Ryan Avent defends democracy against the observation of outstanding Chinese growth

China’s economy will soon be the world’s largest, but that’s largely because China’s population is the world’s largest. If you can’t manage to produce more with 1.3 billion people than Americans produce with 310m, you’re doing something terribly wrong. Relatedly, China’s recent growth rates have been fast because China was previously so poor. And China was previously so poor because its authoritarian government embraced atrocious economic policies for decades. It’s certaintly true that, “democratic governance may in some modern situations be inimical to competent economic stewardship”. This is not a new development. Just as hoary a chestnut is the generalisation of the above quote: governance may in some situations be inimical to competent economic stewardship. What’s true of presidents and prime ministers was also true of Chairman Mao. And many kings, queens, pharoahs and chieftains of old.

An important point here also is that China’s investment rate exceed the golden rule rate.

So in economics we have this notion of the benevolent social planner who sets up and runs your economy perfectly. Don’t worry my libertarian friends, the entire exercise runs on the back of Arrow’s proof that a free market economy could do just as well as any social planner.

And, as it turns out the social planner’s problem is easier to solve on a blackboard. Once, you have that done, you have a fair guess at what the free market will do.

Anyway, so it turns out the social planner will want to invest for the future. This is natural and matches what people do. However, she wouldn’t want to invest everything. Indeed, she wouldn’t even want to grow her economy as fast as possible.

Why not?

Because doing so means lowering consumption today. It means making folks poorer today so that they can be richer tomorrow. However, they will already be richer tomorrow. So lots of investment means transferring money away from yourself when you are poor in order to give to yourself when you are rich. This is not sensible.

In economists speak it lowers your lifetime utility.

On the other hand, however, when investment is too low the return from even a little investment can be very attractive. Give up just a little bit today and you can have a lot tomorrow. Even if you are rich tomorrow, if the return is high enough it might be a deal worth taking.

So there is a balance. A golden rule whereby you don’t save to little but you don’t save too much.

China, by my sights has blown right through the golden rule. Back of the envelope usually puts the Golden rule of investment somewhere in the 20 – 30% range depending on how impatient our citizenry is. However, even with zero impatience it can’t go above something like 35%. China’s investment rate is north of 40%. They must be breaking the Golden Rule.

That is to say that are growing quickly alright, but in a way that actually makes the people worse off. Indeed, per capita GDP comparisons between the US and China don’t capture the full picture because household consumption as a fraction of GDP is only 35% compared to 71% in the US.

This means that the average Chinese citizens lives a life that is half as comfortable as the GDP measures would suggest.

About these ads