30 July 2010
Trade can only benefit both partners
ECONOMICS is at its most rewarding when it contradicts banality. Our intuition, or even our common sense, is not always the best guide. Indeed, economist Diane Coyle famously wrote in Sex, Drugs and Economics: "When economics and common sense clash, economics wins every time."
I rehearsed this thought when I heard Digby Jones, head of the CBI, arguing that we must "make Britain more competitive". It sounds sensible. It sounds close to self evident. It is nonsense.
How can a nation be competitive? The statement has no meaning. It is a polite rendering of the dud idea that trade involves one side to an exchange being a loser. In such a flat-earth economics, exports are in some mysterious sense virtuous, with imports a measure of failure.
Jones has omitted a central insight of economics - comparative advantage. It was David Ricardo who first defined this vital idea. All other economists after Ricardo have refined and confirmed his insight that specialisation - across frontiers - is to everyone’s advantage.
Britain is invariably described as "the world’s fourth largest economy". But we are not some sort of Hibs or Hearts always beneath the American Rangers or the Japanese Celtic. The CBI may able to claim we have the fourth largest GDP per capita, but what does that mean?
The language of trade is price. Prices can only be established by trade. Swapping goods and services can only enrich both parties. Trade is nothing to do with the concept of "competitiveness". There is a sort of primitive anthropomorphism to the CBI line. To be competitive is to be alert, diligent or inventive - to exhibit capitalist or entrepre-neurial virtue.
I’m not concerned to praise commercial agility. That seems self-evidently useful. Yet "competitive" is really only CBI-speak for political begging. The CBI wants the exchange rate to be lower, though bafflingly it also favours joining the euro - thus abolishing exchange rates at least within the EU.
Ricardo may have established the primacy of comparative advantage 160 years ago, but each generation has to relearn that all trade, internally and beyond borders is enriching.
When a Turk or a Canadian or a South African exchanges something with a Scot there are no winners or losers. Both gain. The important point, the really crucial point, is that it is only individuals who know what they want and at what price. Public agencies know nothing of our individual preferences.
The notion that nations compete is a fallacy, as the errors lead to initiatives for exports or other mirages. Tariffs and subsidies are cousins of "competition policies". The moment politicians try to "help" the rot sets in.
Jones expresses the fear that Asian countries will subvert our industries by their dastardly habit of lower wage costs. Yet that is part of the comparative advantage of being in Bangladesh or Sri Lanka. Jones’ instinct is to ban, suppress, delete or censor the price information that is the market.
Britain can no more be "competitive" than can Scotland, or East Lothian or Kirkcaldy. The only worthwhile policy is to open our doors to as much international trade as possible. That entails relaxing all the crazy protectionism of the EU, yet, exasperatingly, the CBI supports this vast impediment to mutually beneficial trade.
Perhaps in the CBI world view is the illusion that trade is like the Rugby World Cup. In trade we are all winners. I wish that the men meant to be the leading exponents of capitalism would shout that from the hilltops.
• John Blundell is director general of the Institute of Economic Affairs.
Institute of Economic Affairs, 2 Lord North Street, Westminster, London, SW1P 3LB | tel: 020 7799 8900 | fax: 020 7799 2137 | email: iea@iea.org.uk
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