The True Meaning of Francois Hollande: As Politics move in the right direction the Economy is about to fall of a cliff

Here is a great graph via David Beckworth showing Nominal GDP for the whole OECD.

Source: OECD Statistics

Looks like we are all still way below trend. The demand shock starting in 2007/8 has not been corrected and although total spending has recovered to above its precrisis levels that masks wide variation in rates of recovery. Canada’s doing great, Spain, not so much.

During the worst of the crisis the fundamentals of developing world helped to drag global growth back up. In fact the late 00s were good for large parts of the world. China, Brazil, many African countries all performed strongly through to 2012, despite a set back in 2008. In fact global GDP per capita has never been higher.

The bad news is that serious problems appear to be developing all around the world. The Eurozone is still in a permacrisis, industrial production is stagnant in India, China has been fighting deflationary pressures for some time and appears to be beginning to lose, Brazilian industrial production has turned negative. The US is facing huge budget cuts in the autumn which will be broadly contractionary through its economy.

The insane European Central Bank‘s policy rate is at 1%. That’s right, despite the Eurozone imploding the insane ECB is has steadfastly refused to ease policy despite even Germany heading towards recession. Other central banks around the world have all done good jobs avoiding anything as horrific as America’s Great Depression, but they all remain wary of using unconventional tools to expand demand.

In 1999, what Ben Bernanke argued was needed in times of great crisis is the willingness to be aggressive and experiment, to show Rooseveltian Resolve to get the economy moving again:

Needed: Rooseveltian Resolve

Franklin D. Roosevelt was elected President of the United States in 1932 with the mandate to get the country out of the Depression. In the end, the most effective actions he took were the same that Japan needs to take—-namely, rehabilitation of the banking system and devaluation of the currency to promote monetary easing. But Roosevelt’s specific policy actions were, I think, less important than his willingness to be aggressive and to experiment—-in short, to do whatever was necessary to get the country moving again. Many of his policies did not work as intended, but in the end FDR deserves great credit for having the courage to abandon failed paradigms and to do what needed to be done.

This is the real meaning of Francois Hollande. He needs to say “non!” to more or less everything Merkel and the insane ECB put forward.  Hard money and austerity have been a disaster in a benign international environment, if demand for European and American exports dries up and deflationary pressures go global we will see a recession inside a depression scarily reminiscent of the 1930s. We need a Roosevelt.

Filed under: Economics, Foreign Affairs, Politics, Ben Benanke, Brazil, China, David Beckworth, FDR, India, the insane ECB

Better than Fiction

I do sometimes wonder why people write “historical” novels around things that never happened when the real world is so pregnant with possibilities:

So just to re-iterate: a blind man scaled the wall of a compound where he was being detained by something like 100 people and then hobbled 20 kilometres on a broken foot to where a car was waiting for him before going on to cause a medium level diplomatic incident. That’s the dog’s bollocks, that is, to give niubi it’s colloquial British English translation.

Filed under: Blogging, Chen, China

You can be a well cultured despot you know

Noah and Scott‘s argument about China’s culture is going nowhere. They’ve got bogged down talking about whether culture affects economic potential or not. Long story short, of course it does! Consider these two examples:

Chinese expats around south-east Asia seem more entrepreneurial and they sure as hell are richer than the locals in places like the Malay Peninsula and Thailand. Less fortunately, Black Africans are less trusting than other people and this is just one reason economic growth is more difficult there. Without being able to trust that someone will take your money, disappear into another room and come back with what you want there can be no Argos. And where would you be without Argos? A lot poorer. [1]

The reasons for these cultural traits are complex. I don’t know the Chinese, but Africa’s level of trust appears to still be badly effected by the long defunct institution of slavery; kidnapping was very common for 200 years or so in a way which the rest of the world hasn’t had to deal with. You can be culturally more entrepreneurial. Likewise, you can culturally more or less prone to trust strangers. Both of these have real effects for lots of things, including economics. There, cleared that one up for you.

But whether culture affects wealth given a certain set of economic institutions is irrelevant. What is important is whether culture can influence China’s institutions. China is still deep in the throws of catch up growth, entrepreneurship is of course very important, but not nearly as important as having institutions which allow for the full execution of whatever entrepreneurship occurs. As I said earlier:

No amount of “pragmatism” will make a self-interested elite step aside, the pragmatic thing to do is to expropriate assets and imprison your enemies: to shut down economic activity you’re not involved and to erect barricade between the population and your clients…

Until now, Chinese elites have not been threatened by creative destruction they have been able to harness it to embellish their own power, wealth and status. The true test of Chinese growth will come when China’s central planning runs out of steam and urban elites and rural poor separate from the CCP begin to erode its power, then we will see whether elites will be forced to do what is right.

The only way China’s culture will significantly influence its long run - at least until it reaches say half of rich world income per capita) – growth prospects is by influencing its institutions. An entrepreneurial culture, or pragmatic culture, is completely unrelated to whether China adopts a growth friendly political framework over the next five to ten years. What matters is whether the politically powerful can be convinced/forced to become economic losers. Look at those guys at the top. Do you think they’re culturally inclined to agree to that?

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[1] Not sure if that translates to my non-British readers. Argos is a shop with a tiny shop front full of catalogues and a big warehouse full of stuff. You order at the front and stuff appears a few minutes later from the back. The flippancy of my reference is of course a little ruined by this extensive footnote.

