Twofish's Blog

July 2, 2006

Ideas colliding at high rates of speed

Filed under: china, finance — twofish @ 4:21 am

I just started reading Ellen Hertz’s “The Trading Crowd: An Ethnography of the Shanghai Stock Market.”  The thing that struck me is how the role of the state has changed since 1992, and become much more transparent and institutionalized.  In 1992, the local securities regulators in Shanghai had a huge amount of power and it wasn’t clear usually who was responsible for a decision.  In 2006, the center of regulation is clearly in Beijing, in commissions and ministries that act in what seem to be to be rather transparent fashions which are determined in large part by institutional objectives.  What this suggests to me is that “Kremlinology” is no longer a very good framework for figuring out what is going on.

The other thing that struck me about Hertz is that she uses the framework of Hill Gates who has argued that since the Song dynasty, China has operated with two “modes of production”, the state-tributary modes of production and the petty-capitalist modes of production.  These two frameworks have played a huge amount in my thinking about the Chinese economy, and one thing that I’ve noticed is that discussions about Chinese economic reform (or economic reform anywhere) typically lack anthropological and historical depth.  Understanding how the Chinese economy worked in 1000 or 1850 would be really useful for trying to figure out how the Chinese economy will work in 2020 or 2050, but this is rarely discussed.  This conversation works the other way.  The fact that the flow of textiles is going from China to Britain today says some things about the viable of Britain wanting to open China to industrial products in 1830, and studying how the balance of payments crisis in 1800 led to war, might help us understand and figure out the current balance of payments issues with the United States.

But getting back to Hill Gates.  The division between the bureaucratic tributary mode of production and the petty capitalist mode of production has been a persistent feature of the Chinese economy since the Song dynasty.  My argument is that changing this dynamic is not an essential part of moving the Chinese economy forward in the 21st century.  The goal of the next phases of economic reforms should be to rationalize the behave of both the BTMP and the PCMP.

The essential problem with central planning was outlined by Ludwig von Mises in the “economic calculation problem” (basically economies are too complex to be centrally planned) and Fredrich Hayek’s “the road to serfdom” (basically central planning leads to detailed directives which interfere with human choice”).  The solution is to embed economic institutions in a pricing system.  So the direction that I think China should go in is to have state institutions act as the same way as shareholders.  In this area, the fact that China is so big is useful, because you then have a diversity of state institutions, where there is a balance between local and central control.

Some other ideas to throw into the mix.  The idea that big countries can in some ways be more preserving of freedom than small countries isn’t my idea.  I got it from reading the “Federalist Papers” (particularly paper number 10).  One thing that I’d like to see is a discussion on the  relevance that Federalist Paper No. 10 has on current Chinese political structures.  In the paper, Publius (a.k.a. James Madison) really puts a very strong argument against democracy and for a republic that echos a lot of the themes that the Communist Party has been putting out recently.

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