Competition in Resources vs. Competition in Manufacturing and Knowledge -intensive Services

1. Competition in Resources vs. Competition in Manufacturingand Knowledge-intensive Services Erik S. Reinert Chennai, January 25, 2012.

2. Key assumptions: • Economic growth is created by dynamic imperfect competition. Perfect competition is a trap where labour has to stay poor. • Economic activities are qualitatively different

3. Mechanisms at work. Diversion of land use to export crop. ‘THE EASTER ISLAND SYNDROME’ Third World Countries growing food (crops) they cannot afford to eat (use). GLOBAL MAQUILA-EFFECT IN AGRICULTURE Third World specializes in technological dead-ends.

4. Characteristics of Economic Activities:GOOD (Schumpeterian) and BAD (Malthusian) Activities ‘Bad’ export activitiesif no Schumpeterian sector present ‘Good’ export activities • Increasing returns • Diminishing returns • Dynamic imperfectcompetition • ‘Perfect competition’(commodity competition) • Stable prices • Extreme price fluctuations • Generally skilled labour • Generally unskilled labour • Creates a middle class • Creates ‘feudalist’ class structure • Irreversible wages(‘stickiness’ of wages) • Reversible wages • Technical changecreates higher wages to the producers • Technical change tends to lower prices to the consumers • Creates large synergies(linkages, clusters) • Creates few synergies

5. Colonialism as a Technology Policy.‘That all Negroes shall be prohibited from weaving either Linnen or Woollen, or spinning or combing of Wooll, or working at any Manufacture of Iron, further than making it into Pig or Bar iron: That they be also prohibited from manufacturing of Hats, Stockings, or Leather of any Kind… Indeed, if they set up Manufactures, and the Government afterwards shall be under a Necessity of stopping their Progress, we must not expect that it will be done with the same Ease that now it may’. Joshua Gee, Trade and Navigation of Great Britain Considered, London, 1729.

6. Innovations & new technologies The Quality Index of Economic Activities Dynamic imperfect competition (high-quality activity) • Characteristics of high-quality activities • new knowledge with high market value • steep learning curves • high growth in output • rapid technological progress • high R&D-content • necessitates and generates learning-by-doing • imperfect information • investments come in large chunks/are divisible (drugs) • imperfect, but dynamic, competition • high wage level • possibilities for important economies of scale and scope • high industry concentration • high stakes: high barriers to entry and exit • branded product • produce linkages and synergies • product innovations • standard neoclassical assumptions irrelevant • Characteristics of low-quality activites • old knowledge with low market value • flat learning curves • low growth in output • little technological progress • low R&D-content • little personal or institutional learning required • perfect information • divisible investment (tools for a baseball factory) • perfect competition • low wage level • little or no economic of scale /risk of diminishing returns • fragmented industry • low stakes: low barriers to entry and exit • commodity • produce few linkages and synergies • process innovations, if any • neoclassical assumptions are reasonsable proxy Shoes (1850-1900) Golf balls Automotive paint House paint Shoes (2009) Baseballs Perfect competition (low-quality activity)

7. The Virtuous Circles of Economic Development: Marshall Plans Higher Real Wages Lowering Export Prices at the same rate as Productivity Increases Higher Demand Higher Savings Higher Possibility for Taxation (better Health, Education, etc.) Labour Saving Technology Pays Off No Increase in Real Wages Under-development Large Scale of Production Highly Diversified Economy Systemic Synergies Higher Investments Higher Profits Children as inferior goods. Less population, attracts migrants Exit from System Economies of Scale and Scope Higher Capital Labour Ratio Productivity Increases (Activity-Specific) Source: Reinert (1980) , p. 39.