Filed under: Economics, Foreign Affairs, History, Politics, China, Elites, Entrepreneurship, Noah Smith, Scott Sumner, Why Nations Fail

Why China Might Fail

I found Scott‘s post very confusing, for many of the same reasons discussed here by Noah. [1] Scott says:

China boosters like Robert Fogel claim that China will soon grow to be twice as rich as France the EU.  Others pundits claim it will get stuck in the middle income trap.  Both the boosters and pessimists are wrong.  Like Japan, like Britain, like France, indeed like almost all developed countries, it will grow to be about 75% as rich as the US, and then level off.  It won’t get there unless it does lots more reforms.  But the Chinese are extremely pragmatic, so they will do lots more reforms.

China is currently a very poor country, so the Chinese model has nothing to teach the West.  If we want to learn from the Chinese culture, learn from Singapore(or Hong Kong), which is how idealistic Chinese technocrats would prefer to manage an economy; indeed it’s how China itself would be managed if selfish rent-seeking special interest groups didn’t get in the way.  But they do get in the way—hence China won’t ever be as rich as Singapore; it will join the ranks of Japan, Korea, Taiwan, and the other moderately successful East Asian countries.

First of all, what I agree with in the post. China is poor and has for the last 40 years not been run by bloodthirsty foreigners or a psychotic madman. Growth from the abject poverty that was 1970s China is inevitable under those conditions. What is clear from Scott’s post is that China’s growth has very little to teach the wealthy West other than “don’t let genocidal maniacs into government” something we learned the hard way a little while ago.

Scott seems to think that China has got its act together and that it isn’t in anybody’s interest to derail its development. Things will be better for everyone when China is like Singapore and therefore we shouldn’t worry that China’s growth will decline disastrously or go into reverse. Technocrats are good! Just like the technocrats in the Fed…oh never mind.

Although I kinda agree that China looks like it has a good culture, strong infrastructure and abundant human resources, so did Argentina 100 years ago, and look what happened to them. What matters are institutions, Argentina’s stank and so do China’s. I am curious that Scott seems so keen to give a clean bill of health to China’s crony-capitalist economy and dictatorial, judicially-repressed polity.

I think he is being naive. Elites rarely do the right thing because they are oh so wise, they do the right thing if they are forced to.

Think about China this way: Whether its Township and Village Enterprises or Foreign Direct Investment into Free Economic Zones, a significant proportion of the growth which China has enjoyed has been controlled by the Chinese Communist Party. Not control as centrally planning, but control as the ability to cut of freedom of action of each. This ability to cut off these developments has kept party chiefs on the same side as China’s bourgeoisie.

It becomes difficult to keep control of growth when you hit middle-income – the low hanging fruit has been picked. One reason Michael Pettis is so worried about Chinese is that consumption repression has always been at the heart of the Chinese growth model. This has been fine for capitalists operating export orientated firms or contractors building infrastructure or real estate, but again places great power in the hands of China’s elites. To reverse this would require a massive transfer of wealth and power from political control to private control. I think Scott underestimates how much the Chinese Communist Party fears the consequences of this.

You can see this in the security apparatus of the Chinese State and its repression of free speech and its tight grip on the internet. they know that as their population gets wealthier they are going to demand more freedoms and more political representation; likewise they are going to demand more economic freedom and more social mobility, something which by definition must damage the interests of the current ruling elite. Powerful magnates will arise to  challenge the power, wealth and status of the current Chinese elite.

No amount of “pragmatism” will make a self-interested elite step aside, the pragmatic thing to do is to expropriate assets and imprison your enemies: to shut down economic activity you’re not involved and to erect barricade between the population and your clients.

Scott says that he cannot see a stable China with a middle-income coast and a poor interior. You can be rich and surrounded by poverty, look at North America! Just look at it! Its been rich and surrounded by poverty for centuries. China still operates a hukuo system of local registration which until very recently prevented anyone from moving anywhere without official say so. You think the Chinese can’t stymie growth by reintroducing the hukuo system of internal border control? Urban Chinese still seem pretty dismissive of “farmers” judging even by the international lot I meet at LSE.

We’re back to my new favourite book to think with: Why Nations Fail. Until now, Chinese elites have not been threatened by creative destruction they have been able to harness it to embellish their own power, wealth and status. The true test of Chinese growth will come when China’s central planning runs out of steam and urban elites and rural poor separate from the CCP begin to erode its power, then we will see whether elites will be forced to do what is right. The point isn’t to describe how China will fail, I’m not sure it will, but only to highlight that there are powerful pragmatic reasons for those in power to want China to fail.

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[1] I will not that Noah has still not commented on my rebuttal of his bullish post on the potential for Chinese industrial espionage. Noah should note that I argue Scott is wrong for the same reasons I argue he is wrong. They both slightly misidentify how the drivers of long run growth operate.

Filed under: Economics, History, China, Elites, Hong Kong, Noah Smith, Scott Sumner, Singapore, Why Nations Fail

Its not “innovate or steal” its “innovate or repress”

Who hasn’t, I ask, been tempted to compare modern political economy to computer games? Its fun, but wrong, like most fun things, come to think of it…

Anyway, before I’m sidetracked, Noah Smith asks “Why should China innovate when it can just steal?” Good question. Its one that highlights how vital industrial espionage and intellectual property theft have been for every newly industrialised country since Germans started engraving “Made in Sheffield” on their Hamburg steel. “Stealing” technology to help drag people out of intense suffering is pretty much a Good Thing in my opinion.

