America is not afraid of competition

Rz:

Is there anything surprising for you in the recent 20 years of the world’s economic development?

Edmund Phelps:

One of the events was certainly the collapse of the Soviet Union and the economic system, which evolved in this region. Obviously, if anyone asked me some time ago if that system would last forever I would give a negative answer. Yet, it was something unexpected. It seems to me that the majority of humankind’s achievements are largely surprising. One of the accusations against the school of classical economics is that it does not anticipate any possibility of unexpected changes, e.g. structural changes. In the preliminary period of post-communist economic development I was astonished that it was so slow. Nevertheless I realized that it takes time and we can see now that the growth rate in recent years has rapidly picked up. In addition, at some point I started to have an impression that the US economy experiences stagnation, but America has once again started to gain speed.

This century has already brought about two crises —the burst of the internet bubble in 2000-2001 and the current financial crisis. Was it possible to anticipate any of them?

I think that they were predictable. The current crisis is more serious than the one at the beginning of the century. Only one risky speculative element could have been distinguished then. Many areas of the economy were sound. But an advantage of this period was the creation of the giant Internet infrastructure e.g. optical fibre. Recent years brought many innovations based on concepts and solutions, which were devised in the times of the internet bubble. I don’t think that the economic correction, which occurred later on, was any kind of catastrophe. This was a sort of crisis, but the banking system dealt with it very well. The banks simply stopped financing certain investments.

It is similar to the current situation. The banks reduce financing. But I think that there are more similarities.

At present we have to do with a crisis caused by a boom on a subprime mortgage market. And it has much more speculative character than the internet crisis. The NASDAQ index needed only a few years to pick up after the events of 2000 and 2001. The current crisis is even more surprising for me because I did not realize that it is so closely related to the banking sector. I was aware that operations in the mortgage market bring high risk but I did not know that they could cause so extensive damage to the economic system as a whole.

We have recently observed that affluence has extended all over the world. Do you think that this phenomenon has any boundaries? Eventually, not all the countries can be as rich as the USA or Western European states, for example.

I think that there are no such boundaries. The pattern of development is simple — consistent and with endless growth. I do not believe that the economic growth can have any limits. GDP, salaries and the level of affluence will always increase. However, if we look at it from the point of view of human self-realization it does not mean that it is better. The most developed societies or most talented, dynamic people are not happier nowadays than they were in Vienna in 1819, London in 1776 or New York in 1940. These dates are not chosen at random — for me these are places and times when I would have been happier than now.

Don’t you think that the extension of wealth takes place through the fast development of low-cost countries? They are the ones, which provide the rich with cheap goods, enhancing the feeling of being wealthy. If there is no boundary for expansion of wealth what would happen if the effective low-cost markets would be in short supply?

The problem in this situation is rather that there are not enough countries like Poland, and merely a few like the United States. If out of the blue China, currently a low-cost country, would become the second America, from the point of view of smaller economies such as Poland, it would be only beneficial. First of all there would be twice as many countries from where investment capital originates and where Polish products could be exported. There is a great number of economies with similar size and aspirations to Poland — e.g. Vietnam or Latin America countries such as Colombia. Poland will certainly sooner or later join the group of rich countries, but there are also many other countries following the same objective which is expected to relatively extend the time in which Poland can arrive at that point. If there would be one such country — all investments and talented young people would go there. Provided that there are more such countries the point of reaching a certain level is delayed.

Poland has all of a sudden stopped being a low-cost country with the increase in wealth. What can we do to have a certain advantage in catching up with the level of the richest ones?

When a country joins the group of developed countries it can no longer compete with cheap labour and the inflow of capital, or the development of commercial exchange no longer gives the same economic effects. The only thing which can be done at that time is to increase innovativeness. And companies must pursue, in terms of production or service quality, the highest available standards e.g. the ones applied by American companies. Equalization of chances in their own country is added on the top of that.

Yet the process of diminishing low-cost countries can affect the United States. Finally, cheap goods from China or Vietnam increase the purchasing power of the Americans. Some time ago Japanese cars were a cheap, worse alternative to American ones, today they set the standards and US automotive concerns have difficulties in competing with them. The same can happen in the future with China.

I do not think that the feeling of success and affluence which the Americans have would depend on that, i.e. the price and quality of cars. This does not even depend on commercial exchange. It might sound shocking, but I think that the majority of Americans do not care at all about prices of cars, houses, cinema tickets or imported products. They are concerned with their jobs or their role in the society. Certainly, they are afraid of hiking petrol prices and whether due to this reason they will be able to arrive safely to their workplaces every day, or if they would be able to feed their children without a necessity of changing their lives entirely. If the USA, as it has been so far, can demonstrate stable growth at a rate of 3 percent a year there is no reason to be afraid of commercial competition of aspiring countries. In addition, the majority of competitive advantages in this regard result from technological differences. And here the United States have still an advantage.

Edmund Strother Phelps, an American economist, born on 26th July 1933, a winner of the Nobel Prize in Economic Sciences in 2006 for research on macroeconomic policy. He studied at Yale University; his professors were James Tobin and Thomas Schelling. After obtaining a doctoral degree at Yale Phelps lectured at Pennsylvania University, and currently he lectures on political economics at Columbia University. He received the Nobel Prize for elaborating one of the models of relation between inflation and unemployment, whose effect is so called Friedman-Phelps curve. The analysis of the curve showed that it is not possible to constantly decrease the unemployment level by means of macroeconomic, monetary or fiscal policy. This was confirmed by the crises of the 70's, which led to the independence of central banks in terms of decision making and the introduction by them in the 80's of a money supply strategy, whose positive outcome was low inflation.