I had to pull my chin off of the floor after reading this WSJ op/ed by Andy Stern arguing that “China’s success is proving that the free-market fundamentalist economic model is being thrown onto the trash heap of history.”
Say what?!?? Stern has it exactly upside down. The more the US follows China’s example, the worse off we will be in any dimension of our lives you want to measure: standard of living, physical health, spiritual health, freedom. You name it. Moving to a top down macro economic planning model ala China is a recipe for disaster.
Japan was also going to conquer the world with a new economic model organized around industrial planning in the 1980s. Top down macro-planning is no recipe for economic success. History has proven the opposite over and over and over again. China will be another poster child for this fundamental law of human society and macro economics when the Chinese economy inevitably faces intractable challenges and contradictions caused by dysfunctional linkages between the public and private sector.
An ironclad law of political economy (coined by Lord Acton) says that power tends to corrupt but absolute power corrupts absolutely. We saw recently at Penn State a perfect example of what happens when a system run by ostensibly upstanding individuals loses its institutional checks and balances. Good people end up doing bad things. The System rots from the inside out.
China’s communist party is institutional judge and jury, majority owner of productive assets in the economy, as well as regulator, policy maker and politician.
Such monolithic institutional power is a recipe for disaster and we can already see the dysfunctional effects. China’s system is deeply flawed; any thoughts of China becoming a model for a new economic model are not only premature, they are fanciful given what we know right this second about China. The country is a one party totalitarian state. The government spends as much on internal security as it does on military.
Stern conveniently leaves out the part about China currently having a dysfunctional legal system, about endemic corruption in communist party; he leaves out the part about China lacking basic freedoms we take for granted here in the US such as freedom to organize and freedom of speech. Further, the result of China’s 30 year economic miracle that Andy Stern is so enamored with includes massive environmental and social degradation of a country becoming increasingly brittle to exogenous and endogenous shocks. Public investment in green energy, construction of 6 million homes, high speed trains, etc, etc, are superficial window dressing for a society and economy that is alreaedy fundamentally bankrupt on multiple levels.
It is quite ironic that Andy Stern points to 5 year plans as a sign of enlightened progress in China. Wow, only if we had a one party state with smart policy makers like China. We could spend billions on green energy and have shiny infrastructure and focus resources on super high tech R&D, more money for teachers and schools, we would all drive electric cars and sing by the campfire every night.
On paper the top down planning model sounds like a winning recipe. But in practice – and we can see this in China already – it has been a disaster .... for the physical and spiritual and moral and material wealth of the society. Despite gaudy growth numbers over 30 yrs, this growth has come at an incredibly steep price including epic environmental and moral degradation and the crowding out of individual freedom in favor of state “macro” priorities.
1. Ben Franklin wisely said people willing to trade their freedom for temporary security deserve neither. Modern pragmatists on both the left and the right of the political spectrum would surely argue with Ben that he was being too ideological!!! Don’t we have to trade some of our individual freedoms for the collective good???
No. Acting for the collective good is a myth. Planners can’t plan for the collective good. How can they?? When politicians beseech us to give up our liberties for the common good this is really a secret code-word by politicians aiming to create rent seeking opportunities for themselves and politically connected special interest groups. "Give up your guns for the collective good." That is what the German politicians argued in the 1930s. The German public complied and next thing you know, Hitler is leading his the Nazi holocaust.
politicians will always appeal to the rich to pay more taxes for the collective good -- but where does the money go? the EZ, especially Greece and Italy, is finding a painful answer to that question.
In the 1990’s no one talked about 5 year plans in China because all of the new wealth being created and the “action” in China in the 1990s was in the newly empowered private sector.
Contrary to Andy Sterns erroneous assertion, the return of the importance of China’s 5 year plans is a symptom of what is going wrong in China, NOT what is going right. In the past decade and especially since the 2009-10 easy money boom, the public sector (party and state) has reconsolidated its strangle hold over productive assets in the economy. Everyone is paying attention to 5 year plans again because they matter. Again, this is NOT a sign of sustainable economic dynamism and strength. just the opposite!
