Competition

Paul Krugman reports that he has several times had the following disconcerting experience. Being a recognised talking head, he’s at some meet-and-greet sipping champagne and nibbling cheese, when he finds himself in conversation with an actual decision-maker. And they seem intelligent and well-read, and genuinely engaged with what he has to say about international trade. But Paul Krugman starts to realise that they do not understand the theory of comparative advantage. So, he starts to explain. And the other person nods, and makes intelligent comments. And when the explanation is over, they make another comment. Which reveals that they did not understand a single word Paul Krugman said. It’s not that they misunderstood. Somehow they just didn’t experience the point at all. The concept exists in a parallel universe to them.

And it’s always the theory of comparative advantage. It’s just too counter-intuitive, too far outside the framework of how we’re all taught to think. It’s not something that anyone disagrees with. It’s something that no-one can hear.

Comparative Advantage

It’s early in the 19th century, and England is considering opening up its markets to trade with Portugal. There are only two interesting things to trade: cloth and wine.

In England, a bolt of cloth costs 2 pounds. A barrel of wine costs 4 pounds. In Portugal, a bolt of cloth only costs 1 pound. And a barrel of wine costs 1 pound as well.

Basically, the Portuguese are kicking English arse on all fronts. The English are hopelessly outclassed, unable to do anything well.

So what is there to trade? The Portuguese win on everything. Why would they buy anything from England? If England opens up its markets, all the money will flow to Portugal, England will be left hopelessly in debt, and the kingdom will be ruined.

Hmm. But imagine that you are a particularly wiley English trader. You figure out the following elaborate scheme. You borrow 2 pounds. You buy a bolt of cloth. You then take it to Portugal and sell it for 1 pound. Uh-oh, you made a loss. But wait! You then go across the street and use that pound to buy a barrel of wine. You ship that back to England and sell it for 4 pounds. You pay back your 2 pound loan, and you’ve got 2 whole pounds out of the exercise! For nothing!

The weird bit though: Portugal imported cloth from England. Despite being so useless at essentially everything, there still was a role for English manufacturing in the world. The cloth itself is perfectly fine, and appreciated by the Portuguese. Not only that, but no actual money moved between the two countries. No-one was made poorer. In fact, England was made slightly richer to the tune of 2 pounds-worth of wine.

What happens if we let this carry on? Traders will systematically start buying up all the cloth in England so they can ship it to Portugal. They will start buying up all the wine in Portugal so they can ship it to England. England will be flooded with cheap Portuguese wine, Portugal will be flooded with cheap English cloth. The wine industry in England will die out, but all of those resources will be redirected to cloth production. The reverse will happen in Portugal. Eventually, England will have the monopoly on cloth, Portugal the monopoly on wine. Crucially, both countries will have both more cloth and more wine than when they started. This despite England still sucking at cloth production just as much as ever.

The trick is, while England does still suck at cloth production, they suck even worse at wine. They don’t have any advantage over Portugal in anything. But they have a comparative advantage in cloth – compared to their appalling disadvantage at wine. And it’s this comparative advantage that defines their niche in the global economy.

Extending this to every country in the world, they are all different. In all the thousands of products a country can make, there are many countries that don’t have a global advantage in any of them. But they must always have a comparative advantage over every other country in the world in something, just as a mathematical fact. If they are allowed to trade freely, the market will find that comparative advantage and exploit it. And that exploitation will only work insofar as it enriches the people of that country – otherwise why would they sell their stuff?

Mercantilism

Perspicacious readers may notice that globalisation in the 19th century was notably not characterised by the entire world all being lifted up in a grand spirit of cooperation and mutual enrichment. There are one or two details left out of that picture.

But that’s really not the reason people don’t get this story.

Normal people need to work to earn money. They need a job. In order to get a job, they have to go to a job interview. That involves putting on a suit and making yourself seem intelligent. But typically, the goal is not to reach a particular threshold of employable intelligence. The goal is to be the smartest person applying for that particular job.

You’re in a competition. You have to win.

