by Michael Roberts
In my view, the Chinese economy remains at a structural crossroads.
The state and state enterprises continue to dominate the economy in
investment, employment and production. That means that foreign capital,
domestic private capital and market forces do not hold sway, even
though they have been increasing in weight and power over the last 30
years.
My view is controversial in Marxist circles. The vast majority of
Marxist economists and ‘experts’ on Marx’s ‘theory of the state’ reckon
that China is capitalist or ‘state capitalist’. But for me, the class
nature of the Chinese state remains open.
All I would add at this point is to remind readers of the data that I published in a past post on the sheer weight of the public sector and public assets in the Chinese economy.
The IMF has published a full data series on the size of public sector investment
and its growth going back 50 years for every country in the world. It
shows that China has a stock of public sector assets worth 150% of
annual GDP. Only Japan has anything like that amount at 130%. Every
other major capitalist economy has less than 50% of GDP in public
assets. Every year, China’s public investment to GDP is around 16%
compared to 3-4% in the US and the UK.
There is nearly three times as much stock of public productive assets
to private capitalist sector assets in China. In the US and the UK,
public assets are less than 50% of private assets. Even in ‘mixed
economy’ India or Japan, the ratio of public to private assets is no
more than 75%. This shows that in China public ownership in the means
of production is dominant – unlike any other major economy. But the IMF data also show that, while public sector assets in China
are still nearly twice the size of capitalist sector assets, the gap is
closing. Private (capitalist) sector investment stock is growing faster
than state sector assets.
In this post, I want to show that, because the Chinese economy is
balanced between the power of the state and the market, this is
increasingly reflected in the ideology and economic thinking of Chinese
officials and academics. There are still many academics in Chinese
universities that hold to what they think is Marxist economy theory and
categories. But there are many more, particularly officials in
government and state enterprises that have been educated in ‘Western’
universities, who have long abandoned a Marxist view and opted for
mainstream neoclassical or Keynesian theory.
A recent striking example is Wang Zhenying, director-general of the
research and statistics department at the PBoC’s Shanghai head office
and vice chairman of the Shanghai Financial Studies Association. This
leading Chinese state banker recently summarised his economic views from
his Chinese language textbook on economics (for Chinese students) in
the Financial Times of all places.
Wang tells us that “Crises destroy, but crises also create.” He means that “the
outbreak of each crisis gives rise to new economic theories. Marx’s
theory of Surplus Value was created amidst frequent economic crises in
the late 19th century and Keynes’s revolutionary theory was put forward
during the Great Depression in the 1930s. Today, with a worldwide
financial tsunami only now receding, people are expecting a new economic
theory in response to the failure of the pre-crisis mainstream.”
So for Wang, Marx has had his day in the theoretical limelight (ie
19th century) and for that matter so has Keynes (2oth century). The
recent global financial crisis needs a new theory for the 21st century.
Marx and Keynes apparently have nothing more to offer.
And what is this new exciting theory that Wang is proposing to his
students to explain the world economic crisis? He calls it ‘Trading
Economics’.
What’s this? Wang: “Trading economics” is one new theory
emerging against this backdrop. Mainstream economics deduces the macro
whole by extrapolating from the behavior of individual “representative
agents”. Trading economics replaces this with a systematic and
comprehensive analysis approach. It stresses that in an interconnected
world, the interaction between trading subjects is the fundamental
driving force behind the operation, development, and evolution of
economic systems.”
Well, I am still no wiser. Wang explains that mainstream
neoclassical theory is stuck with ‘representative agents’ who have
‘rational expectations’ who maximise utility and profits, while market
prices move up and down to achieve equilibrium. As Wang says, this
bears no relation to the reality of modern economies and never did. In
contrast…
“Trading economics chooses a different path. Everyone
participating in economic activities is put in a specific organisational
structure. As a result, their behaviour becomes affected by culture,
morality, property, and system. There is no “economic person” like
Robinson Crusoe in trading economics. Trading economics only has
organizations with specific internal structures: households and
enterprises. This is the first step to bring economic theory back to the
reality”.
This all sounds promising. Wang is going to ‘rethink’ economics and return it to reality. And what does he come up with – behavioural economics. “Behavioural
economics experiments have demonstrated that choices are characterised
by variety — there is no single answer to all situations.”
Now this is not so promising. Economics is reduced to considering
each situation or problem as having a different answer. That would
suggest we cannot find any generalised laws about the world economy and
its crises.
