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ISET Economist Blog

A blog about economics in the South Caucasus.

Does Competition Spoil People?

Many of the influential critics of capitalism shared a sentiment that life under competitive pressure is not good for human beings. Marx felt deep uneasiness about the fact that workers have to “sell” their workforce -- he feared that this would contribute to “alienation” between the worker and their work. One of the main objectives of the Socialist society was therefore to create a new kind of human, a human who would not compete with others in the market arenas and who would not be driven by selfish motives. Rather, the human grown in Socialism would cooperate with others to foster the goals of the collective.

Less radically, even if not dreaming about creating a new kind of human, many believe that living in a competitive environment brings about problematic personality traits like materialism, greed, and selfishness.

But is that true? Did the Soviet economic system really bring the better out of the people?

Some casual observations do not support this view. In Soviet organizations, lacking any competitive pressure, people were conspiring against each other, there was a lot of bullying, and the whole economy was permeated with nepotism and other corruption.

In an organization operating in a competitive environment, on the other hand, everybody depends on the success of the whole. Bullying rarely hits people who are essential for the functioning of the organization – nobody bullies the expert surgeon in a hospital if he is the one who attracts the patients to come to that hospital. In communism, on the other hand, the hospital staff may be glad about having to cater less patients, and getting rid of the expert surgeon may be a convenient way to achieve this goal. Likewise, nepotism and corruption are punished in competition by the disadvantages they cause for economic success.

Likewise, the willingness to pay for charitable purposes is most developed in the United States – the mother of all capitalist societies. In the countries of Western Europe people much more rely on the governments to take care of social problems and support vulnerable groups etc. One could argue that in this way the welfare states of Europe foster moral indifference among their citizens.

But let us look at Georgia. How does competition relate to typical “Georgian” values? Far from giving a conclusive answer to this question, let me report on two insightful experiences I made in my holidays.


INSIGHTS FROM THE COUNTRYSIDE

“When the only tool you have is a hammer, then everything looks like a nail” -- indeed, an economist cannot have holidays in the countryside without seeing the forces of supply and demand in every village. Even if I just want to enjoy food in a restaurant, questions about the market structure, monopolies, and competition come up forcefully.

I must admit that due to the fact that I have been raised in the 90s, when the country was struck by economic hardship, I have not seen many of Georgia’s impressive sights and beautiful places in my childhood. Now, as a grown-up and a mother, I am gradually trying to close this gap.

Recently, our family visited the vicinity of Bakuriani. After we drove to Rabati, we carried on to Abastumani. The road appeared longer than expected and everybody became hungry. We stopped at one of the local restaurants – actually, it was the only one along the road. A sign on the wall proudly announced that it was supported by an international organization, raising our expectations.

Yet we were utterly disappointed. In addition to an unfriendly waitress, there were problems with the food. Nobody apologized and we had to pay the full price, which was not lower than in Tbilisi.

Obviously, the problem here was the total lack of competition, giving this restaurant the market power of a monopoly. Being supported by an international organization reduced the competitive pressure even further. Being in such a cozy environment, they do not bother about the word of mouth, spreading their low food quality and abysmal service. In this comfortable situation, they also do not need to develop any entrepreneurial initiative, like registering on Trip Advisor or any similar tourist guiding applications. Even hospitality, the frequently praised most noble character trait of Georgians, goes down the drain when there is no competition!

After this experience, I was much more careful about choosing restaurants. Fortunately, I remembered a lesson from “Principles of Microeconomics”: one can avoid informational asymmetries by relying on brands. Brands are, more or less, reliable, as misbehavior would devaluate the name of the whole brand, which is the most important asset for many companies. Yet small businesses cannot afford to establish brands, can they?

They can! Look at the photograph. There is a queue at the door of this guy’s booth, who is selling nazuqis (Georgian sweet bread) at the road of Surami, like his neighbors do, for years. We hardly managed to grab two breads, which were hot and yummy and of excellent quality, as we expected. Despite the New Year traffic, such queues were not to be seen at the neighboring shops, which were also selling nazuqis.