If you’ve been looking for a job recently, you’ll have participated in, and lost, quite a number of those competitions. You will probably have despaired and panicked and sweated and beaten your head against the wall, before you eventually contrived to get your nose slightly in front at the moment you reached the finish line.

That experience stays with a person.

And while you might think, perhaps correctly, that the competition is particularly fierce these days, fierce competition has been a characteristic of human civilisation ever since it was created. The collective trauma of losing, many many times over, has defined the culture for millenia. We have learned not just to commiserate with the losers of the world (even while we are the ones beating them), we have even more so learned to celebrate winning as by definition the highest human ideal. Our heroes are winners. Winners at what, is irrelevant. War, or real estate, or tiddlywinks. The pure willingness to compete is held as the ultimate good in itself. Sometimes explicitly. More usually as a background hum.

In that context, no matter how mathematically accurate comparative advantage may be as a model, it doesn’t sit right.

There’s a far more satisfying model. Countries compete to sell their stuff. Whoever makes their stuff the most efficiently can sell it for the cheapest price. That country will make all the money, and they will be rich. Huzzah!

This alternative model is called “mercantilism”. In the history of economic thought it slots in as the evil ogre that was defeated forever by the hero of classical economics, centuries ago. Today we are all proud globalist cosmopolitans happily buying and selling derivatives on our options on our futures on commodities we will never actually lay eyes on, smugly secure that the crumbs from the margin we extract will trickle down to infinitesimally enrich every person on earth. Just, like, not as much as it’ll enrich us.

You do trade, right?

Most people don’t. Most people are stuck trying to memorise the name of the HR drone who set up the interview. And for those people, mercantilism makes a lot of sense.

You know who spent some time awkwardly stuck in a waiting room practicing how to say “nice to meet you” in a confident voice while trying not to forget the name of the HR person? Friedrich Merz. You can tell he’s had that experience, because of how today he wants to tell us all about Germany’s Wettbewerbsfähigkeit. Specifically, how we don’t have enough of it. China and America have all the Wettbewerbsfähigkeit these days, and there’s bugger all left over for Germany. So we need to ditch our labour laws and raise our pension age. That’s what economies do instead of staring at the company website beforehand so you know all their product names. No pain, no gain.

Labour

When economists talk about competition, many people hear this pop-culture job-interview-based version of competition. But economists are talking about something very different.

In real life, Kareem Abdul-Jabbar was a great basketballer partly because he happened to be very tall. Economists disapprove of that sort of thing. An economist would say, he should have bought his height, and been able to sell it to other players. Otherwise he is not competing fairly. Instead he is “rent seeking”, a grave crime in classical economics.

Competition in the classical economic sense is between people who know the same things, have the same access to money, pay the same prices to run their businesses, and have the same customers. In this setup, businesses don’t just compete for contracts. They also compete for capital. And they compete for their inputs – raw materials and labour.

If you squint you can sorta see this happening for real in the world of business. Provided, that is, you are comparing businesses in the same place. If the businesses are in different countries things break down pretty quickly. Because while contracts can move between countries easily, and raw materials can move between countries somewhat easily, labour can barely move at all.

Despite the fear-mongering about immigration, very few people are willing to leave their families and their society and their mother tongue behind just to find work. Even myself, currently on my 6th or 13th migration depending how you count, I don’t move countries to follow my job. I move jobs to follow my countries. And that’s considering people who are allowed to move. Of that minority who are willing to move countries, very few of us are actually allowed to.

So when it comes to hiring labour, companies are stuck with whatever they have locally. Those populations are different. That’s not fair, in the economic sense. And in economics, competition that is not fair is not competition at all. Since there’s no separating one factor of production from another, we can say that international competition simply doesn’t exist. It’s a myth. An urban legend.

The model of economic competition doesn’t fit international trade analysis at all. You need something else. That’s where comparative advantage comes in. Where competition theory would say, those with lower productivity will be eliminated entirely, comparative advantage theory says that all countries will always have full employment, no matter what they do.

