This is not to say that clerkships, scholarships, and awards don’t often reflect incredible accomplishment. Where that’s the case, we shouldn’t diminish it. But too often in the race to compete, we learn to confuse what is hard with what is valuable. Intense competition makes things hard because you just beat heads with other people. The intensity of competition becomes a proxy for value.
A lot of this is stuff I've been thinking implicitly for a while.
Success can exist on a continuum between competitive and niche.
The far end of "competitive" is being something like a concert violinist. Everyone knows that it's prestigious to be a concert violinist, millions of people want to, everyone plays the same audition pieces; you win if you're a hair's-breadth better than a million people doing the same thing. It's an unpleasant process, and the odds of success are long, but you know for certain what you'll have to do to win, and you know that if you get that coveted orchestra spot, you'll have reached the top of your profession.
The far end of "niche" is probably starting a company in a completely open industry. Nobody else is doing what you're doing; you're not competing directly with anyone; but you don't know what you'd have to do to succeed, you don't know if the niche you've chosen is any good, and you don't know how to judge how valuable it is to succeed in your niche. On the other hand, you don't have the demoralizing stress of trying to do the same thing as everybody else, infinitesimally better.
I've been trying to decide what to do with my life in this context. I'm a grad student in mathematics, with research interests related to machine learning. On the one end of the scale there's academia (which is at the extreme "competitive" side of the axis) and on the other side there's entrepreneurship (at the extreme "niche" side of the axis) and in between there's working as a data scientist at companies ranging from "three-month-old start-up" to "IBM." There's a tradeoff between the freedom of staking out your own territory, and the risk that if you're free to make things up, you'll get everything wrong.
(I've noticed that this is also true within science. In my computational vision research, there's a lot of "whitespace" for developing your own mathematical models; but most people, sooner or later, get proven wrong. In my harmonic analysis research there's a lot of classical theory already existing and the problems are better-defined; but it's correspondingly harder to make an original contribution.)
I've enjoyed everything up to where he starts bad-mouthing the benefits of competition, where he claims that if there's perfect competition "nobody makes any money".
That's about as sensible as Yogi Berra's "Nobody goes there any more -- it's too crowded".
With more competition, things are significantly better for nearly everyone, and only slightly less awesome for the erstwhile monopolists.
Your confusion is understandable, but nonetheless real. Let me explain.
First, when economists talk about profits they mean something entirely different than when accountants (or most normal people) do. An "accounting profit" is when revenue exceeds expenses. An "economic profit" is when you are making money because no one is competing with you.
Thiel is talking about economic profits, and his statement is a tautology. Perfect competition is defined as the state in which no one can make economic profits, and economic profits are defined as the money you make as the result of not being in a state of perfect competition. :)
In terms of a startup, you make your money by inventing something new, or by executing something old better, or by errecting barriers to entry, or exploiting first mover advantage, or by having key patents, or by effective advertising. These are all ways in which we struggle to ensure that there is not perfect competition, in order that we may reap economic profits.
Second, as already mentioned, "perfect competition" is a pretty specifc term, and it has some interesting consequences. It is the state where a all products are perfectly identical. Which in turn means that, oddly, there is none of what we call "competition" in a market with perfect competition. :)
In turn, this is why things actually aren't "better for nearly everyone" with perfect competition. Pretty much every single product you've ever liked was the product of a very non-perfectly competitive market, from sodas to software to jeans to phones to food. You don't want a generic "hamburger" like every other hamburger in the world, you want one of those great burgers the guy at the burger shop around the corner makes, with extra pickles and garlic aioli, because it tastes fantastic! Or maybe a chicken burger, or hey, maybe even a McDs quarter pounder (I won't judge you).
But the point is, these are all different products, and some people like one, and some like another. Would you be happier in a world with perfect competition in burgers, where every burger was literally identical, interchangable, and indestinguishable from every other?