According to Wang; “Trading economics differs by recognising that
different people have different information, in part because they have
different experiences. So while each trading subject seeks maximum
profits, the “maximum” differs from one subject to another, even when
trading and constraints are the same. Therefore, if the behaviour model
in neoclassical economics is the absolute maximum, then it is
the relative maximum in trading economics. This is where the difference
lies.”
Hmm. I am still none the wiser.
What Wang really seems to be arguing for is free trade and international integration. “From
the study of the development rules of economic system, it is found that
global economic integration is neither the innovation of a single
politician, nor a strategy implemented by a certain country to pursue
its own interests. Instead, it is the only option following the
development rules of social economic system. Today’s world has shifted
from an isolated island, through small-world development, to a network
without marks. To achieve comprehensive progress and development, the
world economy must promote the integration of trading network among
countries. We need to listen to the warning of trading economics in a
world awash with anti-globalisation thoughts.”
This is shades of the very line presented by President Xi at Davos
2017, where he claimed that China is the leading globaliser. Now the
economic theorist of People’s Bank of China is offering ‘trading
economics’ to support Xi.
A key feature of Wang’s ‘trading economics’ is that it rejects the
idea of looking for causal relationships between economic variables. He
refers to the ‘masterpiece’ work of right-wing monetarist Milton
Friedman’s analysis of the cause of the Great Depression of the 1930s.
Friedman argued that the failure of the Federal Reserve Bank to control
the money supply properly was the cause. The banks collapsed because of
an unnecessary monetary squeeze. But others argued that the economy
collapsed because a change in ‘expectations’.
Wang concludes that “It is impossible to find a single factor among various events to explain the great contraction”. You see it’s just too complex for ordinary mainstream theory. So Wang says we must “give up on simple causal relationships”. Instead, using ‘trading economics’ we can get “a concrete structure through the trading network.” Then, apparently, “various possibilities of economic operation can be predicted, including the fluctuation of economic cycles, the probability of crisis, assessment of policy effects, etc.”
Wang provides no evidence in his FT article for his claim of the
power of prediction enabled by trading economics. And here is the nub
of his theory, namely its close “connection between macroeconomics and behavioural economics. According to Wang, “The
behaviour of each trading subject and the ways in which they react to
external disturbances can be informed by the research of behavioural
economists and psychologists. The economic operation simulated in this
way is better targeted and the analysis has more solid experimental
foundation.”
There we have it. Far from carrying out empirical research for cause
and effect, all we need is to go back into the laboratory of behaviour
and do ‘experimental research’. Wang claims that this “is a great
leap in methods of economic theory research because it represents the
unity of economic research and natural science in methodology.”
Actually, behaviourist approach is an economics cul de sac.
Before the global financial collapse, this micro motivation approach
to economics was popular with young economists who had turned away from
questions like poverty, inequality or unemployment to study behaviour on
television game shows. Looking at the ‘irrational’ behaviour of
people’s brains and thinking was substituted for the aggregate trends
and changes in modern economies. The irony of Wang’s view is that since
the global financial crash, empirical studies have come back into
favour to look for the causes of the Great Recession, because mainstream
and behaviourial theory had failed.
The irony of Wang’s view is that, since the global financial crash,
empirical studies have come back into favour in looking for the causes
of the Great Recession, because mainstream and behaviourial theory had
failed. Despite that, Wang wants us to ditch Marxist macro theory for
Keynes’ psychological ‘animal spirits’ or the micro ‘nudge’ theories of behaviourists like Richard Thaler.
Is the way forward really through behaviourists developing computer
models where the idea is to populate virtual markets with artificially
intelligent agents who trade and interact and compete with each other
much like real people? Sure, every situation is different but anyone who
makes a living out of data analysis knows that ‘heterogeneity’ is
limited enough so that the well understood past can be informative
about the future.
In my view, if economists want to understand the causes of financial
and economic crises, they need to look away from individual behaviour
models and instead look to the aggregate: from the particular to the
general. And they need to turn back from deductive a priori
reasoning alone towards history, the evidence of the past. History may
not be a guide to the future, but speculation without history is even
less based in reality. Economists need theories that can be tested by
evidence, but the evidence of the aggregate and history not the
laboratory.
Yes, Wang recognises that mainstream economic is no good at
explaining developments in modern capitalism, but does ‘trading
economics’ take us any further? It seems more like an ideologically
acceptable theory as an alternative to Marxism in the country of
‘socialism with Chinese characteristics’.
If you have opinions about the subject matter of posts on this blog please share them. Do you have a story about how the system affects you at work school or home, or just in general? This is a place to share it.
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