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2018 globalinequality
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globalinequality

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Hayekian communism
Hayekian communism 1½ Adam Smiths
1½ Adam Smiths
The Americas, armed trade and cheap
You think it is a contradiction in terms, a paradox. But you are energy: review of Kenneth Pomeranz's
“The Great Divergence”
wrong: we are used to think in pure categories while life is much On the Threshold of the Third
Globalization: why Liberal Capitalism
more complex; and paradoxes do exist in real life. China is might Fail?
indeed a country of Hayekian communism.
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Nowhere is, I think, wealth and material success more openly Submit
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celebrated than in China. Perhaps it was stimulated by the 40th
anniversary of the opening up which is this year, but more Search This Blog

fundamentally, I think, it is stimulated by the most successful Search

economic development in history.  Rich entrepreneurs are
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celebrated in newspapers, television, conferences. Their wealth
and rags‑to‑riches stories are held as examples for all. Ayn Rand
would feel at home in this environment. So would Hayek: an
incredible amount of energy and discovery was unleashed by the About Me

changes that transformed lives of 1.4 billion people, twice as Branko Milanovic

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wealth on an almost unimaginable scale (certainly, unimaginable
▼  September (3)
for anyone who looked at China in 1978).  Hayekian communism
1½ Adam Smiths
At a large banquet in Beijing, we were presented first‑hand The Americas, armed trade and cheap
energy: review...
stories of five Chinese capitalists who started from zero (zilch!
►  August (2)
nada! ) in the 1980s, and became dollar billionaires today. One
►  July (3)
spent years in countryside during the Cultural Revolution, ►  June (3)
another was put in prison for seven years for “speculation”, the ►  May (3)

third made his “apprentissage” of capitalism, as he candidly ►  April (1)

said, by cheating people in East Asia (“afterwards I learned that ►  March (3)
►  February (4)
if I really wanted to become rich, I should not cheat; cheating is
►  January (4)
for losers”). Hayek would have listened to these stories,
►  2017 (42)
probably transfixed.  And what news would he have loved better ►  2016 (38)
than to read in today’s Financial Times that the Marxist society ►  2015 (41)

at the Peking University was disbanded because of its support of ►  2014 (26)

striking workers in the Special Economic Zone of Shenzhen.

But there is one thing where Hayek went wrong. These

incredible personal (and societal) successes were achieved
under the rule of a single party, Communist Party of China.
Celebration of wealth comes naturally to Marxists.
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Development, widespread education, gender equality,

urbanization, and indeed faster growth than under capitalism,
were the rationale, and sources of legitimacy, of communist
revolutions as they took place in the less developed world. Lenin
said so; Trotsky confirmed it when he canvassed for large‑scale
industrialization; Stalin implemented it: “We are fifty or a
hundred years behind the advanced countries. We must make
good this difference in ten years. Either we do it, or we shall be
crushed”.

I remember, as a precocious high‑school student in Yugoslavia,

how I scanned the newspapers for the indicators of industrial
growth. Since Yugoslavia was then among the fastest growing
economies in the world, I was deeply disappointed when the
monthly growth rate (annualized) would fall below ten percent.
I thought ten percent was the normal growth rate of communist
economies: why would you care to become communist if you
would not grow faster than under capitalism?

So the celebration of growth—new roads, new super fast trains,

new housing complexes, new well‑lit avenues and orderly
schools—comes naturally to communists. Not any less than to
Hayekian entrepreneurs. (As an exercise in this, read Neruda’s
beautiful memoirs Confeso Que He Vivido where he exudes
enormous pleasure at seeing Soviet‑built dams.) The difference
though is that the Hayekinans celebrate private success which
also helps society move forward; in communism, success too was
supposed to be socialized.

But this did not happen. Collectivist efforts worked for a decade
or two but eventually growth fizzled out and the efforts flagged.
Cynicism reigned supreme. It was left to China and to Deng
Xiaoping to stumble (in the immortal phrase of Adam Ferguson)
on a combination where the rule of the communist party would
be maintained but full freedom of action, and social encomium,
would be given to individual capitalists. They would work,
become rich, enrich many others in the process, but the reins of
political power would firmly remain in the hands of the
communist party. Capitalists will provide the engine and the
fuel, but the party will hold the steering wheel.