Top down industrial planning -- as Japan did in the 1980s and as China is doing now --- is a fools game requiring FORCED mobilization of private sector savings and earning power into investment and production of goods for the larger good of the state. The model can generate high rates of growth in the short term because it can funnel private savings that otherwise would have gone into consumption into investment and production. but delivering sustainable growth with a model organized around financial repression (like China -- where households are systematically screwed by a state owned banking sector that keeps deposit rates artificially low and funnels most credit to fellow state owned companies).
Sustainable growth comes from the interaction of millions, billions, trillions of micro decisions made every day by risk-taking entrepreneurs and private savers and consumers using market signals to guide them. Sure, government is there to protect private property rights and to enforce the rule of law. Free markets doesn’t mean anything goes. Free markets means people mutually trading with each other and respecting each other’s rights -- in a system that SELF COORDINATES!!! amazing but true. top down economies are the ones that either boom and bust or never take off in the first place. the only "successful" economies are ones that are left enough freedom to spontaneously organize.
Free markets based on classical liberal principles of mutual respect and reciprocity are inherently peaceful because no one is allowed to claim or act upon a value system where ends are justified by the means. in a free market transaction, you have both sides getter richer (or thinking they do -- or else they wouldn't make the trade). It is only when the no it all government gets involved with fixing market failures do we have to use “force” or coercion in society -- all in the public interest, of course. Public sector coercion is always hidden behind the collective good -- it is described as what is in the interest of the indivual whether he knows it or not. That is why politicians appeal to the morality of acting in the common good. They can pretend that it isn’t government coercion that forces indivuals to comply with arbitrary government rules and regulations and taxes. It is the common good, so everyone should be willingly on board for “the program.” If Warren Buffet wants to pay higher taxes, no one is stopping him. but he doesn't pay higher taxes ever out of the goodness of his heart. he waits until he is forced to do it. you might say, wel that is ok. maybe it is, but it is still violence and coersion and ends justify the means behavior by the state. it is exactly the opposite of the behavior the state is pretending to perform on the behalf of the "common good." there we go with that bogus notion again....
Infrastructure, technology, green energy and education ARE the natural results of a dynamic economy organized around private property rights and free exchange. entrepreneurs will provide technology where it is needed in the most appropriate amount possible. Creating an economy is NOT like baking a cake. There is no fixed recipe. you can't say ok, lets take 3 parts infrastructure (roads, rails, bike paths), 2 parts technology, 4 parts education, 1 part R&D. 6 parts green energy. If you add more of a good thing, like investment in R&D will it make the cake healthier and better tasting??? Who knows? The recipe for economic growth is always changing; no one knows or can predict what the recipe will be in the future. If you think you can develop 5 year plans to ensure social stability, productivity and wealth gains and income equality, you are DREAMING.
Productivity gains are the outcome of an organic spontaneous process requiring risk takers acting upon market signals. If government hijacks the market signals or ignores them or tries to co-opt the signals or meddles in any way with the so called factors of production and market price signals – what happens is a failed cake or a lopsided economy that was supposed to work but fell over under the weight of planning error and systemic rent seeking and corruption.
There is absolutely no reason why education must be a public monopoly run by government bureaucrats. Why not let our children have the best education the world can offer? Don’t we know in our hearts that school could be so much better if the private sector competed for students? Imagine how much incentive a principle would have if he needed to run an operation that failed if it didn’t attract students. The way it works today: poor children are held hostage in a dysfunctional system hi jacked by public teacher unions. Defenders of public education claim the world will come to an end if we do away with public education. As if public education isn’t already doing enough damage. Why should critics of public education have to defend privatization??? Public education is an epic failure. The burden should be on those who would continue to force children into attending a school with teachers who don’t give a damn.
The questions and challenges for top-down planners are endless and unanswerable.
This is not to say the “free market” will solve all social ills. It won't. free markets are no panacea, but they are the best we can do. i can also guarantee that top down planning will always result in an outcome worse than the maximum free market. It is a law of economics (i am developing in a separate project called "A new natural science of Economics -- stay tuned).
My research highlights some remarkable conclusions: life isn’t fair, the market is imperfect. Some rich people are lazy. Some hard working chaps fall on bad luck. Natural disasters occur in markets that are unforeseeable and part of the landscape. Income inequality is an inherent feature of markets. if income creates social tensions, you can bet the reason for the income inequality isn't "the evil market." the market doesn't do anything. people do. we fail the market, not the other way around. if inequality is a problem, look around for what policy makers did in all good intention that led to the rich getting richer. Is there a central bank printing easy money? Well then you can bet there will be income inequality issues in the society.
