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Does Central Economic Planning Work? From Gosplan to Market-regulation — Which Would You Choose?

Maybe you could start your next email with a list (or even just one) counterexample [to modern China] of a functioning “unregulated” [economic] paradise? –Bill, Re: [Politics] self-regulating systems

OK, What You Asked For Bill – – –

I thought since you were in Hong Kong when I started writing this, it might be a good example (but it’s Jake who believes in Paradise; I only claim “markets aren’t perfect, just better“) – – –

…”miracles” first gained currency three years ago in a remarkable book published by the World Bank. Called The East Asian Miracle, its topic was the relationship between government, the private sector, and the market. And no doubt about it, the growth had been phenomenal: since 1960 the eight countries in question — Japan, Singapore, Hong Kong, Malaysia, South Korea, Indonesia, Thailand, and Taiwan — had collectively experienced more than twice as much growth as the rest of East Asia, roughly three times as much as Latin America and South Asia, and five times as much as Sub-Saharan Africa…. In my experience everyone wanted to hear about Korea, even though its income per capita was the lowest of the four tigers’ (Hong Kong, Singapore, Taiwan, South Korea); at $8,260, it still remains less than half that of Hong Kong…. the bias is entirely understandable. In Hong Kong, bureaucrats and planners had almost no role. — …and Wrong, William McGurn, National Review

73% of Hong Kong businesses employ nine or less; only 1% employ 200 or more. Hong Kong has had more than a 7% annual growth rate since 1948 [46 years]. –Briefing on Mind Extension Univesity, 3 Mar 1994

Hong Kong rated most free by Heritage Foundation study. Hong Kong has had the longest, steadiest growth of any country over the last 50 years. –Investor’s Business Daily, ~11 January, 1995

The Economic Gradient

First let’s take a look at that favorite of all Tigers, South Korea and how it got that way (which, remember, achieved only about half the per capita income of Hong Kong) – – –

…the Korean model operates on a completely different set of principles. …Like most technocrats, Park associated wealth with heavy industry…There would be none of this trusting the marketplace to sort out winners and losers. The government knew what industries were needed, and those that were favored received credit while those that were deemed frivolous withered on the vine.
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Like the Japanese model, the Korean model rested on three pillars. First, a bias toward the bigness that bureaucrats thought would guarantee economies of scale. Second, the idea that banks would not evaluate risk and credit as their counterparts did in the West but would rather serve as policy arms of the government. Third, that growth would be paid for by the public, by suppressing consumption. “Guided capitalism,” they called it, and though …it came with huge opportunity costs, it did work in the sense that the countries based on this model did develop. — …and Wrong, William McGurn, National Review

So, S. Korea did well — but only about half as well as Hong Kong.

And doesn’t that notion that “growth would be paid for by the public, by suppressing consumption” ring a bell somewhere – – –

In the years after the 1917 revolution, the Soviets lacked capital to build all the steel mills, dams and auto plants they needed. Soviet leaders seized on the theory of “socialist primitive accumulation” formulated by the economist E. A. Preobrazhensky. This theory held that the necessary capital could be squeezed out of the peasants by forcing their standard of living down to an emaciating minimum and skimming off their surpluses. These would then be used to capitalize heavy industry and subsidize the workers. –Alvin and Heidi Toffler, Creating A New Civilization, pp. 69 & 70

The results of centrally planned “socialist primitive accumulation” would probably even shock Jake. Remember, in the old U.S.S.R., somewhere between 16 and 20 million men, women and children were “emaciated” to death by “skimming off their surpluses.” And somewhere north of 38 million were similarly emaciated to death in central planner Mao’s “Great Leap Forward.” And once again, Keynes has something relevant to say – – –

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. –John Maynard Keynes

In these cases, it was defunct economist E. A. Preobrazhensky and his theory of “socialist primative accumulation.”

Now I’m going to engage in a little a priori logic here and suggest that a “self-evident” gradient exists among centrally planned soviet states such as Communist China, the U.S.S.R. versus, say, “guided capitalism” such as South Korea versus supposedly unregulated Hong Kong.  Hong Kong was, of course, regulated by the most intractable of regulators, market forces.

