This is how the world got rich “the wrong way” *

Why would a leading international economist like Paul Krugman want every college student in the United States to be blind to the term competitiveness? This term seems to evoke something in him beyond indifference. Why did you react so strongly? The reason may be related to the use of this term in public discourse, in many cases, in an uncritical and not exactly known way. I think there are deeper reasons. The idea of ​​elevating the nation to higher standards of living through competitiveness, that is, participating in activities that raise the national standard of living more than other activities, directly contradicts the assumptions and beliefs that underlie the neoclassical economic edifice. This is not the way economic growth is supposed to occur 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 companies” operate with perfect availability of information (all information is available to everyone) and without scale effects, the term competitiveness does not make sense. Hence Krugman’s view that the idea of ​​a “high-value industry” is absurd. The idea of ​​competitiveness results from factors that neoclassical economics assumed did not exist, so the term seems to be meaningless.

All competitive, high-value industries thrive in a world where information is not fully available and economies of scale are great. Economies of scale are at the heart of global competition. Indeed, under the normative assumptions of neoclassical economic theory, it is difficult to find reasons for the existence of firms, including international firms. Therefore, despite the vague and stereotyped 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 major problems facing stereotypical economic theory today is that countries that got rich got it wrong. In the neoclassical world, the resulting additional wealth is supposed to spread through lower prices. And in a world with ideal information availability rather than economies of scale, there is no room for wealth to be distributed otherwise. New technology that comes in the form of adding capital to each factor increases the economy’s output and, under stereotyped assumptions, this spreads through 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 get rich in two very different ways. One is the mechanism proposed by Smith and Ricardo: technological change only drives prices down. Another method that has not been discussed outside the field of labor economics is that a significant part of the benefits derived 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 distribution of economic growth and the second method of collusion of distribution. When the first mechanism works, the benefits of a technical change extend exclusively to the consumers of the goods produced. When the second mechanism works, the producer of the goods (company and country) retains a significant part 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 call “industry rents”. The essence of a competitive strategy is to identify industries where there are high incomes, that is, where there is a collusive prevalence of economic growth. Competitiveness, in this case an increase in income, is achieved primarily through the allocation of this income.
In the stable system of neoclassical economics, “rent seeking” is considered a negative term. In a world where returns to economies of scale, imperfect information, and enormous barriers to entry dominate all industries, regardless of their importance, dynamic rent seeking appears to be a key driver for economic growth and competitiveness. Microeconomic competition in an industry that enjoys optimal availability of information, complete divisibility of the factors of production and absence of effects of the volume of production that lead to poverty, regardless of the level of productivity. Protecting local high-tech products is part of this rental quest. The existence of this income and its allocation at the national level is the essence of competitiveness. “Industry rents” are also a key feature of the mechanisms that prevent factor price equality from occurring in the world, and they give us a clue as to why increasing globalization is associated with greater income inequalities. Within the European Union, this trend has been confirmed. Currently, more than 60% of the regions of the European Union receive subsidies for “arrears”. This amount is added to the effects of a massive redistribution of national economic budgets. And the search for competitiveness seems to require greater flows of funds for social cohesion. Originally, one of the main arguments of the European internal market was to reap economies of scale. Unsurprisingly, this seems to lead to a concentration in production, which means the creation of fewer economic centers and more peripheries, and thus a greater need for redistribution.

Despite the vague and stereotyped 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.

If the growing wealth resulting from the new technology is preserved in the producing country, in the form of higher wages and profits, then the justification for our global economic system today will face a serious challenge. Since technological progress is distributed unevenly at any time between various economic activities, the logical consequence of this is the protection of local high-tech products that we see in practice today. Countries try to choose the winners, that is, those activities with the greatest potential to increase productivity and sales, assuming that increasing returns and incomplete information will lead to continued “industrial income.” The constant Ricardian gains from trade may be offset by the effects of “industrial income,” for example, by increasing returns. On the other hand, if both trading partners operate at increasing returns, this will once again make a stronger argument for free trade. However, it is very easy to imagine situations in which free trade would not be the preferred solution.
Recent developments in mainstream economic theory – the “new growth theory” and the “new trade theory” – are moving closer to understanding the same factors that we are discussing here, but from a different angle. As the father of the “new theory of trade,” Krugman revived a key concept in national economic policy in the 19th century: economies of scale. In my opinion, 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 an uneven distribution between industries of economies of scale, internal technical changes and, consequently, of the positive effects of the crisis of hysteria, you will find, In my opinion, both Robert Reich, the school of logical competitiveness, and the new ‘growth theory’ and the ‘new trade theory’ address the same problems. One of the obstacles to this theoretical convergence and mutual understanding is that, although economies of scale are considered an important factor in determining the overall distribution of income, Krugman and other “new business theorists” seem to avoid confronting the practical consequences of their theories. It is easy to understand their hesitation. Incorporating the conclusions of the “new theory of trade” would require a complete overhaul of the global trading system that painfully clears up 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 an excerpt from a research paper prepared by the author that was published on www.networkideas.org on November 4 with the title: “Competitiveness and its predecessors: 500 years from a national perspective”.

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