LINK: Competition is toxic
“I looked at what I think of as the food chain that led to the financial crisis, which was that you had individual consumers buying houses they couldn’t afford, sold to them by realtors and property people who were competing to sell more properties at a higher price and so on. [...] I thought, hang on a second, classic economy theory tells you that a competitive marketplace is superior because competition provides a diversity of products which is good for the consumer, and it also, therefore diversifies risk. And yet, in this instance, competition has led every single one of these companies to copy each other, which had concentrated the risk. And I thought, Wow, that’s interesting. That’s specifically what’s not supposed to happen.”
More here.
Who ever said competition produces what is good for the consumer? It produces what the consumer wants. If the consumer wants to shoot himself in the foot, it delivers a neat kit consisting of a gun and shoes with a target painted on them. Who ever promised more than this?
This is really similar to AI design. The core issue is those consumers wanting different things than the author. Blaming competition is simply a trick, a misdirection. Essentially the author is saying it is too bad the firms deliver what the customers want and not the author.
See also this.
Question: Have you looked into the federal reaction to the Savings and Loan crisis? If you haven’t, you should.
Not only does it explain exactly why the housing crash collapsed the financial market, it also explains why the United States has, since the early 90′s, increasingly looked the same nationwide.
First, the Federal government shut down S&L real estate loans.
Second, because the real estate market was now tanking because the primary investors weren’t around anymore, the Federal Government set up a panel to begin the commoditization of real estate.
Third, to encourage this new source of investment, real estate investments were given special equity status, equal to bonds or other “secure” investments.
Fourth, when the housing market crashes (as it does every now and then), and the paper value of investments fell, the insane leverage laws which the real estate equity helped companies more heavily utilize caused those companies to become insolvent.
Perverse incentives lead to perverse results.
Tangential question:
If it’s to be expected that the housing market will periodically crash, why does it still get people investing in it?
Crashes happen periodically in just about everything: commodities, real estate, currencies, equities, bonds, etc. People invest in them because overall return is still expected to be positive.
...assuming either a constantly growing economy, or a constant flow of wealth from those without investments to those with them.
I don’t think this is actually true. Assume zero GDP growth and zero change in the ratio of income from capital and income from labor. The share price of your stocks does not increase or decrease, but they pay you an annual dividend. The return is still positive even under overall stagnant conditions.
First, most people buy a house to live in and not as a pure investment. Second, all markets periodically crash (including equity markets promoted on LW as the ideal destination for one’s money) and that clearly doesn’t stop people from investing in them.
Huge tax benefits in the U.S.
Just found this curious hypothesis:
http://www.theatlantic.com/magazine/archive/2009/12/did-christianity-cause-the-crash/307764/
It’s almost as if the housing and banking markets are highly regulated.
And yet their even more highly regulated status from the 1940s through 1990s lead to fewer problems...
The dimension on which regulations are properly measured is not “high” to “low” but “wise” to “unwise.” The US has never had wise banking legislation on the national level (consider Canada as a nation with historically wiser banking regulations). I don’t think characterization of the housing market as more highly regulated during the 40s to 90s is correct either, and when it comes to national laws and incentives I expect that 1940 will look wiser than 1990 which will look wiser than 2005.
Were they, really? Do you have some support for that assertion?
Diversity of products is nice to have, but it’s not the main reason economics says a competitive marketplace works better. Instead, it’s important mainly because it provides a dynamic incentive for allocating goods efficiently and against artificially creating rents (in the economic, not the housing, sense). Incentivizing innovation is also important, though, and that could plausibly be linked to the financial crisis: the mortgage-backed securities that played a key role were quite novel. Not that I think incentivizing innovation goes in the loss column overall.
“Diversifies risk” is just bizarre, at least outside a few specific segments: an agricultural region takes on less risk if it grows several different kinds of crops, because then the sector as a whole is less vulnerable to e.g. disease or infestation, but that’s just as true if there’s one farmer running the place or fifty, and it’s not like there’s a species of aphid that feeds on refrigerators.
But what do you expect from a link that includes the phrase “human sheep”?
I don’t think this is due to competition alone, though it certainly played a role. The real estate bubble that lead to the financial crisis had multiple causes which combined into a perfect storm.
Clearly competition is essential for a healthy economy. Clearly people tend to be competitive. Clearly unfettered competition leads to some pretty ugly outcomes (Marxism took hold as a response to that). Also as clearly, a categorical pronouncement “competition is toxic” is a poor title for anything posted on a site devoted to rationality.
Not going to read your link, given its loaded title.
Oh dear Lord, she’s so mind-killed it hurts...
Would you care to be more specific?
Seems like that author started with “competition is evil and responsible for all bad things” as the bottom line, and then just took examples of random problems and tried to fit them to this pattern. As opposed to… exploring things as they are, and then coming to a conclusion.