The low man on the totem would be the Soviet and/or Chinese citizen being squeezed by incompetent — and doomed — central planners since governments, by their nature, court gamblers’ ruin by usually putting all their eggs in one basket. Thus these citizens have a good chance of being emaciated to death.

Next up the ladder would be folks in South Korea, etc., in economies where the central planners had discovered some of their limitations and thus citizens weren’t emaciated to death. But still emaciated. By their central planners. And finally, LARGELY free-market places like Hong Kong — which for some reason — perhaps because “bureaucrats and planners (manipulators and congenital controllers) had almost no role,” seem to be in the minority — and very difficult to find.

So the gradient goes from Gosplan-style central planning (U.S.S.R., Mao’s China, North Korea, etc.), first to “guided capitalism” style central planning (South Korea, etc.) — then to nearly self-regulating free-markets. From Mao’s “Great Leap Forward” famine to Hong Kong (until the turn-over). From emaciation to twice the per-capita income of the “guided middle.

Lessons From the Guided Middle

It’s also interesting to see just what it was the S. Korean type “guided capitalism” technocrats had learned since “The Great Leap Forward” – – –

SO what accounted for the success of this planning as opposed to the socialist [primitive accumulation] varieties? The answer is simple. In contrast to other planned economies, Japan, Korea, Indonesia, Malaysia, et al. required that the companies supported be competitive in overseas markets. Instead of trying to preserve the foreign-exchange balance by curbing imports, the tiger economies like Korea did so by boosting exports, hence ensuring that their companies were more competitive. — …and Wrong, William McGurn, National Review

How? Despite Mr. McGurn’s assumption about not curbing imports to preserve the lop-sided foreign exchange balance, the technocratic central planners used every trick in the book. And then some. Including curbing imports. To start with, the fact they were squeezing their citizens automatically curbed imports — their citizens couldn’t afford them. They also subsidized their producers in various ways, put import taxes on external competitors, used NTRs — and fiddled the foreign exchange. Etc.

The thing is, you need A co-dependent — a country willing to accept your exports — and willing to accept a trade imbalance. In effect, that means a country who will send you the net difference in the value of trade goods exchanged between the two countries in “money.” Say, dollars. Some folks call that a “trade deficit.”

So the co-dependent net importing country says, “I’ll gladly pay you Tuesday for a hamburger today.” And, the co-dependent exporting country pretends not to notice that Wimpy is probably a deadbeat.

The problem is, of course, there are consequences.

The net importing country, in essence, “exports” the jobs that would otherwise be producing those imports at home. Sound familiar?

How do you ignore Wimpy’s impecunious position? – – – First off, don’t try to cash in his I.O.U.s. Currently, Japan and China, in that order, are holding the most of those dollar denominated I.O.U. tokens in their vaults.

There is, naturally, a limit as to how long this co-dependence can be kept going.

For the exporter, one trick is to keep it’s currency weak — and thus its exports cheap. One way to do this is to keep interest rates low, thus encouraging borrowing — which, in effect, “inflates” the exporter’s money supply thus lowering its value. At one point, Japan lowered its interest rates for preferred borrowers, literally to zero. This economic ploy, off and on still in play, powers the famous “Yen carry trades” — with all the attendant hazards.

After its 1989 economic implosion — where Japan lost about 41% of its apparent net worth (another consequence), such low interest rates did nothing to alleviate Japan’s approximately ten concurrent years of recession — something never seen before and finally labeled as a “balance sheet recession” by the US Fed in 1991. And, with a resurgence of inflation in Japan currently, there were fears of incipient stagflation.

Your mission, Mr. Benter, should you choose to accept it, is to explain why, since it seems clear that the less central control, the less fiddling with the currency, and thus the freer the market, the better off people are, why do we have, even in the United States, instead of increasingly freer markets, creeping fascism and/or socialism?

