Economic Nonsense

Ross Gittins has a nice piece in Saturday’s SMH on the economic nonsense talked about ‘competitiveness’. He begins with this quote from Hugh Morgan.

As the pace of globalisation increases, the reality is that governments are in competition with each other. This means that the primary role of government is to establish and foster the conditions for an economy that can compete effectively with the rest of the world.

Though it is economic nonsense, you can find this kind of comment in all sorts of places. I talked about it a little here. As Paul Krugman said

[I]f you hear someone say something along the lines of ‘America needs higher productivity so that it can compete in today’s global economy’, never mind who he is, or how plausible he sounds. He might as well be wearing a flashing neon sign that reads: ‘I don’t know what I’m talking about’.

Looks like John Howard was wearing that flashing sign in this speech [pdf] where he says:

The Government believes that a single set of national laws on industrial relations is an idea whose time has come. In an age when our productivity must match that of global competitors, forcing Australian firms to comply with six different workplace relations systems is an anachronism we can no longer afford.

Funny thing is that in the year before making the comment above, when the Productivity Commission suggested that we allow national employers access to national OH&S and workers’ compensation regulation, the Government rejected the report arguing that:

the role of the Australian Government is to facilitate the development of a nationally consistent framework for OH&S and workers’ compensation rather than developing national template OH&S safety standards or be in the business of providing national workers’ compensation.

But the states won’t be implementing nationally consistent OH&S or workers compensation arrangements any time soon. So there you go. What’s sauce for the goose isn’t necessarily sauce for anything else . . .

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Cameron Riley
15 years ago

Nicholas, What is the correlation between increasing productivity and increasing living standards?

btw is David Gruen any relation?

Fred Argy
Fred Argy
15 years ago

Yep this is a really interesting topic. Business people are right when they say that all firms and industries, whether they have international comparative advantage or are operating on the borderline, need to be as productive and efficient as possible and that governments should ensure the right sorts of incentives and policy environment are in place to bring this about (including through removal of ineffective or inefficient regulation, active labour market programs, education/health, infrastructure investment and revenue-neutral tax reform).

But trying to make an economy as productive and efficient as possible is not the same as straight cost-cutting and a race to the bottom. What really gets up my nose is when I hear that taxes need to be cut and workers need to be squeezed harder to help even our most marginal firms and industries survive, even the ones that should be allowed to fold up and release resources for other activities. That kind of policy may make sense in a recession if you are happy to adopt a “beggar thy neighbour”

Chris Lloyd
Chris Lloyd
15 years ago

Gittins article includes this:

The principle of comparative advantage says every country’s better at doing some things than others and the best way for all of us to get rich together is for each of us to specialise in doing what we’re best at and then trade with the countries that are good at doing what we’re bad at.

This is completely wrong isn’t it? Even if a country is better at producing everything it will specialise in the activities where its comparative advantage is greatest.

My colleague Mark Crosby uses a great example in his MBA class. Perhaps it is well know but I had not heard it. He asks the simple question “Should Tiger Woods do his own tax accounting

Gaby
Gaby
15 years ago

Good one Nicholas. And beware when you hear “competitiveness” and “globalization” in the one sentence.

I heard Johnnie spouting this “competitiveness” argument when the IR bill was introduced and thought immediately of Krugman’s essays collected in “Pop Internationalism”, where he comprehensively demolishes the importance of competitiveness as an analytical economics notion in this context. He also makes the point that its use invariably leads to bad policy.

In fact, Gittens piece is a very good summary and application of Krugman’s main points in “Competitiveness: A Dangerous Obsession”.

Cameron, the link between the two is mediated by rising real wages. Krugman posits a roughly one to one historical relationship between increasing productivity and rising real wages. He goes on to demonstrate it using a toy model or two in “Does Third World Growth Hurt First World Prosperity?”

Business leaders may not understand “comparative advantage” but they certainly want to deploy “competitive advantage” style arguments. I haven’t read Michael Porter’s “Competitive Advantage” but i understand, via Krugman, it is essentially about how external economies may generate comparative advantage. But as Gittens argues these arguments are quickly subverted to calls for surreptitious “financial advantage”.

phil
15 years ago

OK, let’s go: how about this?

“Comparative advantage”: inextricably linked to natural resources – minerals, fertile land, water, harbours etc. You either exploit them or you don’t. You’d be crazy not to but in the case of minerals, for example, be aware they don’t last forever and you should be planning for what comes next. In the case of productive land and water – look after it, don’t squander it.

“Competitive advantage”: invented to counter the laissez-faire argument that says you simply compete on the basis of comparative advantage and there isn’t much that governments can do about it except ensure a good business environment – taxes, regulation etc. That’s ‘good’ regulation, not necessarily ‘no’ regulation – see Fred Argy’s comments about a race to the bottom. The difference being that governments can influence competitive advantage by, for example, investing in skills/education.

The notions behind the economic nonsense highlighted by Nicholas is deeply embedded in government-think.

phil
15 years ago

or “are”, as the case may be…

phil
15 years ago

Nicholas – back to Ricardo. Fair enough. I was probably trying to make a point that wasn’t there to be made.

Fred Argy
Fred Argy
15 years ago

Nicholas, I never said or implied business people are “evil”. I don’t even think they are misguided. If I were in buasiness I would try to reduce my cost in any way that was legal (and consistent with my conscience). I don’t even think the Howard Government is “evil” – but I do think it is misguied in ecnouraging and facilitating a race to the bottom, as it is effectively doing through its new IR/welfare reforms.

Chris and Nicholas, perhaps I am missing something but I cannot see anything wrong with the particular Gittins quote you both disapprove of. I agree with Chris that “if a country is better at producing everything, it will specialise in the activities where its comparative advantage is greatest”. But how is Gittins’ statement inconsistent with yours, Chris? perhaps I am dense today.

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[…] productivity and real wages having a one to one correlation. Nicholas Gruen wrote in a comment to his article Economic Nonsense: But in the long run, you expect to see income trending towards productivity. People or nations […]