Michael Pettis — Why market liberalisation now may hurt China more

In the end, while standard macroeconomic reforms may work in theory -- albeit under an unrealistic set of assumptions -- they’ve never worked in practice. Rather than eliminating the controls that protect China from a financial crisis, leaders should confront their debt problem head-on and begin deleveraging.

For that to happen, it would help if the decision-making process were more, not less centralised. Only forceful action from the top can overcome the tremendously powerful vested interests that are blocking the redistribution of local-government wealth.

A more liberal China may be desirable in the abstract -- but not until a more controlled China gets a handle on its debt problems.

Today
Why market liberalisation now may hurt China more

Michael Pettis | Professor of Finance at the Guanghua School of Management at Peking University in Beijing

See also

While China's government debt remains contained, at 46.9 percent of GDP as per latest figures from the Bank for International Settlements, top policymakers have recently raised concerns about a sharp build-up in household debt.

Outstanding household consumer loans have surged close to 30 percent since the middle of last year and reached 30.2 trillion yuan as of October.

Outstanding yuan-denominated property loans amount to 31.1 trillion yuan and individual mortgage loans totals to 21.1 trillion yuan as of the third quarter of 2017, data from the People's Bank of China showed.

Yet, at the same time, China's economy is said to be held back by the traditionally high level of household saving, which is supposedly holding back restructuring from an investment-based economy to a consumption-based one.

CNBC
China's debt is growing at a faster pace despite years of efforts to contain it

Reuters

Sebastian Heilmann — Big Data reshapes China's approach to governance

Absolutely must-read!

Economic planning and societal control: The digital transformation is changing the rules of the game in the global systemic competition. China's determined pursuit of a "digital Leninism" presents a major challenge to liberal market economies and democratic political systems.

MERICS — Mercator Institute for China Studies

Big Data reshapes China's approach to governance

Sebastian Heilmann

ht Ryan in the comments

Sebastian Heilmann is the founding president of the Mercator Institute for China Studies (MERICS) and professor for the political economy of China at the University of Trier (currently on leave). Heilmann also conducted research at Harvard University’s Fairbank Center, the University of Oxford China Centre, and the Harvard-Yenching Institute. He has published extensively on China’s political system, economic policy making, and international relations.
Heilmann has years of experience providing advice to the German federal government and EU institutions. From 2010 to 2013, he was the principal investigator of a project group funded by the German Federal Ministry of Education and Research examining the industrial and technology policies of the People’s Republic of China. In 2014, he was appointed as one of 15 German representatives to the German-Chinese Dialogue Forum, which fosters non-governmental exchanges and bilateral confidence-building.

Oleg Komlik — Karl Polanyi on the Rise of Fascism and Market Economy

Karl Polanyi was deeply concerned by the essence of Fascism and focused on the institutional structure from which Fascism starts its march. He devoted the final parts of his magnum opus The Great Transformation specifically to this crucial topic and elaborated a bright analysis of the dark rise of Fascism between the two world wars. 

The following passage is composed from excerpts I selected from this insightful classic book and assembled them as a short article. I urge you to delve into this piece (and then to read the full original chapters) and to mull over the substance of fascist situations and moves, as well as their linkage to free market and economy of self-interest, which generate anti-individualistic and repressing endeavors directed to change not only the political sphere and societal fabrics, but human consciousness itself.

Economic Sociology and Political Economy
Karl Polanyi on the Rise of Fascism and Market Economy
Oleg Komlik | founder and editor-in-chief of the ES/PE, Chairman of the Junior Sociologists Network at the International Sociological Association, a PhD Candidate in Economic Sociology in the Department of Sociology and Anthropology at Ben-Gurion University, and a Lecturer in the School of Behavioral Sciences at the College of Management Academic Studies

Brad DeLong — Econ 101 – The Market

Econ 1: Spring 2016: U.C. Berkeley: "The Market" as an Institution

Econ 1: Spring 2016: U.C. Berkeley: The Market Economy: Pro

Econ 1: Spring 2016: U.C. Berkeley: The Market Economy: Con

Diane Coyle — The capitalism we deserve

  Émile Durkheim held that collective consciousness is a key factor in sociology. Societies not only differ owing to culture and institutional arrangements, but also culture and institutional arrangements are both the product of the group mindset and also influence its transformation through influence on the mindsets of individuals. Sociology is a science to the degree that it can identify regularities in social behavior. 

