Ian Welsh

The horizon is not so far as we can see, but as far as we can imagine

Category: Development Economics Page 2 of 5

Losing the Power of the Printing Press

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On November 9, 2022

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If you look up whether governments can “just print more money,” what you’ll find at most sites is the answer, “No, because it only increases the amount of money, not the amount of economic activity.”

This is not true, and it’s not true in a number of ways.

If there is under-utilization of capacity, you can print. Here’s US capacity:

The US has been running substantially under capacity for a long time.

But, you say, there was a lot of money printing (private and public, most money is created by banks, brokerages, and so on), and capacity utilization didn’t go up. In fact, it went down.

Well, yes, because the money went to other countries like China, where it increased capacity vastly, or it went into assets (the housing bubble, stock bubbles, and so on), or it bought private jets and yachts and so on.

Which is to say, it’s not just about money creation; it’s about who gets the money. Since virtually all the money creation of the past 40+ years has gone to rich people, capacity has been created for what they want. And because it was cheaper and more profitable to build capacity overseas, that’s where the money created went.

In addition, there’s the fact that the US dollar is used to buy oil and is the general medium of exchange in most foreign trade. It’s also the “gold” currency, in that during crises it tends to go up, so people want to hold a store of it against bad times.

All of these factors are contingent. If oil was not sold primarily in dollars, or trade settled in dollars, for example, there’d be a lot less demand for dollars. If the trade regime didn’t allow for vast imports and exports, but the world was more autarchic, then building new industry overseas wouldn’t make any sense, and so on.

This is to say, nothing is eternal. The dollar’s position is a historical artifact, based on specific circumstances which did not, and will not, always exist.

Remember, there was a time when the center of the world economy was Britain (chart from Mike Todd).

What you see in that chart (and it’s going to keep getting worse) is the switch from London to New York; from the pound to the dollar, because the pound wasn’t the primary international currency any more AND (and this is important) the UK kept de-industrializing so there was less and less relative demand for its products, though the City of London retained an important financial role, which kept the pound higher than the economic situation of Britain would otherwise have allowed.

Developing countries, as a rule, cannot run the printing the press because people only want enough of their currency to buy whatever goods and services they produce. In addition, because most Third World countries have vast import requirements (more so as time has gone on), and their agricultural bases have been destroyed, printing money causes inflation very fast. It’s not just an internal matter, more money chasing goods, it’s that people try and use the new money to buy goods produced externally, and their exchange rate collapses.

When the US prints money, a lot of it goes into other countries reserves and the reserves of people and companies. It pools, as it were, uselessly, and to the extent that it is “more money chasing the same goods,” its effect is spread over most of the world and not just internally.

Once this was true of the British pound.

The original conception of comparative advantage was based on the assumption (true at the time) that money mostly pooled inside countries and could not be used to create production in other countries. If Britain produced less widgets because French widgets were cheaper, the money freed up in Britain would go to produce something in which they had a comparative advantage, say woolens, instead of fleeing overseas. (See Ricardo’s Caveat for the long form of why comparative advantage doesn’t work with free capital flows.)

Now, you can also print money if you give it to the useless classes, i.e., the rich. In that case, it drives bubbles (see the SPX chart above or art prices) or creates niche markets, like yachts and private jets. It doesn’t drive general inflation, it only drives inflation for what useless people want.

Unfortunately, that inflation does eventually cause various crises, but for a time, it seems “free” — you make the rich much richer without causing widespread inflation.

What matters, then, is who you give the money to, and what they spend it on. Volcker crushed wages because, in addition to wanting to make useless people richer, he didn’t want ordinary people to have more money because they would spend it on things which lead to buying more oil, and given oil prices at the time, that would lead to more inflation. He needed to smash oil prices, and he did so by smashing wages to smash oil demand.

If you print money and give it to ordinary people, and it just leads to them buying more stuff from overseas, it won’t move that capacity utilization number you see in the chart at the top very much.

But this isn’t to say that printing money doesn’t “work.” It does work. It always does something. Someone benefits. If you print a bunch of money, and make sure it goes to ordinary people in your country, and that your country increases utilization and/or increases how much it produces, then it can produce a general wave of prosperity. After all, when wages rise higher than the cost of goods and services, that’s prosperity, but companies don’t like that unless they’re still making more money because they’re selling more overall.

(That last sentence, by the way, is the secret of the post-war good era. Meditate upon it.)

You lose the power of the printing press when no one wants your currency because you can’t produce enough, or increase production, AND it isn’t necessary for other things (like international trade).

