The Role of Diversity and Competition in Promoting Economic Performance – by Clement A. Tisdell

Red Deer at Dawn

Photo: Richard Fisher, Creative Commons 2.0

His new book Competition, Diversity and Economic Performance: Processes, Complexities and Ecological Similarities focuses on the implications of dynamic processes for economic performance and specifically the role of diversity in its improvement – something which thus far has been neglected by economic theorists.

Various forms of diversity and competition play a central role in theories of the performance of ecological systems. In economics, however, little attention has been paid to diversity as an influence on economic performance and to some dimensions of competition found to be important for the operation and sustainability of ecological systems. This is despite Alfred Marshall proclaiming in his Principles of Economics (see Preface, 8th edition, 1938) that “The Mecca of the economist lies in economic biology…”. Competition, Diversity and Economic Performance: Processes, Complexities and Ecological Similarities is intended to help rectify this situation.

Competition, Diversity And Economic Performance book coverIn this book, I identify important consequences for economic performance and industrial evolution of the nature of market competition and of diversity among buyers (consumers) and sellers (mainly business firms). I also demonstrate how diversity among consumers and business enterprises can facilitate market development and improve dynamic economic performance. Economic theorists have given insufficient attention to the implications for economic performance of these types of diversity. For example, microeconomic theory has focused mainly on the average (rational) consumer (for example, the theories of John Hicks) and on the representative firm (for instance, the theories of Alfred Marshall and Edwin Chamberlin).

I propose that moderate market competition is likely to be more effective in improving economic performance than intense competition (there are ecological similarities), and that moderation of market reactions and the presence of some imperfections play an important role in improving the dynamic economic performance of markets.

Following an introductory overview, my book includes a critical discussion of different contemporary concepts of market competition and their claimed consequences for economic performance, especially for dynamic economic performance. The consequences for economic performance of consumer diversity are then outlined, and the remainder of the book mostly concentrates on processes involving the supply-side of markets. Particular attention is given to Schumpeter’s theory of business innovation and economic performance as expounded in Capitalism, Socialism and Democracy. Major issues which he failed to address are noted, such as the role which consumer diversity plays in successful product innovation as well as the importance of potential limits to economic growth.

My analysis of diverse business attributes of significance for economic performance has revealed that varied (diverse) business practices are likely to be optimal in an industry for achieving economic efficiency both in static and dynamic situations. In general, uniform business practices fail to promote top economic performance. Therefore, it is necessary to be wary of benchmarking approaches which suggest that all firms in an industry should strive to adopt the best economic practice in the industry. Consequently, analysis based on economic efficiency frontiers is found to be wanting.

I have explored the relationships between business diversity, economic evolution and economic performance, observing that ecological/biological theories of evolution have quite a different basis to economic theories of industrial evolution. Thus, as stated by Joseph Schumpeter and Edith Penrose, there are significant limits to similarities between ecological and economic theories. Nevertheless, it can be productive for the development of economic theory to take account of ecological theories of the nature of intraspecies competition (for example, scramble and contest competition) and evolution. Among other things, important consequences are found for economic sustainability of the types of competition considered in ecology. A possible difference between biological evolution and industrial evolution is that the former tends to result in speciation in the absence of major exogenous events whereas the latter appears to lead to greater uniformity of products globally as well as increased global uniformity of forms of industrial organization.

Niches play an important role in ecological theories of inter-species competition. I have explored their role in economics, and speculate that as a result of economic development (market extension), market niches become less secure. As a result, product variety declines at the global level but may increase at the local level. Reduced product variety does not appear to necessarily decrease economic welfare, however. In fact in some cases, reduced product variety can actually increase economic welfare, for example, if it also results in a sufficient decrease in prices of the less diverse available products.

Implications for economic performance of differences in the fitness of firms as indicated by variations in their cost of production are also explored in my book. As market conditions alter, such differences facilitate efficient sorting of firms and convergence to a new market equilibrium in circumstances identified. However, I also observe that as a result of market extension, adverse selection can occur in some cases – a high cost producer or region may come to dominate the expanded market due to its initial cost advantage which is clearly inefficient. Ways in which the pursuit of increased economic efficiency and market extension can result in growing economic vulnerability are also outlined. This is an important problem for modern economies.

The remainder of this book focuses on the economic performance of organizations. Why might greater use of competitive types of market mechanisms for the management of the public sector actually reduce its economic efficiency rather than increase it? Similarly, the complexities and limitations of using markets and market-like mechanisms to manage multidivisional business are also explored. The economic efficiency of alternative forms of business organization, such as franchising, are discussed in the latter part of this book, with one chapter dedicated to demonstrating how business partnerships and co-operation between firms can improve performance. Similarities and differences between co-operative situations in ecology and in economics are considered.

This work concentrates on the implications for economic performance of dynamic processes rather than on the consequences of equilibrium situations. The bulk of economic theory (except that of the Austrian School and a few British economists) has tended to concentrate on the latter aspect. It is clear that many of the complexities of the performance of economic systems can be better understood by making comparisons with ecological theories.

Clem Tisdell photoClement Allan Tisdell is Professor Emeritus in Economics at The University of Queensland and a Fellow of the Academy of Social Sciences in Australia. He is probably best known for his contributions to ecological and environmental economics (e.g. his Economics of Environmental Conservation) but he has also made substantial contributions to microeconomics, industry economics and managerial economics (e.g. see his Bounded Rationality and Economic Evolution) as well as to tourism economics. In the last mentioned area, Edward Elgar recently published his jointly authored book, Nature-based Tourism and Conservation, which, among other things, gives attention to the diversity of behaviours of tourists and their bounded rationality. 

See also ‘Can Nature-based Tourism Help Conservation? by the same author.

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  1. Can Nature-based Tourism Help Conservation? – by Clem Tisdell and Clevo Wilson | ELGARBLOG - March 8, 2013

    […] Clem Tisdell is Professor Emeritus in the School of Economics at The University of Queensland and a Professorial Research Associate of its Resource and Sustainable Management Group. He is regarded as one of the founders of tourism economics. See Clem’s other article ‘The Role of Diversity and Competition in Promoting Economic Performance‘. […]

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