Culture and institutions are analogous to mathematical functions with respect to outcomes of individual behavior in groups, so it is not surprising that patterns of social behavior can be identified and expressed rigorously. 

Societies are not merely aggregations of individuals making individual decisions independently based on individual preferences, as some have supposed. Not only is cross-influence operative, but also sets of rules, some implicit, like tradition, and some explicit, like law. Behavior is internally correlated by shared mindsets but and externally correlated by culture and institutions.

Capitalism is a socio-economic phenomenon exhibited by many societies. Being an expression of a shard mindset and established through custom and law, it is subject to these influences and follows rules. 

Capitalism's expression and transformations in particular societies is based on the level of collective consciousness of that society. The type of collective consciousness and their level in the sense of exhibiting inclusivity and universality that sociologists call "solidarity" fluctuates.

In this sense the culture and institutions that a society "deserves" is based on the level of collective consciousness. Because collective consciousness is not constant, it can be "improved" in the sense of increasing the sense of solidarity. This implies different varieties of capitalism based on different levels of solidarity, from the extreme individualism of laissez-faire to the managed capitalism of social democracy.

Historian Jürgen Kocka has written Capitalism: A Short History at 169 pages. What’s more, it spans the centuries from China during the Han Dynasty through the Arab empire and the European Middle Ages to global financial capitalism today.

The Enlightened Economist
The capitalism we deserve
Diane Coyle | freelance economist and a former advisor to the UK Treasury. She is a member of the UK Competition Commission and is acting Chairman of the BBC Trust, the governing body of the British Broadcasting Corporation

Bill Mitchell — The government really is instrumental in creating growth

Sometimes one reads a press article that is so obviously misleading that it is hard to know where to start with it. But perhaps the conclusion is the best place to start sometimes. Such is the case of a Bloomberg article (January 15, 2016) – What #ResistCapitalism Gets Wrong – written by American academic Noah Smith. Basically, the article attempts to attribute all of the post-Second World War prosperity to the “free market economy”, which he says is “a term many use synonymously with ‘capitalism’”. By the end of the article we learn that in fact that prosperity does not come from ‘free market’ liberalisation and that strong governments are essential for growth and reductions in inequality. The “boring old mixed economy” where, in Noah Smith’s words “government really is instrumental in creating growth”. Start with the conclusion and read backwards is my advice in this case.…

Bill smacks Noah down for purveying conventional wisdom by setting for the facts. But Bill admits that Noah finally comes around in the end and wishes he had begun the post that way.

Considering that the post appeared in Bloomberg View, I think there's a good chance that Noah suckered his audience in with confirmation bias by reiterating the conventional nostrums about "the free market" as synonymous with "capitalism," and then turned it on them in the end. If that is the case, it was a good job of persuasion.

Bill Mitchell – billy blog
The government really is instrumental in creating growth
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Henry Blodget — Sorry, but it's not a 'law of capitalism' that you pay people as little as possible — it's an excuse

It is not a law that they pay their employees as little as possible. 

It's a choice.

It's a choice made by senior managers and owners who want to keep the highest possible percentage of a company's wealth for themselves.

It's a choice that reveals that, regardless of what they say about how much they value their employees, regardless of what euphemism they use to describe their employees ("associate," "partner," "representative," "team-member"), they, in fact, don't really care.

These senior managers and owners, after all, are taking home record profits and earnings while choosing to pay their employees so little in many cases that the employees have to live in poverty.