This goes in stages. Britain, outside of the EU and with less and less industry, and with less reason to send money to the City of London, is in danger of losing the power of the printing press in the way Third World countries do. “There’s no reason to buy any more of this than however much you need to buy their goods.”

At that point, you need to figure out how to re-industrialize and under a free trade order like the neoliberal one, that’s hard. Every time you try, money floods out of your country instead of increasing activity inside of it.

As for the US, it’s in an extraordinarily privileged position, but as China and the BRICS move to conduct more and more trade without dollars, and as trust in the US to run the international monetary system drops and drops due to repeated sanctions and thefts of reserves, that privilege will decline, and the US will find more and more that if it wants goods from another country, it will need to provide not dollars (though they may still be exchanged), but actual goods and services itself.

If you can’t pay with goods and services, you pay by selling your patrimony — companies, land, resources, etc.

The power of the printing press is great, but it can be used for ill and good. It can create real economic growth and widespread prosperity under the right conditions, conditions which are partially under a country’s control. But if you become too weak or poor, you can lose even the theoretical ability to create those conditions. There is essentially nothing most African countries can do to restore enough sovereignty to allow them to use the printing press for good, and if you’re a relatively rich country which does still have the freedom of the printing press, there is always the temptation to use it foolishly or venally, as the US mostly has in recent generations.

Money is a social creation. So is how we run the economy. It can be made to work for everyone, for a few people, or as a machine of impoverishment. The choice, on aggregate, is ours.

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The Great Favor the West Is Doing China by Banning Equipment Needed to Make Chips

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On November 7, 2022

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We really are run by fools.

“If you shut out [China] with export control, [they’ll] strive toward tech sovereignty… [Then] they’ll be able to do it all by themselves and the market [for European suppliers] will be gone.”

The great problem in the neoliberal era is that the usual road for tech and industrial catch-up, protectionist tariffs is mostly closed. (This is how Britain, the US, and almost everyone created their industrial base and caught up in tech.)

Despite what a lot of people seem to think, China isn’t a command economy. It’s a capitalist one, albeit with a large state company sector. Letting markets in is explicitly how Deng created the Chinese economic miracle.

So China buys a lot from other countries. It is a trading state, and that makes it more difficult to catch up in some techs.

Now, if this was done to, say, Bangladesh, or probably even India, those countries would be screwed — they don’t have the industrial and knowledge base. But China has these things; sure, it wasn’t cost-effective to do all the research necessary to learn how to make this equipment when they could just buy it, and after all, they need to buy some things from their customers.

But if they can’t buy it, they can learn how to make it themselves. Sure, it’ll cost them two or three years. It’ll hurt. But they’ll get over it, and then they can make it for themselves.

The knock-on effect is fun, though: Once China can make this equipment, they can sell it to other countries, which means those countries (Brazil, Iran, India, etc.) don’t need to get it from the West, and sanctions become much less effective because there’s another option on the table.

So by sanctioning China, the West will soon lose its ability to sanction not just China but pretty much the rest of the world.

Fun!

This is also true of the sanctions on aircraft equipment, by the way. China, which has a rather advanced space industry, will learn how to make its own civilian aircraft, and then, instead of everyone having to get aircraft from Europe (Airbus) or the US (Boeing, though Boeing is losing the ability make aircraft), they’ll be able to get it from China (and possibly Russia as well).

Now sanctions like these have their place: You do them just before you’re about to declare war. But if we aren’t going to do that (and there are certainly factions in Washington who do want a war with China soon), then it’s just foolishness.

Let’s hope it’s just foolishness.

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Growth Through Real Estate Bubbles v.s. Sustainable High Income Growth (China)

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On November 4, 2022

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All right. Let’s talk some basic development stuff, primarily in the neoliberal era.

Because industrial policy was disallowed with a few marginal exceptions due to the “rule based order” enforced by a variety of trade agreements and organizations, the traditional route of protecting domestic industries and growing behind tariffs became very difficult to do.

Various countries used different dodges. Russia, to get out of the Yeltsin era collapse, went whole hog into resources: advanced nations had to have oil and natural gas and minerals, and bribed key financial regions like London’s city with huge influxes of resource-money.

China did something different. They opened up partially and let foreign companies in, but they used bureaucracy to keep them under control (as had Japan, in part) and offered foreign elites huge labor arbitrage profits. They bribed the West’s elites with personal wealth, in effect. In exchange they insisted on, generally very strictly, in real technology transfer. Meanwhile, they created a protectionist bubble thru monetary policy, keeping the exchange rate in their favor.

But the other thing they did is what Turkey tried. They created a self-reinforcing property bubble. Municipalities and states built tons of new homes, people flooded in from the countryside to get the new factory jobs and the service and government and construction jobs which supported industry. Prices went up, municipal and state budgets went way up and a virtuous cycle was created, for a time.

