Tournaments and Creative Destruction
Economists see sporting tournaments as great examples of economics in action: an effective way to promote ‘creative destruction’, and by extension, economic progress. The term, coined by twentieth century economist Joseph Schumpter, describes the process whereby firms, seeking profit, innovate so successfully that their new product destroys the demand for existing products. Consider how CDs replaced cassettes, for example.
One way to encourage innovation is to establish environments in which creative destruction is nurtured. The perfect environment in this instance is that of the competitive tournament: essentially all the government does is put up a prize for a specific achievement, and then wait to crown the winner. Tournaments are effective because firms tend to spend more on research and development than the prize money itself. The rewards of winning exceed prize money: firms also get prestige, attention, and press coverage.
The Ansari X PRIZE is an example of a very successful and ambitious tournament in which creative destruction was allowed to thrive. With US$10 million in prize money, and the thrill of competition to entice firms, the X Prize proved that it was possible for a private company to fly into space. Though the cost to develop a vehicle capable of winning the prize was many times the prize money, the tournament was an extraordinary success and a catalyst for rapid innovation.
In Australia we already have one well-known tournament, the World Solar Challenge, a solar car race from Darwin to Adelaide. There should be more. The cars have become so successful, that is to say, the level of innovation so great, that a new section was set-up with more onerous restrictions.
To enjoy strong economic growth Australia must be at the forefront of innovation, and our firms must be responsible for creative destruction. The use of tournaments would not only appeal to our competitive natures, but help us get there.
-By Andrew Barnes and Rohan Alexander, adapted from an article published in The Australian Financial Review 17.5.2011
