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I have asked different people about their thoughts of any new economy that might develop after the Great Recession, the European (and US) debt problems, the third world economies, and the growing economic power in China.
They have not given much in the way of an answer, but today I read this article.
The Economist on the rise of state capitalism
Not sure this is a 'new' economy; merely a formalization of the existing one. The 'traditional' model has a few companies spending large amounts of lobbying money to keep and maintain contracts with the government; the new model tranfers that money to bloated bureaucracies. In both cases, the money doesn't go towards promoting new companies and investments. The more things change...
I think that it will work against competive market, but it is model that seems to provide the right complements to give many companies and nations a big boost in productivity and growth.
But I agree that big business competes hard for that advantage in Washington. Maybe there is less need to be competitive and innovative if you can get a nice assist, from your Uncle.
But what the companies are being competitive and innovative in is getting tax dollars; not actual production and R & D of products and services.
I keep asking for a like button...
Now though, this State Capitalism is a model taking form in China and third world economies, apparently. I am certain that I don't understand it quite well enough.
Does it change the global economic model? Can private companies compete with state run companies? Does it give these state corporations wage controls and other special advantages, in addition to fairly large access to capital? Will it impact growth and innovation?
Will it the new 21st century economy, shifting fortunes away from the west to the developing nations?
Interesting, and perhaps related.
Did you have a chance to read the whole Report? I'm a little behind in my reading so I just finished it today.
The bottom line from The Economist was that state capitalism is pretty good for helping developing economies catch up to the rich world, but, in the end, it is likely to be at best a way station to an economy dominated by truly private businesses.
The Economist identified several problems with the state capitalism model. First, state-owned enterprises (SOEs) have a return on capital that is significantly below the average private company. This matters because, in the long run, the businesses and economies that most effectively use capital are the ones that are most likely to prosper. Second, even in countries that have successfully employed state capitalism so far (like China) the corruption is overwhelming. Many politicians look at SOEs as places to park relatives and friends for a nice salary (by world standards cronyism in the U.S. is low). Third, beyond just using SOEs for personal reasons, government officials generally cannot resist meddling in the business affairs of the SOEs. Singapore has been one of the best countries at keeping out of the business affairs of the SOEs, but even there there is a lot of meddling in business affairs by Western standards. Fourth, most state capitalist systems exist in authoritarian political environments that almost always discourage innovative and creative thinking. Innovative and creative thinking generally redounds to the government's detriment because such thinking cannot usually be restricted just to the field of business. Innovative and creative thinkers generally have a need to express themselves in all manner of fields. You are more likely to have political unrest and agitation for an open and democratic political system once you get enough innovative and creative thinkers who have enough money to have a fairly high stake in how the government uses their money. If you want to have the ability to sustain economic growth beyond the sophisticated mimicry that most SOEs have so far employed, you need to be able to develop innovative and creative thinkers so that they can dream up the new products and services that the company will provide.
Two thing come to my mind with this question.
First, the growth may have little to do with the economic model and more to do with the vast growth that is available simply because the current state of economic development. Massive opportunity just to catch the population up to reasonably close to Western standards.
Second, if the model catches on with improvements that are possible in the areas you summarized, especially innovation incentives and corruption tendencies, then it will be a tough model to beat, with state support and capital available to drive the market engine.
Private capital would not be able to compete, if state capital model could work out its inherent issues.
My real question though, and I almost brought it up in one of the other topics.
What changes might be expected to our capitalist model in the coming years, after the recession, after the recovery, given the global nature of the new economy and the opportunities in the developing nations, the maturity in the Western developed economies, and the recent experiences with sovereign debt and expansive social support sustems.
What is next?
Or maybe an easier question - what recent book might be a good read on these questions?
Given what I've seen of the post-crisis reaction so far, I don't expect much of a change at all, at least not systemically. Just like after the Great Depression, you'll probably see changes in individual behavior, both from people and businesses, like people not going so much in debt as they had prior to the crisis, but you aren't going to see much of a change to the model itself.
