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The Competitiveness Distraction

December 27, 2011

Tags Free Markets

Does the ongoing failure of US elementary and secondary education bode ill for US international competitiveness? What about government regulation run amok along with a host of other maladies? Business and economic commentators uniformly answer yes without ever getting specific about the meaning of competitiveness. They apparently view competitiveness and the national maladies as one and the same. Evidence about the maladies is prima facie evidence about competitiveness, at least for the commentators.

To be sure, things like failing public education sap overall US production potential. However, overall production potential does not determine competitiveness, at least as economists have defined the term for close to 200 years tracing back to David Ricardo in 1821. For economists, competitiveness traces to the apportionment of production capabilities across goods and services, not overall capabilities. Apportionment of capabilities determines producers' alternative earning opportunities — their opportunity costs, the final arbiter of competitiveness. When it comes to competitiveness, living standards are a distraction.

Take the case of a professional athlete like Albert Pujols, long-time slugging first baseman for the St. Louis Cardinals who will be playing for the Los Angeles Angels next year. The skills that make him such a tremendous baseball player — upper and lower body strength, eye-hand coordination, and quickness — would undoubtedly make him a phenomenal mower of lawns. Indeed, it is no exaggeration to say that Mr. Pujols could probably cut more lawns per day than anyone in St. Louis, Los Angeles, or anywhere else for that matter.

Would Mr. Pujols's lawn-cutting prowess translate into competitiveness in lawn-cutting circles? Nope. Just the opposite. He is surely among the highest-cost lawn cutters wherever he lives. That's because his cost for cutting grass depends on what he can earn were he not cutting grass — in this case, playing baseball. He will reportedly earn about $155,000 per game next year. Assuming he could cut, say, 40 lawns per day, that translates into an opportunity cost of close to $4,000 per lawn. So is the fastest mower of lawns in the country serious competition for other lawn cutters? Duh.

Can Mr. Pujols's lawn-care competitiveness ever change? Sure, but it takes a change in his baseball earnings relative to his lawn-cutting abilities. Looking at only one activity tells us nothing. Likewise, positing that both abilities fall (or rise) tells us nothing absent knowledge about how his abilities are changing relative to each other.

It is the latter error writ large to a whole country that ensnares commentators. Unless changes in a country's overall production abilities are skewed, its competitiveness — that is, opportunity cost — doesn't change.

Am I am overstating the commentators' position? No. Consider World Economic Forum's (WEF) "Global Competitiveness Report," issued annually for over 30 consecutive years, usually to much media acclaim. Its most recent report (more than 500 pages!) claimed to rank the competitiveness of 142 countries, defining competitiveness as "the set of institutions, policies, and factors that determine the level of productivity of a country." In econospeak, productivity is merely another term for overall production potential or living standards. The WEF offered no hint of opportunity-cost thinking when discussing competitiveness.

Some might think that the fact that people in wealthier countries sell lots of things to people in other countries supports the idea that international competitiveness traces to living-standard differentials. Not true. After all, the same people that sell a lot abroad also buy lots of things from people in other countries. Do we want to say that higher living standards simultaneously undermine competitiveness? That would be silly. In the final analysis, wealthier nations buy lots of things from the rest of the world because they're wealthier. These purchases provide foreigners the wherewithal to buy things from them. So people from wealthy nations sell and buy a lot abroad because they're wealthier. The composition of what is sold and bought turns on the arbiter of competitiveness: opportunity costs, not wealth.

The competitiveness gurus' lack of attention to economic fundamentals leads them to polar opposite competitiveness "stories" in other venues. For example, it is common to hear pundits intone about people in poor economies having a competitive advantage when they sell in the United States. Say the pundits, lower foreign living standards mean foreigners work for less, dooming any Americans who try to compete with them.

This story is completely at odds with the commentators' maladies story. To wit, how can Americans becoming poorer make Americans less competitive, but foreigners being poorer make foreigners competitive? Hint: it can't. Being poorer can't reduce competitiveness for some and increase it for others. That's because competitiveness doesn't turn on overall production capabilities. Think Albert Pujols and lawn cutting.

So does this mean that levels and changes in living standards are unimportant? Not at all! Living standards obviously matter. They measure the effectiveness of economic systems and policies. However, positing a link between living standards and competitiveness is asking living standards to answer a question they can't answer. If systems and policies cause a nation's residents to be poorer, just say so. Competitiveness rhetoric is a distraction.


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