Why Free Trade Hurts Economic Growth

July 8, 2014

by Marianne Brunet

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Free trade, deregulation and limiting the federal government’s powers form what Columbia professors Joseph Stiglitz and Bruce Greenwald call the Washington Consensus – the core precepts that have dominated policymaking for the last 50 years. But those ideas are misguided, they contend. Tariffs and trade restrictions, for example, are fine, especially if they are part of a broad framework that stimulates learning throughout a society.

In their new book, Creating a Learning Society: A New Approach to Growth, Stiglitz and Greenwald argue that the key to success for economies around the world is to encourage progress.

According to the authors, the average human standard of living hardly changed from Roman times until 1800. But in the last 200 years, they claim, there has been a transformation to “learning societies” in Western economies.  Higher levels of productivity drove improvements in human wellbeing in the last 200 years.

Their argument builds on the findings of Nobel economist Robert Solow. About 60 years ago, Solow found that rising incomes are largely attributable to technological progress (learning how to do things better). Solow’s research showed that such learning improved living standards more than resource accumulation or more-efficient allocation of those resources.

Stiglitz and Greenwald provide economic insights and policy recommendations based on the notion that modern economies have succeeded due to technological progress. The central thesis of this book is that every aspect of the market economy (and more broadly of our society) needs to be reexamined from the perspective of learning and innovation.

In this book, learning does not mean education for children. Instead, according to the authors, creating a learning society “means ensuring that all firms learn quickly to improve their productivity, as best practices themselves improve, so that the gap between average and best practices is reduced; distorting resource allocations toward sectors with more learning and more learning spillovers; and investing more in R & D and in learning to learn.”

Developing countries should do this too, according to the authors, but with a particular focus on closing the gap between their practices and the best practices in advanced industrial countries.

Creating a Learning Society presents historical examples that illustrate the benefits and shortcomings of free trade and reexamines trade policies through a new lens.  The authors combine technical economic models with provocative rhetoric to emphasize the significance of learning. I will talk about the central focus of this book: industrial policies and challenges that the authors identify as most important to creating learning societies.

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