Turkey did the same thing, but the problem is Turkey didn’t have an expanding industrial base, and that’s why Turkey imploded sooner.

All bubbles, including property bubbles are time limited. The more of a real economy you have, the longer they can run, but eventually inflation in property becomes too high, and most citizens can’t afford the housing. Meanwhile, inflationary increases in living costs make workers too pricey, and the industrial base begins to suffer.

You can start from three positions.

  1. Like the US or UK or much of the EU you can start with an industrial base and cannibalize it, or..
  2. Like Turkey you can start with a poor but big country and cannibalize an increasing part of your population, plus what little industry and agriculture you have (India is similar, but much larger and managed to get some industrialization out of this strategy), or..
  3. Like China you can build your industrial base at the same time.

Whatever you do, this strategy eventually runs into the roadblock of a cost structure which becomes too high to allow actual productive industries.

At that point, you have to tame the housing market and other out of control costs (medical, food, whatever). If  you don’t, you’re pushed back from 3 to 1, or if you did 2, the artificial prosperity begins to collapse. (India’s calories per capita have spent decades decreasing and someone who spent time there in the 80s, I can tell you Indians weren’t overfed to start with.)

So China’s now in a position where rather than bubbles, especially the housing bubble, being synergistic with industry and improvements in technology, they’re starting to strangle growth.

The route out (minus mercantalist imperialism, which is long run a loser too) requires you to stop relying on property bubbles, and start strangling your cost structure. The “free” money from asset bubbles has to go away, and you have to create a consumer society: not one like we have now, but one like we had in the post-war liberal era. Housing costs have to be kept at a level where people can buy or rent homes fairly easily: 30% of wages for rent or so, and at most about 5 years wages to buy a small home or condo.

Since the free profits of bubbles and speculation have to go away, companies have to make real money by providing real services and not just count on “real estate always goes up” or (America) “people have to have health care, so we’ll increase prices thru the roof.”

This is the task that China now has. It’s a hard task, akin to getting of hard drugs like heroin or SSRIs or Xanax. It hurts, because the financial pipes are reliant on what amounts to free or easy money.

During this transition, headline GDP and so on will suffer, there is no way around it minus looting expeditions, especially since simply running the printing press (something we’ll talk about in another article) defeats the point, which is making companies earn their money by providing goods and services for small markups at scale. (The post war liberal era worked on 3-4% markups for most mass goods.)

This is where China is. Where America and most of the West is similar: except it’s after destroying much of the industrial base and real consumer economy that doesn’t rely on massive price gouging on items people must have. There is no way to bring the good jobs back for most of the population in the US or UK or Canada or Australia without crushing the cost structure, strangling property speculation and prices and in the US tackling the medical and drug cartels.

China’s making the attempt. A lot of what they’re doing is clumsy and crude (but then, so was the one child law, but it worked even if it caused future problems.) So far the UK and Canada and the US and most of the West are not even trying, which is why you hear more about friend-shoring (aka to cheap places that are Western allies) rather than re-shoring, which can only be done for the goods that are either very high margin or which elites have realized are too militarily strategic to do in other countries.

This is why, as far as I’m concerned, the smart money is still on China, and if it wasn’t for climate change and ecological collapse, I’d consider it a done deal even if it took a couple more decades and a lot of screaming and shooting.

As it is, we’ll see. But China’s at least trying to do the right thing.

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The Debt Trap That Helped Take Down Sri Lanka Was Not Chinese

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On July 14, 2022

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Let’s put an end to this nonsense:

The Asian Development Banks is essentially a US proxy and the World Bank is mostly controlled by the US. Market borrowings are almost entirely from Western sources.

The article goes into more detail:

Sri Lankan President Gotabaya Rajapaksa, who spent a significant part of his life working in the United States, entered office in 2019 and immediately imposed a series of neoliberal economic policies, which included cutting taxes on corporations.

These neoliberal policies decreased government revenue. And the precarious economic situation was only exacerbated by the impact of the Covid-19 pandemic.

Facing an out-of-control 39.1% inflation rate in May, the Sri Lankan government did a 180 and suddenly raised taxes again, further contributing to popular discontent, which broke out in a social explosion in July.

Seems that cutting revenues makes you more likely to default on your debts and does not magically improve the economy. And when you do it just before a pandemic, well maybe it doesn’t work out well.

From Reuters, about that tax increase too late.

An increase in Value Added Tax (VAT) to 12% from 8% with immediate effect is among the key tax increases announced on Tuesday, which is expected to boost government revenues by 65 billion Sri Lankan rupees ($180.56 million).