Would things be ever better if the political power too was in the
hands of capitalists? This is doubtful. They might have used it to
recreate the Nanjing government of the 1930s, venal, weak and
incompetent. They would not work hard but would use political
power to maintain their economic privileges. It is one of the key
problems of US capitalism today that the rich increasingly
control the political process and thus skew economic incentives
away from production and competition into creation and
preservation of monopolies. Much worse would likely have
happened in China. It is precisely because the political sphere
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was largely insulated from the economic sphere that capitalists

could be safely kept busy with production, and at arm’s length
(as far as possible because the party is exposed to growing
corruption) from the politics.

How did China stumble on this combination? There may be many

reasons including millennial tradition of being run by imperial
bureaucracies, the historical alliance ‑‑even if it got unraveled—
between the Communist patty and Sun Yat‑sen’s KMT (an
alliance the like of which never existed elsewhere in the
communist world)—but one cannot but ask oneself, could it have
happened elsewhere too? Perhaps. Lenin’s New Economic Policy
was not much different from Chinese policies of the 1980s. But
Lenin saw NEP as a temporary concession to capitalists—because
he believed that socialism was more progressive and thus
“scientifically” generated higher growth. Perhaps it is only the
failures of the Great Leap Forward and the chaos of the Cultural
Revolution that chastened Chinese leadership and convinced
Deng and others that private initiative was more “progressive”
than social planning and state‑owned enterprises. Lenin could
not have seen that. It was too early.

I also wondered what Stalin would have made of China. He

probably would have been glad that his name is still enshrined in
the official pantheon. (In a large bookstore in downtown Beijing,
the first row of books are translations of Marxist classics: Marx
himself, Engels, Lenin..and Stalin. Very few people look at
them. The next rows that display books on wealth management,
finance economics, stock market investments etc. are much
more popular.) Stalin would have been impressed by Chinese
growth; by the extensive power of the state and the country (for
sure, no longer a country to which he could send his advisors to
help it technologically), by the party’s ability to control in a
very sophisticated and unobtrusive manner the population.

Stalin would have loved economic success and the military

power that comes with it, but would have probably been
shocked by private wealth. It is hard seeing him coexist with
Jack Ma. Hayek’s reaction would have been the opposite: he
would have been delighted that his claims about the
spontaneous market order have been vindicated in a most
emphatic fashion, but would have failed to understand that this
was possible only under the rule of a communist party.

No one would have been left indifferent by the most successful

economic story ever. And no one would have fully understood it.

Posted by Branko Milanovic at 2:05 AM No comments:

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1½ Adam Smiths

The recent book by Jesse Norman simply entitled “Adam Smith”

is a pleasure to read. There are of course innumerable books on
the founder of the  political economy, so why another one?
Norman’s book is directed toward that, at times elusive, general
educated reader, and has, in my opinion, three objectives: (i) to
situate Adam Smith in his time, both intellectually and
politically, (ii) to argue that there is a remarkable consistency
between the Adam Smith of the Theory of Moral Sentiments,
Lectures on Jurisprudence and the Wealth of Nations, and (iii) to
show that most of neoclassical and laissez‑faire appropriations
of Adam Smith are at best one‑sided, and in many cases
downright wrong.

Point (i) is nicely discussed in the first part of the book (“Life”).
We follow Smith, his education, early jobs and successes,
friendships, intellectual influences, and his later fame all the
way to his death. I think that placing Adam Smith in the
tumultuous history of 18th century Scotland and England was a
right decision. Political conflicts and  wars between the
Jacobites and the Crown,  religious strife, the Union of 1707, US
war of independence as well as the remarkable economic
progress of Scotland that Smith witnessed first hand, must have
all contributed to, or even formed, his view of the world. I wish
Norman would have spent a bit more time in explaining for the
readers not sufficiently familiar with Scottish and English history
of the period what were the differences and interests of the
various factions. I was unable to fully follow them and
consequently to more exactly gauge Smith’s political position.

Smith as a person remains rather vague. Of course, his erudition

and even temper are agreed by all who knew him. But Smith the
man is still obscure. Most of contemporaries’  laudations cited
by Norman (and other writers on Smith;  many of these praises
are used and reused) are a bit too generic for the reader to feel
what really were Smith’s virtues. The standard British approach
at the time seems also to have been partial to flowery
expressions of admiration which were often pro forma.