What Noah doesn’t note is that successful countries always and everywhere begin innovating themselves – there is no choice between innovation and spying. None.

There are important reasons China cannot continue to steal technology forever. The first is technical. Technologies do not exist as comfortable chunks of something which are easy to steal, very often the successful operation of a technology requires tacit knowledge by those using it. You can get Ford to build you a factory, as the Soviet Union did, but without the knowledge of Ford’s workers your factory will be significantly less productive. Newer technologies require more tacit knowledge – because nobody has been able to codify and simplify it yet – and hence you cannot steal your way to prosperity, only to a certain ratio.

More fundamentally, Noah has got the trade-off completely wrong, exemplified in his penultimate [1] paragraph.

Anyone who is rooting for China’s economy should not be so worried by the innovation limitations discussed in articles like this one, unless they also believe that China’s demonstrated capacity for forced tech transfer and espionage are also diminishing.

Woah there!

A lack of innovation is not a policy choice with good consequences if you consider innovation to be natural. Let me clarify. Although many polities have repressed innovation, and despite technical progress being slow through most of human history this has been the result of political structures which have worked to either punish potential innovators or to expropriate successful ones. Even given this history of repression people have still sought to improve technology, especially where they have been allowed to keep some of the spoils from doing so. Eric Jones is very good on this – look to the efflorescence  of Song China or the slow acceleration of growth after the Glorious Revolution.

To shift resources from innovation to spying requires a repression of innovation akin to the suppression of the printing press in the Ottoman empire, or Elizabeth I’s successful attempt to stamp out Lee’s stocking weaving innovation in the British textile industry (!). You cannot make that trade-off as costlessly as Noah imagines.

In fact, I would argue that there is no trade-off between spying and innovation at all: spying is a military expense and innovation is a political expense. You pay spies out of taxes or corporate profits, you pay for innovations by suffering the economic and political losers of creative destruction. They operate at completely different margins.

China’s primary challenge is not to choose between innovation and spying, because that is not a choice. The Chinese needs to decide whether they want to deal with the political and economic instability but dynamism of creative destruction or not – if they do they can have a little more espionage and a little more innovation, if not then they’ll have little of either. If this decision is left to their elites only, then China will likely fail, if left to the people there is a decent chance China will continue to prosper.

This is in part the basis for Michael Pettis and Free Exchange‘s bet on whether China will achieve even 3% growth in the coming decade. Can China shift from a centralisedish investment boom to diffuse growth through innovation? States either embrace creative destruction or seek to repress it. Both innovation and spying are sources of creative destruction but only successful states with inclusive political and economic institutions can successfully cope creative destruction.

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[1] I hope you’ll be as interested as I was to learn that penultimate refers to the song prior to the ultimate (i.e. last) song in an opera. Neat huh?

UPDATE: I realise now, having woken up a little that my first paragraph stands alone a little. Noah refered to “a game called Master of Orion II” which inspired, or was used as a hook, for his post. I meant to refer to it but didn’t. That sort of sloppy writing is probably one reason I wasn’t shortlisted for the Orwell Prize by central party lickspittle my pal Hopi Sen.

UPDATE II: Repetition of “a little” above would annoy me in someone else’s writing.

Filed under: Economics, Foreign Affairs, China, Exclusive, Ford, Glorious Revolution, Inclusive, Noah Smith, USSR

Bulgaria under the yoke of Communism again

Spiegel: Great Wall this week became the first Chinese automobile manufacturer to open an automobile assembly plant inside the European Union…

…Bulgaria, the EU’s poorest country, is attractive as a labor market because it is an oasis of cheap wages and low taxes. Workers are considered well educated and the country is ideal as the site for a company like Great Wall to launch. Given that wages for factory workers have risen considerably in China in recent years, assembly sites abroad have become increasingly attractive for some manufacturers.

(H/T). Some thoughts:

1. Don’t overweight cheap labour and underweight transport costs and clustering in thinking about global trade.
2. There will be more of this. In the end the country with the most people wins – that means China for a while and India afterwards.
3. There should be less of this, trade barriers mean international investments need to be made that would not were the EU a true open borders free trade area.
4. East Asian labour is remarkably low-skilled and poorly educated despite what positive prejudices  you might hold.
5. Technology is highly mobile and drives convergences in incomes all round the world in interesting ways.
6. The future prosperity do the world depends on the rich world restraining its xenophobic hostility to foreign capital, as much as foreign workers. You boss may one day speak another language and earn much of his money in a foreign currency, that should be fine so long as she still pays your wages.
7. We live in interesting times.

Filed under: Economics, Society, China, Free Trade, India, Investment, Outsourcing, Trade, Tyler Cowen

Cameron’s dreadful case for national pride

This is just wonderfully revealing from Cameron today:

Whatever the obstacles to growth today, we still boast some of the best universities in the world, the most favourable timezone in the world, and the world’s first language.

Hundreds of years ago we conquered and colonised a load of places and they and their trading partners now speak our language. Also, by historical fluke, we just so happen to sit in between populus Asia and wealthy North America.

So this is what national pride has come to. No celebration of the English Pub, the centre of the community, no longing for days of imperial grandeur, no ideological fervour for christ, cricket and capitalism. Nope, something more like this…

A cosy 25 million bedroom nation with excellent local amenities, a large secluded garden and great transport links. Comes complete with lovely views of France and neighbours who will begrudgingly speak your language.