In fact...would any person be made better off by perfect competition in burgers? Or isn't it actually kind of good that we have choices? That I can start a burger shop if I want to, and offer a range of burgers made with grass-fed angus beef, or whatever? In other words, isn't it good that we don't have perfect competition, so that people can compete? :)
(And, of course, that all goes for software and startups too.)
Please don't presume that I'm confused. I've worked to develop a fairly good sense for when I don't understand, and I believe (even if I'm not completely certain) that Thiel, here, is conveniently ignoring the most important counter-arguments to his thesis.
First, I'd like to note that I agree with Thiel about the value of examining popular assumptions concerning the costs and benefits of competition v.s. monopolies. The question of whether entrepreneurs are intrinsically driven, or if instead they actually require rewards in the hundreds of millions (instead of mere single-digit millions) is an important and reasonable one.
According to the notes, he claims monopolies are better for everyone ("Perfect competition is arguably psychologically unhealthy. Every benefit social, not individual.") He does not, however, note for whom such competition is psychologically unhealthy, nor does he address the psychological impact to the victims and perpetrators of the anti-social, value destroying behavior that monopolies inevitably engage in (e.g. the closed standards of MS Office; the falsehoods marketed to physicians about in-patent drugs; etc.).
Since it makes little sense to engage in exegesis from hearsay, I'll try to be as charitable as I can with what appears to be Thiel's principal claim: that perfect competition is unhealthy for entrepreneurs, that competition is a "race to the bottom", and that the vast majority of the benefits are social rather than individual."
Throughout this section of his lecture, Thiel gets considerable leverage by creating a false dichotomy between monopolies and pure competition. For example, his claim Apple is a monopoly may immediately make his Stanford audience sympathetic his pro-monopoly position, but this does not change the fact that Apple, decidedly, is not a monopoly -- certainly it's no more a monopoly than, say, the French Laundry (a restaurant that charges $270/head, sans wine pairings). Monopolistic competition is not perfect competition, but it's not a monopoly, either.
Continuing in the effort to be as charitable as possible, it seems that Thiel, here, is at best being "hazy" as to the costs and benefits of monopolies v.s. competition. On the one hand he seems to be claiming that perfect competition is worse and monopolies better for everyone ("Monopolistic firms can also conduct better long-term planning and take on deeper project financing, since there’s a sense of durability that wouldn’t exist in perfect competition where profits are zero."). But I suspect, were he pressed on this position, he would equivocate, saying that his perspective is that of the individual entrepreneur. Come on, Thiel: cui bono?
While Thiel seems to be claiming that durable, monopoly-level rewards are required for the psychological well-being of entrepreneurs, Thiel himself claims that money is a poor motivator.
But Thiel's biggest omission is perhaps in failing to give credit to the benefits of a highly competitive (but far from perfect or pure) market. It is only thanks to extreme competition that Apple can manufacturer iPads for $300 in the first place. Wal-Mart's (and Apple's) power and profits are both derived from competition among their suppliers.
Ironically, PayPal itself serves as a strong counter-example to Thiel's claim. Was PayPal's monopoly necessary in order to support the service it provides? Would those running it have been adequately compensated if there had been more competition? On the whole, have consumers been better served by a monopolistic PayPal, or would everyone have been better off (in total value and in rate of growth) if there had been quickly agreed-on open standards for online transactions? Was the near monopoly of Internet Explorer a boon for the internet? Has TicketMaster's monopoly been a net benefit?
Contrast this with the markets in which competition is fierce -- in Hollywood, in web design, in chip manufacturing. In meme generation, in indie music and art, in blogs. Do we see a lack of innovation in these areas? Apart from a lack of out-sized rewards, and the poor "psychological health" of the participants, where is the downside? (... and why Thiel seems to believe that we should treat mental health problems by propping up monopolies is a question only he can answer).
Apart from Thiel's recommendation that we ought to have businesses doing something that other people aren't, what are we supposed to take away from his advocacy of monopolies? Should entrepreneurs advocate the dismantling of anti-trust legislation? When they end up running large companies should they advocate for closed data standards? To what kind of ethics should business owners adhere?