Other measures, including increasing corporate income tax to 30% from 24% from October, will earn an additional 52 billion rupees for the exchequer.

Withholding tax on employment income has been made mandatory and exemptions for individual taxpayers have been reduced, the statement said.

So, the biggest chunk of it was a regressive VAT tax increase.

I’m not an expert on Sri Lanka, but the third world debt trap, which started primarily in the 1970s was based on the idea that you could borrow money and use that money to buy development. The play was to spend the money to turn to exports the West wanted (cash crops, minerals, etc…), which you had a “comparative advantage” in. Problem is that everyone was getting the same advice, so the supply of cash crops and minerals increased in multiple countries and the price crashed. Worse, to grow cash crops you had to get your subsistence farmers off the land. They went into slums, and you now had to feed them, which meant you had to import food.

In Sri Lanka’s case tea, spices and coconuts are key exports. You can only eat one of those three. When Covid happened the market collapsed, incomes were already down, debt load was high and … BOOM. According to the figures Sri Lanka is a net “agri” exporter, but it exports mostly non food agri items and can’t feed its own population.

(Rule : if your country can’t feed its own population, you are always vulnerable to outside forces.)

So, anyway, Sri Lanka spent generations servicing debt by selling the developed world luxury agri-goods, but the prices of those weren’t that high, and they didn’t get a developed economy out of their loans, but still had to pay the loans while unable to feed their own population. Pretty normal story, sadly. (Egypt is the saddest, from the cornucopia of the world to a food importer. The Aswan dam should never have been built, losing the Nile’s annual flood was too high a price to pay for its electricity.)

Now, the media is constantly full of stories about the Chinese Debt Trap. They’re bullshit.

African countries owe three times more debt to Western banks, asset managers and oil traders than to China, and are charged double the interest, according to a study released on Monday by British campaign charity Debt Justice.

This is entirely consistent with what I have discovered every time I’ve looked into the issue. It is not that there have never been corrupt high interest Chinese loans, but generally speaking, Chinese terms are far better than Western ones.

The reasons are twofold:

  1. China wants resources. In exchange they are willing to build infrastructure for cheap in countries who will sell them those resources. If you want hospitals and schools or even an entire city as well, they’re happy to build that for you too.  This seem similar to Western policies from the 70s but is different in important respects: the West wanted the resources and they wanted to make lots of money off the loans and they wanted to gain control of economic policy in developing countries so they could institute neoliberal policies like getting rid of food subsidies.
  2. China has just spent decades developing its own country. While the job isn’t done, it has slowed down and China found itself with a lot of extra development ability: companies and workers specialized in building infrastructure: from ports and airports and railways, to everything a city needs, including sewage and power. They want to keep that industry running, and not have to get rid of millions of employees and have firms downsize and go bankrupt. So those firms, and often workers now develop countries all around the world. As long as they make some profit, that’s good enough for China. It doesn’t have to be high, especially, again, as they’re getting resources in exchange.

The “developing” world is a mess because of the West, not China. It is our policies which made it nearly impossible for most nations to develop. Those policies were designed to make our coporations and banks rich and to weaken the ability of poorer countries to resist us. They were exactly the opposite of what is required to develop a country, which is almost always done behind trade barriers and by moving UP the value added chain, not by selling raw materials and crops. This is how the US did it, Britain did it and almost every country in Europe did it. It is how Japan and Taiwan and Korea did it.

We sold countries like Sri Lanka advice that was bad for them and good for us, and which put them into a debt trap we refused to let them get out of by pretending that debt default was unthinkable and debts sacrosanct and by hurting any country which tried to default brutally.

This isn’t the historical norm. Previously third world countries defaulted all the time, and they soon floated new debt and yes, investors loaned to them anyway.

People who loan money should not be protected that much from default. Some protection is reasonable, but when a person or country is bankrupt, they should be able to default. Doing so keeps lenders honest: they either don’t lend, or they accept the risks, and they have incentives to keep debt reasonable, since if they don’t, they will be hurt.

When we made it so that default was virtually unthinkable, we changed the incentives (so beloved by economism believer) in ways that made it make sense for investors to lend money which was to be used in ways which crippled entire countries, indeed continents and made it impossible for countries to change course and pursue strategies which would actually allow them to develop.

That’s the story of most of the developing world.

And if you need to borrow money as a third world nation? Borrow it from China, not the West, if they’ll lend to you. As for the IMF, their job is to keep the payments going and keep countries in the debt trap so they can never develop and never have policies independent of the US and the West.

