Competitiveness and its predecessors - a 500-year cross-national perspective

An important problem facing the standard economic theory of today, is that the countries which grew rich did so in the wrong way. In the neo-classical world, additional created wealth is supposed to spread through lowered prices. In a world with perfect information and no economies of scale, there is no room for wealth to be taken out in any other way. New technology in the form of added capital per worker increases the output of the economy, and - under the standard assumptions - this spreads through the world economy in the form of lowered prices. Both Adam Smith (12, p. 269) and David Ricardo (13, pp. 46-47) explicitly state that this would be the effect of improved techniques - prices would fall. However, as technology progresses a nation can get rich in two very different ways. One is the mechanism suggested by Smith and Ricardo: technological change only causes prices to fall. The other way, which is not discussed outside the field of labour economics, is that an important portion of the benefits from technological change is being distributed inside the producing nations through higher profits, higher wages, and higher taxable income overall. I call the first mechanism The Classical Mode of distribution of economic growth, and the second The Collusive Mode of distribution. When the first mechanism operates the benefits of technical change are spread exclusively to the consumers of goods produced. When the second mechanism operates, the producer (company and nation) of goods retains an important part of the benefits of improved productivity. (See 14, for a discussion of this). Only when the second system is at work - when there is a collusive spread of economic growth - there is a possibility for discussing competitiveness. Competitiveness in this way can be seen as the consequences on a national level of what labour economists refer to as 'industry rent'. The core of the competitiveness strategy is to locate industries where high industry rents exists - where there is a collusive spread of economic growth in my terminology. Competitiveness - the income-rising effect - is essentially achieved through appropriation of this rent.