5 ms·

When you have a hammer everything looks like a nail. My problem with these kind of analysis is that it pretty much only looks at things from a financial perspec

by gitah 9y ago

When you have a hammer everything looks like a nail. My problem with these kind of analysis is that it pretty much only looks at things from a financial perspective thinking it's the be-all-end all. However, on first level principles, money is simply an abstraction; it's a medium for trading your services for other people's services. And if you become more efficient, you can buy more services with the same amount of effort and vice versa. The root cause of this increase in efficiency is technology. As a developing country, China has lots of easy productivity growth just by adopting current technologies on the technological frontier. Therefore, I think an analysis on how fast China is advancing in various technological areas and their industrial policy would be much more useful than one just at a financial level. Are Chinese companies as a whole becoming more productive and creating new technology?

leoc 9y ago
> However, on first level principles, money is simply an abstraction; it's a medium for trading your services for other people's services. And if you become more efficient, you can buy more services with the same amount of effort and vice versa. The root cause of this increase in efficiency is technology. Pettis does discuss this at length.
- deleted 9y ago
  [deleted]
- gitah 9y ago
  Can you elaborate? From the article, Pettis assumes the following is true: 1) China has overinvested in infrastructure and manufacturing capacity to such an extent that in the aggregate the cost of additional public sector investment exceeds the present value of future increases in productivity generated by the investment and 2) China's long-term sustainable growth rate is substantially below the economy's current GDP growth target Why does he make these assumptions without also analyzing the technology improvement aspect? I don't see anything about that in this article.
  - ryandamm 9y ago
    He elaborates on technology improvement in other articles, but it boils down to: technological improvements have a range of returns, but even the most optimistic of historical returns to technological progress can't paper over the debt-fueled boom China is currently undergoing. Basically, qualitatively, you're right. Technological improvements can generate growth from scratch. But when you look at the historical data to try to quantify it, you see it's quite modest. Big gains have come from: women entering the workforce, electrification, containerization. The rest is incremental enough it doesn't matter in the same way. (Part of this is how it's measured; the fact that consumers get much more value for their dollar isn't well captured, but the point remains because it's about debt-servicing, not consumer value.)
    - gitah 9y ago
      I don't get it. US workers still have 5x higher average income than China. Doesn't this suggest there are still a ton of technological improvement left to exploit? Why can't China just keep walking the same path of technological improvement as the US?
      - ryandamm 9y ago
        The average disguises a few things. One, I assume that's in absolute terms and not, say, purchasing power parity (which accounts for lower consumer prices in China). Two, the 'average' in China includes huge numbers of the rural poor. They are living in the third world; an office worker in Shanghai is not, but her income's contribution to the average is diluted by rural subsistence farmers. This does suggest that there is room for growth via urbanization and modernization: if subsistence farmers switched to commercial farming, and the excess labor moved to productive cities, in theory you've got a productivity boom. But China's productivity is predicated on the world's ability to absorb their excess production, which is not actually unlimited. That said, the central government is taking deliberate steps to encourage urbanization (while simultaneously not undertaking some reforms that would help, like overhauling the hukou system).
    - mattmanser 9y ago
paradite 9y ago
Similarly, if you use Western standards to measure economic metrics of China, everything looks weird. China is still pretty much a planned economy, where the government is in control of major state-owned corporations. I wouldn't worry too much about the debts that they owe to the state.
- hackuser 9y ago
  > I wouldn't worry too much about the debts that they owe to the state. Why not? The state can forgive the debt, but when those resources disappear from the economy then many people will lose out.
  - Mtinie 9y ago
    > ...when those resources disappear from the economy then many people will lose out. My initial reaction is "...and?" Not because I'm trying to be obstinate or lacking empathy, but because I'm trying to hard visualize a situation (re: China) where those who lose out legitimately can do anything about it. They can't realistically move, or revolt. They can starve[0], but that's happened in the past and the State really didn't suffer for it. --- [0] https://en.m.wikipedia.org/wiki/Great_Chinese_Famine https://en.m.wikipedia.org/wiki/Great_Chinese_Famine
    - JumpCrisscross 9y ago
      > They can't realistically move, or revolt Some can. Those are the ones who matter. No man rules alone--political leaders are only powerful insomuch as they can incentives or coërce others to act for them. A ruling class whose living standards is falling is a ruling class more willing to entertain other leaders. "Certain types of unemployment are likely to be perceived as more politically costly than others - e.g. because returning to family farms acts as a kind of safety valve, even though a significant fall in living standards, unemployment among migrant workers is likely to be less costly, or because university graduates are presumably more communicative and have higher expectations, their unemployment might be more costly" [1]. [1] http://carnegieendowment.org/chinafinancialmarkets/66221 http://carnegieendowment.org/chinafinancialmarkets/66221
spangry 9y ago
