Thursday, 6 February 2014

The Myth of the Level Playing Field

The Myth of the Level Playing Field

In the past Liberalism and today, Right or Economic Liberalism, has stated that the ideal economy is one in which economic entities are free from distortions to the free market. That a company should not be helped or hindered by Government action or policies, but that instead it should be free to pursue whatever benefits that particular company. In the past this was often called Laissez Faire, but today it's more often referred to as the Level Playing Field.

The idea of the Level Playing Field is that in an open market companies shouldn't be protected or hidden way from competition, quite the opposite. Each and every company needs to compete on the level playing field, because only then can the benefits of competition be realised. Lower costs, higher productivity and continual improvement of products be achieved. As companies better able to meet the challenges before them succeed and those not able to are not protected but instead fail.

But a problem arises from the idea of the Level Playing Field and that is that it doesn't exist. The Level Playing Field is an ideal state of play, one where the differences between different markets have been sorted out. But of course in reality those differences have not been worked out and it's hard to think of a future were they will have been. The vastly different levels of standards of living mean that we are comparing oranges and apples, not apples and apples. A company that only needs to pay it's workers $10 a day has an enormous advantage over a company that needs to pay it's workers $10 an hour. It has been argued by some that that will force the $10 a day company to increase it's wages to be attractive to workers. But if workers are on separate continents I do not see how that can work, the worker on $10 a day is not exposed to the other worker and therefore he feels no pressure to seek a higher wage simply because another worker far away gets paid more. The reverse argument is that the $10 an hour worker will either be sacked or will be forced over time to reduce his wage to remain competitive. Sadly I think this is closer to the truth.

So does that mean that protectionism is the answer? Yes and no is my response and the reason I say that is because both Free Trade and Protectionism have advantages and disadvantages. Free Trade works when the living standards of workers are roughly comparable, I would say when two countries have per capita GDP income within $US5000 of each other a year, and no tariffs or subsidies then there is little realistic reason to oppose free trade in general. Of course there may be exceptions for certain industries or sectors but they would be just that, exceptions.

But countries with differences in per capita GNP of more than $US5000 should have tariffs to protect both companies and workers from unfair competition. Nations have many national interests and that can be further divided into different kinds of interests and one of them is economic. For a country without an economic interest is either dead or dying, a thriving economy is one that has been given as many advantageous as possible while at the same time having as many disadvantageous as possible reduced or done away with. To protect the economic interest of the entire country either tariffs or subsidies, I prefer tariffs over subsidies, need to be in place.

To further explain my example:

Country A has a per capita GDP of $US20,000

Country B has a per capita GDP of $15,000


Country C has a per capita GDP of $25,000

Country A would have free trade with both Country B and C.

Country B would only have free trade with Country A

Country C would only have free trade with Country A

Over time the economic fortunes of countries change so it is likely that over time free trade would be granted or withdrawn as those economic conditions changed. Of course the change would need to be managed as it would be both cruel and not in our national interest to be too hasty, but the change would need to be made and I think it would be best if that change was part of an open formula that everyone, friend and foe knew and could with reasonable knowledge understand.

It could be argued that this would hurt the very poorest countries and the very poorest people. First of all the aim of every Government should be first and foremost the interests of it's own nation and people and not the interest of other nations or peoples. Secondly one of the reasons these countries are poor is because of their lack of trade, so in most cases it will affect very few. Of course it may be prudent to make some exceptions, or it may not be prudent to make exceptions. But as always exceptions should be exceptions.

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