Competition in Resources vs.
Competition in Manufacturing
and Knowledge-intensive Services
Erik S. Reinert
Chennai, 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 AGRICULTURE
Third World specializes in technological deadends.
Characteristics of Economic Activities:
GOOD (Schumpeterian) and BAD (Malthusian) Activities
‘Good’ export activities
‘Bad’ export activities
if no Schumpeterian sector present
• Increasing returns
• Diminishing returns
• Dynamic imperfect
competition
• ‘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 change
creates 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.
Innovations & new
technologies
Dynamic imperfect competition
(high-quality activity)
The Quality Index of Economic Activities
Characteristics of high-quality activities
•new knowledge with high market value
•steep learning curves
Shoes (1850-1900)
•high growth in output
•rapid technological progress
•high R&D-content
Golf balls
•necessitates and generates learning-by-doing
•imperfect information
•investments come in large chunks/are divisible (drugs)
•imperfect, but dynamic, competition
Automotive paint
•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
House paint
•little technological progress
•low R&D-content
•little personal or institutional learning required
Shoes (2009)
•perfect information
•divisible investment (tools for a baseball factory)
•perfect competition
Baseballs
•low wage level
•little or no economic of scale /risk of diminishing returns
•fragmented industry
•low stakes: low barriers to entry and exit
•commodity
Perfect competition
(low-quality activity)
•produce few linkages and synergies
•process innovations, if any
•neoclassical assumptions are reasonsable proxy
The Virtuous Circles of Economic Development: Marshall Plans
Productivity Increases
(Activity-Specific)
Higher
Real Wages
Higher
Demand
Higher
Savings
Large Scale of
Production
Highly Diversified
Economy
Systemic Synergies
Economies of Scale
and Scope
Source: Reinert (1980) , p. 39.
Higher Possibility
for Taxation (better
Health, Education,
etc.)
Lowering Export Prices at the same rate as
Productivity Increases
Labour Saving
Technology
Pays Off
Higher Investments
Higher Profits
Children as inferior
goods. Less
population, attracts
migrants
No
Increase in
Real
Wages
Underdevelopment
Higher Capital
Labour Ratio
Exit
from
System
The Vicious Circles of Poverty: Morgenthau Plans
Engaged in Production of Technologically Mature
Products and Products Subject to Diminishing returns
Little Productivity Increase
Perfect International Competition
Reversible Wages
Productivity Increases Taken Out As Lowered Prices
No Increase in Real Wages
Demand
Low
Savings
Low
Small Scale of Production
(Imports Cheaper Due to Scale
Economies)
No Diversity of Production
Balance of Payment Problems
Break-down of the Capacity to
Import
Low Possibility for
Taxation - (Poor Health,
Education, etc.)
Investment in Labor
Saving Technology
Unprofitable
Low Investments
Many children as
an asset.
Population grows
Low Capital, Labor Ratio
Low Wages vs. Other Nations
Comparative Advantages in Labor-Intensive Activities
Theorising by Inclusion: The qualitative differences between manufacturing and agriculture
as perceived over time as ideal types or stylised facts.
‘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)
‘Manufacturing’
‘Agriculture’
Dynamic imperfect competition
Perfect competition (commodity competition)
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
Activity-specific Economic Development:
The mechanization of cotton spinning during the First Industrial Revolution.
Ave annual
increase in
productivity
30,0
25,0
20,0
15,0
10,0
5,0
0,0
1750
1800
Source: Carlota Perez, Calculations from Jenkins 1994
1850
1900
1950
2000
2050
Years
USA: Learning Curve of Best-Practice
Productivity in Medium Grade Men’s
Shoes’
Shoes’.
1818
1616
1414
Man-Hours Required by Best-Practice Methods
of Producing A Pair of Medium-grade Men’s
Shoes at Selected Dates in the U.S.
1212
1010
8 8
Year
6 6
Man-Hours Per Pair
1850
15.5
4 4
1900
1.7
2 2
1923
1.1
0 0
1936
0.9
1850
1850 1900
1900 1923
1923 1936
1936