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Competition v Monopoly

March 2, 2010

There is always a tension between the desire to have a single uniform approach, and the benefits from competition. Unfortunately for me (and other defenders of competition) the benefits from uniformity are sometimes more immediately obvious. This is especially true when it comes to the topic of jurisdictional competition, compared with the lure of a quick fix through political centralisation.

The benefits and costs of jurisdictional competition are similar to the benefits and costs of market competition. The costs are (as many people note) the duplication, and complexity of having different approaches. Having multiple shoe manufacturers creates waste because each one employs their own administration team and there is confusion for shoe retailers because they have to deal with several different shoe manufacturers. Likewise, having multiple regional governments creates waste because each government has their own administration team and there is confusion for people moving between regions.

There is no denying these costs… with business and with government.

However, I very strongly believe that the benefits of competition exceed these costs of coordination.

About 100 years ago the “best and brightest” were sure that a single and centralised government monopoly would always be the most efficient way of producing anything. They pointed out that potential benefits of uniformity, such as less administration costs and greater simplicity. They were wrong.

What they failed to realise was that there is a very important dynamic issue at play. A single government monopoly may well be better if they have all the right information, all the right incentives, and the world never changes. But the world isn’t like that.

Instead, the world is (and always will be) full of imperfect politicians who face distorted incentives and face an ever-changing world. The problem of a centralised government approach is the “knowledge problem”, where it is very difficult for central authorities to be able to bring together the diverse and ever-changing knowledge & preferences that are hidden in the minds of 22 million people spread around our country.

That is why competition is so important.

Competition works between governments in a similar way than it works in markets — having multiple competing jurisdictions encourages innovation, the quick implementation of good rules and the quick removal of bad rules. This last point is especially important. Without jurisdictional competition, governments are able to maintain bad rules indefinitely with weak pressure for change.

With competition between Australian States we have six times the chance to discover a better way of doing things, and when one area makes a break through then this is likely to lead to imitation.

The benefit of competition isn’t that it provides a perfect outcome today, but that it creates a better dynamic so that the system will be constantly evolving closer to a better approach. Without the competition (in markets & in jurisdictions) we rely simply on the hope that politicians will be permanently benevolent and supremely wise. That is not a good assumption.

Competition doesn’t sound as sexy as the “lets just get one perfect centralised way of doing it” approach… but it has the advantage of actually working.

(The other benefit of competition is that sometimes people actually want different things, and having different approaches allows the jurisdictions (or the business) to cater to the needs and desires of their members (or customers). Imposing uniformity removes this benefit. A final benefit is that decentralisation keeps with the intentions of our constitution. Though I think it is the dynamic incentives point above that I think is most important.)

None of this denies the perfectly true point that competition has costs. Jurisdictional competition will lead to multiple bureaucracies instead of a super-central bureaucracy… and it will mean some more complexity for some people. These aren’t good things. But there is no perfect system, and I think the complexity costs are a small price to pay for the benefits of competition.

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