by Observer R for the Saker Blog
This paper is mainly about the Chinese economy, but includes discussion of the Russian and United States (US) economies in order to provide a clearer explanation. The Chinese economy is the largest in the world according to the latest CIA Fact Book, based on the Purchasing Power Parity (PPP) method. The CIA claims that the PPP is a better method to use than the nominal method based on conversion to US dollars. Many analysts and politicians still use the nominal method, however, which shows the US in first place and China second. China has been continually careful to claim only second place, presumably as part of its long-term strategic decision to keep its head down and not make unnecessary waves. Second place also fits better with the significantly lower per-capita income in China and the Chinese aim to keep the status of a “developing country” for purposes of climate change response and funding.
There are many labels used to describe the various economic systems around the world, most ending in “ism.” Different authors use the same label to describe different systems, making it hard to understand what they are really referring to in real life. In reality, most economies appear to be a mixture of various systems, as these are defined in the dictionary. The Chinese economy is no exception. So for the purpose of this article, it is simply called “Red Capitalism” for want of a better term. Red Capitalism is an amalgam of many different systems combined with the so-called “Chinese characteristics.”
The first section of this article provides background information about how the various economic systems are defined by Webster’s. These definitions can be kept in mind while reading the rest of the article.
The second section describes the rivalry between two different methods of explaining and managing a national economy, using either engineering or economics, and how this rivalry plays out in practice. The discussion also touches upon issues with computer models and simulations.
The third section deals with booms and busts. These economic and financial events are a notorious problem that seems to defy a long-term solution. Even the cause(s) of economic and financial instability are lacking any agreement. Some suggested readings are provided for those who wish to delve further into the topic.
The fourth section mentions some aspects of national security which are important for analysis, such as culture and economics. The importance of these two factors in the demise of the USSR is touched upon, and whether China can avoid a similar fate.
The fifth section covers competition and monopoly in China and the US, and how the two countries have tried to deal with these issues. It incorporates many of the topics addressed in the preceding sections and applies them to the evolving situation.
Finally, a concluding section points out some of the difficulties in describing a national economy using the common “isms.” National economies contain elements of various systems, as well as varieties within systems. China is no exception.
I. ECONOMIC “ISMS”
A great deal of discussion in various media concerns differing economic structures, including capitalism and socialism. The problem with these discussions is that these terms are not defined and other types of economic organization, such as mercantilism and imperialism, are overlooked. For example, there are state capitalism, finance capitalism, crony capitalism, and numerous others. To assure that both readers and authors were clear about what structure was being addressed, for example, the first page of such articles or books could provide a detailed definition of which capitalism is being discussed. The Merriam-Webster dictionary states that capitalism is composed of private ownership and private investment decisions, and that prices, production, and distribution are determined by the market. But there need to be much more detailed descriptions in view of the many different varieties of capitalism. As for socialism, there is a similar problem of variety. The dictionary states that socialism is the government ownership and control of the means of production and distribution. That is a start, but what if it is control, but not ownership? Or vice versa? What about market socialism as promoted by the Swedes versus command socialism theoretically practiced in the USSR? We could even invent a few new terms: Bankers’ capitalism and bankers’ socialism for a start. After all, China claims to be socialist but has a central bank and numerous other banks, as do most other countries, including the US. China appears to be following the same economic advice as the US, leading to the same asset bubbles and too-big-to-fail enterprises.
As another example, the dictionary defines mercantilism as the attempt to increase the power and monetary wealth of a nation by government regulation of the economy, usually trying to accumulate gold and promoting a favorable balance of trade. Mercantilism also supports manufacturing and agricultural development, as well as foreign trading monopolies. The campaign for “Made in China 2025” may be partly viewed in this light. It is a national strategic plan along the lines of industrial policy to promote manufacturing. According to some reports, China is the number one gold-producing nation in the world and all the gold produced is purchased by the Chinese government. Imperialism is defined as extending the dominion of a nation by territorial acquisitions or by gaining indirect control over the political or economic life of other territory. Imperialism and mercantilism support each other, especially in terms of foreign trade, protecting domestic manufacturing and collecting gold and other rare commodities. Communism is defined in one version as “a system in which goods are owned in common and are available to all as needed.” This definition requires considerable finesse when talking about the Chinese Communist Party.
