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Wednesday, February 14, 2007

Edward Prescott: 'Competitive Cooperation'

 Edward Prescott, winner of the 2004 Nobel Prize in Economics, defends globalization:

'Competitive Cooperation' by, Edward C. Prescott, Commentary, WSJ: Of all the thankless jobs that economists set for themselves when it comes to educating people about economics, the notion that society is better off if some industries are allowed to wither, their workers lose their jobs, and investors lose their capital -- all in the name of the greater glory of globalization -- surely ranks near the top. This is counterintuitive to many people (politicians among them), because they view it the government's economic responsibility to protect U.S. industry, employment and wealth against the forces of foreign competition. If the government has any economic role at all, surely this must be it.

Actually, no. Government has a higher calling ..., which is to provide the opportunity for people to seek their livelihood on their own terms, in open international markets, with as little interference from government as possible. That doesn't mean we shouldn't provide short-term social insurance policies to aid those displaced by foreign competition, but the purpose of that aid should be to prepare workers, not protect them. ...

[B]roadly speaking -- and these broad operating principles matter -- those countries that open their borders to international competition are those countries with the highest per capita income. ...

How to explain this phenomenon? The answer lies predominantly with competition ... [I]t is useful to consider the example of the U.S., which, from its early days, created wealth from the healthy competition among businesses and industries in its member states. ...

This same competitive cooperation has been firing the economic engine of Europe for 50 years... And there is other evidence throughout the world for the benefit of international openness. Like the U.S., Australia is also a tale of competition among member states... The five wealthy countries of Eastern Asia -- Taiwan, Singapore, Japan, South Korea and Hong Kong -- were not so well off just a few decades ago, but their subsequent commitment to export markets and international competition put them on an upward trajectory that has improved the lives of millions of people.

And what of Latin America? Unfortunately, the region provides a case study in the perils of protectionism. ... [There is] much evidence to support ... that competitive barriers are to blame for Latin America's retarded growth. ...

Of course, many other factors account for marginal differences in productivity and wealth among countries that are already wealthy -- tax rates being key among those factors -- but they are comparative "frosting on the cake," and the cake in this case is the institutional commitment to international competition. ...

Protectionism is seductive, but countries that succumb to its allure will soon have their economic hearts broken. Conversely, countries that commit to competitive borders will ensure a brighter economic future... This lesson should not be lost on the U.S., the paragon of competitive growth, where politicians and policy makers are contemplating whether to construct more protective barriers. It is openness that gives people the opportunity to use their entrepreneurial talents to create social surplus, rather than using those talents to protect what they already have (or to protect rents, as economists like to say). Social surplus begets a rising standard of living, which begets growth, which begets social surplus, and so on. Rent protection stops growth cold and keeps people poor.

People in all countries are motivated to improve their condition, and all countries have their share of talented risk-takers, but without the promise that a competitive system brings, that motivation and those talents will only lie dormant. ...

    Posted by on Wednesday, February 14, 2007 at 11:02 PM in Economics, International Trade | Permalink  TrackBack (0)  Comments (24)


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