Here are a couple of clues – – –

I’m surprised it lasted this long,” said one friend of Hong Kong’s uniqueness as a beacon of free market practices. While never perfect, Hong Kong set the standard for openness to foreign trade and minimal government. While the ports remain open and the capital flows freely, the regulatory noose is tightening and the taxman cometh for the people of Hong Kong. Budget 2006-2007 Special: The Language of Taxation (By Andrew Work)

The result was fabulous growth in exports plus a gleaming array of new factories. It was hard to argue against. In Hong Kong the typical entrepreneur has a 5- to 10-man trading company in a grotty concrete building in Mongkok. In Korea, however, the visible signs of development were all modern-looking: gleaming factories, modern skyscrapers, roads full of new cars, etc. If it was more attractive to foreign theorists, this was in good part because it literally looked more attractive.
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In theory it worked like clockwork. As long as the consumers did not revolt, countries like Japan and Korea were able to create internationally competitive economies on the back of suppressed earnings. But as the world economy became more complicated and the running of these economies more cumbersome, the system itself became a threat to competitiveness. On paper the advantage of cheap capital was that it could be channeled to companies where it was needed; in practice this meant that capital was often steered to the politically connected rather than the economically meritorious. –…and Wrong, William McGurn, National Review

So, there were other consequences just starting to bloom: If you’ll notice, the article I’ve been quoting is dated Feb. 1998, written just as the “Asian Contagion” which “punished” most of the Tigers with major currency crises and inflations was beginning to bite. But Hong Kong was the least affected.

As Mr. Bernanke says, then,

“I think we can agree that, at a minimum, the opposite proposition–that inflationary policies promote employment growth in the long run–has been entirely discredited and, indeed, that policies based on this proposition have led to very bad outcomes whenever they have been applied.” –FED Chairman Ben S. Bernanke, July 10, 2007

P.S. Bill, the Thomas Friedman article you linked on China inadvertantly, apparently, included another unifying example for the Gosplan to Hong Kong gradient – – –

…as snapshots go, the one China presented through the Olympics was enormously powerful – …China did not build the magnificent $43 billion infrastructure for these games, or put on the unparalleled opening and closing ceremonies, simply by the dumb luck of discovering oil. No, it was the culmination of seven years of national investment, planning, concentrated state power, national mobilization and hard work.
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…. Yes, if you drive an hour out of Beijing, you meet the vast dirt-poor third world of China. But here’s what’s new: The rich parts of China, the modern parts of Beijing or Shanghai or Dalian, are now more state of the art than rich America. The buildings are architecturally more interesting, the wireless networks more sophisticated, the roads and trains more efficient and nicer. And, I repeat, they did not get all this by discovering oil. They got it by digging inside themselves…. –A Biblical Seven Years, By THOMAS L. FRIEDMAN, nytimes.com, Published: August 26, 2008, Beijing

The Chinese elites got it by “digging inside themselves” all right — by a modern version of “socialist primitive accumulation” and in accord with the Iron Law of Oligarchy, by squeezing the “magnificent $43 billion infrastructure for these games” out of the peasant part of “themselves” — “by forcing their standard of living down and skimming off their surpluses.”

This is the same way the “magnificent” Pyramids — AND the Great Wall of China — which at least seems to have served a useful function — were built.

In effect, “guided capitalism” — as in S. Korea, “modern” China, etc. — is just an improvement on Potempkin Villages. It may be unconscious, but you see the results: The central planners spending loot “emaciated” from the “peasants” on the elites and their plans. There’s a little different but closely related version practiced in America, where the Iron Oligarchs hire lobbyists and buy legislators to distribute the loot lifted mostly from the poor — regressive FICA “reverse Robin Hood” stealing remember — so they can spend it on their central plans. [1] Currently, bailing out their friends, the banks, insurance companies, and others “politically connected rather than …economically meritorious.”

Surprise surprise.

The only process that can dependably determine what, in the long run, is “economically meritorious” is a continuing and tireless “due process of market.”

Notes:

[1]

What those calling themselves planners advocate is not the substitution of planned action for letting things go. It is the substitution of the planners own plan for the plans of his fellow-men. The planner is a potential dictator who wants to deprive all other people of the power to plan and act according to their own plans. He aims at the one thing only: the exclusive absolute pre-eminence of his own plan.” –Ludwig von Mises return

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