Cameron and Osborne race to the bottom in economic literacy

Google Cameron global race and you get a depressing 33,000,000 responses. Google Osborne global race and you get a depressing 2,650,000 responses. Apparently, the ‘global race’ is going to be a major theme of the Conservative Party conference. The concept of the global race is terrible economics and a reflection of utterly incoherent thinking. This is a pity because one of David Cameron’s major speeches on the concept contained a very fine set of aspirations (even if those aspirations are a long way from being implemented in policy). However, the policy analysis in the speech was completely overwhelmed by the reporting of the global race rhetoric which does so much to undermine understanding of economics in the public sphere.

So what is the problem?

Cameron does not say with whom we are in a race. But, given that it is a global race, I guess we can assume it is everybody: India and China at one end of the scale (rapidly growing but still relatively poor countries) and France and Germany at the other end. Presumably, in Cameron’s view, there is some kind of fixed prize. If France or China adopt bad policies, we are more likely to win the prize and come first in the global race. But there is no evidence for this competitive theory of development. A poor France or a failing India does not help Britain. It will mean more expensive imports for Britain if other countries are less efficient and smaller export markets for our own companies if other countries are less prosperous. Furthermore, good policy can be copied – if there are models of good policy abroad, that provides evidence for Britain and we can copy those ideas: low corporate tax rates in Ireland and competition in education in Sweden are both examples of global copying rather than global races in a zero sum game.

Secondly, trade is based on comparative advantage not absolute advantage. In a static analysis, we see competition between (say) German and British firms for individual markets and this may look like a race. However, the long-term dynamic perspective suggests a very different picture. Germany may be relatively good at exporting luxury cars and so resources in the UK will flow towards other industries such as insurance and legal services that we will export instead. We will export these things in order to import luxury cars. We could not possibly produce teddy bears at a lower unit cost than China. We can, though, export higher education to China and, with the revenue from one Chinese student over three years, import about 20,000 teddy bears. That is how trade works at the individual level and at the country level.

So, let’s have good policy at home because it will lead to prosperity at home. And let’s encourage, in appropriate forums, good policy abroad because it will lead to prosperity at home and abroad. There are no losers in the global race if all countries adopt good policy – all will have prizes. There are no winners in the global race if we are the best of a bad lot – there will be stagnation for all. There is no sense in which the term ‘global race’ is useful in policy analysis. It is an attempt by ministers to avoid the difficult task of explaining why free markets and free trade produce prosperity for all.

Academic and Research Director, IEA

Philip Booth is Senior Academic Fellow at the Institute of Economic Affairs. He is also Director of the Vinson Centre and Professor of Economics at the University of Buckingham and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He also holds the position of (interim) Director of Catholic Mission at St. Mary’s having previously been Director of Research and Public Engagement and Dean of the Faculty of Education, Humanities and Social Sciences. From 2002-2016, Philip was Academic and Research Director (previously, Editorial and Programme Director) at the IEA. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. He is a Senior Research Fellow in the Centre for Federal Studies at the University of Kent and Adjunct Professor in the School of Law, University of Notre Dame, Australia. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.

1 thought on “Cameron and Osborne race to the bottom in economic literacy”

  1. Posted 19/07/2013 at 00:05 | Permalink

    Does it matter if political statements are inaccurate if they achieve something useful?

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