The melange that is contemporary ideology surely finds no clearer expression than in the odd truth that Communist China has appointed a clique of Schumpeterian capitalists to oversee the final transformation of its economy to free markets, just as the greatest bastion of American capitalism, the Federal Reserve, has ascended to a role of post-apocalyptic Keynesian triumph.
Still, both sides are closing in on precisely the same spot from opposite sides of the ring and the outcome may get bloody!
Let us define our terms, lest I be misunderstood. Joseph Schumpeter is a doyen of the Austrian school of economics and most famous for defining the notion of “creative destruction”. Purists will be horrified to learn that the term actually derives from Karl Marx but Schumpeter adapted it to, in his mind, the capitalist engine of growth as innovation and productivity drive new capital to supplant old. Monopolies are toppled, efficiencies ruthlessly achieved, dead-wood removed and wealth expanded. Creative destruction is, above all, a business cycle theory of economic development. Take the pain and you will prosper!
A fact that contemporary Austrians tend to forget is that Schumpeter was so taken by the perpetual motion of his own idea that he saw it ultimately destroying capitalism itself as it chopped up, commoditised, sold off and consumed the very values that underpinned its rise. Judeo-Christianity, liberal democracy, even common decency, all ultimately get creatively destroyed as the entrepreneur rises to an heroic materialism right before his fall. Institute of Public Affairs take note!
That bring us to Keynes, the doyen of his own school. It was Keynes who took the simplistic models of free markets and built upon the rather obvious point that if left to their own devises markets will, inevitably, destroy themselves. It was Keynes who most popularised the notion that government should step in and stabilise the creative destruction of the business cycle from time to time, lest it devour the aggregate demand that underpinned it.
What is often forgotten is that Keynes too was a classic liberal and believed that even as government stepped in from time-to-time it should do so while preserving the moral underpinnings of capitalist individualism.
These are rude summarises of course but this is a blog post not treatise, after all!
Back to our contemporary world and where do we find ourselves within the sweep of these two broad ideas? China’s leadership is sounding very Schumpeterian right now. From the FT:
China’s premier warned on Thursday that future defaults on bonds and other financial products were “unavoidable” as the failure of a steel mill in the north of the country to pay off loans risks triggering a cascade of bad debt.
And more from Angus Grigg at the AFR:
…“We are going to declare war against our own inefficient and unsustainable model of growth and way of life,” he said on Wednesday at his annual press conference in Beijing.
…In addressing the economic challenges ahead, China’s second-ranked leader said last year’s growth rate of 7.7 per cent was achieved without using any “additional” short-term stimulus measures. “Why can’t we do this this year?” he said.
The Premier reiterated the Chinese economy would grow at “about 7.5 per cent” this year, stressing the new leadership was more concerned about employment than a fixed growth target.
Hmmm, well , there was stimulus last year even if it was planned the year before! Even so, China seems determined to inflict more creative destruction upon its economy. It has reined in corruption, centralised power around the Schumpeterian reformers, and is now spending that political capital. I still say stimulus will come (couched as more reform). Indeed, Chinese interbank rates are already very low, suddenly, and the yuan has fallen a little. But it will not be as commodity-centric as it has been in the past and the Schumpeterian project of reform will march on.
This is a very large change for Australia. Since the West’s own Schumpeterian disintegration in 2008, when free markets blew themselves sky high, China has pursue an explicitly Keynesian program of monetary and fiscal stimulus on a scale that Keynes himself would probably have balked at. It is that reason above all others that we have sailed through the past four years so relatively well.
China’s post-GFC Keynesian moment has passed. Over the medium term that will mean considerably lower growth and commodity prices, especially in the bulks. We have seen the leading edge of this in the past month with Chinese growth falling, iron ore and copper tumbling and relative indifference among authorities.
Meanwhile, in the US, over the post-GFC period a similar Keynsian course was struck. Struggling to revive poor aggregate demand, authorities embarked upon a huge bailout of the economy. Leading that project has been the Federal Reserve, which has not only kept interest rates at zero, it has also purchased closing in on $4 trillion in US government and mortgage bonds.
Some will argue that Keynes would not agree with this policy (and they may be right) but in the broad brush-stroke funding huge government deficits during a time of weak aggregate demand in this manner can rightly be described as Keynesian.
But as in China, the US Federal Reserve is now revoking its largess. Quantitative easing is being “tapered” as it is thought that the recovery in aggregate demand now has self-sustaining strength. The fallout there has been immediate too, with housing markets slowing materially and a bad winter also denting demand in the short term.
Yet US authorities have also kept their chins up. The US Treasury has forecast the strongest growth since 2005 and the Federal Reserve shows no signs of stopping the taper.
It is over to the private sectors of both countries to put their shoulders to the grind stone and push this business cycle forward. The most dynamic 37% of global output is having its Keynesian training wheels removed.
As often happens, Australian trends are following those of our hegemons. We have ourselves just elected a Schumpeterarian government. We are embarked upon the end of the age of entitlement with fiscal austerity and creative destruction the touchstones of our new parliamentarians.
But Australia uniquely straddles the Occidental and Oriental worlds. On one hand, we live off the income generated by exports to China. On the other, we leverage those gains up using the magic of US-style financial capitalism. The first is going to fall, the second is going to get more expensive.
Given the Schumpeterarian shift in our two great and powerful friends, one wonders how far behind Keynes can be for us.