Among China-watchers, Michael Pettis has had a sober and reliable view of China, and is consistently right in the estimation of the Chinese economy. Mish Shedlock relies on Pettis. Regardless of your views on China policy, good or bad, policies create winners and losers and to know the difference makes the actions “tradable” in the sense there is money to be made, one way or another.
It ain’t the hand you are dealt, it is how you play the cards.
Now we should not judge a man by how he plays his cards, but we can certainly listen to his motivations and critique those. Pettis goes beyond studying what is tradable and actually attaches value judgments to ideas and actions.
He has writen a blogpost I would like to critique, since given his prominence and what as I see as wrongmindedness, it invites criticism.
To wit (my points between the *** ***):
A brief history of the Chinese growth model
Posted by Michael on February 21, 2013
in Uncategorized
As regular readers know I have often argued that the Chinese development model is an old one, and can trace its roots at least as far back as the “American System” of the 1820s and 1830s.
***Yes, so have I and it is common for the Chinese to explain what excesses for which they are criticized by pointing out they are expressly using the means the USA used to get rich in China's quest to raise up the Chinese people. For example, Chinese pollution mimics the pollution USA encountered on its rise to the top. ***
This “system” was itself based primarily on the works of the brilliant first US Secretary of the Treasury Alexander Hamilton (see especially his report to the Congress on manufacturing and his two reports on public credit and banks).
*** to my mind Hamilton was a counter-revolutionary and hardly brilliant, his ideas go back to Joseph, he of Pharaoh’s Vizier fame.***
This development model was also implicitly part of the debate in France that led to one of the most important financial innovations of the 19th Century, the creation of the Crédit Mobilier in France in 1852. The debate concerned one of the great economic questions in France, especially after the defeat of Napoleon: why had England, a country that one hundred years earlier had been poorer than France, managed to surpass France and all other countries economically and technologically, even though in the pure sciences and engineering the French were at least the equal to the British and perhaps superior?
*** Now none of us has the whole picture, but Mr. Pettis really should pause and consider the French Revolution. It did much to set France back, and the consequent Naploeonic wars rather stifled innovation by the yeoman, who was otherwise engaged, if not dead.
Further, Mr. Pettis ought to reflect on James Chanos' history of Credit Mobilier:
..if you go back to the 1870s, and the Crédit Mobilier, which was the Enron of its day, scores of lawmakers and the standing vice president were caught with their hand in public till – being paid off by Union Pacific Railroad through their fraudulent Crédit Mobilier construction company. But there were just reprimands. No indictments. The public was outraged; similarly to today, but law enforcement and Congress at the time did not police themselves.
***
Further, Mr. Pettis ought to reflect on James Chanos' history of Credit Mobilier:
..if you go back to the 1870s, and the Crédit Mobilier, which was the Enron of its day, scores of lawmakers and the standing vice president were caught with their hand in public till – being paid off by Union Pacific Railroad through their fraudulent Crédit Mobilier construction company. But there were just reprimands. No indictments. The public was outraged; similarly to today, but law enforcement and Congress at the time did not police themselves.
***
One obvious reason had to do with the financing of the commercial application of new technology. The French banking system, dominated by rentiers and the landed aristocracy, seemed to specialize in protecting savers, in part by mobilizing capital and investing in gold or in government obligations.
***One contribution to the French Revolution was the King took the savers' money. Vast amounts of savings in the form of tontines was stolen to finance war and extravagances. There were always private versions of the tontines, but as usual, when the state gets involved, disaster follows.***
The English banking system did this too, but it also seemed much more willing to finance infrastructure and manufacturing capacity.
In fact more generally I have argued that the main reason “industrial revolutions” have occurred largely in England and the United States is because industrial revolutions are not driven by scientific developments but rather by the commercial application of scientific developments.
***Now this is the error of the narrow basis of comparison. Looking back a mere 200 years is rather myopic. The wheel and mill where industrial revolutions driven not by scientific development but by commercial application. With a long history of scientific development, China knows from commercial application.***
For this to happen it seems that a robust financing system is key. England, and the US later, benefitted from a financial system that seemed to do better than others in financing new infrastructure and technological ventures.
***Never mind all the dead aboriginals who lands and resources were stolen to enrich empires. Never mind mankinds long history of industrial revolution sans modern finance.***
A well-functioning financial system, one that allocates capital to new ventures, in other words, may have been the key difference between England and France at the end of the 18th Century,
***So the definition of a well-functioning financial system is one that allocates capital to new ventures. Pettis will get around to saying, like hamilton, this is the role of a state, ignoring that sans states we have allocation of capital to new ventures, but when states enter the arena, we have disasters following doon thereafter.***
and for this some historians blame the brilliant but erratic John Law and his Mississippi Bubble.
***You mean the Scotsman who scammed the French? I suppose Bernie Madoff was brilliant, in a way. For the record, John Law was one odious man.***
This concern about the inefficient French banking system led to the creation of Crédit Mobilier, whose role was to break the constraints of the existing Rothschild-dominated financial system, mobilize the savings of the middle classes, and allocate these savings towards financial projects, such as infrastructure development, that would, over the longer term lead to more rapid economic development.
***Or not. It also collected everyone’s savings under the nose of the state so it could tax and speculate and create credit to lend out of thin air. War and starvation ahead.***
Aside from Alexander Hamilton, its intellectual and political godfather, the main proponents of the American System were figures like Henry Clay, Henry and Matthew Cary, John Calhoun, and even Abraham Lincoln himself.
***Scalawags all...***
Their vision of economic policymaking was looked down upon as naïve and even foolish by most American academic economists – schooled as they were in the laissez faire doctrines then fashionable in England –
*** The dissenters were right about the victors policies, as we see today...***
but I think it is hard for any economic historian not to feel relieved that neither the academics nor the Jeffersonian and Jacksonian factions had the clout to force “good” economic policy onto US development. America got rich in part by doing the wrong things.
***Yes, like enshrining slavery in the US Constitution in the 13th amendment, racial cleansing of the US Indians, later embarking on empire to seize Spain’s holdings... etc...***
To get back to the main story, in another, also brilliant and provocative, book (America’s Protectionist Take-off, 1815-1914) Michael Hudson refers to a leading member of the second generation of proponents of the American System, a Columbia University graduate by the name of E. Pechine Smith. What is especially interesting about Smith in the context of China is that in 1872 he was invited to Japan to serve as advisor to the Mikado, becoming the first of a stream of economists and lawyers – most of them proponents of the American System – to advise and help shape Japanese development after the Meiji restoration.
Smith thus creates a direct link between the American System and the Chinese development model. It was of course the post-War Japanese development model, itself based on Japan’s experience of economic development during and after the Meiji restoration, that became the standard for policymakers throughout East Asia and China. I think of China’s growth model as merely a more muscular version of the Japanese or East Asian growth model, which is itself partly based on the American experience.
*** I don’t think we need to establish a link when all successors today expressly note they copy the USA imperial model. There is no doubt our system can generate exceptional wealth for the few, but death and destruction are not far behind.***
More tomorrow.
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