Filed under: Economics, Foreign Affairs, History, Politics, Cameron, Capitalism, China, Christ, Colonialism, Cricket, France, FT, India, nationalism, The Pub, USA

Migration as Technology

I was a little confused by this Robin Hanson post. He cites with approval the fact that since 1970 40% of all the extra consumption in the world has occurred in the United States. Below are the top 30 gainers in terms of tens of billions of dollars a year.

United States 583, Japan 183, China 103, United Kingdom 73, Germany 63, France 53, India 47, Brazil 47, Italy 39, Canada 37, Mexico 37, Spain 28, Indonesia 14, Netherlands 11, Greece 9, South Africa 8, Thailand 8, Switzerland 8, Belgium 8, Austria 7, Colombia 7, Sweden 7, Philippines 7, Norway 7, Malaysia 7, Portugal 6, Chile 6, Finland 5, Ireland 5, Denmark 4. (source)

Robin argues that this is argument against Tyler’s notion of a slow down in technological innovation. But the population of the US is 48% bigger in 2010 (310,000,000) than in 1970 (209,000,000). At first I couldn’t see why this would counts as evidence against some notion of a slow down in intensive growth. The US got more from more which is great for all those people involved, but it is not evidence we can get more from less, is it?

Well, in a way it is, although you have to denationalise your perspective. The US does have an overwhelming lead in one “technology”; that of receiving and assimilating migrants. The factors behind this are geographical, historical and cultural, but it still as a really important technology in terms of increasing “our” productive and consumptive capacity.

The productivity of millions of people has been hugely increased simply by them moving across a border. Allowing more migration is an innovation that can make many people better off by improving their productivity. But it is a technology which cannot be excercised by a single firm, it is better thought of as a society-wide innovation akin to germ theory or corporation law.

Filed under: Blogging, Economics, History, Migration, Austria, Belgium, Brazil, Canada, Chile, China, Colombia, Denmark, Finland, France, Germany, Great Stagnation, Greece, India, Indonesia, Ireland, Italy, Japan, Malaysia, Mexico, Migration, Netherlands, Norway, Philippines, Population, Portugal, Robin Hanson, South Africa, Spain, Sweden, Switzerland, Thailand, Tyler Cowen, United Kingdom, United States

Then versus Now: Or, why all the inequality?

Via, via, via. Click to embiggen, commentary below.

A few things are driving this.

1. The entrance of South East Asia, then China, then India into the global division of labour and the global market for consumer goods and services. This pushed up returns for the wealthy who could hirer cheaper and sell more widely and pushed down returns to labour as workers had to compete with their ever poorer neighbours (although many goods were cheaper and inflation lower).
2. A decline in innovation, a la Tyler Cowen. We became much better at doing things from the 1920s-1970s. Most of the modern world was created then and we haven’t created anything like a big a breakthrough as kidney dialysis, chemotherapy, the airplane, TV, refrigerators, air-conditioning, etc., in the last 30 years. The internet is nice, but not a huge boon to GDP.
3. Some combination of declining returns in the real economy and rent-seeking in the financial sector has caused a shift from real production to finance. With attendant crises and diminished growth. As it became harder to profit from real production capital fled to finance. As finance became more dominant it became more difficult to profit from real production, a vicious cycle.
4. The above graph looks at US incomes and so overstates the divergence. Policy may be set in the main at the national level but production occurs globally. Many people worse off than those living in the US have become significantly better off. The deceleration from the 1980s in the west is mirrored by an acceleration in the rest of the world. Little comfort to some, great comfort to others.
5. Policy in the west erred in two ways:
1. It sought to trade equality for more growth. Taxes were reduced on the wealthy to incentivise them to innovate more. Unfortunately the incentive effects of tax cuts on the wealthy are weak, especially compared to how much more difficult it became to innovate (see 2) or produce profitable non-financial firms (see 3).
2. Secondly, the decline of trade unionism didn’t just make workers more “flexible”. It also caused a decline in worker “voice” in the workplace. Compensating for this, and I would argue provoked by this, there was an increase in occupational licensing (from baby-sitter to lawyers) and centralised directives to protect workers. Where workers could have once demanded whatever protection was deemed necessary with union backing, they now had a significantly weaker on site negotiating position. Workplaces became more intimidating for workers, and more regulated for employers.

UPDATE: Read Noahpinion (do it, it is excellent) for an expansion and deepening of the argument I make in point 1.

Filed under: Economics, History, Politics, Bosses, Capital, China, Cosmopolitianism, Equality, Finance, Hong Kong, India, Indonesia, Inequality, Labour, Malaysia, Occupational Licensing, Philipines, Regulation, Singapore, South Korea, Supply Side Economics, Taiwan, Thailand, The Great Stagnation, Trade Unions, Vietnam, Voodoo Economics, Workers

An Open Letter to Libertarians and Socialists

A spectre is haunting the blogosphere – the spectre of Libertarianism.

Nothing would please me more than to give in to its haunting charms. Libertarianism is neat, it is consistent and it is beautiful. Its economics are marvellously simple; a tidy web of self-interested individuals reaching an equilibrium and prospering.

People can exchange what they have earned for what others have created, and through this voluntary exchange everyone ends up even more prosperous than before. Ad infinitum.

