Page 194 - Global Political Economy_Understanding The International Economic Order

SYS TEMS O F POLI TICAL ECONO MY
subsequently moderated his former enthusiasm for strategic trade and
argued that international economic competition takes place between
individual business firms and not between national economies. Krug-
man and other American economists have noted, moreover, that since
imports comprise just a small fraction of the American economy, the
principal competitors for most American firms are other American
firms. And interfirm competition is beneficial, because it rewards effi-
cient producers, benefits the consumer, and leads to maximization of
world wealth.
Whereas some individuals and governments believe that nations are
engaged in a win-or-lose economic struggle, economists argue that
free trade and international competition benefit everyone; indeed, ac-
cording to the theory of comparative advantage, every nation has a
comparative advantage in something and can therefore be a winner.
The mercantilist or geoeconomics position of the Clinton Administra-
tion that emerged from belief in the win-or-lose struggle, Krugman
correctly warned, would produce ill-conceived and reckless policies,
including wasteful industrial policies and confrontational trade poli-
cies. Moreover, he warned that emphasis on competitiveness diverted
attention from such fundamental problems as America’s low savings
rate and the declining skill level of an alarmingly large portion of the
American workforce. Indeed, in the 1990s the United States found it
necessary to import large numbers of engineers and scientists to staff
its growing information economy.
As Krugman has pointed out, the most appropriate measure of an
economy’s performance is its productivity and not its balance of trade
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or of international payments. The national level of productivity and
the rate of productivity growth not only constitute the true measure
of an economy’s performance but also determine a nation’s long-term
well-being. For this reason, Krugman and other economists have no
objection to the term “international competitiveness,” provided that
such thinking refers to national productivity and gives rise to im-
proved government policies to increase national savings and invest-
ment in capital goods and in skilled labor.
It should be pointed out, however, that economic policies designed
to increase a nation’s rate of productivity growth do not necessarily
have any effect on a nation’s balance of foreign trade and interna-
tional payments, although many noneconomists believe that there is
a direct causal relationship. The trade balance and payments balance
of an economy are determined principally by its savings/investment

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Productivity is a measure of the ratio of national output to national input.
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