If you’ve spent a lot of time in the workforce, you are bound to experience the pain of competition — losing out on a dream job to someone smarter or more experienced. Companies can also be hurt by competition, although it may be harder to sympathize with their complaints about it. Our incumbent bankers – especially, the too-big-to-fail behemoths—lately have been squealing about the pain of competition, as they find their business models under threat from the wave of unbundling currently transforming financial services into lean and mean specialty providers, with nonbank credit steadily outpacing bank credit, and stablecoins about to revolutionize the payments system with new speed, security, and efficiency. Isn’t it paradoxical that some of the biggest U.S. financial institutions see innovation and competition as dangerous?

Runners and Hitters

And yet watching two East African runners—Sebastian Sawe and Yomif Kejelcha finish the 2026 London Marathon in under two hours, something no one had ever done before in official competition, a different thought occurred to me: Sawe and Kejelcha helped propel each other into the record books by running in the same race, giving each other an example of excellence and a pace to match. By competing, both achieved something that they may not have achieved alone.

That reminded me of the 1998, 1999, and 2001 baseball seasons. Those were years in which slugger duos – Mark McGwire and Sammy Sosa in 1998 and 1999, and Barry Bonds and Sammy Sosa in 2001— vied throughout the season to break the existing homerun record.

In all three cases, Sosa lost out (with 66 homers in 1998, 63 in 1999, and 64 in 2001, to McGwire’s 70 in 1998, and 65 in 1999, and Bonds’ 73 in 2001), but Sosa’s slightly less amazing performance in all three years is remembered both for its greatness and for having contributed to McGwire’s and Bonds’ record numbers in 1998 and 2001.

If not for Sosa, would McGwire in 1998 and Bonds in 2001 have broken the record? The evidence suggests that Sosa’s competition may have made the difference; in other nearby years (1997, 2000, and 2002), the top two homerun hitters never exceeded a total of 114, which is much less than the number in the three years that had two close contenders vying for a new homerun record — 136 in 1998, 128 in 1999, and 137 in 2001.

Competition and Constraint

Call it the Paradox of Competition. Competition makes some of us fail in the moment, but it makes all of us succeed more over a lifetime by providing markers of what is possible and making us try harder to be better. I would say that the paradox is even broader: It applies not just to competition between rivals at a moment in time, but to all kinds of participation in market interactions within a free society.

A related concept that arises in markets – and sports – is the Paradox of Constraints. Economists often think of market constraints as limiting the aspirations of participants. Economists are trained to believe that any constraint, such as a regulation, makes a market participant worse off in terms of the static gains he can achieve from trade. But those static effects may be reversed when one considers the dynamic effects of constraints in improving ideas and boosting effort.

There are many examples of excellence and benefit arising from constraints, whether it is the rules of a game or the forms of a symphony.

Innovators often count on competitors to overcome constraints. As technological historian, Nathan Rosenberg, showed, future inventions respond to bottlenecks that are identified by recent inventions: One person’s invention creates incentives to solve new problems, thereby creating future inventions that make the initial idea more valuable. Recognizing their mutual dependence, would-be inventors of the airplane, including the Wright Brothers, even shared information about their progress with their competitors in the years leading up to its successful invention.

LLM’s and Stravinsky

Consider what we have all experienced with recent LLM/AI innovation. In November 2022, ChatGPT had a breakthrough. It beat others to the punch that were working on similar ideas. But its monopoly was short-lived because it was never really unique in its skills and knowledge. Only a little more than three years later, there are numerous AI models competing with one another and making each other better. For many applications, pitting one AI against another to reach consensus on how to answer complicated questions is proving to be better than using any one in isolation.

Music is a form of market innovation, too, and it displays a similar interactive phenomenon. Composers compete. And learning from past composers makes current ones able to perform better. The great composer, Igor Stravinsky, remarked that “the more constraints one imposes, the more one frees oneself.” Constraining his revolutionary musical ideas about rhythm, melody and harmony to reside within the structures and forms of pre-existing musical genres, for example, made Stravinsky’s inventions more powerful by combining originality with associational points of reference.

Smith’s Mutual Benefit

Market interactions other than supplier competition or innovation also provide examples of how actors that seem to constrain or oppose one another end up helping each other. Buyers and sellers are opponents in the static sense that they bargain, respectively, to lower or raise the price of a transaction. In doing so, they work hard to limit each other’s prosperity in the moment. But voluntary exchange fosters the prosperity of both buyers and sellers, and thus expands markets over time to mutual benefit, as Adam Smith famously described.

