05/12/2011 09:59 am ET | Updated Jul 12, 2011

Why Is Global Competition Good for Detroit Yet Bad for Nantucket?

A recent Time Magazine cover story addressed whether the United States was in serious decline or still had better days ahead. Fareed Zakaria saw decline; David Von Drehle was the optimist. Both authors noted several trade, economic, and education trends to make their points, but both overlooked the way in which American values will determine our future.

Our underlying values actually drive our economy's performance. These values influence the way in which our political system operates, the integrity of our legal system, the transparency of our capital markets, the trust required for an efficient market economy of producers and consumers, and the effectiveness of our education system -- all of which relate to our overall global competitiveness.

What are these values now and why do they matter? When we think of American values, we think of freedom and privacy, openness and transparency, honesty, fair play, generosity, compassion, competition, tolerance, and an individual, entrepreneurial spirit. Our future does not rely so much on what we produce, how efficient we are, or whether we lead the world in patents. Instead, our future depends on how we conduct those activities, the values we bring to the competitive arena as well as to our daily lives. These values exist among individuals, organizations, and communities. Some of these values are also associated with the effective functioning of free-market capitalism.

Free-market supporters often cite Adam Smith's famous "invisible hand" passage from The Wealth of Nations. They cite that passage to support the operation of unfettered, free and competitive markets which maximize economic gain. But free markets entail both winners and losers. Harvard economist Joseph Schumpeter called the process, most memorably, "creative destruction." Those workers hurt by the "creative destruction" process through no fault of their own are often helped by governmental assistance, community organizations, non-governmental groups, and charities like United Way.

Values such as generosity, compassion, and tolerance -- the ones that temper or compensate for the harm of creative destruction -- are also discussed in Adam Smith's other famous book, The Theory of Moral Sentiments. Reconciling these "two sides of Adam Smith" -- the invisible hand and the helping hand -- is a major challenge for American society, especially given the impact of rampant global competition.

The structure of the American economy -- in particular the changing nature of our job market -- has been and will continue to be impacted by globalization through competitive market forces affecting costs, natural resources, supply-chain integration, human capital, and technology. Economists Michael Spence and Sandile Hlatshwayo of the Council on Foreign Relations in a recent Working Paper, "The Evolving Structure of the American Economy and the Employment Challenge," explain how economies have typically evolved from exporting labor-intensive products, then more capital-intensive products, and then to human capital-intensive activities. China, today, is simply following patterns already experienced earlier by Japan, South Korea, Taiwan, and the United States. African nations will no doubt follow at some point.

Trade patterns change through this process, and free trade clearly expands individual and aggregate national net worth. But how a society treats its winners and losers, how it allocates the benefits of free trade and compensates those harmed, demonstrates its fundamental values.

The benefits of free markets and technological change have long been quantifiable and welcomed, but the losses are too often ignored. As a country, we pocket the savings but too frequently sidestep the costs. For decades, we have talked about providing real trade adjustment assistance to displaced workers who lose their jobs due to free markets and technology, but our meager efforts to provide direct assistance and meaningful retraining have not worked.

You can see the costs of this process at work by looking at Detroit, Michigan. What was once the automobile capital of the world and a vibrant community is now a hollow shell with high crime, broken schools, a declining population, and a shrunken tax base. Undoubtedly, the auto industry's former management and union leaders share much of the blame, but the loss of competitive advantage has shifted car production from Detroit to Japan, Korea, Germany, and perhaps at some point even to China.

To survive, Detroit's Big Three automakers have taken drastic steps: accepted a Federal government bailout (GM), been bought by foreign competition (Chrysler), and scaled back jobs, costs, product lines, and health care costs (Ford plus the other two). While I hope the future will be different, it is uncertain that the American auto industry will ever return to its former strength in aggregate sales, market share, or number of employees. Have we done enough as a nation to provide income support, education, and retraining to the people in Detroit (and elsewhere) hurt by these trends?

Contrast Detroit with another American town, Nantucket, Massachusetts. In the 1840s, Nantucket was the world's whaling capital. Today, it's an adult theme park, often called a playground for corporate America's leaders. In fact, many CEOs have homes on the island, and it's hard to find a house there costing less than $1 million. (Full disclosure: I own a modest Nantucket home purchased for well under $200,000 nearly 20 years ago.)

What is fascinating about Nantucket is that it is today one of the most highly regulated communities in America. The island's strict zoning laws ban chain stores like the Gap, Banana Republic, and Borders. There will never be a Wal-Mart on the island, and Petticoat Row will never have a fast food outlet among the pricey specialty boutiques. Nantucket represents what all free traders supposedly oppose vehemently: pure protectionism.

And the people who go to Nantucket like it that way: only one car dealership, two book stores, and one hardware store. Summers are reminiscent of life in the 1950s: houses are rarely locked, and there's a reading of the Declaration of Independence every July 4, along with blueberry pie-eating contests and face-painting booths on Main Street. These small-town attributes are what give the island its charm, appeal, and community values. Life in Nantucket is not about achieving the lowest possible price. In fact, there are occasions when the opposite seems true.

So why do so many CEOs want to escape to a place so different from where they work? Why is global competition somehow good for Detroit but bad for Nantucket? Why not open up the island to McDonald's and Wal-Mart? There is a certain irony, perhaps even hypocrisy, in these disparities.

But we need to take these questions seriously and find a meaningful answer as to why these two communities should be treated differently. One has been fully exposed to market forces; the other has been fiercely shielded from them. By contrast, in downtown Tallinn, Estonia, one of the most beautifully restored medieval cities in Northern Europe and a city listed in 1997 as a UNESCO World Heritage site, there's a McDonald's just inside the old city walls. Is Tallinn somehow different from Nantucket?

Global competition cannot -- and should not -- be stopped, but it needs to be examined closely, tempered, tamed, and regulated. Personally, I like Nantucket the way it is today and would not want to change it. But I also recognize that we cannot leave Detroit the way it is today. Somewhere between the two extremes of Detroit and Nantucket lies an answer, and the country needs to get about finding it. We need to approach that answer by focusing on the values that make us Americans -- people who have found ways to be competitive and compassionate at the same time.

Charles Kolb is the President of the Committee for Economic Development in Washington, D.C. He served in the first Bush White House from 1990-1992 as Deputy Assistant to the President for Domestic Policy and in the Department of Education as Deputy Undersecretary for Planning, Budget and Evaluation (1988-1990). The views in this article are solely the author's.