Again, we see the forces of competition in action. In the past, the nazuqi market came close to what economists call “perfect competition”: a number of booths that were selling identical nazuqis. These were offered by women who were standing outside, waving with the fresh bread. Then they started to engage in product differentiation, so as to reduce competitive pressure. Some became very innovative and started to have dummies outside, holding the bread, instead of women standing in front of the shops. However, the one shown on the photograph is the most popular booth, indicating just the name of a man, probably a head of the family.


GEORGIANS NEED COMPETITIVE CHALLENGE!

The bottom line of my observations is that Georgians, when exposed to healthy competition, are efficient and creative, and they develop marketing skills. This is very encouraging – economic failure is not due to inherent shortcomings of people, but due to something that can be changed: market structure.

It is also comforting to see that some of the best character traits of Georgians, namely holding one’s word and caring about one’s reputation, are not offset in a market economy but rather encouraged. Failure to meet high standards is not induced by competition but by a lack thereof. A monopoly can turn even the most decent Georgian into a lazy bum. Yet if Georgians compete, their work becomes a matter of pride for them – they want to be better than others -- and nothing can stop them from being successful!

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Guest - tbilisipr on Tuesday, 03 February 2015 23:45

Great piece, indeed we can still observe early stage economics and marketing in practice with many sectors - not least the food sector. I note that the real lessons of branding are still not common knowledge which often means inconsistent quality, poor service and opportunistic pricing. Doubtless increased competition will apply darwinian processes to businesses and indeed the number of identical offerings often in close proximity to one other is indicative of the fact that there has not yet been a real shakedown of the market. I believe these processes are best left to happen naturally and even in the past couple of years I've see them starting to happen...

Great piece, indeed we can still observe early stage economics and marketing in practice with many sectors - not least the food sector. I note that the real lessons of branding are still not common knowledge which often means inconsistent quality, poor service and opportunistic pricing. Doubtless increased competition will apply darwinian processes to businesses and indeed the number of identical offerings often in close proximity to one other is indicative of the fact that there has not yet been a real shakedown of the market. I believe these processes are best left to happen naturally and even in the past couple of years I've see them starting to happen...
Guest - Andrew Parkinson on Tuesday, 03 February 2015 23:55

Yes, competition between restaurants, bakeries, shops, etc. is largely a good thing, but that is hardly a particularly novel observation, is it? The use of hospitals as an example of how capitalism operates in comparison to communism is also a very odd one. In nearly all developed countries (America being one very obvious and notable exception), hospitals do not compete for patients, but rather operate in a way more similar to the author's characterture of communism, in that the patients come to them regardless. Health being largely seen as a public good and not something to compete over. And despite that they don't, to my knowledge, try to get rid of the best surgeons to keep patient numbers down. Certainly they don't in the UK (where I'm from) with its very monolithic state run health service. On charity giving, yes Americans do tend to give more than Western Europeans, but this is quite obviously because the need to do so is much greater in the US precisely because the American safety net is inadequate, especially when compared to those operating in Western Europe. And American charitable giving is clearly insufficient vis-a-vis Western Europe, given that poverty rates and attendant social problems are self evidently worse in the US than all other developed countries. So, if Americans cared more than Europeans for their fellow citizens, as the author and her textbooks suggest, then they would be giving much more to charity to make up for their inadequate welfare system. Of course though, they don't. In fact attitudes to the less well off tend to harden the more unequal a society. Certainly in the UK attitudes to the poor (something that has been measured for decades) have become increasingly less charitable as the welfare safety net has become less universal and society more unequal. Worryingly the younger people are the less forgiving of poverty they are, at least as regards their fellow citizens. As way of another example, Scandinavian countries and the Dutch have always given proportionally the most in economic aid to poorer countries, whereas more unequal countries like the US have given proportionally quite small amounts. Look beyond the textbooks and the models and the world gets a lot more interesting and complicated.

