THE PROBLEM WITH A COMPETITIVE BUSINESS

THE PROBLEM WITH A COMPETITIVE BUSINESS

Many Businesses Face a Problem With a Competitive Business

Imagine you’re running one of those restaurants in Mountain View. You’re not that different from dozens of your competitors, so you’ve got to fight hard to survive. If you offer affordable food with low margins, you can probably pay employees only minimum wage. And you’ll need to squeeze out every efficiency: that’s why small restaurants put Grandma to work at the register and make the kids wash dishes in the back.

Restaurants aren’t much better, even at the very highest rungs, where reviews and ratings like Michelin’s star system enforce a culture of intense competition that can drive chefs crazy. (French chef and winner of three Michelin stars Bernard Loiseau was quoted as saying, “If I lose a star, I will commit suicide.” Michelin maintained his rating, but Loiseau killed himself anyway in 2003 when a competing French dining guide downgraded his restaurant.) The competitive ecosystem pushes people toward ruthlessness or death.

A monopoly like Google is different. Since it doesn’t have to worry about competing with anyone, it has wider latitude to care about its workers, its products, and its impact on the broader world. Google’s motto—”Don’t be evil”-is a branding ploy in part, but it’s also characteristic of a kind of business that’s successful enough to take ethics seriously without jeopardizing its existence. In business, money is either an important thing, or it is everything. Monopolists can afford to think about something other than making money; non-monopolists can’t. In perfect competition, a business is so focused on today’s margins that it can’t possibly plan for a long-term future. Only one thing can allow a company to transcend the daily brute struggle for survival: monopoly profits.

MONOPOLY CAPITALISM

MONOPOLY CAPITALISM

So, a monopoly is suitable for everyone on the inside, but what about everyone outside? Do outsized profits come at the expense of the rest of society? Yes, profits come out of customers’ wallets, and monopolies deserve their bad reputation—but only in a world where nothing changes.

In a static world, a monopolist is just a rent collector. If you corner the market for something, you can jack up the price; others will have no choice but to buy from you. Think of the famous board game: Deeds are shuffled around from player to player, but the board never changes. There’s no way to win by inventing a better kind of real estate development. The relative values of the properties are fixed for all time, so all you can do is try to buy them up.

Many Businesses Solve Competitive Business

But the world we live in is dynamic: it’s possible to invent new and better things. Creative monopolists give customers more choices by adding entirely new categories of abundance to the world. Creative monopolies aren’t just right for the rest of society; they’re powerful engines for making it better.

Even the government knows this: that’s why one of its departments works hard to create monopolies (by granting patents to new inventions) even though another part hunts them down (by prosecuting antitrust cases). It’s possible to question whether anyone should be awarded a legally enforceable monopoly for merely having been the first to think of something like a mobile software design. But something like Apple’s monopoly profits from designing, producing, and marketing the iPhone was the reward for creating greater abundance, not artificial scarcity: customers were happy to finally have the choice of paying high prices to get a smartphone that works.

The dynamism of new monopolies itself explains why old monopolies don’t strangle innovation. With Apple’s iOS at the forefront, the rise of mobile computing has dramatically reduced Microsoft’s decades-long operating system dominance. Before that, IBM’s hardware monopoly of the ’60s and ’70s was overtaken by Microsoft’s software monopoly. AT&T had a monopoly on telephone service for most of the 20th century, but now anyone can get a cheap cell phone plan from any number of providers. If monopoly businesses tended to hold back progress, they would be dangerous, and we’d be right to oppose them. But the history of progress is a history of better monopoly businesses replacing incumbents.

Monopolies

Monopolies drive progress because the promise of years or even decades of monopoly profits provides a powerful incentive to innovate. Trusts can keep innovating because profits enable them to make long-term plans and finance the ambitious research projects that firms locked in competition can’t dream of.

So why are economists obsessed with competition as an ideal state? It’s a relic of history. Economists copied their mathematics from the work of 19th-century physicists: they see individuals and businesses as interchangeable atoms, not as unique creators. Their theories describe an equilibrium state of perfect competition because that’s what’s easy to model, not because it represents the best of business. But it’s worth recalling that the long-run equilibrium predicted by 19th-century physics was a state in which all energy is evenly distributed, and everything comes to rest—also known as the heat death of the universe.

Whatever your views on thermodynamics, it’s a powerful metaphor: in business, equilibrium means stasis, and stasis means death. If your industry is in competitive compensation, the end of your business won’t matter to the world; some other undifferentiated competitor will always be ready to take your place.

Lastly, remember that a business’s strength is derived from its unique human capital, which deserves the investment in your well-being just as much as anything else. Contact HyperEffects to chart out a tailor-made tool for your business processes to be swifter, organized, and easy.

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