I'm far from convinced that there is a "next" simply because there is no model out there that has shown to be superior to the one that we have, even in theory, let alone in practice. The problem that caused this crisis was not a problem of the model but of performance, which you are never going to be able to rid any model of, human nature being what it is.
Unless you are able to alter fundamental human nature, a regulated capitalist system is the best option on tap to provide the most good for the most people.
NOTE: What The Economist was getting at, and it's something that I concur with, is that state capitalism is destined to come up short because of its inherent problems. You can find workarounds for inherent problems, but you can't solve them. State-owned enterprises are destined to be less efficient users of capital than private enterprises, and they are destined to be more corrupt and to breed more corruption than private businesses. Governments can use heavy hands to tamp down these problems, but the use of those heavy hands will themselves cause problems that reduce the overall efficiency of the economy.
Even now, when China is growing like gangbusters and the West is barely growing at all, Western businesses run circles around Chinese SOEs when it comes to the employment of capital. The Chinese government has been subsidizing their SOEs to the tune of trillions of dollars over the last 30 years and they have yet to rise up to a level that is even close to the standards of Western firms in their employment of capital. The only hope that Chinese SOEs have of being relevant half a century from now is if their capital reservoir (i.e., the Chinese state coffers) is deep enough that they can simply bludgeon their competition to death with losses. Given the fact that the Chinese state is running up major piles of red ink, it is highly debatable that they'll be able to do this for much longer.
And another thing, this wouldn't be that big of deal if the Chinese government were subsidizing these SOEs so that private firms could grow and take over the market. But the fact is that SOEs are essentially choking off capital from private firms. It's almost impossible now to get a loan in China if you are a private Chinese firm. Your only hope is to have a wide circle of friends that you can draw from or to team up with a Western firm. But both of those options tend to be limiting for growth.
Unless you are able to alter fundamental human nature, a regulated capitalist system is the best option on tap to provide the most good for the most people.
How can you be sure that some other system that no one has thought of yet isn't better?
How can you be sure that there isn't an invisible demon sitting on your shoulder dictating your actions? Maybe someone will invent a demon detector that will allow us to "see" those demons.
Maybe you will be hit by a meteor as you type the next sentence.
Maybe reality is an illusion and you are engaged only in mental masturbation with no one else really existing.
#10: How can you be sure that some other system that no one has thought of yet isn't better?
I'm not a fan of Intelligent Design. Such things are not planned. They evolve. Planning connotes coercion, and if there's one trend that evolution favors, it's that violence is inefficient.
Obviously I don't know. But I believe the implication of my post was that, of the economic systems that have so far been tried, the one that we currently have--a regulated capitalist system--is the best in terms of wealth creation and distribution.
How is that Financial Crisis Inquiry Report reading progressing. I may open my copy and read along.
It would be interesting I think to look at the Inquiry report and Dodd Frank to see how we did.
My gut suggests to me that we swatted flies but left the sh*t.
Lunar could you expound on the comment "one trend that evolution favors, it's that iolence is inefficient."
I am afraid I don't catch what is intended there.
According the Financial Crisis Inquiry Commission, the crux of the cause of the crisis was that: 1) firms involved in the mortgage market hit on a way to drastically increase their profits, but which had very dangerous consequences for the economy if certain underlying assumptions failed to hold (the primary one being that the value of homes would at the very least not fall), and 2) the agencies responsible for regulating these firms failed to rein in such activity for one of two reasons. First, there was institutional interest in that regulated firms had the ability to choose by whom they were regulated; the implication being that if one regulatory agency were too hard on them, they could opt for a different regulator (this existed both within the national government and between the national and state governments). Second, there was an ideology among some regulators (especially at the Fed) that the market was self-regulating in that no firm would rationally choose to engage in activity that held such risks and that the firms in the industry were much better placed than external regulators to know about and understand what is and what is not too much risk to take on.
As far as whether Dodd-Frank addresses those concerns I really can't say. The Dodd-Frank legislation is highly complex and something about which I do not know enough to even hazard a guess as to its efficacy in dealing with the problems identified by the FCIC.
