Competition and Economic Growth: The Lessons of East Asia

Abstract

In a celebrated article in the American Economic Review, Egon Sohmen (1959) made the case — in the then unfashionable spirit of what he called “19th century economic liberalism” — that the remarkable West German growth record during the 1950s ¹ was mainly the result of competition within a framework of tight monetary discipline. This earned him hostile comments that pointed to more proximate but quantifiable “causes” of growth, such as a growing labor force or high capital formation. In the subsequent exchange with his critics, he managed to dismiss their criticism convincingly with the riposte asking what explained the growth of labor or capital inputs in the first place — if not competitiveness and monetary stability!

Article Note

[This is] not the first instance in which I have detected a misunderstanding of the true significance of efficient resource allocation in a competitive economy. In the eyes of many people, competition seems to be associated merely with the choice of one particular point among those available on a society’s production possibility locus. What counts at least as much is that allocative distortions can make an economy operate far below this locus as a result of imperfections in the markets for factors and intermediate goods, even though all resources are employed to the fullest extent.

— E. Sohmen, “Competition and Growth — The Lesson of West Germany: Reply,” American Economic Review, 1960, p. 1027

Article Note

The author gratefully acknowledges helpful suggestions from his colleagues Sharon Jackson and Stefan Markowski, as well as from Herbert Giersch, other conference participants, and Jürg Niehans. — All remaining shortcomings are of course my own.