Competition plays a vital role in economies, but don’t make the mistake of assuming what is true for an individual company also is true for nations. The key to prosperity is productivity. The question of how we do compared with other nations is much less important.
This issue is being raised in a roundabout way. I came away from President Barack Obama’s State of the Union address profoundly disappointed he had not seized the opportunity to put a bolder challenge to the American people.
The 2010 election clearly demonstrates we collectively are not willing to make hard decisions. No, we don’t want bailouts, and we don’t want deficit spending. We don’t want a growing national debt. We want lower taxes, not higher taxes, and we don’t want cuts to Medicare, Social Security, student financial aid or crop subsidies.
It was a chance for the president to call on two good, bipartisan commissions — one appointed by Obama that is headed by former Sen. Alan Simpson, R-Wyo., and Erskine Bowles and the other headed by former Sen. Pete Domenici, R-N.M., and Alice Rivlin.
Obama could forcefully have told the nation that Americans need to understand, as both commissions emphasized, that the only way we will solve our fiscal problems is with a combination of tax increases and spending cuts.
But he didn’t. Shakespeare spoke of “a tide in the affairs of men, which, taken at the flood, leads on to fortune.” I thought the president just sat on a dock in the bay, watching such a tide roll away. The rest of the speech seemed like platitudes.
But different people hear different things. I received an e-mail from a friend saying: “The theme that stood out to me last night was competition. Can we compete our way back to greatness or even solvency?”
Now, that’s a good question.
Competition is different for individuals and companies than for nations, and it is dangerous to confuse the two.
As Adam Smith pointed out in 1776, competition is a powerful incentive for innovation and efficient use of resources.
The butcher and the baker don’t come up with better steaks or buns out of altruism. They know offering a better product means they will earn more money.
Medieval attitudes and social structures, such as guilds, hobble competition. Freeing nations from such attitudes and structures made life enormously better in Europe 200 years ago, just as it has in China in the past 30 years.
But countries are not companies. Economic growth is not a zero-sum game in which higher incomes in China or Korea mean lower ones in the United States or France.
The world has many resources, and people have many unmet needs and wants. We can all be better off, and we can use resources more efficiently. Is it really important which economy is the largest in the world or has the highest per capita income?
Yes, people like to win races. Yes, it is nice to feel, paraphrasing De Beers diamond company founder Cecil Rhodes, that Americans “have won first place in the lottery of life.” But for me and for many others, it is far more important that we have a prosperous, just and sustainable economy than a higher income than everyone else.
There was a time when military rivalry conferred economic advantage.
Luis de Camoes, Portugal’s Shakespeare, swam ashore from a shipwreck in the 1570s, holding the manuscript of his greatest poem above his head, landing at a site near where I served in Vietnam.
Why was he there? Portugal and the Netherlands were duking it out for control of trade from Asia, and military domination of that trade conferred economic monopoly power and hence higher incomes.
This perceived link between politico-military power and national prosperity has repeatedly driven wars, including World Wars I and II. But the link was a false one.
In 1640, the Dutch had the highest incomes in the world and the largest economy in Europe. A century later, the English had passed them up. But the Dutch never were poorer in absolute terms, and they live very well today.
The Swiss never dominated anything, but they have enviable levels of prosperity, justice and sustainability. (The food isn’t great, but globalization eases that detail.)
What is important is productivity. I wish Obama had phrased it in those terms. To be more prosperous, we need to improve what we produce with the human and natural resources and capital at our disposal. That means a high national savings rate, plus tax, regulatory and other policies that favor investment, innovation and prudent risk taking, public goods such as education, infrastructure, research and public health. It means a stable currency and honest, efficient financial markets.
That is the primary answer to my friend’s query. But I must say that although we still are prosperous and the world’s most powerful nation by any measure, we cannot “compete our way to greatness or even solvency” without reaching a consensus on public finances.
That ongoing failure — and the political and economic views that underlie it — will erode efforts to improve productivity or competitiveness, call it what you will.
© 2011 Edward Lotterman
Chanarambie Consulting, Inc.