Monday, April 16, 2007

From The Files: Edward Prescott on 'Competitive Cooperation'

When it's been a slow couple of days for business strategy or equity markets news, I often turn to a pile of choice articles I have saved from earlier editions of various business publications.

Today, I want to touch on an excellent piece by Nobel Laureate, and periodic Wall Street Journal contributor, Edward Prescott. Back on February 15 of this year, Prescott wrote about 'competitive cooperation,' with the just-turned-50 European Economic Union, the product of the 1957 Treaty of Rome.

Among the many pieces of economic data Prescott cites, these are some of the most compelling. The original six Common Market countries progressed from having a productivity level that was 55% of that of the US, to having achieved rough parity twenty-five years later. However, three countries which did not enter the pact- Denmark, Ireland and the UK- but were near parity on productivity with the six in 1957, fell behind. The same trends held true for subsequent signatories to the Treaty in in the 1980s, '90s and this decade.

Prescott continues the analogy by noting the progress made in Australia and its trading partners in Southeast Asia. The glaring laggard geographic area is Latin America. There, Prescott cites the region's preference for protectionism as having predictably 'poor' results and consequences. Specifically, referring to research by some of his Minneapolis Fed colleagues, he writes,

".....from 1950 to 2001, per capita GDP for Europe increased 68% relative to the US; Asia increased by 244%, while Latin America decreased by 21%. This is all the more striking when we realize that Latin America's per capita GDP actually exceeded Asia's by 75% in 1950."

Prescott sums up his article by noting that protectionism's short term seductiveness inevitably has disastrous long term consequences for relative and absolute wealth creation. Getting the flywheel of economic development and growth going is key, and protectionism tends to slow that flywheel down and cement existing economic conditions in place, while the rest of the competitive global economies move forward.

With this point in mind, I will close this piece with a quote from the beginning of Prescott's editorial,

"If the government has any economic role at all, surely, this.......(to protect US industry, employment and wealth against the forces of foreign competition).....must be it. Actually, no. Government has a higher calling in this country...which is to provide the opportunity for people to seek their livelihood on their own terms, in open international markets, with as little interference from government as possible."

While Prescott is understandably vague on the particulars, I'll be more blunt. At a time when the US Congress has been taken over by liberal Democrats, and their economic protectionist and income redistribution agenda, this sage advice is more crucial than ever. It's a big mistake for government to attempt to manage the how of economic activity, in hopes of attaining a collective economic welfare. The names we have historically used for that vary, but include socialism and fascism.

Rather, the US has historically allowed its citizens to determine the organization of economic resources, as well as own them, while simply setting some minimum, and minimally changing, guidelines within which to pursue their individual economic welfares. If we depart from that history to any great degree, thanks to the current Democratic Congressional agenda, I fear that Prescott's warnings will ring true in America quite soon.

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