Yes, competition between restaurants, bakeries, shops, etc. is largely a good thing, but that is hardly a particularly novel observation, is it? The use of hospitals as an example of how capitalism operates in comparison to communism is also a very odd one. In nearly all developed countries (America being one very obvious and notable exception), hospitals do not compete for patients, but rather operate in a way more similar to the author's characterture of communism, in that the patients come to them regardless. Health being largely seen as a public good and not something to compete over. And despite that they don't, to my knowledge, try to get rid of the best surgeons to keep patient numbers down. Certainly they don't in the UK (where I'm from) with its very monolithic state run health service. On charity giving, yes Americans do tend to give more than Western Europeans, but this is quite obviously because the need to do so is much greater in the US precisely because the American safety net is inadequate, especially when compared to those operating in Western Europe. And American charitable giving is clearly insufficient vis-a-vis Western Europe, given that poverty rates and attendant social problems are self evidently worse in the US than all other developed countries. So, if Americans cared more than Europeans for their fellow citizens, as the author and her textbooks suggest, then they would be giving much more to charity to make up for their inadequate welfare system. Of course though, they don't. In fact attitudes to the less well off tend to harden the more unequal a society. Certainly in the UK attitudes to the poor (something that has been measured for decades) have become increasingly less charitable as the welfare safety net has become less universal and society more unequal. Worryingly the younger people are the less forgiving of poverty they are, at least as regards their fellow citizens. As way of another example, Scandinavian countries and the Dutch have always given proportionally the most in economic aid to poorer countries, whereas more unequal countries like the US have given proportionally quite small amounts. Look beyond the textbooks and the models and the world gets a lot more interesting and complicated.
Guest - Eric Livny on Wednesday, 04 February 2015 14:03

Andrew, I tend to agree with many of your points. Indeed, competition and "markets" are not the only (and not always the best) mechanism to instill motivation for improvement and hard work. Team work - by instilling a sense of solidarity - is known to be a major motivator as well. Our "textbooks" acknowledge "moral incentives" as a very powerful mechanism of driving good kinds of behavior. For example, empathy and compassion, shame and honor can go a long way in motivating people to perform better, far beyond what money could buy. After all, people are often ready to sacrifice their own health and life - the value of which is infinite in "textbook" utility terms - for the sake of moral causes. (I would not suggest, however, that Nino should commit harakiri because of your criticism).

Incidentally, Freakonomics, has a great example of how the introduction of "market incentives" may fail: https://financialservicescommission.wordpress.com/2013/04/24/book-review-freakonomics/:

"Co-writers give us an example of a clash of economic and moral incentives in the first chapter. A kindergarten in Israel introduced a late pick-up fine of $3 on tardy parents in the hope of reducing the rate. The result turned out, however, doubling the rate of late-pickup. What happened with the fine? Here is the thing. Parents who usually were late used to feel sorry at least, however, after the enacting of $3 fine, they no longer had to feel that worries. They could only pay the “sin-tax of $3,” which means their moral incentive to pick-up their child early transferred to economic incentive of a small amount of $3 fine. Parents rather chose to spend more time at work or other sports thinking that way was more efficient for their utility. Unfortunately, co-writers say the Israeli kindergarten could not get rid of the problem even after abolishing the fine system."

That said, the absence of competition combined with a fatal weakness of financial or moral incentives to exert effort - as in the late Soviet period - resulted in people cynically shirking their duties and work obligations on a historically unprecedented scale. As a famous joke went, the Soviet state pretended to be paying and people pretended to be working. This is not a caricature of the late Soviet reality, but the naked reality itself.

Conversely, in some of the earlier Soviet periods, however, particularly in periods of war and reconstruction (during and after the Civil War and the Great Patriotic War), moral incentives - solidarity and ideological fervor combined with fear of repression and of "what would the neighbors think" - played a huge role, paving the way for military successes, eradication of illiteracy, electrification and industrialization, the first Sputnik and man in space. And all that without any markets and very weak financial incentives.

Healthcare systems would be an interesting subject to study in a comparative setting from the point of view of prevailing incentives. I would hypothesize that any well-functioning system must be driven by a combination of financial AND moral incentives to deliver good service.

