Geoeconomics

There is an article at The National Interest by Michael Lind that I found thought-provoking. Its subject is “geoeconomics”:

FOR DECADES, the study of international security has been divorced from the study of international trade and investment, along with domestic economic development. In political science departments on university campuses, self-described realists debate defense and diplomacy with idealists of various kinds. In the economics department next door, there is no debate; the academic economists almost unanimously agree that free trade and investment benefit all sides. They instead postulate an ideal world where national borders would be insignificant and there would be free flows of goods, services, money and labor.

Even before Donald Trump became the first president in living memory to explicitly promote U.S. economic nationalism, the wall that divided the national-security realists and the free-market economists was crumbling—mainly because of the rise of China, which has benefited from a version of statist economics while challenging U.S. military hegemony in Asia. Slowly but inevitably, debates about national security and the global economy are merging into a single dispute about relative national power. This marks a revival of what Edward Luttwak has called “geo-economics.”

The article includes observations with which I agree and some about which I am skeptical. For example, IMO this is obvious:

Any country which hopes to be an independent great power must be able to obtain and maintain its own state-of-the-art manufacturing sector, if only for fear of falling behind in the economic arms race inspired by the security dilemma.

except, presumably, to those who think the United States can remain an independent great power on the basis of finance, health care, and other service industries while diminishing its manufacturing sector.

I’m skeptical about this:

In the jejune version of Econ 101, which is all that most policymakers and pundits know of economics, all markets are naturally competitive and divided among many small producers. There are constant or diminishing returns to scale—that is to say, a bigger producer is not necessarily more efficient than a small one.

This assumption was valid in the pre-industrial era, when a single blacksmithing firm employing a thousand blacksmiths working side by side under one roof could not turn out horseshoes any better or more rapidly than a thousand self-employed blacksmiths. But modern mechanized manufacturing industries are characterized by increasing returns to scale. An automobile factory with assembly lines can churn out automobiles more efficiently and cheaply than a team of artisans assembling one automobile at a time by from scratch.

Based on my knowledge and experience, while businesses that have increasing returns of scale up to a point are commonplace, businesses that have increasing returns at any scale are extremely rare. If that were not the case natural monopolies would be very common. Study after study has found that they are vanishingly rare. In almost every case monopolies are a consequence of policy rather than of natural forces.

That is true for multiple reasons. For one thing, while the cost per unit of inputs may go down up to a certain point, they plateau. It’s generally cheaper although not a lot cheaper to buy 10 smartphones than it is to buy 1. Is it really a lot cheaper per unit to buy 100,000 smartphones than it is to buy 10,000?

Additionally, bureaucracies don’t increase in cost linearly with size but at best at n log n or, more likely at n². Consequently, I suspect that the likelihood of a business or an industry to realize increasing returns to scale depends on the relationship between the cost of inputs and the price of outputs at all scales.

I found this claim intriguingly vague:

In increasing-returns industries, including the manufacturing industries that are the basis of modern military power, Econ 101 does not apply. Markets are imperfect. Efficiency is produced by scale, not competition. Because bigger firms and establishments are more efficient, unchecked competition tends to drive out small firms, leading to oligopoly and perhaps to monopoly.

What are “increasing-returns industries”? Is there such a thing? This smacks of “no true Scotsman” to me. Going from the general to the concrete, are Chinese manufacturers able to produce less expensively than U. S. manufacturers because of economies of scale or because of lower labor costs per unit output?

I think there are unquestionably rent-seeking sectors in which managers are able to lobby to prevent competition. That is amazingly common. I wish Mr. Lind would name specific companies so I could test his hypothesis.

I also think that developments like improved communications and additive manufacturing are disrupting the operations of companies in practically every sector at a ferocious rate. While it is true that by 1920 an automobile assembly line could produce automobiles faster and less expensively than an individual artisan could in 1900, I’m not convinced that the same conclusions can be drawn about producing things in factories that can now be produced in the home using a 3D printer, especially when transportation costs are taken into account.