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India Is Not The Next China

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On November 2, 2021

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One of the main reasons I took some time to read the smarter members of our international elite was to learn what their assumptions are. The smart ones disagree on the consensus in some places, but what is most interesting to me is where they don’t.

India is one of those places: almost all assume that since China modernized, India’s modernization is inevitable and it will be the next great power.

I don’t see it. India still doesn’t have the necessary government capacity to run the country. Despite the attempt to clean up corruption with demonitization, the civil service is still immensely corrupt, but it is also incompetent. Whatever one thinks of the CCP, they had state capacity; they could make things happen and discipline local elites. The central government in Delhi still mostly lacks the ability to carry out complicated actions in the regions; heck, often enough they can’t even manage the capital region well.

Next, the Indians haven’t taken the right lessons from China. They see that China was involved in global value chains, but they haven’t understood how China used dual currencies and currency restrictions, along with currency purchases to control subsidize exports. They don’t understand, that is, that China’s rise was Mercantalist and not Neo-liberal. Certainly China liberalized certain sectors, but they didn’t neo-liberalize monetary policy and they kept government firms in charge of large amounts of the economy, including much of the banking sector, which they used to direct loans where they wanted. Despite criticisms and problems, this worked.

Chinese liberalization was always within the context of a centrally controlled monetary and fiscal policy, ntended to create the necessary conditions for international competitiveness and to direct capital towards sector the government prioritized. Regional governments were allowed vast latitude to purse centrally chosen goals, but the center did determine the goals and keep an eye on what regional officials were doing.

Third, even if India modernizes faster than I expect, they aren’t beating climate change. India is one of the major countries which will be hit hardest. Crude effects like pure heat increases, potential problems with rainfall, increased extreme weather events, and loss of water from the Himalayas can all be expected to harm India. Since the Indians have also vastly overused their groundwater, they will be hit by serious water issues very early compared to much of the rest of the world.

Then there is Bangladesh, one of the lowest lying countries in the world: it will be one of the first nations to collapse under climate change, and it will send literally tens of millions of mostly Muslim refugees into India.

India isn’t making it. They still only have a small middle class, they regularly have food problems, their government is corrupt and incompetent and they don’t understand how modernization actually happens so they aren’t pursuing the right policies. Ironically they really should sit down with the Chinese and cut a deal through the Belt and Road initiative to be the nation which primarily receives industry China is offshoring but is suitable for India’s stage of development, but tense Chinese/Indian relationships are preventing making an arrangement which would benefit them.

(The Chinese cut deals with America, who they have many historical grievances with, and overlooked America’s primary support for Taiwan, when they needed what America offered. They weren’t over-proud, they did what they had to to get strong first.)

Unless climate change effects happen far slower than I expect (and so far my predictions have been far closer to what’s happening than consensus forecasts, but still slightly optimistic) and the Indian government gets a clue about how the world actually works and manages to actually fix their civil service, there’s no way India makes it before global value chains start collapsing under climate change and having to be re-engineered. At that point India will have so many problems that industrialization will be off the board, and only an extraordinary government and leadership would be able to take advantage of changed circumstances to build up India. Much more likely is government collapse and loss of effective control of huge swathes of the subcontinent as mass famines killing at least 10s of millions of people (and quite possible hundreds of millions) and mass migrations occur.

I wish my analysis indicated otherwise. I’ve spent time in India, I have family who stayed after independence, and I like the Indian people.

But I’m just not seeing it.

 

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China’s Economic “Miracle” Was Normal

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On November 1, 2021

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Over the last few weeks I’ve been reading books by some of the smarter members of the international elite. One thing they all seem to agree on is how amazing and unprecedented China’s economic rise was.

It wasn’t.

China industrialized and modernized the way almost all nations have:

  1. Through mercantalist policies. In China’s case, keeping the value of the currency low, taking advantage of low wages, and starting with the oldest parts of industrial value chains.
  2. By exporting to large external economies which let them: the US and Europe.
  3. By grabbing as much intellectual property as possible.

This is how America did it in the 19th century. This is how Japan did it twice (Meiji, post WWII, Taiwan and South Korea did it. This is how virtually everyone did it.

Americans got greedy and stupid, from a geopolitical point of view. They believed the nonsense “End of History” bullshit about how capitalism and democracy are intertwined and capitalism inevitably leads to democracy and they were salivating over the profits they could make in China. So they traded and they let China into the WTO.

Contrary to the idea that democracy and industrialization/modernization are intertwined; Japan and Germany did most of it under authoritarian governments and with massive government direction. Even post-WWII, Japan was a one-party state, not a real democracy. Germany’s industrialization was based on Prussia’s command economy, and the great companies were practically state organs even if they were nominally civilian.