Is any policy that aims to reduce income inequality a good policy: e.g. progressive tax, subsidies for health care and education, etc etc etc.? No. every well intended policy operates under the law of unintended consequences. macro outcomes cannot be engineered period. if you try, you will make things worse. guaranteed. that is why i know china is in big trouble.
The fundamental research I've done developing a new econmoic paradigm also suggests that there is no such thing as market failure per se. There are market features we don’t like, such as pollution, industrial accidents, creative destruction, bankruptcy, unemployment, income inequality, poverty, etc. BUT these features are not Failures per se. The market doesn’t do anything in a human premeditated sense, so how could it "fail." would we say nature failed when an earthquake occurs?? no. income inequality is a feature of markets, just like earthquakes are a feature of the earth system. So there is no such thing as market failure. Furthermore, we humans didn’t not design the market or the economy or any major sector of the economy.
We need to understand that markets are spontaneously organizing natural systems (just like the weather) that are beyond our control, design or planning. We can make a positive impact in the world through our individual acts of kindness and charity. BUT, just because a little private charity is good doesn’t not mean a lot more of public charity is even better. Once governmetn gets in the game of doing the analogy of cloud seeding in the economy, this triggers a cascading series of unintended consequences that result in net welfare losses for society – and typically a net welfare loss for those being targeted for help. Take the example of families handing welfare culture down from one generation to the next.
what if we humans are responsible for designing the economy. if something goes wrong, don't we have the moral obligation to fix it?? it is practically impossible for anyone to imagine humans designing the economy. the complexity of the system boggles the mind. There are islands of central planning in a large economy, such as we see with families and companies and small towns and cities. but these islands of central planning interact with each other in an unplanned way. No one plans the patters of activity in an economy nor does any plan results. nor can anyone plan or design results into the macro economy -- not even central bankers or president of the USA.
Top down planning sounds good on paper, but it leads to perverse, counter-productive results in practice.
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No government can make the right decisions let alone implement them without systemic dysfunction, misalignement, mis measurement, corruption and ultimately without system failure over time.
China will be the poster child for failed central planning. It is just a matter of time. The US will too if we don't reverse consolidation in the Federal government ourselves centered around the Federal reserve. anyway... back to China .... In many ways, China is already a poster child for failed central planning – measured by social welfare, environment, freedom, income inequality, etc. etc. Soon the high growth providing superficial evidence of success will come crashing down too, thus reducing to rubble the idea that “China-is-the-next-economic model.”
Only a delusional union boss could look at China and see a successful economic model currently despite all of the obvious warts.
What ails America is not too much freedom, but too little. it isn't too little central planning but too much. let individual liberty reign. planning is a false God that assumes we humans are in fact capable of god like actions on earth. We can do individual acts of god, such as charity to another family in need or such as inventing a new technology that the world has never seen. those are god like actions. Man is like god in micro ways. but let us not mistake our micro god abilities with macro god abilities. We humans are not like Gods when it comes to designing and organzing social outcomes. We must have faith in something. that something is the faith that maximum individual freedom (based in reciprocal private property system) results in maximum social welfare. to think otherwise is to believe man is God. ben franklin was right: if we trade freedom for safety we trade our humanity. we trade in hubris when we believe we humans can engineer social outcomes.
DECEMBER 1, 2011
China's Superior Economic Model
The free-market fundamentalist economic model is being thrown onto the trash heap of history.
By ANDY STERN
Andy Grove, the founder and chairman of Intel, provocatively wrote in Businessweek last year that, "Our fundamental economic beliefs, which we have elevated from a conviction based on observation to an unquestioned truism, is that the free market is the best of all economic systems—the freer the better. Our generation has seen the decisive victory of free-market principles over planned economies. So we stick with this belief largely oblivious to emerging evidence that while free markets beat planned economies, there may be room for a modification that is even better."