And Smith also saw large additional dynamic gains from voluntary exchange: Most importantly, it makes us better people. According to Smith, market interactions make us behave more virtuously, less selfishly and less corruptly, because they reward a capacity for sympathy and impartial judgment. 

This is the deep truth about the Paradox of Competition and the Paradox of Constraints: ultimately, all of humanity gains enormously and even cooperatively from living in a competitive world in which markets make it possible for individual participants to succeed or fail on any given day. 

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The Arc Blog

05/22/26 — Arc Radio A new shortform weekly podcast that briefly recaps the week and takes a short anticipatory look ahead in markets and monetary policy.

04/27/26 — Fed Communication Needs to Embrace the Full Range of Risks Ahead of the FOMC’s May meeting, the Fed’s communication framework needs to better reflect the full spectrum of inflation and growth risks now facing the economy.

04/23/26 — Investors See Risk in Leveraged Households from Oil Shock Examines how falling oil prices, while reducing inflation, could trigger a recession by squeezing indebted households and tightening credit conditions.

04/14/26 — Re-Imagining Capitalism or Re-Imagining Journalism? A critical look at whether recent media coverage of capitalism reflects genuine economic analysis or a shift in journalistic framing and priorities.

03/30/26 — Oil Shocks Raise Recession Odds and Inflation Risks Analyzes how the latest oil market shock is simultaneously lifting inflation expectations and increasing the probability of a near-term recession.

03/26/26 — The Era of Cheap Risk Has Come to an End Geopolitical fragmentation and persistent supply-side pressures have permanently raised the cost of risk across global markets.

03/11/26 — Peace Has a Price Tag Discusses the significant fiscal and economic costs that any eventual peace settlement in Europe’s ongoing conflicts would impose on Western governments and markets.

03/05/26 — France’s Government Debt Adds to Europe’s Inflation Risk Explains how France’s growing sovereign debt burden is compounding inflation risks across the eurozone by limiting fiscal flexibility and complicating ECB policy.

03/02/26 — Crypto Selloff Reveals Challenge For Stablecoins The recent crypto market downturn exposed the difficulty stablecoins face in maintaining their peg and inspiring confidence during periods of broader market stress.

02/26/26 — Sudden Liquidity Anxiety Exposes Fault Lines In Private Credit A spike in investor concern about liquidity has revealed structural vulnerabilities in the rapidly-grown private credit market that had been papered over during more benign conditions.

02/23/26 — Global Bond Managers Seek to Widen Safe Asset Menu Lupin Rahman explains how geopolitical fragmentation is leading international bond managers to look beyond U.S. Treasuries and diversify into a wider range of sovereign safe assets.

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Podcast (Global Rewire)

05/12/26 — Digital Finance in Europe with Ulrich Bindseil Former ECB Director General Ulrich Bindseil discusses the trajectory of digital finance in Europe, including crypto regulation, the digital euro, and financial stability concerns.

05/04/26 — Over a Barrel with Spencer Dale BP’s Group Chief Economist Spencer Dale explores the current dynamics and long-term outlook for global oil markets amid geopolitical disruptions and the energy transition.

04/30/26 — One Shock After Another with Mark Dowding RBC BlueBay Fixed Income’s Mark Dowding examines how successive economic shocks are reshaping the outlook for interest rates, the U.S. dollar, and Fed policy.

04/21/26 — The Big Picture with Seth Carpenter Morgan Stanley’s Global Chief Economist Seth Carpenter offers a broad view of how AI, tariffs, and shifting monetary policy are intersecting to drive the global macro outlook.

04/14/26 — The Almighty Dollar with Steve Kamin & Mark Sobel Two former senior U.S. Treasury officials debate the durability of dollar dominance in an era of tariffs, sanctions, and growing challenges to the dollar-based financial system.

03/31/26 — Block by Block with Joel Millman Journalist Joel Millman examines how shifting immigration patterns and enforcement policies are rippling through real estate markets and the broader labor economy.

03/24/26 — Socrates at Scale with Andrea Prencipe Andrea Prencipe discusses the transformative impact of AI on higher education, critical thinking, and the future of knowledge creation.

02/24/26 — Beauty on the Brain with Gabrielle Starr Neuroscientist and Pomona College President Gabrielle Starr explores the science of aesthetic experience and what it reveals about creativity, AI, and the human mind.