Japan didn’t become a nominal democracy because “capitalism” it became one because it lost WWII. The Kaiser had a parliament, but still a great deal of power and he didn’t step down voluntarily, he lost power because the Germans lost WWI.

But the emphasis on authoritarianism misses what is actually interesting and almost unique about China: it has the most decentralized government spending of any major country, with over 70% of spending decisions made below the Federal government. As a rule, the center made and makes goals and guidelines, but leaves it up to regional and municipal governments to figure out how to achieve them. China has a dynamic government, and there is a lot of competition between governments, as much as between firms.

It is also easier and cheaper to start a new business in most of China (free in Beijing to incorporate) than it is in most of America or Europe.

Meanwhile, the great danger to capitalism is capitalists being too successful, and buying the system, and then getting rid of necessary oversight and regulation. China has largely avoided that (though real-estate wealth is still a problem) and Xi Jingping has cracked down repeatedly those he considers bad actors. In one recent example he forced delivery app companies to treat their employees much better (better than in America). In another he got rid of the College prep industry almost entirely, which a lot of western observers thought was bad, but the industry was a pure “Red Queen’s Race” situation, because it existed everyone had to do it, and as with all such college prep industries it favored those with money over those without. Xi was entirely right to end it.

Democracy used to serve this purpose in the West. Almost everything FDR did, economically, was to stop capitalism from destroying itself.

Further, all evidence I have seen indicates that contrary to what I thought in the past, the Chinese Communist Party (CCP) goes out of its way to recruit smart, competent people and has thus, so far, been able to avoid the generational nepotism and degradation cycle.

To bring this back to Western elites, a lot of the mistakes come from drinking their own Kool-aid. While virtually no country larger than a city state has ever modernized without mercantalist policies, the orthodox economic position of the West for decades was laissez-faire, and that’s what the World Bank and IMF made most countries do. Those policies are vastly destructive and don’t work IF you want a country to modernize, but if you really want it to become a helpless satellite state they work well. (Bad Samaritans, by Ha-Joon Chang covers this well.)

“Free” trade is not what America did, Germany did, France did, Japan did or even England did to industrialize, and it’s not what China did.

What it is truly unique about China’s industrialization is its size: it’s a subcontinental power with a huge population. Japan was never really a threat to the US, for all the screaming in the 80s, because of its population size and limited geographic extent. China is by some measures already a larger economy, and the only thing might stop it from becoming the world’s greatest power and eclipsing the United States is that climate change will  hit it hard somewhat earlier than it will hit the US, as best I can tell.

So, what matters about China is just that it’s not Western, and poised to become the first Eastern hegemonic power in about 200 years. Of course the US doesn’t like that, and of course Europe (still an American satrapy) is uneasy.

This could have been avoided easily enough, though it probably shouldn’t have been, simply by refusing to cooperate with Chinese mercantalist policies and certainly, if the US didn’t want a rival who would probably eclipse it, letting China into the WTO was insanity. (This was clear at the time, and many people objected.)

The other issue is that the West no longer has a veto on who gets to industrialize. For various reasons Japan, South Korea and Taiwan couldn’t serve as the necessary markets for mercantalist expansion, but China can and that’s what they’re offering many other nations the West never let develop. The European/US monopoly is broken.

The lesson is not to believe your own lies and bullshit. Fukuyama was obviously full of shit about “The End of History” and developed world suggested “development” policies in the last half of the 20th century were meant to stop nations from developing, which was their record, and anyone with  sense who spent a few hours examining the policies of countries which actually industrialized, could know it.

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The Advantage of Permission & The Fall Of Oligarchies

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On September 28, 2021

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One of the main advantages of capitalism is “permission.” It gives more people permission to do things than oligarchical or state capitalism. This was, actually, a lot of what Adam Smith was complaining about in “The Wealth of Nations”: that state monopolies and controls were limiting who could effectively participate in the economy: you might have a great idea, but you couldn’t do anything with it.

Capitalism, as a Western system, also has other features, of course, including wide-scale theft of capital from the majority of the population, of which the enclosure of the commons was one part (the commons were property rights). Society becomes divided into those who have capital, and those who don’t, who are compelled by Marx’s “whip of hunger” to work for wages. (Thus wage-slavery, a term coined in the 19th century when this process was happening in America.)

Still, the explosion of businesses of all sizes is much of what drove the success of capitalism: the ability to DO things, and not be stuck in old forms.

This is also at the heart of much of the success of China. What Westerners don’t realize is that, despite all the cries of totalitarianism, the Chinese government is one of the most decentralized in the world: over 70% of spending decisions are made below the national level: this makes it the most decentralized national government in the developed world.