Andrew, I tend to agree with many of your points. Indeed, competition and "markets" are not the only (and not always the best) mechanism to instill motivation for improvement and hard work. Team work - by instilling a sense of solidarity - is known to be a major motivator as well. Our "textbooks" acknowledge "moral incentives" as a very powerful mechanism of driving good kinds of behavior. For example, empathy and compassion, shame and honor can go a long way in motivating people to perform better, far beyond what money could buy. After all, people are often ready to sacrifice their own health and life - the value of which is infinite in "textbook" utility terms - for the sake of moral causes. (I would not suggest, however, that Nino should commit harakiri because of your criticism). Incidentally, Freakonomics, has a great example of how the introduction of "market incentives" may fail: https://financialservicescommission.wordpress.com/2013/04/24/book-review-freakonomics/: "Co-writers give us an example of a clash of economic and moral incentives in the first chapter. A kindergarten in Israel introduced a late pick-up fine of $3 on tardy parents in the hope of reducing the rate. The result turned out, however, doubling the rate of late-pickup. What happened with the fine? Here is the thing. Parents who usually were late used to feel sorry at least, however, after the enacting of $3 fine, they no longer had to feel that worries. They could only pay the “sin-tax of $3,” which means their moral incentive to pick-up their child early transferred to economic incentive of a small amount of $3 fine. Parents rather chose to spend more time at work or other sports thinking that way was more efficient for their utility. Unfortunately, co-writers say the Israeli kindergarten could not get rid of the problem even after abolishing the fine system." That said, the absence of competition combined with a fatal weakness of financial or moral incentives to exert effort - as in the late Soviet period - resulted in people cynically shirking their duties and work obligations on a historically unprecedented scale. As a famous joke went, the Soviet state pretended to be paying and people pretended to be working. This is not a caricature of the late Soviet reality, but the naked reality itself. Conversely, in some of the earlier Soviet periods, however, particularly in periods of war and reconstruction (during and after the Civil War and the Great Patriotic War), moral incentives - solidarity and ideological fervor combined with fear of repression and of "what would the neighbors think" - played a huge role, paving the way for military successes, eradication of illiteracy, electrification and industrialization, the first Sputnik and man in space. And all that without any markets and very weak financial incentives. Healthcare systems would be an interesting subject to study in a comparative setting from the point of view of prevailing incentives. I would hypothesize that any well-functioning system must be driven by a combination of financial AND moral incentives to deliver good service.
Guest - Andrew Parkinson on Wednesday, 04 February 2015 21:39

Thank you for your reply Eric, some very interesting points and, at the risk of being a bit dull, I do not disagree with yours either. I think my use of the word characterture about Nino's description of the Soviet system may have been misleading somewhat, which is my fault of course. My concern was more about the unfortunate use of healthcare as a comparison between how incentives work in communist and (more or less - they only ever at best more or less free) free market systems. Essentially your description of how incentives functioned/didn't function and evolved in the Soviet system, largely corresponds with my own understanding of the phenomena.

I think, ultimately, in studying incentives (or any other important factors in the workings of economic systems, workplaces, etc.) we should be careful to avoid reductionism (is that the right word?). In other words, a system that produces the best incentives to work (be they moral, financial or a combination thereof), may not be the best system because other factors are more important than the incentives to work on their own. For example, I would imagine that incentives to work hard in say privately run railways may be stronger than in those run as a state monopoly, because of the profit motive, etc. But in spite this deficiency, state-run railways may still function better than private ones, because they are a natural monopoly, a position which a private company may abuse much more than a state one (presuming that the government it operates under is reasonably answerable to the people). Or there may be cases where it is impossible to run a railway (or any other service) profitably, but the overall benefits to the wider economy (and society) of keeping that railway are sufficient for the state to take over, even though the pampered state workers may be lazier than their go-getting private sector counterparts. An obvious point to make on the face of it, perhaps, but I do think it is easy to fall into the trap of thinking that the thing we study/specialise in is the crucial factor and so lose focus on the whole or overall outcome, which is ultimately what matters, or at least what should matter in my opinion.