I guess that last bit is where people are really starting to boggle.

Weekends

Australia is a country with a strong labour movement. Imagine if the whole country moves to a 4-day week. Same pay, just, 20% reduction in working hours. What happens? Let’s focus on cars. I’m old enough to remember when Australia made those.

Suppose when we start the experiment, locally-made Holdens and imported Fords are the same price and the same quality. Both are sold in Australia and in other countries. But now, suddenly, Holdens cost 20% more than Fords. Obviously, Australia is instantly out-competed. Holden’s sales collapse, they scale back their operations, lots of Australians are out of work.

But Australians need to buy cars, which now means importing them from America. For that you need US dollars. So Australians start selling their AUD to buy USD. This causes the Australian dollar to slide on international markets. At some point, AUD has lost 20% of its value. At that point, from an international perspective, Holdens and Fords cost the same price. The export market revives. Suddenly Holden fires up its production lines again, and the jobs come back.

That will just stabilise the AUD. It won’t lift the price back up to where it was. So Australians are left with their wages 80% of what they were, and their savings worth 80% of what they were. Bummer.

You might say that Australia made a selfish, short-sighted choice, they become uncompetitive on the international market, and suffered for their crime. But that’s a pretty twisted view of what happened. Australians have permanent 3-day weekends now. That came with a price. But that doesn’t mean the choice is bad. Some things are worth paying for. 20% less money for 20% less work seems like a reasonable deal to me, if that’s what you want.

Whatever “international competition” means, it’s not winner-take-all. It’s a market. You buy what you want. You leave behind what you don’t need. Other people are making their own choices. But that’s their business.

In Australia, workers get to vote for what they want. But in practice they’re stuck in Australia. And there’s no point having them sit around doing nothing all day. The market might fluctuate in the short term. No-one’s making any promises about wages. But jobs? In the medium term, they will always come back.

Democracy

This turns out to be a pretty important fact about the world.

In a globalised world of international competition, there is no room for the weak, and no room for the lazy. Labour, environmental, and consumer laws are constraints no-one can afford. The first country to discard those wins the competition. Everyone else will be compelled to follow suit to protect their jobs. The race to the bottom.

How can you have democracy in such a world? If there was a global government, you could vote to constrain the worst excesses of the global market. But we have no global democracy. In the current regime of national sovereignty, each democracy can only cover one country. If those countries are rendered powerless by market forces, there’s not a lot to vote for any more.

But this world of international competition is a lie. It doesn’t exist. And therefore democracy does matter. You can vote for a 4-day week. You can vote for stringent environmental laws. You can vote to seize the means of production. All of these things will cost you productivity and wages. But they won’t cost jobs. If you think they’re worth the cost, go nuts.

Is China introducing a 7-day week? That’s not your problem. It neither picks your pocket nor breaks your leg. On the contrary. If China decides to drown your economy in subsidised solar panels, you know what you get? Cheap solar panels. Why would you be scared of that? If Portugal can suddenly sell wine at 2 barrels for a pound, that’s a lot more cheap wine for everyone.

There is no way China or America can make your economy or your life worse by becoming more efficient. This is the part that’s hard to grasp. But it’s true. True in theory, true in practice.

And so the threat of being left behind by productivity improvements in other countries is no reason at all to tear up the laws you spent decades fighting for. A person who raises economic competitiveness as a reason to wind back the law, is someone who hasn’t come up with a rational argument for the change they want.

Making the Case

So there I was, at the Betriebsversammlung. An angry crowd of managers had gathered, demanding to know how we on the Works Council could justify our last-minute denial of the hire of a new colleague. Didn’t we understand, that job had simply moved to another country?

I opened my mouth, and I heard some of the words from above coming out. They made sense when they were in my head. But I could hear exactly how offensive and insensitive they sounded. I could hear my privileged self telling everyone else in the room that they were just statistics, and didn’t really matter.

And I seemed to hear Paul Krugman whispering in my ear. He said: “you should stop talking now.”

So I stopped talking.