Why Western economics fails to explain China’s economy

2015-03-22 15:00 am HKT
Original Chinese article found via the Sinocism newsletter. Translation by CA.

Background: It’s highly likely this article was published as a counter argument to David Shambaugh’s recent opinion piece on the “The Coming Chinese Crackup“, and subsequent discussion in Western media. Or perhaps its also a response to Western media critical of China’s slowing economic growth, and slow pace of reforms. But to be clear, the arguments focus only on the economy, and are presented in a logical manner, citing quotes from Western economists. Another reason for choosing this translation, the author doesn’t rely on nationalistic rhetoric or political ideology to argue his case. Thus it presents a robust challenge to the wisdom of applying neoclassical economic theory to a developing country operating under a different social system.

Why Western economics fails to explain China’s economy
People’s Daily, 2015-03-12
Author: Yu Zhang

At the beginning of the 1990s, when the Soviet Union and Eastern European states were undergoing upheaval, and China was transitioning from a planned to market economy, mainstream Western economics, hereafter “Western economics”, believed that in order to reach a market economy state, China must place full liberalisation and privatisation at the heart of reform. By implementing radical reform, Russia and Eastern European countries would quickly enjoy prosperity, and that China, by persisting with socialism and following a path of gradual reform, was doomed to failure. But the fact that China’s economy has maintained its fast development, whilst Russia and Eastern Europe are mired in recession, challenges this original notion.

So how to explain the stark contrast between theory and reality? Some economists argue that at most China is a special case of a developing economy on the path to becoming a free market capitalist economy. For instance any achievements of economic reform can be accredited to applying concepts of Western economics, such as private ownership, free markets and opening up to foreign markets. Conversely, any failures can be attributed to deviations from Western economics, such as persisting with a socialist system, a state economy, and government intervention etc. With these obstacles in its path, China’s economy will sooner or later collapse, which leads to renewed calls of the “China collapse theory”. But in fact these repeated predictions of China’s economic collapse have come to nothing, whilst Western capitalist economies suffered a serious financial crisis in 2008. So why does Western economics fail to explain the Chinese economy?

Firstly, ideology. It’s undeniable that Western economics contains scientific knowledge, and theories such as price, currency, competition, trade, foreign exchange, enterprise, growth and macroeconomics, which are of use in China. But it also contains strong ideology, particularly in its fundamental theories, economic hypotheses such as the factors of production, spontaneous order, high efficiency of privatisation, liberalisation etc., which clearly favour the capitalist system, and unabashedly advocate an individualistic world outlook. And its from this ideology that its values and policies are formed, i.e. emphasising private ownership over national, the free market over government intervention, and capital rights over that of labour. Obviously these values and policy positions are incompatible with “socialism with Chinese characteristics”, so how can they be expected to accurately explain China’s economy?

Secondly, theory: Contemporary Western economics has the following main characteristics. Heavy on logic* yet light on history, heavy on form whilst light on substance, and ignores differences in human behaviour that exist in different societies with different histories. The approach is to ignore the effects of technology, institutions, politics and culture, and instead place the pursuit and maximisation of self-interest at the starting point of all analysis. Furthermore to assume that the capitalist market economy is the only economic model available to mankind, and then using abstract mathematical logic to determine whether or not economics meets scientific criteria. This theoretical model may appear beautiful in form, yet is far from reality. The Nobel prize winner in economics Joseph E. Stiglitz once said that not only are the benefits of Western neoclassical economics small for economies undergoing transition, but even in the case of explaining developing market economies, are fundamentally of limited use. Another Nobel laureate economist Paul Krugman, in the aftermath of the 2008 financial crisis expounded: “The achievements of macroeconomic studies over the past 30 years can at best be said to have been of no use, and at worst, were even harmful”.

Thirdly, the problem of applying theory: Some Western economic theories which are held to be correct, often take fixed assumptions and conditions in space-time as their premise, but this is not the same as universal truths found in the natural sciences. The Swedish economist Gunnar Myrdal pointed out that “(Western) economic terminology is derived from the Western world’s way of life, standard of living, beliefs, systems and culture. Thus it makes sense to use them in analysis of the Western world, and possibly reach correct conclusions. Yet its obvious they won’t reach correct conclusions in lagging developing countries”. For example, free-trade theory is one of the fundamental principles of Western economics, but whether its the U.K., Germany, France or the U.S., in the early stages of capital accumulation, and establishing their own industrial systems, all of these countries adopted trade tariff policies.

A popular viewpoint is that Western economics reflects the workings and laws of developed economies, held up as universal values, which China’s opening up and reform must follow in order to be successful. This view is a mistake. We know that at the basis of generality lies individuality, and that universality resides in specific circumstances. It can be seen from the general rules of its market economy that modern Western economics contains general or universal values, which as a developing socialist market economy we must carefully research and learn from. On the other hand, lets not discuss the limits and shortcomings of Western economics. Even if it is assumed to be correct, when attempting to explain China’s reform and development, it must be combined with China’s reality, not ‘cut the feet to fit the shoes’, or blindly imitate. China is a large developing socialist country, with a long history and age-old cultural traditions. Our goal is to build a prosperous, strong, democratic, civilised and harmonious, modern socialist country, and realise the great rejuvenation of the Chinese nation. One can only take the general rules of a market economy, and combine with the specific circumstances in China, in order to find a feasible approach to reform, and understand and grasp the essence and logic of China’s economic development. Only by basing upon China’s conditions and practices, summing up from experience, constructing arguments, refining thought, and innovating new theories, can Chinese scholars obtain robust theoretical achievements, that contribute to the development of mankind.

(Author: Peking University, School of Economics Dean)

— In the spirit of pushing discussion on analysis of China’s economy, are any readers able to critique these arguments, for or against, based on history, economics or philosophy? Clearly presented cases will be published on this site.

* An interesting language point, the Chinese word for logic used here is ‘luoji’, a transliteration of the English word ‘logic’, which perhaps highlights the different approaches and value placed on theoretical logic in China.

Included in the popular Sinocism newsletter, March 22nd 2015.

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One comment

  1. […] 4. Why Western economics fails to explain China’s economy (Translation) | chiecon A popular viewpoint is that Western economics reflects the workings and laws of developed economies, held up as universal values, which China’s opening up and reform must follow in order to be successful. This view is a mistake. We know that at the basis of generality lies individuality, and that universality resides in specific circumstances. It can be seen from the general rules of its market economy that modern Western economics contains general or universal values, which as a developing socialist market economy we must carefully research and learn from. On the other hand, lets not discuss the limits and shortcomings of Western economics, even if its assumed to be correct, if attempting to explain China’s reform and development, it must be combined with China’s reality, not ‘cut the feet to fit the shoes’, or blindly imitate. China is a large developing socialist country, with a long history and age-old cultural traditions. Our goal is to build a prosperous, strong, democratic, civilised and harmonious, modern socialist country, realise the great rejuvenation of the Chinese nation. One can only take the general rules of a market economy, and combine with the specific circumstances in China, in order to find a feasible approach to reform, and understand and grasp the essence and logic of China’s economic development. Only by basing upon China’s conditions and practices, summing up from experience, constructing arguments, refining thought, and innovating new theories, can Chinese scholars obtain robust theoretical achievements, that contribute to the development of mankind. (Author: Peking University, School of Economics  Dean) […]

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