When pure, Libertarianism is consistent too; drugs are yours, as is sex and smoking indoors, so long as you don’t coerce anyone to get hold of them.

Those “without” go with what charity can provide. Those “with” keep it, because there are no grounds for removing it; you own yourself and what you produce. Because when people are free they produce fabulous wealth those without become less and less numerous, and the burden on charity becomes less and less burdensome.

However, like a rubber sheet loaded with a lead ball, Government distorts and tangles this beautiful web, drawing prosperity towards its own centres of gravity and will eventual tear a hole in it.

The only thing that’s warns me away from this beautiful web is the overwhelming body of evidence in favour of Socialism.

Now that I’ve set up the straw man, it is time to flesh him out so that I can explain what I really mean.

As mentioned at LibCon, some people really don’t get Libertarianism and I don’t want to talk about morons like Roger Helmer – Bella Gerens explains what a real Libertarian is to her. No, it is Charlotte Gore, our humble Devil, Mr Eugenides, Tim Worstall and The Economist that I need to challenge.

First things first

The economics of Libertarianism are not what got us here. The world is fabulously but it isn’t the free market that got us here, it was a hobbled, chained and unfree market.

England, Hong Kong, Singapore. I’ll admit that these are the places which got to where they were mostly by the free market, however each is unique in its own way and has little to teach us.

Germany, America, South Korea – in fact, the rest of the rich world – got to where it is today by ignoring Libertarian fantasies and by embracing some form of blatant non-market intervention. This is where there are lessons for those that really need them.

Germany didn’t lead the second industrial revolution when the state “got out the way.” It became an industrial leader when state created entrepreneurs set up businesses and state sanctioned banks created credit for strategic industries.

America is not a free trade nation and never has been, it is the home and bastion of protectionism. It built up its industries not in competition with Britain, but with intense protection from her output.

South Korea’s firms did not compete against each other under the careful eye of a night-watchman state. These firms were arranged into giant chaebols, they were infected with nepotism and were deep in the pockets of Government, yet it produced one of the great miracles of the 20th Century.

Property Rights

In an argument atypical, perhaps anathema, to some Libertarians Tim Worstall argues that…

…creators have rights over their creations because we want to encourage the next creator to create. Nobody gives a damn how much effort goes into creating something, the labour used or indeed any other resource used. All we actually care about is encouraging more people to create more things: and to do so we reward those who have created.

In essence, Tim’s argument is that intellectual property rights – and by extension, all property rights – need to be protected because they make us all better off. By working backwards from results to the system which yields them, Tim gives us the classic Libertarian argument that respect for property makes us richer.

This argument is well worn, although usually presented in a completely different. For most Libertarians property rights are sacred because what you produce is yours, and what you buy with that is as much yours as if you produced it yourself. Tim inserts the proviso that it is also the best way to get the results we all want.

However it is not nearly this simple, sometimes property rights can get in the way of wealth creation, no simple Libertarian rationale will cure what ails us.

Enclosure involved stealing land from those who owned it in common. Yet it helped kick start the greatest wealth creation in human history.

Ignoring or not granting patents on medication has helped increase the quality of life for millions of Indians, and others around the world. The research into treatments and cures continues.

Directing tax revenue towards strategic industries can be beneficial. When the tax revenue of South Koreans was directed towards the manufacture of Microwaves it was neither an area they specialised in nor one which returned a profit. However, they soon became market leaders and the welfare of all was increased.

Property rights don’t need to be treated as a sacrament, in fact it can be damaging to do so.

Beyond Economics…

… Libertarians are generally right.

• Huffing on a crack pipe? Your choice, a drug’s illegality only makes it more harmful.
• Girls Aloud murder porn? Your choice, banning it only drives it underground.
• Smoking in a pub? Your choice, surely this one doesn’t need an explanation.
• Want a divorce? I won’t force you into a “cooling down period.”
• Fancy a pint or ten? Sod it, I’m heading to the bar myself, I’ll get them in.

So long as you don’t hurt anyone else, do as you like. But for not one second does the evidence suggest this is a good guiding principle when it comes to economics.

The evidence around us in  points to a system of economics and a vision of the good society that is markedly differnt from that presented to us by Mises or Hannan.

And the Socialist shall lie down with the Lambertarian

Socialism as I understand it, is the only way to a better material existence and a more free life for all of us. A smaller state can be compatible with Socialism, and social liberalism has long gone hand in hand with the left, Socialism is not anathema to what Libertarians want. So join us.

This is our rallying cry. Bloggers have nothing to lose but the chains of an ideologically consistent viewpoint. They have evidence based policy to win!

EMPIRICALLY MINDED SOCIALISTS OF THE WORLD, UNITE!

Mr Eugenides, Devil’s Kitchen, Tim Worstall (you’re a classical liberal, I know, but sadly there’s no CLPUK), Charlotte Gore, Thomas Byrne, Dave Semple, Chris Dillow, Paul Sagar, Paul Cotterill, A Very Public Sociologist, Will Straw, Paul Krugman and Steven Levitt you are my favourite Socialists and Libertarians and this letter is directed towards you. Discuss.

Further Reading: A Memorandum to Libertarians and Socialists: Part One

Even Further Reading: A Memorandum to Libertarians and Socialists: Part Two

Filed under: Blogging, Economics, Politics, The Media, Blogging, China, Democracy, Drugs, Economics, History, Karl Polanyi, Open Letter, Science, Trade Unions

A belated reply to Giles Wilkes on China

I wrote a piece shortly following the publication of the Tory’s One World Conservatism on how it was full of crap.

