Rethinking China

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“What is truth? For the multitude, that which it continually reads and hears.” 

Oswald Spengler, The Decline of the West

Trend following is generally a waste of time, but if you’re lucky you might find something that makes you think. Not all minds that wander are lost. On this note, a topic I’ve delved into lately has been Chinese innovation and the supposed decline of America.

From Themistocles and Xerxes, or Obama and Trump, we’ve witnessed this question arise when a new paradigm has emerged. In the modern wake of the trade war, the current shape of the question is America versus China. Rephrased, it’s really asking what shapes countries over the long run – democracy and property rights or a no holds barren autocracy.

Xi made it clear that his days are spent trying to move the dial for China along his two main goals – boosting GDP per capita and enthroning China’s place as the superpower of the east and eventually the world.

“When thinking about political questions, how to manage power to enact what he believes should be China’s path forward, Xi is less of a Dengist and more of a Stalinist-Maoist,” Crane said.

“Therefore he does not want to leave open any institutional doors, even those that seem relatively insignificant, that might allow others to challenge his authority.”

Xi’s authority percolates across everything in his kingdom. When it comes to business, all major corporations that have “won” are more like stunted creatures of Darwinism. They didn’t win by talent or skill, rather it was destined that Huawei, Baidu, or Alibaba would be given the means to succeed. Artificial Darwinism has nasty effects, namely that it’s a fragile equilibrium. The US economy is different because of the breadth of our industries and the variety of our ideas that are the modern engines of economies.

Paul Romer won the economics Nobel prize for his research on the increasing returns on investment from ideas. Unlike normal goods, ideas are not destroyed when they are consumed; if anything, they become more powerful as the mimetic effect grows. This was the foundation for endogenous growth theory or studying what internal factors that help economies grow.

The question is whether China can boost both the amount of ideas and of those, have enough which can generate returns for most of China. Both of these points look like fantasies currently. The government cannot allow the freedom of ideas because it can incite a Marxist revolution and upset the balance.

From Vox:

“The [Tiananmen Square Protests] ended the period of relatively free intellectual ferment that had characterized the 1980s and ushered in a new era defined by an implicit contract between the Chinese Communist Party and the people: stay silent on politics, and the party will deliver economic prosperity in return. To enforce this political silence, China’s leaders developed a playbook for stopping popular movements before they can ever take hold.”

When Beijing is strong, the country is at ease. However, Xi’s economy is slowing down – the Shanghai composite index fell by ~25% in 2018. The low hanging fruit has been picked in China. The only way to sustain growth is to speed up rates of entrepreneurship; hard to do in a country that still worships the Gao Kao and savings over investment.

The protests of Hong Kong are a harbinger of the future. The only way to see great ideas is to have a lot of them and that generally requires a democracy where anyone can contribute. Autocracies work by way of catch up growth, but growing a developed country is an entirely different game.

The future is uncertain for both America and China: “the challenge is to find a way between the Scylla of outdated wisdom and the Charybdis of nihilistic cleverness.” Outdated Regulation and nihilistic nationalism won’t save us – without growth we’re all doomed anyway. The path forward is through more innovative businesses which can attract capital that has been locked away and free up wealth.

It’s 2019, where are my flying cars?

1 Comment

  1. Pingback: Might is Right – Anirudh Pai

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