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Notes

04/30/26 — FDPR: Extraterritorial Control and Its Global Impact Analyzes how the U.S. Foreign Direct Product Rule has become a central instrument of export control policy, extending American jurisdiction extraterritorially through global dependence on U.S. semiconductor design tools.

04/29/26 — China’s Export Control Architecture and Its Use of Critical Minerals as Strategic Pressure Points A detailed examination of how China has built a unified national-security export control regime since 2020, leveraging its dominance in rare-earth processing to project geopolitical pressure on foreign manufacturers and governments.

03/09/26 — Ample Reserves, Scarce Financing? Investigates the apparent paradox of abundant bank reserves in the U.S. system coexisting with signs of tightening financing conditions, and what it implies for Fed policy.

03/06/26 — Friedman’s Maxim and the Theory and History of Inflation Revisits Milton Friedman’s dictum that inflation is always and everywhere a monetary phenomenon, testing it against historical episodes and modern monetary theory debates.

02/27/26 — Bank Equity Price Reactions to Stablecoin Legislation Uses equity market data to measure how bank stock prices responded to legislative milestones in stablecoin regulation, revealing investor views on competitive and systemic risks.

02/27/26 — What Happened to Stablecoins During the Crypto Winter? Documents the behavior and resilience of different stablecoin structures during the 2022–23 crypto downturn, drawing lessons for current regulatory proposals.

02/26/26 — Tariff Uncertainty Remains the Order of the Day Argues that persistent unpredictability in U.S. tariff policy is itself a significant economic drag, suppressing investment and complicating supply-chain planning for businesses.

02/20/26 — Harnessing the Forecasting Power of Oil Market News An interview with economist Charles Calomiris on how AI-driven analysis of news sentiment can improve forecasting accuracy for oil market prices and volatility.

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Business Insights

05/27/26 — No New Large Mines  Upstream, producer nations are reasserting sovereignty through resource nationalism. Meanwhile, downstream, China dominates metals processing and refining, leaving Western reshoring and friendshoring strategies misaligned with both ends of the supply chain.

03/17/26 — Intangible Assets: The Input & Output of the AI Revolution – Part II The second installment explores how AI is reshaping the valuation and deployment of intangible assets—including data, brand, and IP—as both the fuel and the output of the AI economy.

03/16/26 — Intangible Assets: The Input & Output of the AI Revolution Examines how the AI revolution is fundamentally dependent on intangible assets and simultaneously generating vast new forms of them, with major implications for corporate valuation and investment.

02/26/26 — Agentic AI: Navigating ROI Challenges Assesses the growing corporate investment in agentic AI systems and the difficulty firms face in quantifying and capturing a measurable return on that spending.

02/25/26 — Reports from the Front Lines of AI Adoption Draws on practitioner accounts to document how businesses are actually implementing AI tools, the obstacles they encounter, and the early productivity results they are seeing.

02/24/26 — Transforming Economic Intelligence Explores how AI is changing the way businesses gather, process, and act on economic intelligence, enabling faster and more granular analysis than traditional methods allow.

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Working Papers

05/04/26 — Aggregate Fluctuations from Firm Comovement Investigates how correlated behavior across firms—rather than aggregate shocks alone—can generate and amplify economy-wide business cycle fluctuations.

04/08/26 — The Political Economy of Financial Crises Analyzes how political incentives and institutional structures shape the onset, management, and resolution of financial crises across different countries and time periods.

03/26/26 — A Theory of Bank Liquidity Requirements Develops a theoretical framework for understanding why and how regulators should set bank liquidity requirements, balancing financial stability against the costs of holding liquid assets.

03/24/26 — Are Stablecoins and Bank Deposits Substitutes? Examines empirically whether stablecoins compete with traditional bank deposits as a store of value and medium of exchange, and what the implications are for banking system stability.

03/19/26 — Measuring the Cost of Regulation Proposes and applies new methods for estimating the economic burden of financial regulation, moving beyond administrative costs to capture broader effects on credit supply and growth.

03/06/26 — Data Privacy Gone Wrong: The Financial Fallout of App Misconduct Quantifies the financial market penalties that firms face following data privacy violations, using Chinese app enforcement actions as a case study in regulatory risk.

02/24/26 — Banking on Technology: Bank Technology Adoption and Its Effects Examines how banks’ investment in and adoption of new technologies affects their productivity, competitive positioning, and broader economic outcomes.