The recommendations of this paper were not particularly different from the policies of our current Administration. Of course it continued within the dreadful framework of the post-Washington Consensus (and therein lies the problem).

I divided my discussion into several subtopics for easy navigation, as it ran to some 3,000 words.

Contradictions, Choosing Winners and Losers, Gimmicks: “Bhutan’s got Talent”, Turing up in pair of flip-flops offering to build a school, Vouchers, Microfinance, Rejecting Universal Education, Rejecting Universal Healthcare, Fixation on Private Sector Wealth Creation, The Sanctity of Property Rights, Fighting the Wrong Battles, Some good points made it though

One topic provoked particular criticism from Giles Wilkes of freethinkingeconomist and CentreForum fame.

Under the heading “Choosing Winners and Losers” I criticised the Conservatives for withdrawing aid from China despite it still being particularly poverty stricken. The offending paragraphs follow below.

China and the Chinese are often treated as a political football. Those wishing to vacillate on Climate Change can use China’s pollution as an excuse to do nothing.

It appears that the suffering of the Chinese people in sweatshops, mines and factories is now to be rewarded with a banner which reads “Mission Accomplished.”

Please allow me to put this move into perspective, in 1750 England’s GDP per capita (likewise measured in 1990 dollars) stood at $1,328. In 2006 China’s per capita GDP stood $128 below this.

Today, on the brink of the worst global recession in a generation, China’s GDP pet capita is still only half of what the UK had achieved by the end of the 19th Century. The Tories announce that “Every life is precious” but when those live are collectively labelled “the People’s Republic of China” their well-being becomes a necessary sacrifice.

Giles contends that he “smells a rat.” He argues that I am ignoring the clear differences in Purchasing Power Parity (PPP) that exist between modern China and Victorian Britain.

I start with Angus Madison’s data.  In “1990 International Geary-Khamis dollars“, he has China’s GDP in 1800 at about $600.  Two centuries of woe, caused by both internal and external factors, as well as the disasters of totalitarianism, mean that it is still around $600 in 1960.

There is SOME growth to 1980, bringing us to $1000, but then the new freedoms growth starts motoring from a change in ideology. By Madison’s data, this puts Chinese GDP in terms of 1990 dollars at over $4000 in 2003 – in line with IMF figures. In terms of Purchasing Power Parity, it has grown even faster, to $8500 – reflecting, no doubt, the strengthening currency – from $248 in 1980.

Purchasing Power Parity probably explains much of what Left Outside has Left Outside his analysis.  It is what counts in this sort of discussion: what matters is how much you can get for your buck, not the state of international markets in tradeable items.

I have to accept that I was playing a little fast and loose with the facts in my last post. Giles excellently underlines what was “Left Outside” of my post, however the point I was trying to briefly outline remains valid. (Hopefully only slightly wounded by my slapdash short hand argument.)

Left Wing Imperialism

However, Giles oversteps the mark when he accuses me of “Left wing Imperialism.” He is wrong to do so on a number of counts, however for brevity I will try to limit to discussion on China’s relative wealth and poverty. More general discussions on aid and global justice along Marxist, Rawlsian and Humanitarian lines will have to wait for another time.

No one is going to argue that China’s per capita GDP is not still very low. Using the IMF’s Data Mapper China’s 2009 per capita PPP GDP at current international dollars is $6,546. As Giles argues this is significantly more than our Victorian forbears, however the structure of China’s society makes this simple fact increasingly difficult to map onto concrete reality.

Firstly, I would like to turn to Dave Osler’s recent post on Soft Sinophilia, mainly because it caught my eye recently, but specifically because it addresses an important element of Chinese society.

The sycophancy of many on the left to China’s dictatorial, murderous, exploitative, repressive and capitalist rulers is peculiarly disturbing. While China’s GDP has soared since 1978 the results have clearly not led to as widespread a rise in living standards as could be expected. Speaking about a contemporary calculation on the rate of exploitation Dave says…

…perhaps the closest equivalent metric in mainstream economics is the overall wages bill for a given country, expressed as a proportion of gross domestic product. This is, crudely, the workers’ share of the social product. Even despite the onslaught of neoliberalism, it typically amounts to around 55% throughout western Europe.

But a recent study by Chang Xiuze, an economist with a National Development and Reform Commission think tank, revealed that the salary component of China’s GDP dropped from 17% in 1980 to just 11% in 2007. In other words, the bosses are taking a dramatically greater cut.

It appears that the Chinese are getting a smaller cut of a bigger pie. Some would argue that this is a good thing if the pie is big enough, I would argue that this is a sign of the failure’s of China’s economic model and this sort of imbalance will lead to massive problems soon.

Furthermore, Giles argues that the health of the Chinese is one of the most obvious ways in which modern China is a better place to live than Victorian Britain. However,  as always in China it is far more complicated than that.

It is mostly agreed that “wealthier is  healthier.” However, evidence from China is doing a great deal to prove that the form of society and social institutions matter a great deal for how much healthier a society gets for its wealth.

In this paper form the New Left Review (gated) evidence is provided that shows that China is getting healthier far more slowly than other comparable countries as they got wealthier. Again, it appears that the Chinese are getting a smaller cut of a bigger pie. I don’t think this is good enough, because evidence exists from other countries that it can be done better.

