NICHOLAS WOODE-SMITH: Competition is good — but being stifled in SA

Competition is a forge. It’s hot, full of flames and potentially dangerous. But if used correctly, it will create something durable, precious and valuable.

One of the foremost virtues of a free market is how it requires and nurtures competition between companies, workers, institutions and entrepreneurs. This competition, if done peacefully, helps all parties involved become better. It encourages growth, quality and better behaviour across the board.

When businesses are allowed to compete, we see everyone benefit in the long run. But in what specific ways does competition benefit businesses, workers, consumers and the greater society? And how is competition being stifled and costing SA potential prosperity?

Consumers

One of the primary beneficiaries of competition are consumers. When businesses compete, they primarily do so in two ways: lowering prices or upping quality. Both serve consumers.

The need to outsell a competitor to make a profit drives a business to often lower prices, so they become more appealing to consumers. This allows consumers to buy more, save more and invest more. When lowering prices is not possible, or not prudent, businesses usually increase quality.

This could be in presenting a luxury, better quality version of a product (think Woolworths vs Pick n Pay), or by providing better customer service. In an effort to make a profit, competing businesses will race to appeal to consumers. And we win!

Workers

Despite what many socialists and communists may argue, competition between businesses is actually a boon for workers. A good worker is an asset to a company. And a company will want to hire a worker who will help them beat the competition.

While companies compete for consumers to sell their product, they must also compete for workers to produce their product. This means companies will compete to provide better wages, increased benefits and a better work environment for their employees.

The weekend wasn’t originally a mandated time slot. It was invented by Henry Ford, who incentivised people to work for him by providing time off twice a week.

Competition over workers is stifled, however, by the unions who are meant to be working for the benefit of workers. While the ideal would be for employees to compete for higher wages between competing companies, unions enforce uniform wages across industries and ensure that companies can’t offer individual wages to stellar employees.

Removing these uniform, union-enforced wages would allow for healthy competition between businesses to poach each other’s employees — and the worker would benefit.

Incentive to perform and innovate

The public sector tends to be incompetent, overpaid and corrupt, because it has no competition. When a minister fails to perform, he gets a bonus. When a private company fails to perform, it goes bankrupt. This ensures they never grow lazy.

There is an incentive among competing businesses to perform well, because that is the only way to stay ahead of the competition and ensure you continue to make a profit and stay afloat.

Monopolies, notably government monopolies, have no incentive to perform well. They have no-one to replace them, and get paid if they do or they don’t. That’s why Eskom can’t keep the lights on. It has no incentive to do so. Its executives get their bonuses regardless.

There is also an incentive to innovate in the private sector. This can be in the form of creating more efficient means of producing a product or running a business, but also in creating new products and inventions that drive forward human progress.

The technological revolution, while often claimed to be the result of government intervention, is fundamentally a result of competition between entrepreneurs. And it continues to be led by the private sector.

Risk management

Competition also benefits consumers by providing alternative providers of a product or service in case their preferred company can no longer perform. If Pick n Pay closed, we could always go to Checkers. But we have no such option for electricity with Eskom.

We need many competing companies, because they pick up each other’s slack and provide a mitigating effect to the risk of one company underperforming.

Learning

Competitors learn from one another. When they fail, they can see what their more successful competitors did and improve. And while companies compete, there is often a lot of collaboration in the spread of good business practices, technology, research and skills development.

While competition can be a threat, companies can also become better for learning from their competitors and working together to enrich each other.

Threats to competition

It should be common sense that competition in the marketplace is good. But it is continually stifled by government regulations and intervention — holding back the benefits of the free market.

Government monopolies like Eskom prevent private companies from entering the industry and providing a superior alternative. Regulations in other industries make it harder for new businesses to enter and compete — ensuring the current businesses go static and grow lazy.

Protecting local industries from foreign competitors is also terrible. It not only stops local consumers from benefiting from cheap, high-quality goods from overseas, it also coddles our companies and prevents them from becoming as good as they can be.

Opening up a local market to the world ensures not only that they benefit from the forge of local competition, but that they benefit from competing with companies from around the globe. This means more of all the benefits mentioned above.

Yes, some local industries won’t be able to compete and may close. But if they did not have what it takes to compete, keeping them alive through protectionism, subsidies and other regulatory means will only accomplish propping up an undeserving, weak industry that deserves to die.

Above all else, competition ensures honesty. It ensures that the deserving survive and thrive to provide an ideal service or product to consumers. And it is in competition that SAs industries should and can find the means to make this country prosperous.

• Woode-Smith, an author, economic historian and political analyst, is a contributing author for the Free Market Foundation. He writes in his personal capacity.