We should NOT be more competitive!

We should NOT try and be more competitive.

This is the idea: we should be so good at producing goods and services that we need buy nothing at all from the rest of the world, and can sell anything we want to it. But the whole idea is a nonsense - as David Ricardo showed over 150 years ago.

Countries can be rich or poor, efficient or inefficient, but they can always compete in world markets. They specialise according to what is known as comparative advantage. And 'comparative' is a key word.

Start by imagining a country which is not open to the rest of the world. It does not engage at all in foreign trade. But there is a market system inside that country. There is internal trade, between producers and consumers inside the country.

There cannot be trade without there being prices. Prices are inevitably established by trade. There cannot be one without the other. '

To summarise so far then, our imaginary economy, cut off from the rest of the world, has a fully developed set of relative prices (the prices of goods relative to other goods).

Now imagine that the barriers between this imaginary country and the rest of the world vanish, and the citizens of this economy discover that relative prices are different overseas. For example, suppose that the internal prices were such that if you reduced your wine consumption by one bottle per year, you could with the money buy a pound of cheese. But you discover that overseas, the cheese you could buy if you gave up consuming a bottle of wine was only half-a- pound in weight. Cheese, in other words, was more expensive relative to wine abroad than it was at home.

What happens next?

Foreigners would Observe that by coming to this country and supplying wine, they could get more cheese than they could at home. For a bottle of wine would buy them a pound, not a half-pound of cheese. And residents of this country would also gain; for prices would adjust to reflect the increased demand for cheese, and they would end up with more wine than before and, if they wished, no less cheese.

Now residents of both countries have gained, and there has been no mention of how 'competitive' either economy is. We could now assume that to produce either good, either wine or cheese, our imaginary country which we started with required twice, or three times, or however many times we wished, the amount of inputs per unit of output as did the rest of the world. That does not matter. It does not prevent the economy engaging in, and gaining from, international trade.

Trade between countries is not a competition in which there are winners and losers. It is a mutually beneficial activity, from which both sides gain. (There is one special case. If; when a country opens up to trade, it finds that relative prices abroad are the same as they are at home, then there is no possibility of fruitful exchange. But there are no losses either. In that special case the country neither gains nor loses from trade.)

So then, the notion that countries 'compete' with one another in misconceived.

And not only misconceived. It can cause harm, if it leads to policies which impede international trade. If, for example, we start protecting firms by tariffs or subsidies to produce 'national champions' then we are wasting resources.

Nevertheless, that said, it is necessary to be fair to those who talk of national 'competition'. Obviously, it is better to be more productive rather than less. For the more productive one is, the better off one is. Some at least of the schemes to make us more 'competitive' are actually designed to make us more productive. And that is unequivocally a good thing.

So, to sum up.

First, the idea that nations 'compete' with one another in international trade is totally misguided. It can lead to harmful policies. Countries gain by engaging in trade with the rest of the world. Trade is a mutually beneficial activity, not a competition. If policies justified by 'competitiveness' are actually intended to raise productivity, then they are aimed at a sensible goal. But they are more likely to be sensible if it is clear what they are for.

1 comment:

  1. It's hard not to agree with this comment. Maybe it is so that the notion of competition in international trade is misguided. It is a fact that trade benefits everyone. However, it seems that governments all know this and the 'competition' in trade is not the reason for protectionism. The reasons for it are internal; short run unemployment and the perspective of painful changes in the nature of local economies.