Yes, Peter Thiel is a brilliant and innovative thinker. But when it comes to his claims about economics his convenient notions crumble under slightest weight of objective scrutiny.
I think you are arguing from a social/holistic point of view.Yes with more competition society benefits as a whole and we get better products since the bar is set higher.
If you are arguing from the point of view of huge companies like IBM or Apple then Yes - being in a more competitive market makes sense as larger markets are inherently competitive.
But from the point of view someone without money,resources and who wants to start a business from scratch, it seems obvious to me that avoiding competition is a good strategy.
For example, read the story about competing pizza shops in Manhattan.Although they work hard and are doing their best, they aren't making much money.
Of course monopolies are "good" for those who benefit from them. This much is a truism.
Thiel says entrepreneurs should seek out areas areas in which there will be minimal competition. This, too, is not exactly earth shattering.
The issue is that Thiel appears to be trying to make an even stronger claim; that monopolies are intrinsically good, and might even be necessary for progress; that "no one makes any money" in markets where there's too much competition; that one has failed as an entrepreneur if one doesn't quickly make enough money to retire on. It's this latter claim, and other similarly strong ones that Thiel makes, that don't stand up to objective critical scrutiny.
Perfect competition is a term of art referring to a specific competitive scenario with no product differentiation, no economies of scale, no barriers to entry, and a huge number of well-informed buyers and sellers.
The net result is that the sellers become "price takers", accepting whatever the market will give them. An example of this effect near an extreme is in the securities markets, where you sell stock for whatever price the market will give you. You can't reasonably argue that if my shares are selling for $600 that somebody should purchase yours for $601.
When you think of competition, it's quite likely you're envisioning monopolistic competition in which products are differentiated, and aimed to appeal to slightly different buyers. This is a form of competition where profits are possible, but they're hard to sustain without continued innovation, and the establishment of new differentiating factors.
A monopoly is the other end of that scale, where they have substantial pricing power and that power is quite durable over time, even without substantive innovation.
But I absolutely agree with Thiel that perfect competition is terrible if your goal is to turn a profit.
Is this what happens to airlines? I was wandering that air travel is a very valuable service yet companies seem to struggle to survive. Thanks for the explanation, I wasn't familiar with the term.
It's a good question, but I believe airlines would be classified either as monopolistic competition, or a non-collusive oligopoly. There's an identifiable difference between a flight on Virgin America and one on American Airlines, so at least some of the competition occurs on a dimension other than price.
There's a model called 'Porter's five forces' that is often used to evaluate the strength of business models, and Thiel's choice of language seems to indicate that he's familiar with and supports at least some aspects of this model. It looks at five major factors:
1) threat of new competition (new airlines)
2) threat of substitutes (WebEx, high-speed rail)
3) bargaining power of buyers (you and me)
4) bargaining power of suppliers (Airbus, Sysco Foods, Airports, Labor, Fuel)
5) Intensity of competition
Thinking quickly about airlines, my thought is that items 2 and 5 are the largest problem areas. Item 2 because if prices rise too much, businesses can shift some travel to email/webex/conference call, and pleasure travelers can pick alternate destinations either on lower-priced (likely less profitable) routes, or can simply not fly to their destination.
Item 5 because if A creates a profitable flight, there's a fairly strong incentive for B to start offering a very similar flight and competing (in part) on price. This is likely to eventually drive the profit generated from that flight down to zero. After all, even if A and B managed to reach a profitable equilibrium, C is likely to notice and compete on that flight, and this is likely to continue until everyone's revenues are just meeting their expenses.
Part 2: http://blakemasters.tumblr.com/post/20582845717/peter-thiels...
Part 3: http://blakemasters.tumblr.com/post/20955341708/peter-thiels...
Part 4: http://blakemasters.tumblr.com/post/21169325300/peter-thiels...