As Karl Marx wrote in the middle of the nineteenth century: Imbalances in pre-capitalist economies do not produce aggregate demand crises and collapses. Why don't they? Because Pharaoh can always command that another pyramid be built, the king can always set out on another crusade, and the bishop can always build another cathedral. The expenditures that provide employment for those not producing the consumption-goods-in-demand only have to make profit-and-loss sense under the capitalist mode of production. Capitalist economies suffer Hayek-Minsky crises when deluded financial markets suddenly recognize that they have been overoptimistic, have over invested, and need to shift investment-goods production back down not to normal but way below normal. And the collapse comes as near-universal bankruptcy and financial disruption prevents any such smooth expenditure-shifting. That Hayek-Minsky overinvestment crisis is what Paul Krugman, I, and other China-pessimists haver been fearing for two decades now. But perhaps socialism with Chinese characteristics is insufficiently capitalist for that Hayek-Minsky logic to apply, and Paul and I and others should have been paying more attention to Uncle Karl: Paul Krugman: Will China’s Economy Hit a Great Wall?: "I issued a warning.... The Chinese economy... is, I wrote, 'emerging as a danger spot'.... Unfortunately, the other day was more than 6 years ago. And it’s not just me. Many people have been predicting a China crisis for a long time, and it has kept on not happening. But now China seems to be stumbling again. Is this the moment when all the prophecies of big trouble in big China finally come true? Honestly, I have no idea. On one side, China’s problems are real. On the other, the Chinese government... has repeatedly shown its ability and willingness to do whatever it takes...

...But maybe this is another example of Dornbusch’s Law.... The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.... The fundamental problem with the Chinese economy is that it’s highly unbalanced: It has extremely high levels of investment, seemingly without enough domestic consumption to justify that investment. You might be tempted to say this doesn’t matter, that China can just export its surplus production to other countries. But while there was a period from the mid-2000s to the early 2010s when China ran huge trade surpluses, those days are past.... So China really can’t keep investing 40-plus percent of GDP. It needs to shift over to higher consumption, which it could do by returning more profits from state-owned enterprises to the public, strengthening the social safety net, and so on. But it keeps not doing that. Instead, the Chinese government has been piling on loans to businesses and state-owned enterprises, pushing the SOEs to spend more, and so on. Basically it has kept investment going despite low returns.... However, if this sounds like a compelling case, bear in mind that it’s the same case I and others made in 2011. So apply appropriate skepticism...


#noted

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