Smith does not seem to have helped too many people whom he
knew—other than in his job as a paid tutor; his generosity is
undefined—even if he did not die a rich man (and clearly must
have given away some of the not inconsiderable wealth he
earned). Moreover, the fact that on two occasions he failed to
stand up for David Hume, his close friend and an early
inspiration, is not exactly awe‑inspiring. Norman mentions
Smith’s uncharitable treatment of James Steuart in the WoN,
and I would add not very generous treatment of Quesnay.
(Surely in his economics Smith went far beyond the Physiocrats
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and could rightly be critical of them but he might have been

somewhat less stinting in his praise of Quesnay—perhaps too
because of personal relations that he entertained with him and
from which he probably benefitted intellectually). Smith was, as
Marx noted, rather economical in his citation of the
predecessors or sources for his views.

Norman  is convincing in his task (iii). The cardboard Smith

which is made the originator of the general equilibrium is really
not the Smith of flesh and blood. I think that Smith’s own
reaction to Walras and  Arrow‑Debreu would have been that it is
a nice result—which can be safely tucked in an annex and mostly
forgotten.

I thus sometimes wonder if people who claim Smith as their

inspiration have ever bothered to read him—beyond a few
 quotes and select excerpts. And whether they realize that some
of his most celebrated statements and metaphors (e.g. the
invisible hand, capital’s preference for domestic market,
coordination advantage of smaller groups, relative poverty
[“whatever the custom of the country renders it indecent for
creditable people...to be without”]) are not central concepts
around which his writing is organized but are merely mentioned
in passing and when dealing with specific topics. Perhaps
nothing illustrates better Smith’s empirical bent and inductive
approach.

The belief that Adam Smith was an unqualified supporter of the

free market, anti‑labor and pro‑capitalist, or was always in
favor of small government is just so much at odds with his
writings that one is bewildered as to how such a caricature ever
took hold. Recently, however, not least thanks to Amartya Sen’s
writings, the “real” Smith is much better known. Norman is here
adding, I hope, the  proverbial last nail into the coffin of
neoliberal caricature of Smith.    

Where I see things differently than Norman is in (ii), the so‑

called Adam Smith Frage. Norman is right to dismiss the extreme
version of this argument, namely that there were two Adam
Smiths, the young and idealistic one of the Theory, and the old
and chastened one of the WoN: “The real Smith was not an
intellectual turncoat who switched from altruism in The Theory
of Moral Sentiments to egoism in The Wealth of Nations” (p.
324). Norman’s  main argument against that view is
chronological. Smith worked on the expanded version of the
Theory after completing WoN (and vice versa) while Lectures of
Jurisprudence, written in‑between the two more famous works,
provide an unmistakable bridge. Therefore, Norman argues,
empathy, impartial spectator, fatuity of wealth accumulation
from the Theory, and self‑interest and invisible hand from the
WoN are all part of the same worldview and we are wrong to see
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the WoN as having been built, as George Stigler claimed “on the
granite of self‑interest”.  Norman works hard to convince us that
everything, from empathy to self‑love, needs to  be taken
jointly.

I think he overplays his hand. I do not think that Smith was

inconsistent, an “intellectual turncoat” or that there is a
contradiction between the Theory and the WoN. I think simply
that, in the two books, he dealt with two different aspects of
reality. In one he approached the world as a moral philosopher;
in the other, he approached the world as an economist. This is
not inconsistent—it just reflects our normal separation of topics,
or differently, a multi‑faceted world. There was no point in a
book on political economy, which is concerned, to quote
Marshall,  with “the ordinary business of life”, in talking about
religion, vanity of all things material or our sympathy for others.
It would  have made the book odd and would not have been 
useful. What did, after all,  East India Company have to do with
any of these ideas? (I wrote about the almost universal
“badness”, “the rule of evil men” that is so pervasive in the
WoN here.)   

For our understanding of how an economy works the tools from

the Theory are superfluous. Indeed, for the WoN to stand firm
and tall, self‑interest is enough. */ Smith displayed there I think
a praiseworthy economy of assumptions.