According to this report from the UN Development Programme 15.9%  of China’s population live on less than $1.25 a day and 36.3% live on less than $2, my preferred metric. This is the sort of Dickensian poverty which can be missed if you insist on looking at the number of skyscrapers going up in Shanghai.

When you insist on looking at the number of skyscrapers you can be so awestruck by the shear scale of the things that you fail to notice that up to half of the commercial property in the city sits empty.

This dislocate is what interests me. China is no nut, but the sledge hammer that is being used to crack this society is massive.

Football

While I concede that Giles makes some excellent points I find his casual dismissal of my argument that “China and the Chinese are often treated as a political football” somewhat bemusing.

First of all, there is the historical context. In 1949 Mao’s forces declared the foundation of the People’s Republic of China. In the West this was not treated as a mere violent change of government. Repeated, again and again, was the idea that “we have lost China.” We was the West and implicit in that statement is that China was ours to lose in the first place. The fall of China became a central plank of anti-Red hysteria throughout the 1950s and onwards.

China’s many economic successes are used to underline how powerful the development consensus of free-markets and free-trade is.  It is responsible for the majority of those lifted out of poverty in the last few decades. Dani Rodrik argues that China’s development path could hardly be further from the consensus of the last 30 years, and he is right. However, when some argue that it is bogus to include China’s growth and poverty reduction when discussing global poverty reduction strategies they are described as trying to stage “Hamlet without the Prince.”

And the Tories. They want to act tough on aid by cutting help to China. Despite  the dubious ground on which they stand for cutting aid to a country with such manifest problems they were applauded by the right of their party. 60 years ago, 6 years ago and 6 months ago, China is used again and again as a political football.

It is only in the minutiae of real life that the suffering of the Chinese working classes can really be assessed. Per Capita Purchasing Power Parity Gross Domestic Product can’t illustrate the 72.5% of workers who have had their wages paid late or not at all; although perhaps it does include the 6%-12% of GDP estimated to be contributed by the sex industry (page 20 of the preview). I’m no prude, but nobody can fail but to be taken aback by the prevalence of sexual exploitation in China.

The fact is that China is still poor, that there are those in desperate need in China and that the CCP will not provide the assistance necessary to help them.

Further posts will explain exactly why I think that the institutions that helped China to succeed so far as a country of cheap, healthy, educated and disciplined workers are being undermined. I will argue further that the very process of marketising their economy and opening up to the world economy that initiated its tremendous growth, is also undermining it.

My preference is for those involved in multitude of protests, strikes and industrial actions that take place in China on a daily basis to wrest power and control back from those exploiting them. But until then I don’t feel supporting a transfer of wealth, institutions and knowledge from the rich world to the poor as left wing imperialism.

Filed under: Blogging, Economics, Foreign Affairs, History, Politics, Blogging, China, Democracy, Economics, Foreign Affairs, frankly mediocre speculation, History, Justice, Sexuality, Trade Unions

China at 60: Misunderstood

Mao’s China has been annihilated. 60 years on from its founding on the 1st October 1949 there is little recognisable about it.

Although some on the left will lament the loss of this slightly more presentable face of state Socialism, this is a cause to celebrate. The Cultural Revolution and Great Leap Forward are two of the biggest tragedies to hit humanity. The gains which accrued under Mao are too small to outweigh the horror which occurred.

From ardent globalisers to hardline socialists it seems everyone can find something to celebrate in the New China.

Unfortunately the things highlighted by Andy and Tim underline the misunderstanding that surrounds the success of modern China.

But as the scholar and writer Perry Link has observed, it is more accurate to say that the people lifted the Communist party out of poverty – once it had the sense to get out of the people’s way.

This? This good sense in The Guardian?

Tongue-in-cheek, Tim highlights the Guardian’s coverage of China’s 60th and approvingly asks “So when do we start applying it in the UK?“

The only problem is that Communist Party hasn’t got out of the way. Or at least not in the way Tim implies.

From the earliest days of agricultural reform to the performance of state owned industries now, the party has very much got in the way. The Chinese have found a recipe that works for them, for the moment.

That Tim wants to score political points from it is telling of the difficulty that the libertarian/classical liberal/free trading right has discussing China.

Of course elements of the left are little better at understanding the complexities of modern China.

For some bizarrely reason, Andy Newman of Socialist Unity uses a PRC propaganda photo as evidence of the change in China.

It is certainly worth celebrating the victory which Mao won in 1949, however, to use it as a a reason to stifle legitimate criticism of the regime and its policies is ludicrous.

Both Tim and Andy fall into the same trap that most analysts of China do.

Although most people recognise that China cannot be easily placed on a continuous Left and Right, people still want to label elements of its economy as a left-wing or right-wing policy. I apologise for these caricatures of left and right but they illustrate major failings in some analyses of China.

The leftist penchant for state intervention can be totally inappropriate for China.

China’s agricultural economy was only really successful once peasant farmers once the Household Responsibility System was set up. In this, after selling a set amount of their crop at the low state determined price, peasants were allowed to sell their surplus at market rates. This fermented a boost in productivity not seen since the redistribution of land which followed the establishment of the PRC.

The right have of course been as wrong as the left when it comes to China.

In a developing economy state intervention is essential in creating, extending and maintaining a market. The traditional rightist view that state intervention equals bad does not hold.

