Competition in Resources vs. Competition in Manufacturing

and Knowledge-intensive Services

Erik S. ReinertChennai, January 25, 2012.

Key assumptions:

1. Economic growth is created by dynamic imperfect competition. Perfect competition is a trap where labour has to stay poor.

2. Economic activities are qualitatively different

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 AGRICULTUREThird World specializes in technological dead-ends.

‘Bad’ export activitiesif no Schumpeterian sector present ‘Good’ export activities

Characteristics of Economic Activities:GOOD (Schumpeterian) and BAD (Malthusian) 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

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.

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)

Innovations & new technologies

The Quality Index of Economic Activities

Dynamic imperfect competition(high-quality activity)

The Virtuous Circles of Economic Development: Marshall Plans

Source: Reinert (1980) , p. 39.

Productivity Increases(Activity-Specific)

Large Scale of Production

Highly Diversified Economy

Systemic Synergies

Higher InvestmentsHigher Profits

Under-development

Higher CapitalLabour Ratio

Exit from Syste

m

Economies of Scale and Scope

Children as inferior goods. Less

population, attracts migrants

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

The Vicious Circles of Poverty: Morgenthau Plans

Engaged in Production of Technologically MatureProducts and Products Subject to Diminishing returns

Little Productivity Increase

Perfect International CompetitionReversible Wages

Productivity Increases Taken Out As Lowered Prices

No Increase in Real Wages

Investment in Labor Saving Technology

Unprofitable

Demand Low

Savings Low

Low Possibility for Taxation - (Poor Health,

Education, etc.)

Balance of Payment ProblemsBreak-down of the Capacity to

Import

Low Capital, Labor RatioMany children as

an asset. Population grows

Small Scale of Production (Imports Cheaper Due to Scale

Economies)No Diversity of Production

Low Investments

Low Wages vs. Other NationsComparative Advantages in Labor-Intensive Activities

Export of raw materials and import of manufactured goods is ‘bad trade’ for a nation (King 1721)

Export of manufactured goods and import of raw materials, but also exchanging manufactures for other manufactures, is ‘good trade’ for a nation (King 1721).

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)

Important synergies between city and countryside: Only farmers near manufacturing cities produce efficiently (Europe 1700s to George Marshall 1947) 

Increased population a problem because of diminishing returns and no new land (Malthus)

Increased population a necessity in order to create scale/markets for manufactures (European pre-Malthusian population theory)

Specialisation will meet the flexible wall of diminishing returns and increasing costs/falling productivity (From Bible’s Genesis to Ricardo and John Stuart Mill).  

International specialisation leads to increasing returns/ economies of scale, producing falling costs, barriers to entry and higher profits (Serra 1613)

Traditionally only a minimum of diversity and very little division of labour.

Generalised wealth caused by a large diversity/large division of labour/maximising the number of professions (Serra 1613)

Few windows of opportunity for innovation (until very recent history)

Windows of opportunity for innovation concentrated in few activities (all urban: Botero 1589) (Perez and Soete 1988)

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

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)

Traditionally very little systemic effects, no ben commune (common weale)

Generalised wealth only found in cities with artisans and manufacturing, and explained as a systemic effect: il ben comune (Florence 1200s).

‘Agriculture’‘Manufacturing’

Theorising by Inclusion: The qualitative differences between manufacturing and agriculture as perceived over time as ideal types or stylised facts.

Creates few synergiesCreates large synergies (linkages, clusters)

Terms of Trade tend to deteriorate over time compared to industrial products

Terms of Trade tend to improve over time compared to agriculture

Technological change leads mainly to lower prices in the consuming countries (Singer 1950)

Technological change leads to higher wages, profits and taxes in the producing countries(’a Fordist wage regime’)

Dominated by process innovations, product innovations for agriculture are made outside the agricultural sector (Ford’s tractors, Monsanto’s seeds, biotechnology)

Dominated by product innovations which, when products mature, turn to process innovations

Reversible wages and payment in kindCreates bargaining power for labour and irreversible wages: ‘stickiness’ of wages in money  

Generally creates a feudal class structureCreates a middle class and conditions for democracy (‘City air makes free’)

Large price fluctuations. Timing of sales often more important for income than production skills

Stable prices

Cyclical production/overproduction (no possibility of storing semimanufactures)

Stable production that can be fine-tuned to demand. Overproduction avoided by storing raw materials and semimanufactures.

Slow growth in productivity until after World War II. Subject to ’productivity explosions’ since the 1400s

Activities with low income elasticity of demandActivities with high growth in demand as income grows/Verdoorn’s Law ties increase in demand to increase in productivity

‘Agriculture’‘Manufacturing’

Perfect competition (commodity competition)Dynamic imperfect competition

Activity-specific Economic Development:The mechanization of cotton spinning during the First Industrial Revolution.

0,0

5,0

10,0

15,0

20,0

25,0

30,0

1750 1800 1850 1900 1950 2000 2050

Ave annual increase in

productivity

YearsSource: Carlota Perez, Calculations from Jenkins 1994

0

2

4

6

8

10

12

14

16

18

1850 1900 1923 1936

USA: Learning Curve of Best-Practice Productivity in Medium Grade Men’s Shoes’

0

2

4

6

8

10

12

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16

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1850 1900 1923 1936

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

USA: Learning Curve of Best-Practice Productivity in Medium Grade Men’s Shoes’.