China’s central leaders make decisions and laws, to be sure, but much of how that is implemented in any locale is up to the local party, and definitely not micro-managed.

If China had tried to micro-manage everything, they would never have succeeded in becoming the World’s largest economy, or lifted so many people out of poverty. Instead they would have succumbed to the same diseases that did in the USSR. (Which had its own successes, but stalled out for a variety of reasons.)

Some years ago, in an old book I can’t find, I read an introduction where the author, who had lived thru WWII, noted that the idea that fascism was the superior form of government had been proved to be absolute nonsense: when the Allies turned their economy around and pointed it at war production and mobilization it produced miracles precisely because decision making wasn’t bottle-necked at the top. A dictator and his few trusted cronies can be decisive, but their unwillingness to extend trust down the chain cripples them.

This requires social consensus and trust, however. America and Britain and Canada and Australia had to be behind the war at a population level: but they were, and while guidance was needed and often correction, it is precisely that many people could make decisions which made the war effort possible and helped crush the Nazis.

The problem we have now in the West is dual-barreled; we both have improper direction from the top and bottlenecking. New enterprises can start, and do, but if they are successful they can’t run: they are bought up or sold out. This is a result of the structure of financing these days: founders generally don’t control the majority of their company’s voting stock, and are forced to sell or go public by investors (most often, sell.)

Money itself is bottle-necked: there’s tons of it pooling at the top, but there are radically fewer banks than ever before, and access to money has to go thru the already rich. The old middle and even upper (not rich, but upper classes) are relatively poorer: the famous “check from Dad” investment is available to fewer and fewer.

Regulatory hurdles are massive. Everyone knows, for example, how to make insulin, and you’d think someone would get into the business and undercut producers. Insulin costs about $4 to make, and sells for over $300. In economics this looks like the sort of situation that would automatically lead to competition.

It doesn’t. For one, getting permission to produce is hard and expensive. For the second, if you did manage to, it would be costly to setup the initial factory and supply chain, and that means the current producers would simply step in and undercut the new entrant till they went out of business (people would buy the cheapest), then push prices back up once they had driven the challenger out of business.

The second bit is also a regulatory issue. A properly functioning government wouldn’t allow undercutting: but then a properly functioning government would not allow the sort of predatory pricing and abuse of oligopoly power.

There are only three insulin producers in the US: they are obviously in collusion (which older anti-trust law would have said is clear given how their prices are all so high and uniform, and thus it did not require proof of meetings and so on to set prices.)

And this is the next problem: if there were a hundred pharma producers in the US, one of them would break ranks. But when there are so few, they don’t: collusion is easy. You don’t even have to get together,  you just have to follow the price increases and be willing to commit mass murder. Since it is a requirement of membership in modern capitalist elites in the West to be so-willing, of course no one in charge of Pharma in the US isn’t willing to mass murder to get richer, as Covid has also proved.

This inability to really do new things or even old things (insulin ain’t new) unless they benefit and are controlled by incumbents is rife throughout Western societies: it is by design. Even international trade law is designed to ensure this: tariffs and subsidies are how companies that don’t already lead an industry used to develop, but we’ve made that basically illegal, leaving only “pay your workers dirt cheap wages and we’ll let you in, if you cut us in on those delicious exploitation profits.”

This is what China did, at first: they cut Western and American elites in on the profits. But they also were very aggressive about obtaining the manufacturing knowledge (called “intellectual property” in the West”) for themselves. The price of the profits was that you had to give up your secrets. This was the deal, I was told this decades ago by people familiar with business in China and offshoring, but there’s a lot of pretense now that Western elites didn’t know it. They sold their countries good manufacturing jobs and middle classes down the river for Chinese gold.

I don’t blame the Chinese for this: I’d have done the same in their shoes, because industrializing by the “rules” hasn’t ever worked unless one was willing to be subordinate (Japan, Korea, Taiwan, etc…)

The Chinese sized up Western, and especially American weaknesses shrewdly and took advantage of them. American elites did get most of the profits they had been promised, they just didn’t get to own the Chinese economy, which is what they really wanted.

China is, thus, the great exception: the one who made it out. Almost everywhere else, however, what has happened is that a few companies in each industry have come to predominate. Their production facilities are scattered, but at the same time bottlenecked, with parts production in various locations final assembly in others, so that if any part of the chain is taken out the entire chain can experience shortages.

They are protected by vast “barriers to entry”. They can undercut at will, and regulators won’t stop them. The structure of starting new businesses means upstarts have to sell out, and often to their competitors, as one can see by watching internet giants gobbling up strong competitors like YouTube, Instagram, WhatsApp and so on. Law is against them, up to and including international law.

