Young Economics.

China’s Big Push(/Lean)

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One of the fundamental debates in the study of economics is what type of role government should play. The past few decades have seen Western thought strongly celebrating free market ideologies over those of ‘the intrusive state’. The argument goes that the underlying prices, profits and opportunities in a market system will always pull entrepreneurial investment in the optimal direction for society. In truth, only those on the fringe of right-wing ideology believe the argument to this extreme. A much more realistic version is that while markets aren’t perfect, an economy is such a complicated animal that any attempt by government to influence its direction in a positive way will surely hurt more than help. I think this is Alex’s opinion.

However this idea certainly does not come without its critics. Many think that the state should take an active role, but not just because they value equality, freedom and other left-wing value.  For some, they believe intervention is actually needed sometimes to help society maximize output levels and welfare. This type of thinking can be modeled inside a simple framework showing the need for a ‘Big Push’ (link).

The idea is this: Consider an emerging economy. They are interested in trying to raise output levels and incomes. To do so would require the economic sectors to industrialize, but that’s costly; the technology upgrade would require a fair amount of investment, and the modern firm would have to pay their workers a premium for the extra skills they’d need. Thus, when one firm thinks about making the switch it doesn’t make sense; the costs are too high and money would be lost. However, if every firm made the upgrade at the same time it would be a profitable decision. Since every worker would be earning a higher wage in their sector, it would allow them to spend more on the other products in the economy, boosting profits for everyone else.  

In this scenario, you see that when you leave the market be the economy stagnates with no one industrializing. However, if a government subsidizes modernization then you can reach higher outcomes.

Admittedly, this example is far from the reality of a global marketplace. Today it is not so much about a country obtaining a certain level of technological advancement, but gaining a certain ‘type’. Countries are jockeying to win comparative advantage in producing the things our world will need today and in the future. But just how a country should build this advantage goes back to that fundamental question – state or market?

It looks like China thinks state. The whole reason I wrote this post was because of this article in the NY Times (link). Here’s an excerpt:

Chinese leaders have adopted a plan aimed at turning the country into one of the leading producers of hybrid and all-electric vehicles within three years, and making it the world leader in electric cars and buses after that.

The goal, which radiates from the very top of the Chinese government, suggests that Detroit’s Big Three, already struggling to stay alive, will face even stiffer foreign competition on the next field of automotive technology than they do today.

So it appears that the Chinese government has identified electric cars as a way of the future, and is going to do everything they can to make sure they make them. It’s not so much the specific policy that grabs at my attention, but this ‘social planner’ ideology. Will Chinese state companies be able to outperform all the other private conglomerates? Will their state-planned ideology spread, eventually coming here? In a way, has that already happened? If this idea works then I say Canada should set out to make Google #2.



Written by jk

April 8, 2009 at 2:39 pm

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