8. Perfect International Competition Reversible Wages Productivity Increases Taken Out As Lowered Prices No Increase in Real Wages Demand Low Savings Low Low Possibility for Taxation - (Poor Health, Education, etc.) Investment in Labor Saving Technology Unprofitable Small Scale of Production (Imports Cheaper Due to Scale Economies) No Diversity of Production Low Investments Many children as an asset. Population grows Low Capital, Labor Ratio Balance of Payment Problems Break-down of the Capacity to Import Low Wages vs. Other Nations Comparative Advantages in Labor-Intensive Activities The Vicious Circles of Poverty: Morgenthau Plans Engaged in Production of Technologically Mature Products and Products Subject to Diminishing returns Little Productivity Increase

9. ‘Manufacturing’ ‘Agriculture’ Generalised wealth only found in cities with artisans and manufacturing, and explained as a systemic effect: il ben comune (Florence 1200s). Traditionally very little systemic effects, no ben commune (common weale) The experience of 1500s Spain: The real gold mines are the manufacturing industries, because the gold from the Americas ends up in the manufacturing cities outside Spain (generalised knowledge 1600s) The experience of 1500s Spain: de-industrialisation and return to agriculture creates increased poverty: a nation is better off with a relatively ineffective manufacturing sector than with none Windows of opportunity for innovation concentrated in few activities (all urban: Botero 1589) (Perez and Soete 1988) Few windows of opportunity for innovation (until very recent history) Generalised wealth caused by a large diversity/large division of labour/maximising the number of professions (Serra 1613) Traditionally only a minimum of diversity and very little division of labour. International specialisation leads to increasing returns/ economies of scale, producing falling costs, barriers to entry and higher profits (Serra 1613) Specialisation will meet the flexible wall of diminishing returns and increasing costs/falling productivity (From Bible’s Genesis to Ricardo and John Stuart Mill).   Increased population a necessity in order to create scale/markets for manufactures (European pre-Malthusian population theory) Increased population a problem because of diminishing returns and no new land (Malthus) Important synergies between city and countryside: Only farmers near manufacturing cities produce efficiently (Europe 1700s to George Marshall 1947)  Only farmers who share a labour market with manufacturing activities are wealthy: market for products, market for excess labour, access to technology (US/Europe 1800s) Export of manufactured goods and import of raw materials, but also exchanging manufactures for other manufactures, is ‘good trade’ for a nation (King 1721). Export of raw materials and import of manufactured goods is ‘bad trade’ for a nation (King 1721) Theorising by Inclusion: The qualitative differences between manufacturing and agriculture as perceived over time as idealtypes or stylised facts.

10. ‘Manufacturing’ ‘Agriculture’ Dynamic imperfect competition Perfect competition (commoditycompetition) Activities with high growth in demand as income grows/Verdoorn’s Law ties increase in demand to increase in productivity Activities with low income elasticity of demand Subject to ’productivity explosions’ since the 1400s Slow growth in productivity until after World War II. Stable production that can be fine-tuned to demand. Overproduction avoided by storing raw materials and semimanufactures. Cyclical production/overproduction (no possibility of storing semimanufactures) Stable prices Large price fluctuations. Timing of sales often more important for income than production skills Creates a middle class and conditions for democracy (‘City air makes free’) Generally creates a feudal class structure Creates bargaining power for labour and irreversible wages: ‘stickiness’ of wages in money   Reversible wages and payment in kind Dominated by product innovations which, when products mature, turn to process innovations Dominated by process innovations, product innovations for agriculture are made outside the agricultural sector (Ford’s tractors, Monsanto’s seeds, biotechnology) Technological change leads to higher wages, profits and taxes in the producing countries (’a Fordist wage regime’) Technological change leads mainly to lower prices in the consuming countries (Singer 1950) Terms of Trade tend to improve over time compared to agriculture Terms of Trade tend to deteriorate over time compared to industrial products Creates large synergies (linkages, clusters) Creates few synergies

12. USA: Learning Curve of Best-Practice Productivity in Medium Grade Men’s Shoes’ USA: Learning Curve of Best-Practice Productivity in Medium Grade Men’s Shoes’. Man-Hours Required by Best-Practice Methods of Producing A Pair of Medium-grade Men’s Shoes at Selected Dates in the U.S. Year Man-Hours Per Pair 1850 15.5 1900 1.7 1923 1.1 1936 0.9