I have to stop here for a moment to explain both why I believe

that Adam Smith in the WoN used no tools from the Theory, and
why it has become de rigueur to argue that we should use a
much “broader” Smith than purely the Smith of  economics. The
reason for the latter is the appropriation of the “narrow” Smith
first by neoclassical economics and then by neoliberals. A way to
“fight” against this is thought to reside in showing that Smith
had a much more encompassing view of economics, embedded
in society, in “reciprocity, cooperation and sympathy”. To show
that—it is thought—we must combine the WoN and the Theory
and prove there is only one Smith.  

But where I think this approach is wrong is that it meekly

surrenders the Smith of the WoN to neoliberals and tries to
change the discourse. I think on the contrary that the Smith of
the WoN is indeed the Smith of self‑interest as the motivating
force alone (so I agree with neoliberals there) but that he is not
an economist of the laissez‑faire. Why? Because in example
after example he shows that self‑interest of some (large
industrialists, monopolists, government officials, protected
traders) is deeply pernicious for the society and has to be kept
in check. He does not deny that self‑interest motivates people
in economics but he is not blind (as neoliberals are) to the fact
that self‑interest can produce at times disastrous results. The
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solution then is to direct self‑interest in a way that it becomes

socially productive rather than destructive and one does this by
stimulating competition, being tough on tacit “restraint in
trade” by large companies, breaking the monopoly of traders
and of the East India Company, having the government provide
goods and services others will not. All these  “progressive“
 measures are justified by societal gain, not by a recourse to
sympathy among the economic actors or any other tools from
the Theory.

To conclude: the Smith of the WoN is, in my reading, indeed the

one who believes that when we talk economics we talk self‑
interest almost exclusively,  but this does not imply –actually
most of the time positively rules out—policies of non‑
intervention. Smith on this reading is what may be called a
“center‑left economist”. We do not need to “promote” him to
the position of a sage or social philosopher in order to interpret
him as “progressive”.

  
*/ Self‑interest does not, of course, exclude cooperation. We
cooperate because most of the time we cannot reach our
objectives alone. Division of labor, to take Smith’s most famous
example, is not based on our sympathy for others but on self‑
interest that can be best realized while cooperating with others.
 Also, while self‑interest is enough for economics it is not
enough for a much broader “science of man” a project into
which Hume and Smith, as Norman explains, were engaged.

Posted by Branko Milanovic at 1:02 AM No comments:

S a t u r d a y,   S e p t e m b e r   1 ,   2 0 1 8

The Americas, armed trade and cheap energy: review

of Kenneth Pomeranz's “The Great Divergence”

Yes, I am 18 years late. I have read quite a lot about Pomeranz’s

“Great Divergence”, both laudatory and dismissive reviews,
papers that continued in his footsteps and others that did not,
but I have not read the original book. So I decided to correct the
omission at the end of this Summer.

It is a great book. And it is not surprising that it became famous.

It presents what was then (year 2000) a largely new view on the
causes of the Great Divergence, proves methodically, one by
one, insufficiency of all other plausible explanations, and
presents a logically taut and cogent case for its own hypothesis.
 
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That hypothesis is by now so well known that I will just sketch it

here in the briefest terms possible. Pomeranz argues that
around 1750‑1800 Western Europe, China and to a lesser extent
India were at the same or similar levels of development in all
relevant respects that could have led to the Industrial
Revolution (technology, protection of property rights,
development of markets, institutions in general, demography
and family formation). If anything, China was ahead of Western
Europe in being much more of a competitive  Smithian market
economy: land was easier to sell than in Europe (p. 73), labor
market was well‑integrated with greater migration of labor (pp.
84‑4, 90), state interfered less with merchants and granted
them fewer privileges (p. 170), there were only two state
monopolies (p. 196).

There is thus no apparent reason why only Western Europe

would develop further while the  others stagnated or declined.
The real reason was, Pomeranz argues, in the role played by the
Americas that (i) provided the silver with which Europe could
satisfy insatiable Chinese demand (as China was undergoing the
process of remonetization) and thus provide wherewithal to pay
imported Asian luxuries, and (ii) more importantly, grow food
and cotton for which Europe had no sufficient land or climate.
 Americas thus helped Europe remove the Malthusian trap, or
more accurately, helped it avoid the cul‑de‑sac development
into which China and India fell due to the lack of land on which
to grow food for their increasing populations. In addition,
England was helped by having access to relatively cheap energy
(coal)—a fact which interestingly does not receive in the main
text of the book the attention that later reviewers gave it.

