Despite its socially-beneficial outcomes, the market selection process is hardly a painless one. Unfortunately for many mom-and-pop businesses and American automakers alike, competition is the only way to ensure its ultimate quality.
In creating new ideas and pushing existing firms out of business, economist Joseph Schumpeter famously showed, entrepreneurs help bring more efficient methods, strategies and technologies to the market, with society benefitting as a result.
And in turn, large corporations, often buying out the original entrepreneurs, use their economies of scale and advanced knowledge to universalize those original innovations, with society benefitting even more in the end. In Good Capitalism, Bad Capitalism, economists W.J. Baumol, R.E. Litan and C. J. Schramm explain how this constant competitive cycle, harnessing the power of both entrepreneurial creativity and corporate efficiency, gives society a powerful and nearly endless source of value-added innovation.
The downside to the fantastically diverse and comprehensive modern economic process, however, is its sheer complexity. Just like the complex biological systems that result from traditional Evolution, the market systems that result from Economic Evolution are highly complex, and thus are not accurately explained with the static graphs or abstract mathematics of traditional economics. Market innovation itself, similarly, cannot be simply planned or ordered around by a single Central Authority. Many of society's most useful innovations were completely unforeseen before their accidental invention or chance market success.
It is only through market competition that society can extract the most useful Good Tricks out of a nearly infinite amount of potential ideas. Eric Beinhocker, in The Origin of Wealth, points out that a theoretical "library" of all the possible books ever written would contain over 100 1,000,000 books, vastly larger than the estimated 10 80 atoms in the entire universe, but would still be smaller than the theoretical collection of possible business plans and other strategic market ideas. The market - from Barnes & Noble to the New York Stock Exchange - is what we use to dump what doesn't work out of this gigantic smorgasbord of potential options, and help society adopt what works best for us. In picking what's best, competition creates the process through which businesses fail, so that the markets can adjust to produce the value-added innovations that succeed.
Free market competition is a strange paradox, indeed. For socially optimal outcomes, market participants must be motivated by greed and the desire to bankrupt their competitor, but they only succeed in the end by making other people happy. (Q: How do we make more money, Boss? A: Give the customer more value, Jenkins.) What some businesses consider predatory pricing, economists call saving the consumer money. What businesses consider cutthroat competition is the same dynamic process by which you, the consumer, have more choice, more options, and more value.
The nature of efficient competition thus requires that businesses must shoulder the risk as well as the rewards of market innovation, as the medium of technological, social and strategic evolution. Governments thus shouldn't "bail out" struggling industries or restrict market competition from any source, foreign or domestic. It's the loss of business profits through trade, as difficult as it is, that helps evince the winds of change in the world economy and maintain our growth as a society.
Once upon a time in this country, over 80% of Americans spent their days toiling on a farm. But as the farming industry faced cutthroat competition from foreign agriculture, domestic technology, the Gold Rush, the Industrial Revolution and myriad other forces, the American farmers lost their jobs. Now, less than 2% of Americans spend their days toiling on a farm. The losers were the farming enterprises, but the winners were the American people.
