Summary: Competition is a method for discovering previously unknown facts. If we knew winners in advance, a race and the medals awarded for winning the race would be wholly absurd. However, what economics calls perfect competition is a state in which everyone knows everything that they need to know, thus competition as an activity ceases to be worthwhile. The theory of competition can not be “empirically verified for those cases in which it is of interest”. We can, however, empirically verify that some societies better realise outcomes than others. All structures in macroeconomics are only the result of microeconomic phenomena. But the relevant data is far too numerous, diverse and complex. Macroeconomic theorems are thus non-scientific rules of thumb we can use to predict patterns and regularities, but never individual events. The common objective of competition is the creation of a market order. A true economy can only exist in an organisation where all efforts are directed toward a single set of goals. The knowledge of the managers determines decisions, and organisation members need to explicitly coordinate their efforts. The market, however, creates a catallaxy, an order in the complex structure of individual economies. Here, the knowledge of all participants is aggregated, it preserves the individual objectives of participants. A catallaxy, or market order, can help to realise individual objectives, but it does not guarantee satisfying the most important needs first. It allows for a randomly selected individual to pursue their objectives with effectiveness, without being able to predict which concrete individuals will actually benefit, and which will not. Socialism is the attempt to transform catallaxy into a true economy. A market is orderly in that participant’s expectations of transaction outcomes are realised to some degree. But this is the result of some expectations being disappointed (negative feedback), with plans and expectations being adjusted accordingly. Through competition, we can discover which things are goods, which of them are scarce, and how scarce they are. The market leads the most efficient producers of particular goods, those that can produce at a low price, to actually produce the goods. And while the combination of goods actually produced is at least partly the result of chance, for each combination of goods a market order produces as much or more than any other method we know of. It also produces a maximum of opportunity for an abstract, randomly chosen person, while actual individual shares are partly due to chance. A centralised computer system with full information could theoretically surpass this, choosing the most desirable combination of goods/services to produce, producing them most efficiently, and distributing the product. But we should not compare the market with such an unreachable ideal. Circumstances change, and human actions in total need to adapt to the new circumstances to allow for growth or even stability of average income. If changes are necessary, but their necessity can not be shown in each case, a democratic society can not justly bring about these necessary changes. But competition is a powerful discovery procedure for opportunities. It both shows possible improvements, and forces everyone to imitate improvements that have been made, it is a kind of “impersonal coercion” to change individual behaviour. The price mechanism gives information to individual persons as to which of their actions are changing in importance by changing individual incomes. The reasons for these changes are generally unrelated to individual persons. The merits or demerits of the people involved are simply not accounted for. If some are disadvantages by these changes, we can only compensate them if the system as a whole grows considerably. In some countries social justice policies actually hinder the changes that would improve working class conditions to a point where these policies would become superfluous. In societies with developed knowledge of productive forces and techniques, small adjustments to changed circumstances are constantly needed just to maintain the current level of welfare. But the less a society knows about and realises its opportunities, the more potential for growth it has. Planning for social justice can perhaps be afforded by the rich, but poor countries need to rapidly change in order to grow. Public power should be limited to protecting individuals from social pressures, through private property and rule of law. The greatest problem of contemporary economic policy is wage rigidity; wage levels and structure are becoming independent of market conditions. Labour productivity depends on how workers are distributed among different occupations, which is determined by relative wages. A rigid wage structure will prevent a society to adapt to changing circumstances. Thus, the average wage level at full employment is likely below that of a society with flexible wages. We need to convince labour that allowing for flexible relative wages will increase average real wages.



[I am seriously thinking about making an even shorter summary based on this summary.]

Source: Friedrich Hayek (1968) Der Wettbewerb als Entdeckungsverfahren. Lecture at the Institute for World Economics at the University of Kiel. Translated as Competition as a Discovery Procedure by Marcellus Snow. The Quarterly Journal of Austrian Economics, 5:3, Fall 2002.

(Full text at mises.org, English)

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