What Does Competition Mean Under Capitalism?

by | Jan 2, 2000

Government should uphold and enforce market contracts--not violate freedom of contract by dictating the terms, changing the terms, or abrogating the terms of contracts

Part 4 in a Series of articles on Capitalism, Free-competition, Antitrust, and Microsoft

To compete in a free economy means to create and offer better values to customers than rival firms. Successful competitors focus on reality, inventions, innovations, materials and methods–not on rivals per se. They’re independent, unconventional, often rebellious toward accepted norms and opinions. They’re first-handed. They don’t copy–they originate. They don’t travel well-warn paths–they blaze new commercial trails. They are forward-looking–not mired in the past or in the status quo or burdened by conventional habits. They’re not passive order-takers” or servants of demanding consumers. They invent products and processes that consumers never heard of nor could dream of.

The primary concern of the capitalist producer and competitor is the creative work itself–and as a close second, its commercial applications and profitability. They focus primarily on creative work done well and profitably, not on the welfare of employees, customers or suppliers. But since the creator’s work is done well, employees, customers and suppliers flock to them willingly. Creative producers know that competition means only one seller can receive the same dollar of spending; but they recognize this not as a fixed hunk of meat to be torn from the jaws of rivals, but an incentive to expend greater effort, to improve and achieve higher standards and to attract more dollars. They know they’re not capturing a tiny wedge from a fixed pie but creating more and different pies at a profit. The creators recognize that wealth is created, not seized. If a capitalist competitor doesn’t succeed in the context of voluntary exchange, he does not grab a gun to settle matters, nor run crying to Washington to have Janet Reno use her gun, as did Netscape and its cohorts.

Competition under capitalism leads not to the restriction of output at ever-higher, wallet-gouging prices but rather to an abundance of output at ever-lower prices. The image of competition as leading to monopolies, in which stingy, Dickensan, Scrooge-types hoard their wealth and parcel it out in mean-spirited ways is the image held by those who’ve never grasped the creative essence of capitalism. Creativity comes from a confident ego, from rationality and self-interest, not from humility, self-abnegation and charity. It’s the product of human virtues, not of vices–of a life-affirming ethic, not the ethic of a hermit.

The whole history of capitalism shows this. The creative and productive giants of business boosted output and caused plummeting prices, permitting customers from all walks of life to afford the new and improved. The creators did this while profiting–indeed, to earn a profit means to create new wealth net of resources consumed in production. The profits were earned not by price-gouging but by cost-saving, by expanding the size of operations and inventing labor-saving devices. The result, system-wide, was not fewer workers employed at a plummeting, misery-causing real wage but more employed at rising real wages. This is the new pie, not the fixed pie. Production is neither theft nor exploitation. The stupendous advances of capitalism–made most stupendous by its biggest companies–was completely ignored or derided by Marx and his cohorts in academia and politics.

Those who claim that the “little guy” has no chance under capitalist competition, that the man of limited means but big potential, big ideas and a few commercially viable products will get nowhere or be squashed by the giants–well, these critics ignore the crucial role of capital markets. Under capitalism vast pools of savings are directed by investors into all kinds of new products and ventures, so long as they can project a reasonable rate of return. The return on investment, not its size, is what counts. An investment of $1000 can return 10% just as $1 billion can. No one in the business world even heard of Bill Gates in the late 1970s, when IBM and DEC were both considered insurmountable computer behemoths. Of course IBM, as a creative leader, was then under attack by trustbusters. Under the burdens of a 13-year antitrust case spanning most of the 1970s (1969-1982) IBM lost its edge and much of its creative talent. Microsoft rose up, but not on the back of IBM. Apple rose up too. But Microsoft rose further and farther–and as a result was, like IBM, targeted for attack by the trustbusters: attacked because it was getting large and profitable, because it was creating wealth and contented workers, suppliers and customers.

Even under capitalism it happens that large firms fail to keep innovating, to attract the top talent, or increase profits, through their own short-comings. But in the event, these firms do not deserve, nor receive, any special protections, favors or subsidies from government. The only way a large, existing firm can remain in business and grow is not by raising prices–that would attract competition–but by lowering prices through efficiency and cost-savings. By expanding output at no higher or even lower prices such firms are able to increase their profitability–at the expense of no one. Smaller, would-be competitors who do not yet possess the size, experience or cost-saving prowess of the giants have no right to run to government and secure decrees to rewrite contracts or seize patents and products, or demand the division of the leader into separate pieces. Nor does government have the right to establish a single department or agency to promote such rights-violating atrocities.

Whenever firms or industries become less profitable, investors withdraw their capital and re-invest it where profits are rising, or have the decent prospect of doing so. Typically, the fastest-growing sales and profits are found among the smaller, younger companies in any industry. They face no real disadvantage–and every chance of success–under capitalist capital markets. Indeed, capital can flow to such start-up ventures so quickly that instead of applauding this, the critics of capitalism condemn it. Read today’s papers and find articles deriding the alleged “bubble” in Internet stocks, by which the critics mean, “too much saving” is going into firms that no one has ever heard of, into firms with few products and, as yet, no visible profits. The critics ignore the fact that such ventures incur start-up costs that preclude immediate profitability; and ignore the fact that investors are both forward-looking and patient, willing to take reasonable risks for the chance of high returns. In the 1980s the anti-capitalist critics denounced firms and investors for being “short-term,” obsessed only with next quarter’s profits. In the 1990s they denounce short-term losses taken for long-term gains and decry the alleged obsession with rising stocks.

