Thursday, January 14, 2010

Tom Friedman

New York Times columnist Tom Friedman is a democrat (as well as being a Democrat) and (to a large extent) an advocate for free-market economics. But he sometimes seems ambivalent about letting individual buyers and sellers in the marketplace, and the rank and file in the body politic, make decisions for themselves.

Friedman makes two major points in his January 13 column, "Is China the Next Enron?" The first is that, despite signs of potential "bubbles" in its economy, China is too financially strong to be on the verge of collapse. The second is that the economic growth that China has been experiencing pretty much non-stop since the late 1970s is likely to continue.

I agree with him on the first point. On the second point, however, Friedman ignores certain aspects of the situation that might restrict China's growth down the road.

Friedman lauds China's "political class focused on addressing its real problems". In other words, the politicians are going to make decisions that will produce continued growth. Color me skeptical.

To his credit, Friedman cites legitimate government functions that are necessary to the growth of any economy, such as transportation infrastructure and education. But he ignores the issue of whether governmental restrictions on access to capital, and the flow of information, will be a drag on growth, long before China might overtake the U.S. in overall size of its economy, which would, in turn, be long before it could overtake on a per capita basis.

The beginnings of Chinese economic growth came in the late 1970s, when that country gradually began to allow markets to operate in its economy. Once that happened, it was not particularly difficult to put up impressive numbers in terms of percentage growth, given the small base they were starting from. Compared to Mao's regime, which was so paranoid about giving up control of anything, that it didn't allow markets for food to operate, even when tens of millions of people were starving to death, anything was an improvement.

The Marxist-Leninist command economy has been replaced by free markets in the distribution of consumer goods. And, to an increasing extent, capital is also allocated by market forces. Of all the recent changes in China, the existence of stock markets is perhaps the element most likely to make Mao turn over in his grave.

But significant vestiges of the command economy remain in the allocation of capital. Banks are pressured to lend to politically-preferred borrowers. And political infringements on property rights still impair the workings of the capital markets.

Friedman is probably correct in stating that China's current leaders are making some good decisions. But no one is smarter than the market. Political decisions are necessary on issues such as antitrust, externalities and fraud. But, otherwise, freely operating markets are much better at allocating resources than are central planners. I suspect that the Chinese will eventually find that growth can go only so far, without better capital allocation.

And then there is, of course, the pink elephant in the room that many don't want to talk about: the virtually complete lack of democracy in Chinese politics. That has many implications. But, in terms of the practical effect on the efficiency of the system, they are missing the capacity of democratic political activity to correct mistakes.

No one here in America will say that representative democracy is perfect. Throughout our history, it could be said, in the famously vague phrase of Richard Nixon's press secretary Ron Ziegler, that "mistakes were made".

But representative democracy provides mechanisms for correcting mistakes. An opposition party has the incentive and the forum to point out the mistakes of the governing party. If the electorate agrees with those criticisms, it can "throw the rascals out".

In China, by contrast, the leaders talk to each other in an echo chamber, and appoint their own successors. A reputation for "rocking the boat" constitutes the biggest danger to a Chinese politician's career path. So there is little incentive for an aspiring politician to point up the shortcomings of those who are currently in power.

Friedman likes to present himself as an average guy, good ol' Tom from St. Louis Park, Minnesota. But he displays some strongly elitist attitudes in his writing. He often underestimates the importance of giving ordinary people their say, both in the marketplace and in the political realm.

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