It must be made clear that a lack of state involvement is not synonymous with the free market. The withdrawal of the state in China is often applauded, but institutions which were smashed by the retreating party cadres have not been replaced.

In a survey quoted in Hart-Landsberg and Burkitt’s China and Socialism 72.5% of respondents had at some stage had their wages withheld. David Harvey uses this as an explanation for how so much wealth has been accumulated by so few in such a sort amount of time.

In fact, most of the time this is presented as the evidence of how “extreme” capitalism has become in China. But the theft of labour is not part of capitalism. This is evidence of how poorly China has instituted its new economy. Capitalism relies on functioning markets and as Chris Dillow argues, markets can be undersupplied like all public goods.

It is this difficult framework which has made it so difficult for the big L Left Left and big R Right to discuss China. This is why I think the work of Karl Polanyi is so important to understanding China. In the next post I will outline some of Polanyi’s thought and why it is so useful when discussing China.

Filed under: Blogging, Foreign Affairs, History, Politics, Bureaucracy, China, Democracy, Economics, Foreign Affairs, History, Justice, The New Great Transformation

The New Great Transformation: Polanyi and China – an Abstract

China has witnessed a great Transformation. Perhaps never in history have so many people been through such a colossal change in such short a time. When Examining the first Great Transformation in the nineteenth century, Karl  Polanyi argued that for the first time land, labour and money were treated as commodities. This fiction – that land, labour and money were commodities – resulted in disaster for nature, man and society, and ultimately led to the destruction of nineteenth century civilization. This same dangerous fiction has taken hold in China.

The economic successes that China has witnessed have been purchased at a terrible cost. Not only has the natural and social environment been damaged by these events, but the future success of the Chinese economy has also been jeopardised. China’s success has been built on a myriad of non-market features, which are being destroy in the name of the market, without appropriate replacements being created.

Contemporary China  is a society that offers little of the protection that Polanyi stresses is essential for a society to prevent self-destruction, but it has also proved itself as an economy capable of producing astonishing performances. The subtlety of Polanyi’s work can help us to comprehend the processes that are occurring in China, and the tensions in China’s society can help us achieve a fuller appreciation of Polayi’s thought.

What will follow are are series of posts examining China’s economy, using Polanyi’s work as a framework. Firstly, they will examine Polanyi’s general theories and the theorists which his work has inspired. The posts will surround the three main areas of interest, one will concentrate on Nature, another on Labour and another on the Productive Organisation of China’s economy.

Filed under: Economics, History, Politics, Society, China, Democracy, Economics, Foreign Affairs, History, Justice, Karl Polanyi, nationalism, The New Great Transformation

But first… John Q Publican’s interesting point

It has been said that Markets make fantastic tools and terrible masters. There is an argument happening at Liberal Conspiracy on whether Markets can serve the poor and I think John Q Publican has made an important contribution.

But first, I would like to make a small point on China before I come to John Q Publican’s argument (Can I call you John?).

China

As always when matters of Capitalism, Socialism and Markets come up some one attempted to play China and India as their trump card. Sitting back in smug self satisfaction they waited for people to concede the point…

The argument is simple enough, for decades China experienced poverty, suffering and authoritarianism bordering on torture under Mao. In the late 1970s China embraced the Market and began turning into a Capitalist economy par excellence. On the outbreak of our current crisis China’s GDP stood at $4830bn, dwarfing its 1980 output of around $300bn.

Unfortunately, the argument is bunkum.

When its economy began opening up in the 1980s Capitalists found a literate, discipled, healthy and cheap workforce. Mao may not have given them much, but if you were going to live in poverty anywhere at least in the People’s Republic you could read, get basic healthcare and turn up to a job. Socialism laid the foundations for China’s recent success.

The next 30 years saw State Owned Enterprises (SOE) alongside Foreign Firms exploiting China’s cheap workforce.

The State owned sector still produces a vast amount of China’s GDP and a remarkable amount of the stuff China exports is from State Owned Factories. The market is present but China’s economy is not driven by Capitalist self interest.

Most importantly China’s financial sector is deeply integrated within the state. China keeps its currency low, it has never been a free trading nation – guarding strategic industries, loans go to where the state wants them.

China has succeeded by pulling in agricultural labourers and putting them in factories, by raping the natural resources of the world, by exporting to new markets, by stealing technology and by putting the Chinese through unimaginable hardship.

And now to John Q Publican

In essence China has behaved in a pretty similar way to the way we did in the 19th Century.

What John Q Publican points out is that we have gone through it first. People trying to draw lessons from China are being incredibly foolish, it is China and the developing world that must learn from our mistakes. Markets offer a great way to rearrange inputs towards more productive ends. However, to rely solely on the Market at any stage of development is to invite disaster.

Market Capitalism is a philosophy of constant expansion, new markets, new divisions of labour and an inexhaustible hunger for inputs.

Markets are brutal; Creative Destruction is fantastic for long term development but awful for those experiencing it; the Chinese peasant now working in a factory is 100 times more productive than he was before but he has travelled 1000s miles, lost friends and family and abandoned his old way of life.

As societies change a counter movement is necessary to check the negative externalities the Market brings. This is as true in modern Britain as in the developing world. Markets have presented us with a financial crisis, slow wage growth, long working hours and alienation. The Market does not provide an answer to what ails us.

Filed under: Blogging, Economics, History, Politics, China, Economics, History