As we have examined in Part 2 of this Foundations of Economics series, in a division of labor economy we each focus on producing one or a few things while depending on everyone else to produce the majority of things we need and want. The obvious question arises, then, of who should produce what? A major benefit of a division of labor economy is that it allows individuals to concentrate on the kind of work that best suits their abilities, resources, and passions. In other words, we want the production of any particular good to be done by those who are best at producing that good. So how do we know who is the best at producing a particular good?
Economic competition is the process of establishing who is able to produce things best.
[RELATED on OCR: “Let’s Divide the Work”]
A division of labor economy is dependent on the existence of economic competition. It is the process through which the marketplace establishes which individuals are best suited for each area of production. Moreover, economic competition determines which products are best suited in the market. Finally, economic competition determines what methods are best suited for the production of a good.
Imagine Person A intends to use apple seeds to grow and sell apples at the market while Person Y intends to sell apple seeds in the market merely as jewelry. Competition in the marketplace will determine the best use for the apple seeds. Now Imagine Person A uses his bare hands to dig holes to plant his apple trees. Along comes Person X who has invented a machine that allows her to dig holes for apple trees at a faster rate than Person A. Under a system of economic competition, it won’t be long before Person X replaces Person A as the producer of apples. As a result, economic competition is the process of determining the organization of a division of labor economy.
[RELATED on OCR: “Our Need for Wealth”]
Such economic competition has regularly been denounced as the “survival of the fittest,” or compared to the animal kingdom. This comparison is false. In the jungle, animals compete over a limited supply of subsistence provided by nature. If one lion eats a zebra, another lion’s potential food supply has shrunk. Thus, lions with the best hunting skills survive while lions with lesser skills perish. Such competition involving a dwindling of resources does not exist in a division of labor economy.
[RELATED on OCR: “The Forgotten First Tool for Creating Wealth”]
Competition in a division of labor economy is not competition over a limited supply of subsistence. Unlike competition in the jungle, economic competition is not about one person’s survival causing another person to perish for lack of subsistence. Rather, it is a competition to create new and additional resources. Economic competition takes place in the context of the unlimited potential for improving all of mankind’s well-being.
In fact, competition in a division of labor economy does not create losers. There is room for all in the competition of a division of labor economy. When Person A loses to Person X in the production of apples, it just means that Person A must relocate to another position in the economic system of production. Perhaps, Person A just becomes an employee of Person X. Nevertheless, the adjustments necessary from losing in competition ends up benefiting everyone, including the person who supposedly lost.
[RELATED on OCR: “Foundations of Economics: The Exchange of Wealth”]
Thanks to Person X’s new innovation, everyone, including Person A, has access to more apples. In contrast to the two lions, Person A, as a consumer, benefits from Person X’s competition. Person A‘s labor has merely been freed to produce something else for everyone’s consumption. Freeing Person A to produce something else is an economic benefit (if you remember from the first lesson that the goal of economic activity is the creation of wealth and not the mere creation of jobs). Accordingly, economic competition is also the process of improving the efficiency of a division of labor economy and thereby promoting a higher standard of living for all members.
Similar to the government’s manipulation of money (briefly examined in the previous article in this series), ignoring the vital importance of economic competition to a division of labor economy also can make the economy unstable or inefficient. Government policies ranging from prohibitive taxes and regulations to business tax credit programs such as JobsOhio, business subsidies, and bailouts diminish the ability of economic competition to effectively organize the economy.
[RELATED on OCR: “JobsOhio or BigGovOhio?“]
Although such policies provide an obvious short-term benefit to various partisan groups and politicians needing votes, the policies damage the long-term production structure of a division of labor economy as a whole. To combat the misunderstanding of such policies, it must be realized that economic competition does not compete for the consumption of an existing amount of wealth. Instead, economic competition organizes the production of new and additional wealth.
John Langenderfer is a practicing attorney with a focus in consumer and commercial law. He can also be reached on his Facebook page.
All opinions expressed belong solely to their authors and may not be construed as the opinions of other writers or of OCR staff.
READ ALL OCR articles by John Langenderfer here.