Crony Empire, China, Stares at Recession? Could we see Cultural Revolution II?

Ludwig von Mises was famous for predicting that the system of socialism embodied in the Soviet Union and its satellites would eventually implode on itself due to a lack of accurate pricing. For decades Mises was derided on this point as the Soviets continued on. Then in 1989 it happened. Communism imploded. By 1991 the Soviet Union was no more, an unfathomable development just 5 years before.

China is a very different story and I certainly am not predicting massive implosion ala the Soviet Union. China, though a cronyist state, does have reasonably good prices and at least some feedback mechanisms within the economy. China has color and vibrancy in many parts. The Soviets were just grey.

But China is in for very rough waters. The economic system which on some levels is market based, is also controlled from the top via the Chinese Communist Party. It is they and their cronies who control the banks, manufacturing, real estate, etc. And though the price mechanism in China is light years ahead of the old Soviet Union, the economy still has huge areas of opacity where prices do not work as they should. This is the great weakness of the Chinese economy and it will cause China to stumble. It already has.

I just talked with someone who had spent a few years in China recently. She said that at night she could look out her window at the apartment buildings and see that they were mostly dark. The Chinese authorities had encouraged residential development far beyond what was sustainable and as such, many of the buildings were just empty. And this was a few years ago. The real estate situation is far worse now.

It looks like the world is increasingly waking up to the fact that the Chinese dream can’t go on indefinitely.

In the Sunday New York Times George Mason University economist Tyler Cohen examines the Chinese economic situation and how 2 schools of economic thought, the Keynesians (which is the establishment school) and the Austrians (long the outsiders in the economic debate, but growing quickly due to the fact that they have been shown correct over and over in recent, and even not so recent, years) perceive the slowdown.

You can read the piece HERE.

Also, a very interesting article which comes to us via The Australian, entitled Cultural Revolution fears rise on talk of a China downturn.

In the article the author worries that if the economic slowdown is too harsh the “left” wing of the Chinese Communist Party might gain power. And by “left” he means those who are more inclined toward old school Maoist style thinking.

As the peasantry and newly middle class see their dreams of material wealth slip away from them they may turn to those who were against economic liberalization in the first place. The author says that a second Cultural Revolution is at least possible. This would be a disaster for the 1.3 billion people who live in China, not to mention for the world in general.

(From The Australian)

China will face a second Cultural Revolution if an economic downturn gives the Communist Party’s left wing the opportunity to strike, says Yao Jianfu, a veteran observer and adviser to many of the country’s top leaders.

“The economic elite will collude with the political elite to take what’s left of economic development as the economy slumps,” says Professor Yao. “This will leave less for the general public.

“The workers and peasants will be marginalised, and pushed to the edge of the society with low income. If the economy falls further, they will be manipulated by the extreme left wing, who will take the chance to manoeuvre the disadvantaged social class.”

For those of you who don’t know about the Chinese Cultural Revolution I would encourage you to learn about it. It is what happens when Utopians abandon the principals of human dignity and freedom and seek by any means to force society into a certain mold. It was a horrible time, millions were killed in the name of Maoist doctrine.

Click here for the article in the Australian.

It is pretty clear that things are in a state of flux in China right now. It is the world’s most populous nation and it is the world’s second largest economy. How the Asian Dragon deals with its first hard downturn since emerging from pure statism will impact the world for years to come.