Crazy that, though this is so widely known, nothing has really changed in the last 100 years. Instead, wages stay stagnant, and cost of living rises. Hours needed to survive increase. It's all so illogical, it's crazy.
Also, when you say "wages stay stagnant and cost of living rises," you make it sound like real wages have gone down. That's not the case. Nominal wages have increased, but nominal cost of living has also increased, so real wages have been stagnant (on a 30 year, not 100 year, timeline).
However, looking at it from the point of view of a primate status hierarchy competition, it makes perfect sense. The apex individuals derive pleasure from subjugating their lower status colleagues, and thus seek to make their lives as miserable as possible.
From this point of view, all of human history makes sense. We are but primates, and no amount of highbrow pontificating can change that.
Starting today, if the powerful wanted to, they could design a rational system that maximizes happiness and minimizes suffering for the largest number of people possible. But then, there is no incentive in the primate brain to foster such an endeavor. Even philanthropists, instead of uniting and agreeing on a shared vision, compete with each other for status amongst themselves by virtue signalling their own superiority over their peers.
It is nature red in tooth and claw. We are no exception.
In the same breath you pointed out why such a system does not work then state such a system is possible, I don't think anyone with power would ever genuinely want to enact such a system, but even if they did those participating in such a system would always look for ways to un-level the playing field and recreate the hierarchy we seek in society as primates.
We also expect higher standards in many areas. Regulation increased costs but it also keeps our food and medications water free of contaminants. Auto safety standards keep cars from becoming death traps. All of this costs money, but would you argue the regulatory standard of the early 20th century produced a superior quality of life for the average person?
Truth be told, there are only two real expenses in society these days: housing and health care. Maybe we can automate medicine to become as relatively cheap as transportation and information/entertainment has become, but housing will be harder, as per the aforementioned regulations.
For example, my girlfriend and I are moving into a 1br which could easily support a second bedroom in the back study, but because that room doesn't have any Windows, by law it cannot be a bedroom.
Also, the costs of housing and general rents are passed along to the consumer, so it affects everyone.
Could it be a bedroom with Linux?
Of course, there's the little nagging fact that the whole system might be orthogonal to stuff such as happiness, or enjoying life.
Having said that, competition at work is not great because it leads to worst possible result for workers and best possible result for employers.
The secret sauce must be a blend of many different ingredients. The main thing is finding the right proportions.
There is however a form of competition that does permeate everything. I refer of course to competition for (relative) status. But still, characterizing it as 'permeating everything' is just hyperbole. It is pervasive and sometimes (if not often) pernicious, but in fact, in my universe at least, most of the world has improved remarkably in a short span of recent time and any even-more-recent backsliding is pretty close to insignificant in comparison to the slightly less recent improvements.