The Myth of the Level Playing Field

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Also
not surprising is the usual suggested remedy – government intervention
to the advantage of the complainant or to the disadvantage of his
competitors. Domestically, small U.S. retailers have complained
that their hiring costs and employee compensation expenses are higher
than those of larger firms, such as Wal-Mart, and called for increases
in the minimum wage. Supposedly, this would increase the costs and
prices of the larger firms, thus “leveling the playing field”
for the smaller firms that compete with them.

Businesses
that compete against imports, such as orange growers in Florida
or shrimpers in Texas, have complained that the production costs
of foreign growers of oranges and shrimps are much lower than domestic
costs and have called for high tariffs or quotas on imports of those
products to “level the playing field” so that domestic
producers are at no price disadvantage.

Locally
owned ethnic minority contractors in U.S. cities now ordinarily
request set-asides for government projects, arguing that small,
ethnic minority- or women-owned firms cannot compete in pricing
and services against large national or international contractors
for project construction or operating contracts. Only set-asides
will “level the playing field.”

Common
to these examples and others is the fact that the intervention requested
will either raise costs of production, and thus the prices of the
products in question, or restrict quantities available to consumers,
and thus raise prices – or just directly raise the prices charged
to consumers and received by “competing” firms.

From
the consumer’s point of view, higher prices and restricted
product availability are hardly advantageous; however, that is not
the main argument of this article. The main argument is that business
is not a game and “the level playing field” is a myth.
No such thing exists, nor can exist, in business – or in everyday
life, for that matter.

Business
and zero-sum games

Although
sports and military analogies are often used when discussing business
activities – particularly those involving competition among
individuals, firms, or industries – the analogies are almost
always inappropriate. Sports competitions and military engagements
are zero-sum games. Points lost by one individual or by a team in
a sports contest are gains to the winner. Objectives or positions
achieved by one side in a military battle or campaign are the same
as those lost by the opposing side. That’s one of the reasons
that sporting activities, especially team sports, are good preparation
for military tacticians and strategists.

Business
activities, especially those involving competition, are not zero-sum
games. Instead, they are almost always net value-creating in nature.
The purpose of business is profit; the means is the garnering of
sales revenue in excess of costs of production. Profitable businesses
in an economy free of government interventions are those successful
at channeling resources from lower-valued uses into higher-valued
ones, as shown by the excess of sales price over the resource costs
of producing the commodities in question. Competition mainly takes
the form of price competition, enabled by an emphasis on decreasing
the costs of production, improved marketing, and new-product development.

From
the consumer’s point of view, this means the greater availability
of an ever-increasing range of products at lower prices. The consumer
is not a spectator at a sporting contest, receiving value from observing
the competition itself; he receives value directly from the “winning”
competitor in return for the price he pays for the product. Rather
than from all firms’ charging the same price because their
costs are the same or because there is a government-imposed floor
price, the consumer benefits from the superiority of some firm or
firms at lowering costs, and thus prices, below those of competitors.
Instead of a “level playing field,” the consumer benefits
from a field tilted to the favor of one or the other of competing
sellers by the successful seller himself.

The
law of association

In
fact, in an intervention-free market, this is sure to happen as
a result of the Ricardian “law of comparative advantage,”
the more general form of which was termed the “law of association”
by Ludwig von Mises. Mises showed that the production of value according
to the law of association not only benefits consumers, but increases
the efficiency of all participants in the economy in their use of
resources to create value. Understanding this economic law is simple;
the historical acceptance of it and its implications have proven
politically difficult because of the opposition of those who clamor
for “a level playing field.”

The
law of association is an extension of the social division of labor
that naturally occurs in a market economy because of the great increases
in productivity that it makes possible. Even a frontier family in
a wilderness benefits from the division of labor within the family
because it makes the family more productive. The family also benefits
from the circumstance that, in assigning tasks to individual family
members, some members are more suited to perform certain tasks than
others. They are said to have an “absolute advantage”
over other members of the family in carrying out a particular task.
The association of persons in the family makes it possible to take
advantage of this fact in the assignment of tasks.