The origins of the Great Divergence are thus not endogenous to

Europe: they cannot be found in some features unique to Europe
—be it culture or institutions, or the division of the continent in
many warring states or more advanced technology—but are
exogenous. Without the Americas, there would not have been
(modern) Europe, nor the Industrial Revolution.

The book is not exactly fun to read. The problem does not lie in
bad writing or misorganization. In fact, the writing is excellent
and very clear. The problem lies in the fact that Pomeranz
needed first to dispose of all alterative interpretations for the
European take‑off, that is to show that none of them can prove
Europe’s “difference” from China decisively, and thus to
convince us of “surprising similarities” between Western Europe
and most of China around 1700‑1750. But to do so Pomeranz had
to rely on a multitude of very partial and fragmentary
observations or bits of data (here, a piece of evidence about the
cost of land in a town in China around 1770, there, a
guessestimate of Chinese cotton production around 1720 based
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on information about the “usual” yields in somebody’s diary).

None  of that makes for an exciting reading and had we better
and more consistent data, both for Western Europe and China,
most of this discussion could be safely relegated to annexes. But
under that scenario, most of Pomeranz’s book would be in
annexes. This makes of course for a very tedious reading livened
up, however, from time to time, by some excellent observations
or unusual facts.  

It is only when we come (in the third part of the book) to

Pomeranz’s own hypothesis that the text picks up pace and
becomes more engaging. Pomeranz‘s Introduction that runs to
some 20 pages is also commendably lucid. I read it after having
read the book (as I normally do, since I think that we can
understand general line of an argument much better after
having read the nitty‑gritty) and for those who are do not agree
with me and are interested in the main argument only, the
Introduction may suffice.

Let me now mention two points I found interesting…and

puzzling: armed trade and sources used. “Armed trade”, that is,
trade carried in the shadows of the threat, or actual use, of
force or even pure piracy was the European way to prevail in
Asian trade (p. 182). State‑linked (or coercion‑intensive; both
terms are Pomeranz’s) European capitalism was not only key for
the conquest of the Americas but projected European power
across the world, including in Asia. Pomeranz thus argues that
whenever European refrained from the use of force, they failed
to squeeze out Chinese merchants from Southeast Asia; only
when they resorted to armed trade, did they take control. While
European merchants worked with the state, or were themselves
(like East India Company or the Dutch VOC) quasi states, the
Qing China was uninterested in protecting its overseas traders,
failing even to react to their massacres in Batavia and Manila
(pp. 202‑3).

But the question one can ask is, why was the trade war fought
on what may be thought to be Chinese home‑turf? Were there
some reasons that uniquely enabled Europeans to project their
power and to trade in Asia, and that prevented the Chinese to
do likewise in the Atlantic or the Mediterranean? Was the
willingness to use force the only reason? Thus while I find
plausible or even convincing that the Dutch, Portuguese, Spanish
or English could not outsell the Chinese in Indonesia or the
Philippines except when ready to use force, I still do not
understand what led Europeans to get there in the first place
and prevented Chinese to send similar ships to the Atlantic. Was
that something “endogenous” to Europe?

Second. It is striking how few contemporary Chinese sources we

have (or are quoted in the book), compared to contemporary
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European sources, or even European travel writers in China

(nothing similar exists in China: no Chinese travelers in Europe
are cited). I suppose that Pomeranz who is a China scholar knew
most of the then‑extent sources. Further, we surely have more
sources today than almost twenty years ago. There is an
enormous archival research work going on in China. But the
disproportion is, it seems, still large. If we take the period 1500‑
1700, there are thousands of documents, notes, memoranda,
books and treatises in Western Europe that deal with economic
matters. It does not seem that anything similar existed in China.
And although researchers are finding new data in Chinese
household stashes and archives, and that particular paucity of
numbers may be alleviated, the paucity of scholarly discussion
of economic matters is unlikely to be remedied because if such
texts existed in China, we would have known of them by now. So
the question is, if scholars or bureaucrats  in China were
uninterested in matters economic, and scholars and bureaucrats
in (Western) Europe were,  does not that too show that there
were some “endogenous” differences?

Posted by Branko Milanovic at 10:29 AM No comments:

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