What is the Foundation of the Three Pillars?
Throughout the world, economic uncertainty and anxiety reign supreme.
The rapid growth of information technology, and now, Artificial Intelligence, seems to many a threat to living standards. Competition from foreign workforces, growing in both size and skill level, is also perceived as a challenge to stability and well-being.
From a global standpoint, what had been the promise of the Bretton Woods institutions coming out of the Second World War – embodied in the system of globalization associated with GATT and the WTO – are now challenged by a dual threat.
Why is that the case?
We quote here from the Forward of Shanker Singham’s first book, A General Theory of Trade and Competition (2007). (3)
“There are two ways of looking at the world of human interactions in the economic sphere. The first way is to look at the world through the lens of producer welfare enhancement. This method looks at economic relationships through the eyes of producers only. In this world view, producers make products in one country and sell those products to people in another country. It is in the interests of these producers to block import competition in their ‘home’ markets while securing market access abroad. Ultimately, this is a purely mercantilist approach. “
Economic uncertainties have created a breeding ground for ills wrongly attributed to globalization, providing grist for populist political reaction. The result: open markets are undermined by protectionism, while competition is being replaced by government subsidization of private industry.
As free markets are battered inside nations, a new competing geopolitical alliance based upon autocratic governments, including China and Russia, challenge the global system designed to deliver open trade and competition on the merits as organizing economic principles.
There is a danger that the baby – the prosperity-creating world trade framework – will be thrown out with the bath water. This successful, although still inadequate, system of globalization, undermined by internal and external interference is often blamed for legitimately perceived problems. It is our contention that these problems are actually a result of distortions of the free market, not of the inherent nature of a free market system.
For the Competere Foundation, these conditions are the backdrop for the importance of our mission.
Smith and Ricardo
To identify the distortion of our market system, we have proposed benchmarks for that system – the Three Pillars – which identify causes for the improved global living standards over the past 75 years. We need to understand the principles by which our motor operates before we can diagnose what is interfering with its proper function.
But first, we must identify our economic premises.
The Competere Foundation takes as our starting point the classical doctrines of Adam Smith, author of the foundational masterpiece, The Wealth of Nations(1) and David Ricardo, developer of the law of comparative advantage (2).
Under Ricardo’s approach, trade between nations occurs in such a way that the complementary nature of different national economies allows for the participation by all countries in trade, even when certain nations appear to have absolute advantage over others.
Therefore, when trade barriers are removed, and free trade is enabled without interference, the nation with an absolute advantage over another nation is not the only beneficiary. Trading partners, even those with relatively weaker economies, can also trade and grow. This has certainly been the experience of the world under the GATT and WTO system.
It is the insight of Ricardo in particular that showed that economic interactions led to a non-zero-sum game where both buyer and seller can “win” from the transaction.
As trade increases, all boats are lifted. Labor markets improve, as do transportation and infrastructure enabling this growth, and national economies prosper.
However, it is crucial to identify the impetus for that growth and the lens through which we analyze growth.
As Adam Smith said, it is consumer welfare, not producers’ interests, which drives growth.
Why is that the case?
We quote here from the Forward to Shanker Singham’s first book, A General Theory of Trade and Competition (2007). (3)
“There are two ways of looking at the world of human interactions in the economic sphere. The first way is to look at the world through the lens of producer welfare enhancement. This method looks at economic relationships through the eyes of producers only. In this world view, producers make products in one country and sell those products to people in another country. It is in the interests of these producers to block import competition in their ‘home’ markets while securing market access abroad. Ultimately, this is a purely mercantilist approach. “
“We argue that this kind of approach leads ultimately to nationalism, protectionism, and can only be pursued by some form of command economy where the state plays a significant role in the economy (without necessarily controlling the means of production, although this is frequently a corollary). It is a zero-sum world, where borders are important, and consumers are not. By contrast, the second way is the polar opposite. This consumer welfare-oriented approach leads to free trade, competitive markets and ultimately to economic development. This is a non-zero-sum environment. It is a dynamic environment where the benefits resulting from free trade and competitive markets lead to gains in the economy because they make economies more efficient, enabling the modern world to function. That modern world is not a world of producers producing products in one country for sale in another, but rather a world of closely connected global supply chains for goods, services and indeed people. The more efficient these chains are, the fewer the kinks in the overall structure, the better for people all over the world. This is a world where national borders are less meaningful with all that that entails for immigration policy and cultural identity. For some it is a frightening world with a lot of unknowns. Without diminishing the anxiety that such a world engenders, we contend that it is a world of great promise and hope and one which has greater potential for human beings throughout the planet now or presently than at any time in human history. “
The consumer welfare approach incentivizes innovation, productivity, and growth through competition. Consumers’ best interests naturally include seeking the best value, the best price and the best product for meeting their particular needs. Singham has also emphasized, that in trade negotiations, the consumer welfare issue should be a focal point for agreements, thus ensuring that the law of comparative advantage is being optimized for the benefit of all.
The Two Lenses: Consumer and Producer
To the Three Pillars
How can we, then, optimize the billions of human interactions through which we meet each other’s needs, interactions which we term Voluntary Exchange?
The first step is property rights, and the protection of property rights. This is the First Pillar.
Without property, and the freedom to enjoy one’s property, there can be no economy. There would be nothing to buy and sell, and consumers might not be able to enjoy what they purchase.
Property rights are guaranteed by natural law, above the laws of nations. That, of course, is not how property rights generally function, but that is the standard.
In addition to property ownership, when people apply their work to their property, the result is the creation of ideas or innovation. And from ideas and innovation, comes the Second Pillar – competition. Through technological or other kinds of innovation and improvements in productivity, one firm can compete with another for consumers.
Competition, as we will discuss in a subsequent section, can be within national borders, or outside the border.
Competition outside of the border is the Third Pillar – open trade. Trade functions, as identified above, under the law of comparative advantage. Various trade agreements, whether they be international, multi-national, regional, plurilateral or bilateral are negotiated to improve the benefit to nations and maximize economic prosperity.
The results are as follows (from quote above):
”That modern world is not a world of producers producing products in one country for sale in another, but rather a world of closely connected global supply chains for goods, services and indeed people.”
Do we really wish to go backwards from that accomplishment and overthrow globalization?
The Three Pillars of Economic Development is our contribution to economic theory in the effort to safeguard these advances, by providing a metric which more clearly accounts for recent progress, and thereby enables governments to identify and remedy what is impeding prosperity
Footnotes
[1] Smith, A. (2012). Wealth of Nations. Wordsworth Editions.
[2] Ricardo, D. (1817) The Theory of Comparative Advantage. In: Ricardo, D., Vol. 1 Ed. By Pierro Sraffa with Collaboration of M.H. Dobb, Principles of Political Economy and Taxation, Cambridge University Press, Cambridge, London.
[3] Shanker A. Singham, A General Theory of Trade and Competition (2007), London: Cameron May. Pg 9