Comment by anigbrowl | Hacker News Reader

Comment by anigbrowl | Hacker News Reader

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This is what Peter Thiel discusses in his "perfect competition" argument.

That's not Peter Thiel's argument. That's Peter Thiel delivering a remedial microeconomics lesson. 'Perfect competition', 'monopolistic competition' and 'monopoly' are technical terms which don't necessarily mean what they might appear to. In perfect competition, for example, all goods are fungible. It's a good model for the commodities market, since one barrel of oil is very much like another (there are different grades of oil with different sub-markets, such as 'Brent crude' or 'west Texas intermediate', but you don't care which particular company extracted which particular barrel of oil from the ground within a given market).

Now once you introduce the element of skill, you have something more like monopolistic competition. Pizzerias are in competition, and they're selling a similar product, but they can compete on everything from the quality of the pizza dough to the comfiness of the seating, so different customers may end up strongly preferring one to the other. Maybe I'm price-sensitive and prefer Mario's bargain slice, but you're a gourmet and you prefer Luigi's home-made flavor. Someone else prefers the fancy service at Gino's, and so on. This is why towns can have so many different restaurants and why supermarkets can sell multiple different brands of what are essentially similar products: you can differentiate products and services, and anchor consumers to a particular combination.

Sure a new business may add value by providing a better service than the competitor it beats, but the overall wealth pie of this nation doesn't increase.

Oh yes it does, because now the wealth is being allocated more efficiently. Commodities are one-size-fits-all, but relatively few goods are commodities. Consider, for example, that there are relatively few companies in the business of wheat production (commodity) but a great many different bread companies, in line with the wide variety of different bread products.

Please, pick up a microeconomics textbook. Macroeconomics is so flawed and obtuse that a lot of people dismiss the musings of economists, but microeconomics is a very robust discipline that is almost criminally underappreciated. If I could back to high school and give my teenage self some advice, it would be 'learn microeconomics.'

Ok, I'm reading some economics as I type. on Economic efficiency: Efficiency is really about a society making the best or optimal use of our scarce resources to satisfy most wants & needs.

To use your bread example, more bread companies offering more choices, allow us to better satisfy our diverse wants of bread. Basically we receive more value from our money. This is good.

But does adding more bread companies increase the resources we have? We can only eat so much quantity or so many varieties of bread.

To grow the overall wealth pie, we have to either make better use of our existing resources or increase the efficiency of production. Basically, improvements in process or technology leading to greater production.

I'm not against Steve Blank's 99% mainstream entrepreneurship course by any means. Helping entrepreneurs make better decisions raises the level of competition in the industry and in most cases that is good for society. But if the new businesses started don't come with innovation then I see this as fiercer fighting for a stagnant (or shrinking) pie. I value growing the pie over dividing it more optimally, although I suppose each is important.

Can you explain what this means: because now the wealth is being allocated more efficiently

It's kind of beyond the scope of this conversation, but the basic concept is called 'utility maximization'. It's hard to measure utility directly, but we can infer it by examining the opportunity cost - ie, the value of other alternatives foregone in favor of the option I prefer. Where a consumer's preferred product/service is unavailable or unaffordable, other goods are substituted, but these have lower utility. If rising consumer incomes cause people to switch from one good to another, the abandoned good is known as an 'inferior good'.To the extent that resources are dedicated to the production of something that people don't actually want, it's inefficient. It would be better if those resources were dedicated to the production of superior or ideal goods, of the kind that people buy because they already maximize utility.

This general field is called 'price theory.' Please appreciate that I can only sketch the crudest outline within a single paragraph.

If we add more competitors to the pizza arena, how does that grow the overall pie of wealth?

Greater choice leads to more efficient outcomes. You like cheap pizza served fast, so you get a slice for only $3 and don't waste money on linen tablecloths, which you consider a foolish affectation. I like nice service, so I pay $10 to spend a half-hour being seated and served by a waiter. You save money by not paying for services you don't want, I spend it locally instead of driving to the next town for a sit-down meal, which is what I actually want (as opposed to the drive, which costs me $3 in gas and mileage expenses). We both get what we want, pizzeria owners make money money, which they in turn spend on the goods and services they need, and you have a nice virtuous circle.

Now, you could say that there's money wasted on pizza marketing or too many entrants for all pizzerias to survive, so some will go out of business. All true, but those are short run phenomena. Over the long run, the result is greater efficiency. This pattern of short-term fluctuations between equilibria is the business cycle. What you're looking for is optimality, not necessarily growth. Again, all this is drastically oversimplified.

Thanks for the reply. It's hard to remember sometimes that if wealth is defined by what humans value then increased choice can lead to more efficient wealth. I'm just having trouble reconciling the fact that wealth is being created when we achieve more efficiently what we want but the overall pie is not increasing. Perhaps the pie analogy has limitations. In your example, the pie wouldn't increase, but it would be a better pie. Does that makes sense? It sounds strange as we are not used to thinking of wealth in terms of "better" or "worse", only more or less.

Now, you could say that there's money wasted on pizza marketing or too many entrants for all pizzerias to survive, so some will go out of business. All true, but those are short run phenomena. Over the long run, the result is greater efficiency.

Yes, this is what I'm thinking of. Too many competitors in the short-term. Is there a point where there are no more efficiencies to be found though? Or the efficiencies are so small as to be negligible? Like having 101 pizza shops vs. 100.

On an intuitive level, increasing the efficiency of production feels more important to me than maximizing efficiency of utility. But both affect wealth positively.

Is there a point where there are no more efficiencies to be found though?

For sure. If demand outstrips supply, some competitors will have to exit the market. A good micro textbook will go through all of this, or if you prefer a conceptual approach try Todd Buckholz' New ideas from dead economists.

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