It is no mystery why America's senior managers and owners describe the decision to pay employees as little as possible as a "law of capitalism." Because this masks the fact that they are making a selfish choice.

But that's exactly what they're doing.

If we want to get our economy humming again, we need to remember that the economy is an ecosystem and that healthy ecosystems are balanced. We need to encourage our companies to maximize value, not profit. And we need to encourage great companies and managers to serve three important constituencies — customers, owners, and employees — instead of just one.

Sorry, but you are wrong about this. Capitalism is based on competition and the way that competition works is that efficiency prevails.

The only way to correct excessive efficiency that harms effectiveness is through public action that forces all firms to observe certain standards. It's what commercial law is about for instance. Some Libertarians that laws are unnecessary unless aggression against person or property is involved, arguing that the market is the ultimate corrective. That's just nonsense, as everyone with any experience knows. Markets don't automatically correct.

Competition based on efficiency results in a race to the bottom. This is supposedly beneficial economically in that everyone gets the lowest price and firms eventually compete profit away. There is no evidence for that being true in a modern monetary economy.

Evidence shows that firms will cut the wage bill as much as possible to compete against other firms. It's not a matter of sharing profit or anything of that sort. The market works to ensure that all firms act efficiently and those that don't eventually fail.

Without minimum wage laws and increasing the bargaining power of labor through collective bargaining, enforcing standards for imported goods, and the like, then firms will not do this on their own because competition.

That's the beauty of the market and why markets don't work, too, unless they are managed by voluntary association or by government. While there has been a certain amount of voluntary standard setting in industries, unless there are some enforcement of standards a few firms can free ride and some will. This is why law and regulation are needed to correct the insufficiency of markets.

Business Insider
Sorry, but it's not a 'law of capitalism' that you pay people as little as possible — it's an excuse

Henry Blodget

Geoff Davies — More effective remedies for inequality than Piketty’s

I have read only reviews of Thomas Piketty’s Capital in the Twenty-First Century, but clearly it is valuable for documenting the nature and history of inequality over the past century or three, and for highlighting the excessive political power that flows from super-wealth. Yet he frames it in terms of capital and capitalism and, for all the quality of his diagnosis, his main prescription evidently is just to tax the wealthy, through income and inheritance taxes.
The trouble is, capital and capitalism are very ill-defined. To speak of capitalism is to invite an un-constructive shouting match. Capitalism has caused great harm to people and the world! Yes but capitalism is what has made us rich!

A more useful framing is that there have been, and can be, many ways to structure a market economy. When one looks into the mechanisms that have operated in market economies, one can readily identify mechanisms that pump wealth from the 99% to the 1%. One can then think of ways to stop or reverse these flows, so wealth flows more fairly to everyone involved in its generation. It will be much more effective to fix the problems at the source than just to apply traditional retro-active bandaids like taxes.

In my own book Sack the Economists, I identified seven fairly obvious such mechanisms. Below is an edited excerpt that summarises mechanisms identified in the course of the book’s analyses. (Dean Baker has also made lists, short and longer, which are a little more detailed and only partly overlapping with mine.)

Real-World Economics Review Blog
More effective remedies for inequality than Piketty’s

Geoff Davies

Sack the Economists is available for $4.99 at Amazon Kindle.

Forum: How Markets Crowd Out Morals

Read it at Boston Review
Forum: How Markets Crowd Out Morals
(h/t Mark Thoma)

Michael J. Sandel says yes. Nine people reply, and Sandel replies to the objections.

John Carney — Is This the Book that Inspired Jamie Dimon's Warnings About Regulation?

Another interesting read from John.