And so a few companies, controlled by a very small elite compared to the population, control most of the developed world economy. Where there might have been dozens or hundreds of viable large firms, now most sectors are controlled by a few conglomerates. These conglomerates then own national politicians, and those politicians write the laws to suit them. (A perusal of major extension of copyright law in the USA, with the original expiration dates on copyright on Mickey Mouse will be educational.)

Oligarchy is always stupid and unproductive. The great oligarchs are made out to be heroes, but almost all of them exist by making more activities impossible than they make possible: they do their best to allow nothing to succeed unless they will profit from it, as app stores, with their 30% rates, show at the most retail level.

All things human end. All oligarchical ages end, just as do all democratic ages, aristocratic ages and so on. The question is when and how? The ideal is to use what remains of the machines of effective democracy and government to end this oligarchical age. China has recently cracked down on billionaires and tech exploitation of workers (for example, they made abuse of app delivery workers illegal). They did so because the CCP understands its interests: it doesn’t want opposing power centers, and because the CCP wants the Chinese economy to work for everyone because they don’t want serious dissent.

The need for survival concentrates the CCP’s minds. Whatever one thinks of them, they can, as Matt Stoller points out, still govern.

Our elites, on the other hand, are pigs at the trough. There is nothing they will not do to become richer, and they have no eye for the longer run, only for power and money and now.

This has worked well for them for so long they do not believe it will ever end.

It will. It will either end because the populace ends it (led by a chunk of fallen elite or elite who decides to betray the other elites) or because the necessary conditions for its success crumble. This can be an end to geopolitical supremacy (which Western elites are scared of, which is why the onrushing Cold War with China) or collapse of the environmental conditions and resources necessary to continue this mode of production, which is something our elites are not scared of (no, they aren’t scared of climate change.)

Unfortunately, at this time, it seems most likely that this configuration will end because of environmental and societal collapse.

(My writing helps pay my rent and buys me food. So please consider subscribing or donating if you like my writing.)

A Great Idea About Capitalism That Was Wrong

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On July 27, 2021

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So, back in the 80s, when I was young, green and wet behind the years, one of the great thinkers about how to help poor people was a guy named Hernando DeSoto. (Great name, aces on parents!)

DeSoto, who was mostly concerned with Latin and South America had one big idea: the reason that poor people were fucked is they didn’t have clear ownership of what they actually owned: slum dwellers didn’t own their houses or the land they sat on, peasants often didn’t own their land either, and informal bus companies and the like operated without licenses or any rights to their routes.

Because they had no clear title, they couldn’t borrow against their actual property, couldn’t sell it and move, or in general use it as an asset.

This DeSoto said (and at the time, I believed, and so did many governments and NGOs and so on) was one of the reasons they stayed poor, not only couldn’t they access capital: they couldn’t even use the capital they already really owned.

The solution was to give them that clear title, which would allow a million new businesses to bloom, and so on.

Because we live in a far more cynical age (and because I gave it away in the title!) you know this didn’t work out. What happened instead, though it took a couple decades to become obvious, is that once they had title, they could lose it: sell it, have the government take it away, go into debt (which most poor people do) and have it seized in payment of debt, etc…

If you’ve ever been real poor (in the informal economy, unbanked, no assets) you know that perhaps the only good thing about it is the ability tell collection agents (generally the scum of the Earth) to go fuck themselves. “Take me to court, I have nothing you can seize!)

DeSoto managed to remove that one sliver a silver lining, so that slum dwellers could even lose their tin shacks.

Ah, capitalism! Truly the most glorious system ever developed to concentrate wealth and power in a few hands while pretending that it’s all voluntary. At least when feudal nobles or MOngols conquered you and took everything you didn’t have to pretend it was your free choice, or something.

Realism aside (I was going to say snark, but this is just how the system is meant to work) this is what happens when we are indoctrinated into thinking that capitalism is a system designed uplift everyone, and it just happens to require concentration of wealth. It’s also what happens when we assume that the uplift actually powered by industrialization happened because of capitalism instead.

It’s hard to disentangle these two because capitalism was in power when industrialization happened and the great challenge against it (state centralized “communism”) lost (largely because it had the inferior geostrategic position, I’d suggest.) So we mix the two.

But they aren’t the same, and capitalism, to the extent it has virtues, works best when it is kept under strict control and a lot of things are kept out of the market.

I assume DeSoto was sincere (though who knows), but because he bought the myth, and sold his myth so well, he wound up hurting exactly the people he wanted to help.

(My writing helps pay my rent and buys me food. So please consider subscribing or donating if you like my writing.)

 

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