Today the world’s wealthiest man, Bill Gates was once an unknown, a college drop-out with big talent, a big ego, and big ideas–but a fairly small bankroll: the Geek David facing the Goliath IBM. But in time the capital markets recognized the talent and potential in Gates–in his ideas, his products and his company. The capital markets are a crucial means by which new entrants with good ideas and products grow bigger. If laggards like Netscape truly had a superior, commercially viable array of products, capital would have rushed to its door. That capital did not is no fault of Microsoft and no sign of coercion.

Capitalist competition, despite all the derisive descriptions given it by critics–such as “vicious,” “cut-throat,” is in fact voluntary and peaceful. Indeed, it entails a significant degree of cooperation and coordination–among producers, suppliers and customers. This does not mean self-sacrifice. Capitalist competition is certainly vigorous. It is no tea party–nor should it be. It’s a competition of wits and abilities, not a battle of fists or weapons.

This seemingly paradoxical union of competition and cooperation under capitalism may help you understand a crucial aspect in the persecution of Microsoft. We’re all aware that it’s a vigorous competitor. But who sees that Microsoft is also an excellent cooperator? It must have been to be so successful. Creators like Gates are the fountainheads of human achievement, but they can not and do not create in a vacuum. Workers, suppliers and customers may not match their talents, but they’re important to their commercial success.

The Justice Department is not merely ignorant of the extent cooperation is required–they positively attack it. Here I refer to the department’s assault on the freedom to contract with others. Every firm, Microsoft included, must make contracts–that is, legally binding agreements–with workers, suppliers and customers. Contracts are not coercive devices. They are not undertaken because the parties distrust one another. They ensure that the terms of a voluntary cooperation already achieved are understood and will succeed the inevitable turnover in personnel that occurs. Most important, of course, contracts permit long-range business planning essential to a forward-looking, wealth-building system. The government’s role is to uphold contracts–not to write them, re-write them or break them.

Committing continual acts of injustice, the US Justice Department writes, re-writes and breaks market-based contracts. Trustbusters, for example, have persecuted Microsoft for entering into “restrictive contracts” with suppliers and customers, like Intel, Dell and Compaq. Now, contract law has a long and noble history. Trustbusters violate such law at every turn. It should be obvious that contracts, by their very nature, are “restrictive.” The phrase “restrictive contract” does not symbolize a fraud–it depicts a redundancy. Contracts specify whom you will trade with, on specific terms, at specific prices, over specific time periods. They restrict, as they must, the “whom,” “how,” “what” and “when” of your trading relationships. For those who doubt that contracts are both voluntary in origin and execution, while also restrictive in form and content, ask yourself what it means to enter into a marriage contract. Ask your spouse or spouse-to-be how much force it required to make such a contract and how loose they’ll be in abiding by its restrictions.

To characterize contracts as “coercive” because they are restrictive is to obliterate the meaning of voluntary contract as such. It makes a mockery of freedom. No contracts are safe from such a premise and such smears. This is precisely the result of the Justice Department’s position on contracts. To oppose “restrictive contracts” is to oppose contracts per se. To oppose contracts is to oppose rational, voluntary exchange per se. To oppose voluntary exchange is to oppose liberty per se. When the Justice Department of the United States actively subverts contracts, voluntary exchange and liberty, it’s no longer a department of justice but a dungeon of hellish injustice where liberty is crucified.

The only proper objection one might raise about the validity of any contract is if it was signed under threat of physical force or embodied a misrepresentation or fraud. Capitalist justice does not permit fraud or the initiation of force. The fact is, 99.9% of all contracts do not have such defects. But the Justice Department intervenes in a much greater part than 0.1% of all contracts. Together with regulators, they intervene in more than 90% of them–in the name of justice, but in direct violation of it. Microsoft’s contracts have not involved force or fraud. They were signed with firms like Dell and Compaq, not with Netscape, the lagging rival who got the Justice Department to label Microsoft’s contracts “coercive” and to initiate coercive proceedings against the company. Nothing prevented Dell or Compaq from carrying Netscape’s browser; they refused for business reasons. Netscape answered, not with a better product or proposition–but with the barrel of a gun.

Government should uphold and enforce market contracts–not violate freedom of contract by dictating the terms, changing the terms, or abrogating the terms of contracts. It should neither commit these injustices directly nor assist disgruntled rivals in doing so. When government dictates, alters or abrogates the content and execution of contracts it reverses it’s role as a protector of contracts. It transforms itself from a proper agent preventing or rectifying force or fraud to an initiator of both–it becomes a lawless but legalized thug.

The above article is an adaptation of a lecture Mr. Salsman gave at Harvard University, in May of 1999. The print version has been edited lightly in order to retain it’s spontaneous quality. Mr. Salsman has not reviewed the edited version.

Dr. Salsman is president of InterMarket Forecasting, Inc., an assistant professor of political economy at Duke University and a senior fellow at the American Institute for Economic Research. Previously he was an economist at Wainwright Economics, Inc. and a banker at the Bank of New York and Citibank. Dr. Salsman has authored three books: Breaking the Banks: Central Banking Problems and Free Banking Solutions (AIER, 1990), Gold and Liberty (AIER, 1995), and The Political Economy of Public Debt: Three Centuries of Theory and Evidence (Edward Elgar Publishing, 2017). In 2021 his fourth book – Where Have all the Capitalist Gone? – will be published by the American Institute for Economic Research. He is also author of a dozen chapters and scores of articles. His work has appeared in the Georgetown Journal of Law and Public Policy, Reason Papers, the Wall Street Journal, the New York Times, Forbes, the Economist, the Financial Post, the Intellectual Activist, and The Objective Standard. Dr. Salsman earned his B.A. in economics from Bowdoin College (1981), his M.A. in economics from New York University (1988), and his Ph.D. in political economy from Duke University (2012). His personal website is richardsalsman.com.

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