She uses a wide definition of “competition”, probably a synonym of “scarcity”. Scarcity is bad, therefore competition is bad, therefore capitalism is bad. In socialism, babies will not have to compete for their mother’s attention with a telephone!
I am sarcastic here, but what other purpose does it serve to include the babies in an article supposedly about problems of education, financial crisis, drug research, etc.? If you look into technical details of educational system, technical details of the housing markets, technical details of the pharmaceutical research… I would be surprised if at the end you would find out that all three situations are isomorphic. (And I would be even more surprised if you would find out that the problem is also isomorphic to the babies jealous of the phone.)
This of course leads me to the conclusion that the author does not really care about the technical details of education / housing markets / drug research, and only uses these widely accepted problems as “boo lights” to associate with “competition”.
The whole linked interview is just an extended rant on how competition is a horrible evil that corrupts and misfigures everything it touches while cooperation is the way of the angels that leads straight to salvation. I could detect no attempts to think, this is pure attack mode.
Not sure about Lumifer, but I moused over the link, “competition fetish produces human sheep”, and elected not to click.
This ties in with a thought chain I had this morning. While we may have an incredibly competitive environment, it is also populated by imperfect actors. You can’t effectively compete against people who are not accurately evaluating the consequences of their decisions. This can be seen in sports, where illegal performance enhancers are the norm in many sports, and non-dopers can’t really keep up (despite the achievements of the dopers being annulled later). This can be seen in business where someone who is willing to sell at a loss and make up for it in volume, will steal all of the customers from a legitimately profitable operation (though will soon go bankrupt as well). I’m sure there are examples in all sorts of industry where imperfect actors make decisions based on poor analysis that can potentially ruin better plans due to an overly competitive marketplace.
I’m not sure if performance-enhancing drug use (at least at the professional level) is a good example of irrationally short planning horizons. I’ll bet Lance Armstrong regrets getting caught, but I’ll also bet he’d have been worse off in the long run (financially, and also fame-wise) if he didn’t use the stuff: it’s not unlikely to have made the difference between “world-famous cyclist in disgrace over a drug scandal” and “peaked at a #5 finish in the 1999 Tour”.
Sure, he lost medals, but that could also be phrased as “bragging rights”, and his cycling career was already over the hill at the time.
This is simply expecting too much.
The core issue is that other people want different things than you. You want fair sports, they want to win. You can try to make rules but they are not 100%. The only thing that would really work is if they wanted the same thing as you.
Depends on what exactly they want. If they want to win at all costs, you’re correct. But perhaps they want to win at low cost, performance enhancers have a high cost, and cognitive biases prevent them from seeing that.
So you’re saying capitalism could not possibly work, right? X-/
For more clarification, I was thinking this over when considering rental properties in my area. A lot of people have complained that it is near impossible to make a profit on a rental property where I live. I think a lot of that is because there is a huge chunk of people who have bought property as an investment based on potential appreciation instead of based on cash flow. If your model is using only cash flow, but another model has a 5% appreciation of principle built in to it, it is going to be near impossible to be able to compete with them on rates. However, what you also see is a ton of people looking to sell their rental properties after the appreciation they were expecting never occurs (potentially due to the glut of properties on the market from other people doing the same thing). The people exiting the market take a loss, and the people who could have actually made a profit based on a cash-flow model never can get a renter to begin with, due to overly competitive rates. However, since new people are willing to invest under the same assumptions as the old investors (imperfect information), the market keeps going strong, and renters can take advantage of cheap rates, though no one is really profiting from it. That’s the type of scenario you can get with an overly competitive marketplace filled with imperfect actors.
Edit: I’m sure people are making money from rentals in my area, or there wouldn’t be so much of it. I’m just also sure that a lot of people are losing a ton of money from it, and driving down prices for everyone else.
I don’t see why do you think this is a problem, and a problem for capitalism in particular.
No, I’m saying that capitalism is never purely implemented (with no barriers to entry/perfect information/etc.), and there are cases where due to these inefficiencies, increased competition can cause a poor business model to outcompete a sound business model, leaving nobody standing at the end. This doesn’t always happen (hence capitalism mostly works).
Um. I feel there is some serious disconnect here.
Capitalism is not an abstract model that gets “implemented”. It is what you empirically get in reality given a few starting points (e.g. personal freedom, right to own property, right to trade, etc.).
People build models of that empirical reality and these models are simplified and rely on certain abstractions. But capitalism is not the result of “implementing” these models, quite the reverse—the models are imperfect descriptions of actual capitalism.
Sure. That’s fine. One of the reasons capitalism works so well is that failure in it is frequent. The unsuccessful shoots and tendrils need to die off and free up resources for the successful ones. The journey towards the equilibrium is an unending dynamic process that is not a straight line and never gets to its destination, anyway.
Competition works assuming the market is perfect. With an imperfect market, short term deviations from ideal are not just expected, but are the norm. Downvoting as ‘trivially obvious’, ‘propaganda’, and ‘author trying to sell book’.