October 21st saw the commemoration in Beijing of the 80th Anniversary of the Long March Victory. Inevitably it was a hugely symbolic occasion, such is the significance of the Long March in modern Chinese history, particularly for the Communist Party. But it also seemed to accompany a mood shift in China; a tightening of party control and a reassertion of socialist virtues. The struggle against ‘historical nihilism‘ serves as shorthand for an ongoing battle over different interpretations of China’s history and – much more importantly – future.
In this picture taken on October 12, 2016, visitors look at paintings at the National Museum during an exhibition to mark the 80th anniversary of the Red Army’s Long March, in Beijing.As China marks 80 years since the Red Army ended its epic Long March, the Communist Party is attacking revisionist history in an effort to compel reverence for its founding legend. (FRED DUFOUR/AFP/Getty Images)
This debate has a corollary in the field of economics, in which China’s extraordinary growth rates are treated by many as a direct vindication of China’s reform path, along with offering support for the notion of a ”Chinese Model” of authoritarian capitalism, inherently superior to its more chaotic Western counterpart. Running against this narrative is a more pessimistic account of China’s current predicament, expertly surveyed in a recent opinion piece by Tyler Cowen of Bloomberg.
Resting behind these competing tales of China’s current fortunes lies a familiar – if overly simplified – debate that divides economists the world over; that between so-called Keynesians, and the more conservative Austrians. The distinctions between the two schools are too numerous to detail, but one key philosophical difference concerns the role of what is called the ‘Long Run.’
Keynesians tend to focus on the necessary role of state intervention to smooth out the business cycle, premised on a view of the business cycle as essentially man-made. Austrians tend to view the business more like a natural mechanism for the correction of poor investment decisions. The former view the ‘long run’ with a degree of suspicion, believing that the present provides the impetus for action. The latter, however, take the ‘long run’ more seriously, assuming that action taken to remedy current distortions merely worsens the scale of those distortions in the ‘long run.’
Applied to China, this debate arises most clearly in the reaction to the 2008/9 global financial crisis. While the Chinese economy had been driven by investment and exports for many years, but encountered a crunch in 2008/9. At this point they faced a dilemma, consolidate and weather the downturn, or release the Keynesian stimulus kraken? History will record the widespread derision meted out at the time by Keynesian disciples onto those governments who chose ‘Austrian’ restraint, and by the same token, the almost universal praise heaped on China for opening up the spending taps.
This basic outline of events prompted Simon Cox of the Economist to cleverly summarise Tyler Cowen’s above mentioned Bloomberg article with the following tweet:
“China handles Keynesian problems well; it handles Austrian problems badly. Its Keynesian solutions worsen its Austrian problems.”
Most China watchers will clearly recognise this characterisation of China’s current dilemma. The sheer scale of their post-2008 stimulus operations has given them an enormous debt profile, vast over-capacity, and a pressing need for retrenchment, consolidation and supply side reforms. As time goes on the ‘Austrian problems’ just get worse, with China reportedly accumulating more debt in the last 12 months that the ‘US, Japan and Europe combined.’
The real problem China faces is that there are not two different kinds of problems, Keynesian and Austrian, but two different interpretations on what solutions are most appropriate to context. A Keynesian, faced with the 2008 downturn, would say ‘stimulate and outgrow the resulting debt.’ Whereas an Austrian would say ‘consolidate, endure the downturn, come out of it leaner, more efficient and in the long run, more productive.’
China chose the Keynesian route, and just as the Austrians would have predicted, they now face the long run consequences of ignoring the long run consequences. Yes, China has kept its headline growth rate surging onwards, but its debt to GDP ratio has grown, and is growing, faster, meaning the ‘Austrian problems’ have worsened.
Famously, Zhou Enlai – a hero of the Long March himself – once mistook a journalist’s question about the consequences of the French Revolution, believing that the questioner was referring to the Maoist inspired, and altogether more recent, May 1968 riots in Paris. In doing so he gave the world a more memorable quote than he intended.
In a curious way, however, his answer – that it was ‘too soon to tell’ – at least showed a willingness to assess history, and by implication economics, from the vantage point of the ‘long run.’ And with the wealth of bad news on rising debt and stalled reforms coming from China today, it is tempting to wonder if that fabled ‘long run’ has now actually arrived?
At the end of the Long March, as we know, lay survival and eventual victory for the Communist Party of China, but the contemporary dilemma for China does not turn on the outcome of a civil war so much as on the correctness of two competing accounts of the ‘long run’ in economic theory. Austrians who always warn you of it, up against Keynesians who always assuage your doubts. China today forms only the latest theatre in which this contest seeks a resolution, but whichever way it goes, the results will be impossible to ignore.
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