Microchips, Not Potato Chips

Those who lost jobs in autos and machine tools as American firms lost market share at home and abroad typically took a 30 to 50 percent wage reduction, if they were young. If they were over 50 years of age, they were usually permanently exiled to the periphery of the low-wage, part-time labor market. Their losses might not be a large faction of GDP, but those losses are important to the millions of affected workers and their families. The correct redress for their problems, however, is not to keep Japanese autos or machine tools out of the American market but to organize ventures such as the government-industry auto battery consortium that seeks to expand the American auto industry's market share by taking the lead in producing tomorrow's electric cars.

Since aircraft manufacturing generates technologies that later spread to the rest of the economy and above-average wages, the United States cannot simply ignore the government-financed European Airbus Industrie challenge in an industry America currently dominates.

The fastest-growing and technologically most exciting industry over the next decade is expected to be the industry that lies at the intersection of telecommunications, computers, television and the media arts. Given this prospect the United States cannot afford to let itself be locked out of the Japanese wireless telecommunications market or permit the Europeans to limit American movies and television programs to 40 percent of their markets. To do so is to make the entire American economy less dynamic and less technologically sophisticated and to generate lower American incomes than would otherwise be the case.

In the traditional theory of comparative advantage, Boskin and Krugman are correct. Natural resource endowments and factor proportions (capital-labor ratios) determine what countries should produce. Governments can and should do little when it comes to international competitiveness. With a world capital market, however, all now essentially borrow in London, New York or Tokyo regardless of where they live. There is no such thing as a capital-rich or capital-poor country. Modern technology has also pushed natural resources out of the competitive equation. Japan, with no coal or iron ore deposits, can have the best steel industry in the world.

This is now a much more dynamic world of brainpower industries and synthesized comparative advantage. Industries such as microelectronics, biotechnology, the new materials industries, telecommunications, civilian aircraft production, machine tools, and computer hardware and software have no natural geographic home. They will be located wherever someone organizes the brainpower to capture them. With man-made comparative advantage, one seeks not to find disequilibrium quasi-rents (the gold mine of yore) but to create the new products and processes that generate above-average wages and rates of return.

In their funding of education, skills and research and development, governments have an important role to play in organizing the brainpower necessary to create economic leadership. Just as military intelligence estimates about U.S.S.R. intentions partly guided yesterday's strategic military research and development, so the actions of U.S. economic competitors will partly guide tomorrow's civilian research and development. If the Japanese have an insurmountable lead in flat-screen video technology, it does not make sense to invest government or private resources or talent in a hopeless attempt to catch up.

The smart private firm benchmarks itself vis-a-vis its best domestic and international competition. Where it is not the world's best, it seeks to adopt the better practices found elsewhere. A smart country will do the same. Is America's investment in plant and equipment, research and development, skills and infrastructure world class? Do American managers, private and public, have something to learn from practices in the rest of the world? The purpose of such benchmarking is not to declare economic warfare on foreign competitors but to emulate them and elevate U.S. standards of performance.

Obsessions are not always wrong or dangerous. A passion for building a world-class economy that is second to none in generating a high living standard for every citizen is exactly what the United States and every other country should seek to achieve. Achieving that goal in any one country in no way stops any other country from doing likewise.