Nobel prize winner Prescott on globalization

Ed Prescott, the joint winner of the 2004 Nobel Prize in Economics, writes in the Wall Street Journal today (behind paywall):

Of all the thankless jobs that economists set for themselves when it comes to educating people about economics, the notion that society is better off if some industries are allowed to wither, their workers lose their jobs, and investors lose their capital — all in the name of the greater glory of globalization — surely ranks near the top. This is counterintuitive to many people (politicians among them), because they view it the government's economic responsibility to protect U.S. industry, employment and wealth against the forces of foreign competition. …

Protectionism is seductive, but countries that succumb to its allure will soon have their economic hearts broken. Conversely, countries that commit to competitive borders will ensure a brighter economic future… This lesson should not be lost on the U.S., the paragon of competitive growth, where politicians and policy makers are contemplating whether to construct more protective barriers. It is openness that gives people the opportunity to use their entrepreneurial talents to create social surplus, rather than using those talents to protect what they already have (or to protect rents, as economists like to say). Social surplus begets a rising standard of living, which begets growth, which begets social surplus, and so on. Rent protection stops growth cold and keeps people poor.

(Prescott also wrote a book, Barriers to Riches, which argues that the main cause of difference of income between countries are barriers to the adoption and transfer of technology.)

1 thought on “Nobel prize winner Prescott on globalization”

  1. Hmm. The problem with this kind of argument is that it doesn’t seem to be the way that most rich countries got rich. Germany, the US, South Korea, Japan, China, you name the successful country, chances are that in the initial stages of industrial development they employed, as well as intensive programs to import technologies, selective protection and support to key industries.

    That’s not to say that this is a guaranteed method as it depends on the political backdrop amongst other things – hence the relative failure in Africa and Latin America – and must be timebound, as after a while heavy export promotion is required. But all the recent evidence suggests that it is export value that drives growth in a globalised world; the mistake some make (the Adam Smith Institute being the most egregious example) is equating trade liberalisation with export promotion.

    Mushtaq Khan’s work at SOAS tells a very interesting story of the need to differentiate between types of rents (rents for learning and technology import vs rents for protecting monopolies for example). Rodrik and Velasco’s work at Harvard is telling a very similar story from a different perspective. Some rents are good, the public choice and political problem is how to differentiate between types of rents and promote good ones.

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