II. ENGINEERING VS ECONOMICS
Chairman Mao eventually found that he had a problem in keeping control of Chinese politics due to the development of wealthier businessmen and the growing size of the market economy. His solution was an attempt to return to some of the features of the wartime economy. These included a semi-drafting of civilians into the army, where they were housed in barracks, clothed in uniform outfits, put on work details in the countryside, fed in the mess hall, and moved about on public transportation. This was in line with Mao’s experience as a general commanding the Red Army for many years during the civil war in China. This is wartime mobilization, where the generals decide on the final outputs of the economy and the engineers work out the methods to achieve such results. During war, the civilians are put on rationing and the central plan determines which and what civilian goods will be produced and distributed. Sort of like Henry Ford’s old adage concerning the some of the Model T cars : “Any customer can have a car painted any colour [sic] so long as it is black.” Of course, rationing soon becomes unpopular in peacetime. Mao’s death created a crisis in the Communist Party, with the so-called “Gang of Four” trying to continue his policies, while other officials, led by Deng Xiaoping, called for a different system. In this system, the economists are supposed to work out the methods to achieve results. This system could be described as part “market” and part “market socialism” and part “socialism.” The market part involved privately owned factories and stores producing and selling civilian goods to the public. The market socialism part involved the People’s Liberation Army (PLA) using army-owned factories to produce civilian goods for sale to the public. In the socialism part, the PLA-owned factories continued to produce weapons for the military.
The engineering vs economics issue came up in the West at the time of the 1972 Club of Rome report, The Limits to Growth. This document was based on computer simulations of economic growth which were very pessimistic. The book was very popular around the world, and it and subsequent reports have been extremely influential in the debates over global warming, climate change, and other policy issues. The critics, however, claimed the report was based on simplistic scenarios and amateur scholarship. In essence, the critics said that the report was produced by engineers trying to model the economy without understanding economics. In addition, the critics pointed out that the computer models did not take into account the changes in price that would come about with scarcity. The criticism did not seem to deter the Club of Rome in its efforts to remake the world. Perhaps the members had more confidence in engineers practicing economics, than in economists practicing engineering. In any event, the same controversy continues to this day concerning the degree to which public policy should rely on computer simulations and models that are sensitive to a few key assumptions. Computer simulations are well known always to be subject to the “garbage in, garbage out” phenomena, but less well known is that even with good input data, the output can be drastically different with just a few little tweaks in the assumptions.
III. MONEY & CREDIT
China has a problem with asset bubbles and potential busts, as does the US. China has “ghost cities” and other investments that are symptomatic of malinvestment and too much easy credit. In the US it was the ill-considered financial enthusiasms of the roaring twenties, the dotcom bubble, the housing bubble, and now the so-called “everything bubble” that have led to recessions and depressions. There have been scholarly attempts to explain why these episodes keep happening. For example, 100% Money by professor Irving Fisher back in the 1930’s, detailed the problems with fractional reserve banking. Fisher wrote this with the benefit of hindsight after losing his fortune in the Great Depression. The book, however, fell on deaf ears. Much later, in 1983, another book on the subject was published, The Mystery of Banking by Murray N. Rothbard. It had no better success. In 2016, the former head of the Bank of England, Mervyn King, wrote a book called The End of Alchemy, about the same problem and proposed some solutions. Nothing much was done. The gist of these books is that fractional reserve banking is inherently unstable. Yet this is the system used all over the world. The national security agencies of China, the US, Russia, and others might benefit from some serious study of these books and the issues with money and banking that they explain, as these issues may be more likely to determine their nations’ economic fate. In the US, other isolated prophets have explained the mistakes in money and banking policies, yet, again, nothing much has been done, resulting in potentially grim future prospects. If these books are correct in their analyses of the situation, then the first country to adopt a proper solution would gain significant advantages over other countries.
IV. NATIONAL SECURITY
National security studies and analyses spend a lot of time and effort on competing weapon systems, elections, coups, revolutions, as well as on culture, space, cyber, energy, and psychological warfare. The studies appear to spend much less effort on education and economic security issues. Out of all these types of warfare, the USSR turned out to be grossly deficient in two important areas: Culture and economics. Western commercial culture was simply more attractive to the Soviet public than what they had at home. As more and more Soviets learned about the difference, the more trouble Moscow had in getting the public to believe in the Soviet system. The question is whether China will experience the same problem. It appears that China has plenty of Western commercial culture and its own adaptations, as well as conducting a re-invigoration of its traditional culture that goes back thousands of years. This may help to immunize China against this aspect of the Soviet problem. As for economics, the USSR followed a less desirable path. There are many competing schools of thought concerning what happened, but a basic view is that the planned sector of the USSR economy got into a fight with the unplanned sector and they knocked each other out. The USSR was not able to come up with a solution to the command vs. market problem that worked. China studied the USSR disaster and decided to follow a different path.
