It is not totally impossible that, despite diminishing economic freedom and near-zero free speech, the Chinese economy will continue to grow at high rates. That these rates will reflect genuine economic growth, that is, increased production that responds to consumers’ demand. That some other way than free markets will be discovered to express consumers’ demand. That industrial policy will coerce businesses into efficiently satisfying consumers’ demand. That the centralized Chinese state will find a solution to the central planner’s information problem—what individuals prefer, which trade-offs each is willing to make, and what are all the production functions and all local conditions in the economy. That a dictatorial central government will erase the experience of two millennia of Chinese empires stifling liberty and economic growth. That Chinese businesses will out-compete free Western entrepreneurs (assuming that the latter still exist), and that the fears of American statists that China will (in some real sense) overcome America will be realized.
Perhaps three hundred years of economic analysis have been wrong. In a Popperian way, we must view our current beliefs as conjectures that have not been proven wrong.
It is however much more likely that the current Chinese state is a giant with clay feet and that the country’s economy will suffer the effects of strengthened authoritarianism. The suspicion that a Wuhan laboratory accidentally released SARS-CoV-2, if it turns out to be true, and the incident at the Taishan nuclear power plant last week are consistent with the hypothesis of a fragile economy run by an inefficient central planner. The Chinese government wants to make China “great” again—as it was under Mao and the preceding two millennia of stifling imperial government. (On imperial China compared to the West, the recent books of Joel Mokyr and Walter Scheidel are worth reading.)
In a Regulation article three years ago, I wrote:
As the Chinese government has veered back toward authoritarianism, the prospects for continuing growth have dimmed considerably, even if this does not yet show in economic statistics. Those who, often for invalid protectionist reasons, fear the economic growth of China can relax.
The main danger is that, in order to hide its failures and keep its grip on its subjects, the Chinese Leviathan would excite the latter’s nationalist emotions and lead the world into war. But note that Western protectionism against China—that is, against Western consumers and against Chinese producers who want to open to the world—won’t help.
Freedom of speech is as important for economic efficiency as it is in the search for truth. In their 2012 book How China Became Capitalist, a title that now looks more like an optimistic prediction, Ronald Coase and Ning Wang prudently wrote that “without a free and open market for ideas, China cannot sustain its economic growth.” The intimidation and closing of the last anti-government newspaper in Hong Kong further point to where the system is heading (Elaine Yu, “Honk Kong’s Apple Daily Newspaper Prints Last Edition as Free-Press Era Ends,” Wall Street Journal, June 23, 2021).
One question can still be raised for the future: Is it possible that, past a certain point, a tightly regulated and crony “capitalist” economy could become less productive than an economy dominated by an openly tyrannical government that allows for some limited and closely monitored economic entrepreneurship by state corporations?
READER COMMENTS
Christophe Biocca
Jun 24 2021 at 11:46am
I think the real concern isn’t China being more efficient, and outcompeting the US person-for-person, but China being efficient enough to achieve 1/3-1/2 of US GDP per capita.
At that point their ~5x population more than makes up for the relative lack of efficiency.
That’s a world where China is leaving trillions on the table due to being a (partial) command economy, but still the most powerful country by a significant margin.
Those (1/3-1/2) relative numbers aren’t that unlikely, they’re in the rough ballpark of where the Soviet Union was relative to the US in 1980 (I’m having a hard time determining how much of that is fakery in official measurements vs actual ground truth though).
Pierre Lemieux
Jun 24 2021 at 3:52pm
Christophe: The Chinese GDP per capita was about 30% of the American GDP per capita a few years ago, which puts the standard of living of the average Chinese to where it was for the average American in 1950. Actually, the relative Chinese standard of living must be below that because of higher investment in China. But don’t confuse GDP per capita with government revenues! (Don’t confuse “China” with “China”!) Part of my point is that as the Chinese government will try to control and plunder more of GDP (what people produce and consume), the latter will decrease or stop growing. Also don’t forget:
Matthias
Jun 25 2021 at 2:20am
To compare China today with America in the 1950s via real GDP numbers, you’d need a good handle on inflation/price level over long periods of time.
That’s notoriously tricky.
Even the richest American in the 1950s couldn’t afford a smart phone or play VR games. They just hadn’t been invented yet.
Pierre Lemieux
Jun 25 2021 at 11:41am
Matthias: Of course, these estimates are tricky, but they can give us an idea. For the level of GDP per capita, my data is the World Bank’s GDP per capita in PPP for 2017: $16,806.7/$59,531.7=28.2%. For the 1950 comparison, I used the real GDP per capita in the Maddison Project.
Mark Brophy
Jun 25 2021 at 12:04pm
I fear that China might fail to reach 50% of the United States GDP/capita, suffering the middle income trap that Chile is suffering now. The richer China becomes, the richer we become. We owe our high standard of living to China imports. If they reject debased dollars in exchange for their goods, we will suffer.
David Seltzer
Jun 24 2021 at 11:55am
Nice use of Popper’s falsification principle. Historical note regarding autocratic central planning. In 1921, Lenin proposed his NEP, a freer market policy to foster Russia’s economic growth which had severely declined from 1915. To jump start Russia’s depressed economy, Soviet central planners partially revoked complete nationalization of industry.
Matthias
Jun 25 2021 at 2:15am
> That a dictatorial central government will erase the experience of two millennia of Chinese empires stifling liberty and economic growth.
Chinese history is much more interesting than that.
China spent almost as many years fractured, as it spent united in empire.
Amongst the dynasties, have a look at especially the Song Dynasty. Paper currency was invented back then, as well as gunpowder etc. Free banking was also something the Chinese toyed with on and off.
Pierre Lemieux
Jun 25 2021 at 10:12am
Matthias: They did not have a “culture of growth,” nor did their centralized political system allow it. So they did not have an Enlightenment; and they did not have anything resembling an industrial revolution until after the death of Mao. The book to read is Mokyr, cited in my post.
Lizard Man
Jun 25 2021 at 3:16am
So? China’s growth for the past few years has been driven more by people moving from farms to cities than by anything else. That trend still has a few decades left in it, even as the population starts falling.
Two provinces recently changed the rules on household registration, and now allow anyone with a household registration to change their registration from rural to urban within that province. That is a big deal, and a very big increase in freedom. Same with the three child policy.
Additionally, China’s economy is still a mixed economy. The country does rely on markets, or, at the very least, when it comes to household expenditures, the things that households spend most of their money rely on markets in ways that are similar to the West (housing, transportation, food, energy, appliances, healthcare, education, taxes, clothing, etc.). There are large state owned enterprises, and those are concentrated in the Northeast and in the supply of construction materials (cement, steel, etc.). SOE don’t, to my knowledge, play much of a role in making consumer goods, with perhaps the exception of hybrid companies like Huawei and handsets.
I am not saying that China is totally awesome. Merely arguing that it isn’t much further away from being a market economy than many developed countries.
Phil H
Jun 28 2021 at 11:04am
As Lizard Man says above, once again this picture of China is pretty much unrecognisable to those of us who live here. Economic freedom is not diminishing. It is increasing – at least at the small business level, where I operate. It’s still a bureaucratic hassle getting licenses, but in general, it’s getting easier. And simply because of the growth of the cities, the options for opening businesses are much wider. I live in a second-tier city (Xiamen, population ~4.5 million), and I’m willing to bet that it’s a more dynamic economic scene than most 2nd tier American cities. No-one is trying to manage the economy at the micro-level.
The headlines that PL thinks represent the Chinese economy, things about increased support for the state-owned sector – they’re a million miles away from the things that people do on the ground.
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