Tuesday, August 13, 2013

China's contribution to Economic Model Theory

The Socialism-Capitalism Debate
What does China bring to the Economic Model Table

What is the need to call it Economic Model Theory and why Development Theory is inadequate?
The idea of Development Theory reeks with a faint notion of  Orientalism. It is looked down upon, even dismissively, as something applicable only to Developing countries - the nations which got left behind. The concept therefore implies an unworthiness, an inadequacy springing from its lack of universal applicability. And therefore its scope and relevance gets limited. But the Chinese Miracle due to its extent and intensity goes way beyond anything the developing world has achieved and rises as a broader more universal challenge to some of the most central and sacred economic concepts. In order to stress the broad scope and universal relevance of the experiments and innovations taking place in China, for the entire economic world including the developed countries one needs to move out from the limiting "Development" nomenclature and consider them as more broad and central achievements worthy of consideration at the highest economic platforms For this reason "Economic Model Theory".

Capitalism vs Socialism – One can view this debate throw the Rose-thorn analogy. Those of us who hold strident views, we see only part of the picture and make up our minds based on those views. In the economic model we prefer we see only the rose – the rosier aspects and are blind to the thorns which are inherent and intrinsic within the existing models. It is just the reverse in the opposing models we dislike and even hate. We see only the problematic thorns and are blind to the rose centered within those thorns. The Chinese model does it plan ambitiously to grab both the roses - the roses offered by the two competitive and contradictory economic models - and at the same time avoid all the thorns.

Capitalism – Rent-seeking develops over time. By the very capitalists who  were supposed to terminate rent-seeking. And so we need a “Disruptive” Creative Destruction phase in capitalism. Why doesn’t a constant process of innovative process and product changes happen? Entrenched Elites blocking new emerging elites.  And so it needs a ‘creative destruction’ phase. But quite inefficient due to disruption caused. Lots of collateral damage. Many useful and Working processes go under. Replacement-destruction of entrenched elites has to be done through an act of physical uprooting. Capitalism’s own revolution.  We lately see that one can have the pain of creative destruction without the advantages of new more productive innovative elite class. Financial elites have grown so big that while society has managed to go through disruption they have managed to avoid any disruption to themselves and the new and better financial systems and processes have not emerged. Maybe in this case a bigger revolution will be needed to overthrow the entrenched elites. Social disruption of a bigger order.
China has probably been trying through a process of experimentation to blend capitalism and socialism or one may say to improve capitalism which is the same thing.
We shall see this through a class perspective but through a three class perspective and not a two-class perspective. Though more classes can help us to get a more sophisticated idea. Three classes will simplify matters enough for us to understand point being debated.
But in exactly what way? Mao despite all the pain and misery which was caused did raise the poor masses into a lower middle class – all round education,  health and employment though at a rather basic level and nothing beyond that. No way to channelize human capacities beyond that. With the Deng reforms the social networks were disrupted to incentivize people only according to performance. An elite class developed from the lower middle classes but due to the demise of social welfare schemes many descended back into poverty. Pure capitalism was modified and a social welfare net was developed for – welfare capitalism or a social market as one wants to call it. In addition to this there has also been the recognition of importance of regulation. Not burdened by ideology of either colour, China is probably trying to evolve a more orderly process of elite churn. One on which the entrenched economic elites are not allowed to emerge.  Despite the growth of certain real estate billionaires the Chinese rich are still far smaller in wealth compared to Western elites and relatively speaking maybe smaller even than Indian elites. And so their power to exert control over economic processes is limited. The Regulatory process makes it difficult to
Theoretical question – How does one restrict the growth of powerful economic elites who lead onto regulatory capture, rent-seeking and inefficient self-preservation? How does one avoid the Big Bank, Big Oil, Big Pharma, Big Telecom, Big Media, etc. nightmare of the US model?
1.      Pray and hope that profit-driven elites will not misuse their power for easy unnatural profits and continue to earn it the hard way! That their unproven urge to self-regulate will somehow be more powerful than their urge to earn profits as easily as possible. That they will not be able to offer incentives to the political and bureaucratic class:
i)                    to subvert the competitiveness of the system to prevent challenge from a more vigorous and innovative new elite class. 
ii)                   To corner the natural resources at considerable discount (rent-seeking).

2.      Limiting elite size to a certain point, by
i)                    Keeping them away from the Large Naturally Monopolistic sectors. By limiting these sectors to the control of the State.
ii)                   Progressively increasing Taxation.
iii)                  Regulation

3.      A State “somehow” blocks powerful entrenched elite pressures and continues to incentivize and unleashing the entrepreneurial energies of the middle classes. 
In this regard one must mention the US Big Business elites in monopolistic sectors have not yet gone on to block the growth of Small Business to Middle Business. In fact US and China have the most successful business emergence policies. But there is Sectoral Regulatory Capture. They have certainly cornered specific domains as personal fiefdoms in which newcomers are not welcome. Newcomers are welcome to create domains of their own in IT and Biotech and Genetics but not present a challenge in existing domains. Even in IT and Biotech now the Potential Newcomers are snapped up as soon as they show potential by a newly emerged elite in these sectors which too is looking to block new challenges.

4.      Representative Democracy has not shown any real capacity or even potential for being able to do withstand Elite Pressure. Direct Democracy is messy and inefficient even unworkable except through referendums.  And so we are left with an Authoritarian state. But most authoritarian states too are naturally driven by personal profit motives of the leadership. So why has China evolved differently? Maybe because there is a very small class of tiny nationalistic leaders who are driven by a social impulse to nurture and develop their society and nation despite all the attractions and distractions. A relatively light and benevolent control over the politics and economics of Chinese society. Watching out for negative trends and offering incentives without getting trapped in any ideology.

On the basis of the above complications and limitations with western capitalistic economic model, the Chinese Economic Model relatively free from concentrated economic power stands out. And what stands out equally is the engine behind this accomplishment - the nature of the Chinese state. Authoritarian but benevolent, responsive, caring and nurturing. Maybe not at an individual level as it might not be possible with a billion people. But at a collective level. As a state which stands stands up as a balancing force between Society and the Market. A state which nurtures the market but when the same market grows and concentrates to a point where it starts challenging Society the State jumps in to restore the balance. 

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