V. COMPETITION & MONOPOLY
It appears that China is ahead of the US in realizing that certain policies favored by the oligarchs could be dangerous to the economy and the State. However late to take action, China has recently cracked down on the chiefs of many giant enterprises in a move to curtail their power and influence. They were beginning to rival the authority of the Communist Party. There is always a potential for oligarchs to find common cause with oligarchs in other parts of the world and joining in schemes such as the New World Order, thus possibly escaping control by the national governments. This power struggle in China will have ramifications throughout the world. In the US, it is not even a struggle—the oligarchs are generally considered to be on the top of the heap and nothing much is even considered in the way of curtailing their power. Considering former President Trump’s experience with them, they are way ahead in the power game and are also alleged to be behind the curtain as far as President Biden is concerned.
In the past, the US came up with the Sherman Act and the Clayton Act in order to help control monopoly power. President Theodore Roosevelt campaigned as a trust-buster and the laws were used to break up the Standard Oil Company. Later on when President Franklin Roosevelt was in office, the US instituted the Glass-Steagall Act to address problems which were said to have contributed to the Great Depression. The act separated commercial banking from investment banking. At that time, brokerage houses were a separate feature of the US economy. These laws were also used to break up some of the concentration in the telephone industry. However, things went into reverse during the President Clinton era, when the Glass-Steagall Act was repealed and banks could combine all forms of banking and brokerage into a single enterprise. It was not surprising when the resulting conglomerates grew so large that they were termed “too big to fail” and had to be bailed out by the government. In addition, the anti-trust laws did not seem very useful in controlling the very large tech companies of recent times. Thus to call the US a “capitalist” or “free market” economy is not very helpful since the economy has had very different features at different times, as well as differing degrees of competition.
Thus a question in analyzing the Chinese economy might be to ask if China has the equivalent of the Sherman, Clayton, and Glass-Seagall Acts, and are they actually used or enforced? Does China have other laws and regulations that promote competition or manage monopolies in the public interest? When the Chinese first opened up the economy after Mao, there was relatively little in the way of funding for the military to pay for modernization. The solution was to allow the military to go into producing civilian goods for sale to the public and then keep the profits to help pay for military goods. Analysts would need to research whether the military eventually stopped producing its own weapons and purchased them from commercial industrial companies. How is the military-industrial complex actually structured in modern China? Who owns the armaments factories? More recently in China, the central government has encouraged the military to get out of the civilian goods business and stick to the military side. Again, much more detail is needed in order to comment on the Chinese economic system than to only use the generic terms “capitalism” and “socialism.” It is even more ineffective to toss about the word “communism.”
Another example of the difficulty in pasting labels on different economies: In Russia it appears that the armament-producing factories and companies are owned by the government. In early US times, the military arsenals and navy shipyards were also owned by the government. Pretty much the embodiment of “socialism” in both cases. Now, however, weapons in the US are produced in factories owned by private or non-government companies. However, there seems to be very little real or practical competition in much of the US military-industrial complex, so maybe it would be better described as part “mercantilist” or with some other term? Some experts have claimed that the US has already lost the arms race with Russia, so perhaps the US should try a different tack and return to having the military set up its own factories to produce the exotic weapons needed to compete with Russia? The US has approximately six arsenals currently operating, but they do not produce the types of weapons that are made in Russia. Would this partial return to a variety of “socialism” help the generals to get the weapons they really want, instead of the weapons that produce the most profits? The US Army went back a century to find a design for its latest uniform, maybe the army could consider a return to the old-fashioned arsenals of a century ago.
Any discussion of “isms” such as capitalism and socialism cannot shed much light unless more rigorous and detailed definitions are employed, since both “isms” have many varieties. In addition, any serious discussion should address the extent to which mercantilism and imperialism are part of the mix. All this gets very complex very rapidly, so it is not surprising that such is seldom done. In addition, there is little evidence of any current investigation concerning the command versus market issue in national economies, despite its historical importance in China and Russia. The problems with computer modeling and simulation are well known, but continue to arise in studies of economic growth, climate change, and spread of disease. This difficulty has serious implications for China as the nation is faced with vast disagreement between engineers and economists in designing computer simulation models. Finally, the “skeleton in the closet” that almost no one wants to address is the design of the money and credit system for a nation. Such a look would impinge on the currently politically correct belief in the proper role and nature of commercial banks, investment banks, and central banks. It is interesting from a national security standpoint that China has seemingly adopted much of the US and UK system of banking, despite centuries of having panics, booms and busts, recessions and depressions in the latter countries.
“Red Capitalism” is an amalgam of many “isms,” with Chinese characteristics. So far, it appears to be relatively successful, certainly more so than the system employed in India. However, one can see the same maladies creeping into China that currently beset the US: Malinvestment, stock market excesses, interest rate manipulation, real estate speculation, and increasing concentration of wealth. The question for the world is which country will be the first to find and implement a cure for these maladies.