Thu, Mar 08, 2018 - Page 8 News List

Competition key to industry growth

By Edmund Phelps

All of this was known to the great theorists of the 1920s and 1930s: Hayek, Frank Knight and John Maynard Keynes, and now it is known to Chinese, who understand that a country benefits when companies — each with their own thinking and knowledge — are free to compete.

The West seems to have forgotten this. Since the 1930s, most Western governments have seen it as their duty to protect established enterprises from competition, even when it comes from new firms offering new adaptations or innovations.

These protections, which come in myriad forms, have almost certainly discouraged many entrepreneurs from coming forward with new and better ideas.

History is rife with evidence of the value of competition. In post-war Britain, into the 1970s, industries were controlled by exclusive clubs within the Confederation of British Industry, which barred new entrants. By the time Margaret Thatcher became prime minister in 1979, TFP had stagnated, but Thatcher put a stop to the confederation’s anti-competitive practices and Britain’s TFP was growing again by the mid-1980s.

We are now seeing something similar in China. In 2016, China’s TFP growth rate had been slowing for a number of years, but since the reforms that year, it has been increasing.

The West must address its great TFP slowdown, which has lasted since the late 1960s. Ending protection of incumbents from new entrants possessing ideas for new adaptions and innovations is a good place to start.

Edmund Phelps is the 2006 Nobel laureate in Economics and director of the Center on Capitalism and Society at Columbia University.

Copyright: Project Syndicate

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