Martin Hellwig is the co-author (with Prof. Anat Admati) of the book Banker’s New Clothes, a book about finance that the Financial Times’ chief economics commentator Martin Wolf described as “the most important to emerge from the crisis.” Hellwig is also Executive Director of the Max Planck Institute for Research on Collective Goods and, among other things, a former head of the German Monopolkomission (Monopolies Commission).
The Monopolkomission in 2003 published a report entitled Competition Policy under Shadow of “National Champions” which is a most useful document from our perspective. It argues, as we have, that the pursuit of what we at FG call the Competitiveness Agenda tends to lead to restrictions on market competition. It also argued against creating a German “banking champion” – a position that earned it a dismissive rebuke from the government of Gerhard Schröder, which basically said all was safe and well regulated.
A couple of short excerpts from that document provide flavour and context, and the interview with Hellwig is below.
Fools’ Gold has generally urged extreme caution when considering using c-words such as ‘competitiveness’ or ‘compete,’ in the context of the behaviour of whole countries or states. As we’ve noted, a failed company that can’t compete is one thing: a failed state is quite another; and the processes that these words are normally trying to describe tend to be generically harmful.
A particular bugbear of ours is what we call the Competitiveness Agenda – the idea that it’s essential to shower tax cuts and other subsidies on footloose Capital and its owners, for fear that they’ll run away to more hospitable climes. It is a policy prescription (or set of policy prescriptions) dressed up as a threat.
Many politicians and vested interests know that the c-words (and their like) are a remarkably effective set of tool for bamboozlement: a way to get people to accept these prescriptions without really thinking about them. Who, after all, could be against something called “competitiveness?” Because of the risk of bamboozlement, we really don’t like using the c-words to talk about whole countries unless we really have to.
Yet of course ‘competitive’ is a word in the English language that people can choose to define in ways that don’t subscribe to the Competitiveness Agenda, and in some senses countries do ‘compete’ for investment. One thinker who does use the c-words in more progressive (and thoughtful) ways is Bob Jessop of Lancaster University. In conversations with FG, Jessop has talked of a “high road to competitiveness”, which might be summarised as ‘upgrading’, and a “low road” via deregulation. He dislikes critiques by Krugman and others (see here) because, he says, their starting point is neoclassical economics, which airbrushes out a lot of messy institutional and other factors from the real world. Jessop adds:
“My critique of competition is: be brutally clear about how competition works, and how competitiveness works, and don’t just dismiss it as so much rhetoric because it is misused by politicians and ideologues.”
Now Jack Copley of Warwick University has written us a guest post looking at his ideas in more detail.
Bob Jessop: An historical approach to national competitiveness
David Ricardo’s Theory of Comparative Advantage: Exploring the Hidden Historical Underside of Modern-Day Competitiveness Discourse
David Ricardo’s status as the first really famous economist of the nineteenth century rests on two capacities: his ability to think in pure economic abstractions and his ability to harness economic theory to a liberal political worldview. They came together most famously in his theory of comparative advantage, through which countries are encouraged to specialise in producing the goods in which their workers are relatively most efficient. Despite being two hundred years old, Ricardo’s theory is still the mainstay of the orthodox economics justification of free trade and, at one stage removed, of modern-day competitiveness discourse too. This post by Matthew Watson looks behind the façade of the numbers that Ricardo used to illustrate his theory of comparative advantage, to show that they were anything but an innocent account of essential economic relationships. It therefore helps to place modern-day competitiveness discourse in a far from flattering intellectual light.
(Updated with Krugman comments.) Two years ago Anat Admati and Martin Hellwig published a popular book about banking, The Bankers’ New Clothes, which Martin Wolf in the FT described as “the most important book to emerge from the [Global Financial] Crisis.”
The book pulls off the trick of explaining a lot of technical points about banking in highly accessible detail, and perhaps its most valuable contribution is to have explained so clearly why it is foolish to run banks with only small amounts of loss-absorbing equity. Partly because of the way bank equity is so misleadingly portrayed in the media and elsewhere – as a cost to a bank, and by mindless extrapolation to an economy as a whole – bankers have been able to get away with blunting urgent reforms.