The Enemy Is the Mindset

Headlines focus us on trade of manufactured goods The reality of the global economy: local production of locally consumed services Transferring best management practices would raise standards of living 25 percent Until his dying day in 1601, Tycho Brahe believed that the sun and all the other stars revolved around the earth. For him, our planet was the center of the universe. It wasn't that he lacked the data to understand the error of his thinking; indeed, it was none other than Brahe's own meticulous observations that Johannes Kepler later used to develop the view of the solar system that is so familiar to us today. The devil, it turned out, was not in the details, but in the assumptions. The choice we confront today as we consider the global economic system is not so different from the one that Brahe faced almost four centuries ago. Like Brahe, we can decide to interpret facts on the assumption that the sun, the stars, and the planets orbit the earth, and invent elaborate explanations for the observations that don't fit. Alternatively, we can adopt a more contemporary, but also quite threatening, view of the solar system. Today, some of our most fundamental beliefs about the global economy need the same scrutiny that Kepler lent Brahe. We need, in Emerson's words, "to pierce through rotten diction and fasten again words to visible things. " Consider, for example, the following: "The twenty-first century will be a century of head-to-head competition. Some will win; some will lose. "(1) "Naturally, the global trading system has entered, quite quickly, into a win-lose situation in which one nation's rapid gains translate into losses for others. "(2) "The most important reason for the long upward trend in European unemployment rates is the rise of nations that are competing with us. "(3) All this is interesting. It's politically plausible. It's attractive. It motivates people. But it isn't true. How could that be? How could we have a set of political premises and public views so fundamentally at odds with the reality of our world? To answer this question, we must deconstruct our most basic assumptions about the nature of the global economy. An antiquated paradigm The framework whose applicability I seek to challenge was developed during the Industrial Revolution, and it goes something like this. The world consists of a series of closed national economies, each with its own unique set of factors of production. These economies compete with each other on the basis of manufactured goods strapped to the decks of ships. What determines the standard of living of any one of them is the effectiveness with which it produces the goods that it exports. This is the theory of comparative advantage. According to Ricardo, standards of living in all countries rise if the forces of comparative advantage are able to operate through free trade. Over time, this framework has spawned other ideas, such as the notion that nations compete head to head. Lester Thurow's book of that title, which rests on the presumption that economic performance is about competing in a zero-sum game to produce goods with the greatest added value, has been a best-seller. But there is a problem with this view of the world. It may have been applicable in 1860, and perhaps even in 1890. By 1910, however, it was beginning to break down. Today, it is largely irrelevant. What is so wrong with this perspective? Not much more than what was wrong with Brahe's life's work: just two basic assumptions that have been left unchallenged for too long. These are, first, that the production of manufactured goods matters more than other activities in an economy, and second, that trade in goods is a primary mechanism for enhancing a nation's standard of living. Something else that has gone unchallenged is the corollary of these assumptions: that nations are engaged in a head-to-head competition that yields clear winners and losers. …