The author's point about charitable giving is a case in point. As I acknowledged in my initial post, she was correct to assert that Americans give more to charity than their rich country peers in Western Europe and suggested that this was a positive thing. If your desire was simply to see more charitable giving then she would be right to laud this as a feather in America's cap. But if you focussed on the overall outcomes of a system, in terms of looking after the poor and less fortunate, then America looks quite bad vis a vis Western Europe. I remember when the current coalition government in the UK came to power in 2010 and there was a lot of focus on trying to get people to give more to charity and for the rich to be more philanthropic (I worked on some govt policy papers on this for the charity I worked for at the time) and the US was held up as the example to follow. On the face of it this seemed very laudable and hard to argue with, but I was left feeling quite uncomfortable about us trying to ape a system that was overall worse than the one the UK has (and much worse in the base of some Western European and East Asian states) in terms of avoiding and reducing poverty, just because they were better at one small aspect of redistribution, giving to charity and charitable causes.

Just to add, I do also acknowledge that moral hazard exists and in trying to create the perfect welfare system, one would need to also need to acknowledge the very real disincentives to work that the such systems can sometimes create. Although, I think that these can and are exaggerated and used to justify the punishment of the poor for nothing more than being poor.

I apologise if I was being a bit unnecessarily derogatory by referring to the 'author and her textbooks'. No offence meant.

Thank you for your reply Eric, some very interesting points and, at the risk of being a bit dull, I do not disagree with yours either. I think my use of the word characterture about Nino's description of the Soviet system may have been misleading somewhat, which is my fault of course. My concern was more about the unfortunate use of healthcare as a comparison between how incentives work in communist and (more or less - they only ever at best more or less free) free market systems. Essentially your description of how incentives functioned/didn't function and evolved in the Soviet system, largely corresponds with my own understanding of the phenomena. I think, ultimately, in studying incentives (or any other important factors in the workings of economic systems, workplaces, etc.) we should be careful to avoid reductionism (is that the right word?). In other words, a system that produces the best incentives to work (be they moral, financial or a combination thereof), may not be the best system because other factors are more important than the incentives to work on their own. For example, I would imagine that incentives to work hard in say privately run railways may be stronger than in those run as a state monopoly, because of the profit motive, etc. But in spite this deficiency, state-run railways may still function better than private ones, because they are a natural monopoly, a position which a private company may abuse much more than a state one (presuming that the government it operates under is reasonably answerable to the people). Or there may be cases where it is impossible to run a railway (or any other service) profitably, but the overall benefits to the wider economy (and society) of keeping that railway are sufficient for the state to take over, even though the pampered state workers may be lazier than their go-getting private sector counterparts. An obvious point to make on the face of it, perhaps, but I do think it is easy to fall into the trap of thinking that the thing we study/specialise in is the crucial factor and so lose focus on the whole or overall outcome, which is ultimately what matters, or at least what should matter in my opinion. The author's point about charitable giving is a case in point. As I acknowledged in my initial post, she was correct to assert that Americans give more to charity than their rich country peers in Western Europe and suggested that this was a positive thing. If your desire was simply to see more charitable giving then she would be right to laud this as a feather in America's cap. But if you focussed on the overall outcomes of a system, in terms of looking after the poor and less fortunate, then America looks quite bad vis a vis Western Europe. I remember when the current coalition government in the UK came to power in 2010 and there was a lot of focus on trying to get people to give more to charity and for the rich to be more philanthropic (I worked on some govt policy papers on this for the charity I worked for at the time) and the US was held up as the example to follow. On the face of it this seemed very laudable and hard to argue with, but I was left feeling quite uncomfortable about us trying to ape a system that was overall worse than the one the UK has (and much worse in the base of some Western European and East Asian states) in terms of avoiding and reducing poverty, just because they were better at one small aspect of redistribution, giving to charity and charitable causes. Just to add, I do also acknowledge that moral hazard exists and in trying to create the perfect welfare system, one would need to also need to acknowledge the very real disincentives to work that the such systems can sometimes create. Although, I think that these can and are exaggerated and used to justify the punishment of the poor for nothing more than being poor. I apologise if I was being a bit unnecessarily derogatory by referring to the 'author and her textbooks'. No offence meant.
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