In
a market economy of producing individuals who associate through
trade, the same is true. Greater value will be produced in total
if each production unit specializes in its area of absolute advantage.
The law of association comes into play when a comparison between
the productive abilities of any two persons or any two productive
organizations reveals that one of them has an absolute advantage
in all activities being compared. How then shall specialization
through the division of labor in production take place in order
that the greatest total value is produced?

The
answer lies in discovering the task in which the absolute advantage
of the superior producer is greatest over that of the inferior one.
That is the area of his comparative advantage – the area in
which his relative productivity advantage is greatest. If he specializes
in it, while the inferior producer specializes in the area in which
he is least inferior, total value produced will be greater than
if the superior producer did all tasks or if both did not specialize,
but produced in isolation. Textbook demonstrations of the law are
typically numerical, but an understanding of the law and its implications
can be gained from considering the following simple example: If
a dentist is not only skilled in dentistry, but is also much better
at auto repair than his mechanic (who was at the bottom of his class
in dental school, couldn’t build a practice, and became a mechanic
instead), it is more productive for each to stick to his respective
profession than for the dentist to do some of the mechanical work
on his car at the cost of patient care, while the mechanic does
(poorly) some of his own dentistry at the cost of car repair. To
do all his mechanical work as well as practice dentistry during
the same workweek would be an even worse outcome in terms of value
produced by the dentist. The same is true of the mechanic.

Consequences
of intervention

What
does the notion of “the level playing field” have to do
with this example and with the law of association? Government interventions
to create a “level playing field” prevent the law of association
from determining who produces what. Suppose that our auto mechanic
really wanted to practice dentistry but couldn’t keep patients
because of the competition from our more highly skilled dentist.
He might lobby the city or the state to limit the number of patients
that any one dentist could treat so that this would “level
the playing field” for other dentists like himself by providing
them patients. After all, some dentists have the “unfair”
advantage of being more skilled than others and thus are more able
to attract and keep patients than others. The consequent deleterious
effect on the value created by dentistry should be apparent.

Also
apparent is that the “level playing field” would eliminate
key elements of price competition and product-quality improvement.
Why should any dentist compete for patients in the presence of a
quota? “Leveling the playing field” eliminates competition
rather than enhancing it.

In
fact, the quota system can be expected to increase prices for dentistry.
The more-skilled dentists are more in demand, but each is restricted
to a quota. If they can individually increase their prices to eliminate
the excess demand for their services, they will. The less-skilled
dentists have no incentive to decrease their own prices because
they need not do so to attract the patients driven into their arms
by the quota system and the higher prices of those dentists in greatest
demand.

This
example illustrates why “the level playing field” is a
myth. “Playing fields” in the production of economic value
are never “level.” Some individuals or firms have absolute
advantages; some have comparative advantages. In an intervention-free
market economy, each works to secure such a position against his
competitors to maximize profits. In fact, competition forces them
to do that. The result, according to the law of association, is
that the production of economic value is higher than it would be
otherwise. All participants in the economy benefit from the greater
efficiency in production achieved, except for those who individually
would benefit more through governmental extortion of value from
other participants.

Nothing
in the argument itself changes when we change the context from that
of a single market economy to the economy of the world. It does
not “level the playing field” to force domestic consumers
to pay higher prices to support domestic producers who are at a
comparative disadvantage in the production of value compared with
foreign ones. It just prevents the law of association from working
internationally and thus lowers the total value that can be produced
in the world economy. Some domestic firms that lack a comparative
advantage in the production of economic value are protected and
their resources confined to lower-valued uses, rather than flowing
to higher-valued uses in those domestic firms that do have comparative
advantages. The fact that the firm must be protected to ensure its
survival is a sure sign that its resources would be better used
elsewhere.

The
“level playing field” myth has the result of supporting
policies that make most participants in the market economy worse
off in their roles as consumers and producers in order to make some
participants better off than they would be without the policies.
Life is not a “level playing field.” The law of association
shows how it is possible for human beings to obtain the greatest
total value from the resources available to them, including their
own individually diverse capabilities. The argument that a more
desirable outcome can be obtained in particular situations by policies
that “level the playing field” is nothing more than an
excuse for an extortion program.

May
12, 2005

Samuel Bostaph [send him
mail
] is head of the economics department at the University
of Dallas and an academic advisor to The
Future of Freedom Foundation
.

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