The past few weeks have proven Mr. Grove's point, as our relations with China, and that country's impact on America's future, came to the forefront of American politics. Our inert Senate, while preparing for the super committee to fail, crossed the normally insurmountable political divide to pass legislation to address China's currency manipulation. Secretary of State Hillary Clinton, former Gov. Mitt Romney and President Barack Obama all weighed in with their views—ranging from warnings that China must "end unfair discrimination" (Mrs. Clinton) to complaints that the U.S. has "been played like a fiddle" (Mr. Romney) and that China needs to stop "gaming" the international system (Mr. Obama).
As this was happening, I was part of a U.S.-China dialogue—a trip organized by the China-United States Exchange Foundation and the Center for American Progress—with high-ranking Chinese government officials, both past and present. For me, the tension resulting from the chorus of American criticism paled in significance compared to reading the emerging outline of China's 12th five-year plan. The aims: a 7% annual economic growth rate; a $640 billion investment in renewable energy; construction of six million homes; and expanding next-generation IT, clean-energy vehicles, biotechnology, high-end manufacturing and environmental protection—all while promoting social equity and rural development.
Some Americans are drawing lessons from this. Last month, the China Daily quoted Orville Schell, who directs the Center on U.S.-China Relations at the Asia Society, as saying: "I think we have come to realize the ability to plan is exactly what is missing in America." The article also noted that Robert Engle, who won a Nobel Prize in 2003 for economics, has said that while China is making five-year plans for the next generation, Americans are planning only for the next election.
The world has been made "flat" by the technological miracles of Andy Grove, Steve Jobs and Bill Gates. This has forced all institutions to confront what is clearly the third economic revolution in world history. The Agricultural Revolution was a roughly 3,000-year transition, the Industrial Revolution lasted 300 years, and this technology-led Global Revolution will take only 30-odd years. No single generation has witnessed so much change in a single lifetime.
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David G. Klein
The current debates about China's currency, the trade imbalance, our debt and China's excessive use of pirated American intellectual property are evidence that the Global Revolution—coupled with Deng Xiaoping's government-led, growth-oriented reforms—has created the planet's second-largest economy. It's on a clear trajectory to knock America off its perch by 2025.
As Andy Grove so presciently articulated in the July 1, 2010, issue of Businessweek, the economies of China, Singapore, Germany, Brazil and India have demonstrated "that a plan for job creation must be the number-one objective of state economic policy; and that the government must play a strategic role in setting the priorities and arraying the forces of organization necessary to achieve this goal."
The conservative-preferred, free-market fundamentalist, shareholder-only model—so successful in the 20th century—is being thrown onto the trash heap of history in the 21st century. In an era when countries need to become economic teams, Team USA's results—a jobless decade, 30 years of flat median wages, a trade deficit, a shrinking middle class and phenomenal gains in wealth but only for the top 1%—are pathetic.
This should motivate leaders to rethink, rather than double down on an empirically failing free-market extremism. As painful and humbling as it may be, America needs to do what a once-dominant business or sports team would do when the tide turns: study the ingredients of its competitors' success.
While we debate, Team China rolls on. Our delegation witnessed China's people-oriented development in Chongqing, a city of 32 million in Western China, which is led by an aggressive and popular Communist Party leader—Bo Xilai. A skyline of cranes are building roughly 1.5 million square feet of usable floor space daily—including, our delegation was told, 700,000 units of public housing annually.
Meanwhile, the Chinese government can boast that it has established in Western China an economic zone for cloud computing and automotive and aerospace production resulting in 12.5% annual growth and 49% growth in annual tax revenue, with wages rising more than 10% a year.
For those of us who love this country and believe America has every asset it needs to remain the No. 1 economic engine of the world, it is troubling that we have no plan—and substitute a demonization of government and worship of the free market at a historical moment that requires a rethinking of both those beliefs.
America needs to embrace a plan for growth and innovation, with a streamlined government as a partner with the private sector. Economic revolutions require institutions to change and maybe make history, because if they stick to the status quo they soon become history. Our great country, which sparked and wants to lead this global revolution, needs a forward looking, long-term economic plan.
The imperative for change is simple. As Andy Grove pointed out: "If we want to remain a leading economy, we change on our own, or change will continue to be forced upon us."
Mr. Stern was president of the Service Employees International Union (SEIU) and is now a senior fellow at Columbia University's Richman Center.
