what’s wealth and where does it come from. Wealth, defined broadly, is important to us because it’s useful for our material well-being. Material well-being is not an end in itself but it is instrumental in providing the irreducible basis for our happiness and therefore it is a means to all other higher human aspirations and goals. Without a sufficiently wealthy foundation, it is hard if not impossible to live in peace and harmony with oneself and with others.

The creation of wealth involves competition. As it happens, one of the most potent forces in nature is a process we call competition. It’s a creative process, meaning that both — creation and competition — ultimately are nearly synonymous. You cannot have one without the other. These processes occur not only in the man-made world but more generally in the natural world of living things. Seeing how they work in the natural world helps us appreciate their workings in the world of people and their artifacts.

In the natural world, there is competition for resources. Life evolves from simpler forms to more complex forms. That evolution to ever greater complexity is driven by the need for all organisms to get more resources for itself and thus it has to compete with all other organisms in the same niche. Note that competition is always among others that inhabit the same niche. Lions don’t compete with gazelles; they compete with their own kind and more generally with other predators. Gazelles compete with other gazelles since the slower gazelles fall prey to their predators.

In economics terms, gazelles are resources for lions. The competition is not between the resource user and the resource since they are dissimilar. The fact that lions induce the gazelles to evolve into faster gazelles — and vice versa — does not mean that lions and gazelles compete. The imperative to survive is common to both prey and predator but that does not involve the kind of competition as between predators competing with other predators, and preys competing with other preys.

This is not pointless hairsplitting. Here’s why that distinction is important. Consider the world of producers (entrepreneurs, firms, corporations, etc), products (cars, phones, potatoes, etc), and consumers (you, I, Joe Schmoe, etc). Each firm competes with other firms producing the same product. The competition is never between producers of cars and potatoes. Nor is a firm in the business of competing with its customers. A firm is only in competition with its rival firms. Samsung competes with Apple Inc in the marketplace for phones and tablets. That competition drives the evolution of phones and tablets.

The analogy of predators and prey has served its limited purpose. But before we move on, here’s a connection between biology and economics that I find very interesting. It involves the English cleric Rev. Thomas Malthus (1766 – 1834), professor of political economy and Fellow of the Royal Society, and author of An Essay on the Principle of Population (revised 1826). I consider him a proto-economist.

I had written about it a few years ago. So I’ll quote from that piece here. Begin quote:

Evolution.

It is hard to escape the gravitational pull of the idea of evolution. The idea goes back into antiquity. But it was only recently (in terms of historical time) in the mid-1800s that Charles Darwin (1809 – 1882) pondered the biological variant of evolution and figured out the mechanism. It was natural selection. That is one of the superstar ideas that populate the core of our ideas galaxy. Everything that is known about biological evolution can be explained through natural selection.

Natural Selection

Darwin had patiently observed nature and cataloged a heap of facts during his voyage on the HMS Beagle which ended in 1837. Then another idea pushed him to an inspired guess on the mechanism which produced the diversity of species in the world. That idea came from a professor of political economy and Fellow of the Royal Society, Thomas Malthus (1766 – 1834).

Malthus had considered the matter of how societies function and concluded that the struggle for food is critically important. The competition for food would result in winners and losers. Populations would increase till the standards fell to subsistence levels for the most fecund segment of society. The biological imperative to reproduce as profligately as possible lead inexorably to a situation where natural resource limits are reached and the weakest sorted out of the race. At the center of the drama of life was competition for resources.

Darwin had observed the natural world, pondered the evidence, and read Malthus. That’s what he needed to figure out natural selection. But then so had another contemporary of his: Alfred Russell Wallace (1823 – 1913). Like Darwin, he studied the natural world, pondered the puzzle of the diversity of species and he too had read An Essay on the Principle of Population (final revision published 1826), by Thomas Malthus, and arrived independently at natural selection. Darwin was about to be scooped by Wallace and rushed to publish On the Origin of Species by Means of Natural Selection in 1859.

Competition

The centrality of competition in the natural world is immediately understandable to anyone who has observed nature. Economists appreciate the power of competition and it is not surprising at all that natural scientists like Wallace and Darwin incorporated competition in their explanation of the biological world. (Darwin and Wallace were competitors!) They realized that there was no divine designer involved in the creation of variety in the natural world. There was no grand planner and consequently no grand plans.

The biological world evolves autonomously. There was only competition for resources and the universe was supremely indifferent to who were the winners and who the losers. Natural selection is the mechanism which all living systems rely on for their evolution.

The twin ideas of evolution through natural selection and competition are inseparable. I find it unsurprising that the central organizing principle of biology owes something to economics.

It should be noted that natural selection and competition are descriptive rather than normative features of the world. We are merely noting how things are, and no claim has been made so far on how they ought to be. The universe is neither moral or immoral; it is amoral. That eventually it gave rise to sentient beings that are capable of making moral judgments is itself a result of amoral processes.

End of excerpt from the 2008 piece, “On Competition and Ideas.” On re-reading that piece, I note that it holds up pretty well. In this piece, I am going to advance the argument into new territory next time.

Author: Atanu Dey

Economist. View all posts by Atanu Dey