From the portion of the FCIC's report that I have read, however, I might hazard a guess that the members of the FCIC might say that there really was no need for a grand new legislative endeavor to prevent a recurrence of the crisis. They seem to believe that the regulators had all the tools that they needed to prevent it in the first place. The regulators just didn't use those tools either in the way that they should have or at all.
Given the results, why wouldn't those firms take the identical actions in the future (since, given the bail-out, they were protected from the consequences of their risky behavior)?
And the idea of 'self-regulation' in fields which are very complex and that outsiders don't understand very well always sounds good. Somehow, though, it never seems to work...
If you look at much of the economic work that has come out of the crisis, you would probably find that most economists would tell you that they expect, all things being equal, to see a recurrence of the crisis, but not for the reason that you mention (the bailout). The reason that they would likely cite is the idea of rational irrationality. Rational irrationality is essentially the idea that an action taken by a person in one context can be rational even though it has dangerous implications for them in another context.
The rational irrationality that contributed to (or maybe even caused) the crisis was the issuance of the subprime mortgages to the great extent that the participants in the market spread them around. Each actor in the process was acting rationally when you consider just their own interests. That is, they each made a much larger profit than they otherwise would have in exchange for a miniscule increase in the risk that the economy would tank, which would in turn hurt them. Remember, so long as housing prices didn't fall, the subprime mortgage market was likely to keep humming along. It was only with the inevitable fall in housing prices that the subprime mortgage market collapsed causing an economic calamity.
The participants were acting rationally, however, because each one's individual actions were likely to have very little effect on the overall market. It was only by the accumulated actions of all of the participants that the economy, and hence each participant, was endangered.
But once the arms race took off, none of the participants could stay on the sidelines because 1) the people running those firms would have immediately faced angry shareholders wondering why they weren't making as much profit as their competitors (which did happen to a few CEOs, Citigroup's CEO in particular; all evidence suggests that Chuck Prince wanted no part of the subprime mortgage market but was essentially forced into playing by Citi's shareholders who basically threatened to remove him if he didn't relent) and 2) once the arms race kicked off, those actors who refused to play were not going to be able to insulate themselves from the negative consequences of an economic calamity so they had every incentive to join in, no matter how reluctantly (and the profits they ran up during the arms race could be used to cushion the fall when the economy inevitably crashed).
I use the term "arms race" consciously. It was this type of behavior--rational irrationality--that many international relations scholars believe explains the U.S. and Soviet Union's behavior during the Cold War. While it was in both parties' interest to limit the expense of their nuclear arsenals, neither side could afford not to go one rung up the ladder because of the fear that the other side would eventually develop an arsenal that could completely negate its own arsenal, thereby rendering them exposed to a first strike nuclear attack. But it was, after all, highly irrational to spend all that money on weapons you were likely never going to use and whose sheer numbers presented a danger to the very existence of the country you were trying to defend if you ever did use them.
That's why regulation is so important. Effective regulation works to break the logic of rational irrationality. Had the regulators at the Fed or the FDIC or the OCC or the SEC realized what was happening, they would have (or at least should have) stepped in to prevent the arms race from taking off. There were a number of ways they could have done that, but they instead chose not to do anything.
A science fiction story observed that the arms race (much like the economic race described above) was not a race in the traditional sense, with a clear end point. Rather, in the arms race, the theory was that if one runner got, say, ten yards ahead of all the other runners, they could impose their will upon everyone else. So, neither side could stop, or even slow down.
I would think that sudden, catastrophic consequences to your 'rational irrationality' would have a tendency (for a brief time) to support more long-term thinking among the survivors of the crash. If every lending firm had suffered major losses (or gone under), there would have been a brief time when the survivors might have thought 'Okay, let's not do THAT again.' Obviously regulation would be required; human memory is short; greed is long. The lender might have even asked for regulation as a protection against greedy, short-sighted shareholders.
This was an informative post, though; thanks for the explanation.
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