Read it at CNBC NetNet
Is This the Book that Inspired Jamie Dimon's Warnings About Regulation?

by John Carney | Senior Editor

The book is Engineering the Financial Crisis: Systemic Risk and the Failure of Regulation by Jeffrey Friedman and Wladimir Kraus (September, 2011). Here is what the publisher's description says:

One of the lasting legacies of Reaganomics is a deep-seated distrust of government intervention in the markets. Despite this still-popular sentiment, the Basel Accords, a set of international standards for banking supervision and regulation, have been the subject of remarkably little public criticism. While academics and practitioners decry the enforcement of the Sarbanes-Oxley Act on accounting reform or attempts by Congress to regulate executive compensation, the Basel Accords have been quietly accepted.

In one of the first studies critically to examine the Basel Accords, Engineering the Financial Crisis reveals the crucial role that bank capital requirements and other government regulations played in the recent financial crisis. Jeffrey Friedman and Wladimir Kraus argue that by encouraging banks to invest in highly rated mortgage-backed bonds, the Basel Accords created an overconcentration of risk in the banking industry. In addition, accounting regulations required banks to reduce lending if the temporary market value of these bonds declined, as they did in 2007 and 2008 during the panic over subprime mortgage defaults.

The book begins by assessing leading theories about the crisis—deregulation, bank compensation practices, excessive leverage, "too big to fail," and Fannie Mae and Freddie Mac—and, through careful evidentiary scrutiny, debunks much of the conventional wisdom about what went wrong. It then discusses the Basel Accords and how they contributed to systemic risk. Finally, it presents an analysis of social-science expertise and the fallibility of economists and regulators. Engagingly written, theoretically inventive, yet empirically grounded,Engineering the Financial Crisis is a timely examination of the unintended—and sometimes disastrous—effects of regulation on complex economies.

This implies that there is nothing that can be done to reform the financial system that will not just exacerbate the problem. The authors' solution is to deregulate and leave everything to the invisible hand of the market. Not very reassuring since the history of capitalism is the story of recurrent cycles of boom and bust. If the world economy can just look forward to repeating crises of possibly greater proportion as the global economy becomes more integrated, this implies an inherent failure of capitalism as it presently exists. Or the problems and solutions have not been correctly identified.

Read Dimon's view along with JPMorgan Chase Chief Investment Office Has A Whale Problem by Mark Gongloff at The Huffington Post.

I tend to agree that regulation is not a fix for capitalism as presently conceived and practiced. Capitalism is about risk assumption, and government has eliminated risk (failure) for the credit system as a whole, both nationally and internationally. This creates moral hazard that virtually guarantees overreach.

The alternative is to allow full accountability, but this risks either systemic collapse or nationalization of the credit system when there is a crisis. But it is questionable whether resolution would possible on the scale required at time of crisis. Finance capital is betting that governments will not take the chance of finding out and will perpetually bail them out. This is capitalism?

Markets — On the good, the bad, and the ugly

...Markets are tools that, relative to the alternatives, happen to have great strengths with respect to incentives, efficiency, and innovation. But they are not perfect; they underperform in the presence of externalities (the un-priced consequences – for example, air pollution – of individual actions), informational gaps and asymmetries, and coordination problems when there are multiple equilibria, some superior to others.

But markets have more fundamental weaknesses. Or, rather, most societies have important economic and social objectives that markets and competition are not designed to achieve. In today’s rapidly globalizing world, the most important of these objectives – expressed in various ways through the political and policymaking process in a wide range of countries – are stability, distributional equity, and sustainability.

Read it at Project Syndicate

Mind over Market
by Michael Spence

((h/t Mark Thoma)

Overall good marks on this, but he needs to study up on MMT here:

Attention is increasingly – and, in my view, rightly – being focused on the role of the state, and in particular on the state’s balance sheet. Experience in developing and advanced countries alike suggests that states with substantial and healthy balance sheets are better positioned to deal with today’s stability, distributional, and sustainability challenges. The benefits are several, including an ability to withstand shocks and mount countercyclical responses, as well as a capacity to recycle income to households during periods like the present, when the share of income that goes to capital is rising (with adverse distributional consequences).