Thus the world became richer in the “wrong way” *

By November 9, 2020 No Comments

Why would a prominent international economist like Paul Krugman want all undergraduates in the United States to be blind to the term competitiveness? This term seems to evoke in him something beyond indifference. Why did he react so strong? The reason may be related to the use of this term in public discourse, in many cases, in an uncritical and not precisely known manner. I think there are deeper reasons. The idea of ​​elevating the nation to higher living standards through competitiveness – that is, engaging in activities that raise national standards of living more than other activities – directly contradicts the assumptions and beliefs that underlie the neoclassical economic edifice. This is not how economic growth is supposed to happen in the neoclassical model. The strong reaction against this term is related to the existence of implicit assumptions behind the idea of ​​”competitiveness” that contradict the essence of this economic thought. According to the neoclassical assumptions that “representative firms” operate with perfect information availability (all information is available to everyone), and without scale effects, the term competitiveness is meaningless. Hence Krugman’s view that the idea of ​​a “high value sector” is absurd. The idea of ​​competitiveness results from factors that neoclassical economics assumed were non-existent, so the term seems meaningless.

Angel Poligan – Mexico

All high-value and competitive sectors are thriving in a world where information is not fully available and economies of scale are large. Economies of scale are at the heart of globalized competition. Indeed, under the normative assumptions of neoclassical economic theory, it is difficult to find reasons for the existence of companies at all, including international companies. So, despite the vague and stereotypical use of the term competitiveness, the word carries with it the essence of an intuitive understanding that challenges the model on which the global economic system is based.
One of the important problems facing stereotypical economic theory today is that the countries that became rich did it the wrong way. In the neoclassical world, the resulting additional wealth is assumed to spread through lower prices. And in a world with an ideal availability of information rather than economies of scale, there is no room for the wealth to be distributed in any other way. New technology that comes in the form of adding capital to every factor, increases the output of the economy, and – under typical assumptions – this spreads across the global economy in the form of lower prices. Adam Smith and David Ricardo explicitly state that this price drop will be the result of improved technologies.
As technology advances, a nation can become rich in two very different ways. One is the mechanism proposed by Smith and Ricardo: technological change only brings prices down. The other method that has not been discussed outside the field of labor economics, is that a significant part of the benefits resulting from technological change is distributed within the producing countries through higher profits, higher wages, and higher taxable income in general.
I call the first mechanism the classical method of distributing economic growth, and the second method of collusion of distribution. When the first mechanism works, the benefits of a technical change are spread exclusively to the consumers of the commodity produced. When the second mechanism works, the producer of the goods (company and country) retains a significant portion of the benefits of improving productivity. And only when the second mechanism is in operation is there a possibility to discuss competitiveness. In this way, competitiveness can be seen, at the national level, as a consequence of what labor economists refer to as “the rents of industry.” The essence of a competitive strategy is to identify industries where there is high rents, that is, where there is a collusive prevalence of economic growth. Competitiveness, in this case an increase in income, is achieved mainly through the allocation of this rent.
In the stable system of neoclassical economics, “rent seeking” is seen as a negative term. In a world where returns to economies of scale, imperfect information, and huge barriers to entry to all industries dominate regardless of their importance, dynamic rent-seeking appears to be a major factor in economic growth and competitiveness. Microeconomic competition in an industry that enjoys an ideal availability of information, complete divisibility of factors of production, and the absence of effects of the volume of production that lead to poverty, regardless of the level of productivity. Protection of local high-tech products is part of this rent search. The existence of this rent and its allocation at the national level is the essence of competitiveness. “Industry rents” are also a fundamental feature of the mechanisms that prevent factor price equality from taking place in the world, and give us a hint of why increasing globalization is associated with greater income inequalities. Within the European Union, this trend has been confirmed. At present, more than 60% of the European Union regions receive subsidies because of “backwardness”. This amount comes on top of the effects of a massive redistribution of national economic budgets. And the pursuit of competitiveness appears to require increased flows of funds for social cohesion. Originally, one of the main arguments for the European internal market was to reap economies of scale. Predictably, this seems to lead to concentration in production, that is, the creation of fewer economic centers and more peripheries, and thus an increased need for redistribution.

Despite the vague and stereotypical use of the term competitiveness, the word carries within it the essence of an intuitive understanding that challenges the model on which the global economic system is based.

If the increasing wealth resulting from new technology is preserved in the producing country, in the form of higher wages and profits, then the rationale for our global economic system today will face a serious challenge. Given that technological progress is at any time unevenly distributed among the various economic activities, the logical consequence of this is the protection of the local high-tech products that we see today in practices. Countries try to choose the winners, that is, those activities with the highest potential for increasing productivity and sales, on the assumption that increasing returns and incomplete information will lead to the continuation of “industrial rent”. It is possible that the constant Ricardian benefits from trade are outweighed by the effects of “industrial rent”, for example by increasing returns. On the other hand, if both trading partners are operating with increasing returns, this will again constitute a stronger argument for free trade. Nevertheless, it is very easy to envision situations in which free trade would not be the preferred solution.
Recent developments in the prevailing economic theory – the ‘new growth theory’ and the ‘new trade theory’ – are approaching an understanding of the same factors that we are discussing here, but from a different angle. As the father of the “new trade theory”, Krugman revived a key concept in the national economic policy of the nineteenth century – the economies of scale. In my view, the findings of these “new” schools are fully consistent with the ideas of “high value sectors” and “competitiveness”. If Krugman believes that the pursuit of competitiveness and high-value sectors is the result of unequal spread across industries of economies of scale, internal technical change, and consequently of the positive effects of the crisis of hysteria, he will find, in my opinion, that both Robert Reich, the school of logical competitiveness, and the ‘growth theory The new, and the “new trade theory”, actually addresses the same issues. One of the barriers to this theoretical convergence and mutual understanding is that although economies of scale are seen as an important factor in determining global income distribution, Krugman and other “new business theorists” appear to avoid confronting the practical consequences of their theories. It is easy to understand their hesitation. Incorporating the conclusions of the “new trade theory” would require a complete overhaul of the global trade system that painfully clarifies the flaws, as one American writer referred to as “GATTism.” However, given the problems of the Third World, and now also the rapid erosion of living standards in the Second World, this comprehensive reform remains urgent.

* This text is excerpted from a research paper prepared by the author that was published on on November 4 with the title: “Competitiveness and its predecessors – 500 years from a national perspective.”

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