As a developing country, China has lots of easy productivity growth just by adopting current technologies on the technological frontier. High rates of growth in developing countries, with the rate slowing as they 'catch-up' to more developed countries, is also what the bog-standard macro-growth model (Solow-Swan) predicts.[0] To simplify, developing countries will have lots of labour inputs and relatively few capital inputs. Therefore the marginal factor productivity of each capital input will be high. Eventually, as the economy reaches capital saturation, the marginal productivity of capital will decline and the economy will settle into a low 'steady-state' growth level, where real growth is largely the product of technological advances. This is why I've always been puzzled by economic commentators who assume China will continue to enjoy 7-9% GDP growth rates forever. Although I'm not suggesting that there's "nothing to see here" in this particular case. China does indeed have a bubble (and massive oversupply) in its residential property market, mostly due to the stimulus deployed just after the GFC. It could make one hell of a pop. [0] https://en.wikipedia.org/wiki/Solow%E2%80%93Swan_model#Conditional_convergence https://en.wikipedia.org/wiki/Solow%E2%80%93Swan_model#Condi...
- valarauca1 9y ago
  Solow-Swan model is based on neoclassical economics that assumes a closed market with zero technological growth. In the event of technological growth it assumes a steady state is still reached. And I quote, "Due to Common Sense." [1] How TF do you consider this a valid scientific theory? This is a theory based on NeoClassical economics which modern Behavior Economics finds that the models of NeoClassical economics fail in nearly every situation [2]. The Solow-Swan model has no rigor, predictions, or testable results to justifying its usage nor faith in its system. Science is a quantitative game, yet economics isn't? [1] https://academic.oup.com/qje/article-abstract/70/1/65/1903777/A-Contribution-to-the-Theory-of-Economic-Growth?redirectedFrom=fulltext https://academic.oup.com/qje/article-abstract/70/1/65/190377... [2] http://www.slembeck.ch/pdf/learning.pdf http://www.slembeck.ch/pdf/learning.pdf
  - spangry 9y ago
    I don't have the time atm to get into much detail (but will come back in 8ish hours after work), but very quickly: - This is just a simplified description of probably the simplest macro-economic growth model you'll learn if you study economics. It's basically the model you learn in Macro 101. I didn't really want to write a super-long post going through all the extensions of the base model (not to mention the more complicated micro-economically founded concepts, models and theories you'd learn if you study developmental economics) as one of the predictions of the simple model that I thought relevant, that economies experience slower rates of growth as they reach capital saturation, is empirically supported. - It's not intended to accurately reflect all aspects of a actual economy. No model is. If a model did this, it wouldn't be a model. We would probably just call it 'the economy'. It's just a simplified model from which a number of more complex extensions have been made, but I didn't feel were worth going into. - It doesn't purport to make realistic assumptions, and no-one with any sense would think that to be the case. In addition to what you've pointed out, it also assumes the economy only produces a single good, has no government, no international trade, and constant returns to scale. All of these are almost certainly incorrect to varying degrees. Despite these simplifying assumptions, that does not mean the model is useless, or that it does not make any testable predictions. No-one in their right mind would think these assumptions are correct. I'm honestly not sure what level of realism you expect an economic model to have. Just because a model is strictly wrong (as all models are; hence the name: model), does not mean it isn't useful. You mention empirical results from behavioural economics, which strongly suggest the neoclassical assumption of perfect actor rationality is incorrect. Again, this is just a simplifying assumption under which models can still yield accurate predictions in the large. Is Newton's law of gravitation completely correct? No, and it's been superseded by general relativity. However, is it still useful? Yes. I can't really think of any economists (and this is certainly true for those I work with), let alone any people in general, who would believe any of these assumptions accurately reflect reality. There are a whole bunch of others too, like the implicit assumption that the labour-capital split of income remains constant. This is also almost certainly not correct as well. It, and its extensions which account for 'human capital' (which has a multiplicative effect when combined with physical capital) which the simplified model just rolls into the solow residual (i.e. total factor productivity), do make a number of testable predictions, some of which have actually been tested in cross-country econometric studies. For example, here's a paper that examines a number of extended models, and among other things, examines the evidence for absolute vs conditional convergence (http://www2.stat.unibo.it/brasili/file/2009-2010/COSDI/chap1EconomicGrowthBarro&SalaYMartin.pdf http://www2.stat.unibo.it/brasili/file/2009-2010/COSDI/chap1..., see pages 48 & 49). You can literally just look at the model equation, do some simple algebra to turn one of the independent variables into the sole dependent variable and, presto, you have a prediction. Here are a few: - An economy will converge to a balanced-growth equilibrium, regardless of its starting point. At this point, the growth of output per worker is determined solely by the rate of technological progress. - At equilibrium, the capital/output ratio depends only on savings, growth, and depreciation rates. - Countries with higher savings rates will accumulate capital at a faster rate (if all other relevant features of these economies are the same, which they aren't). - If productivity is the same across countries (which it isn't), then countries with less capital per worker will have a higher marginal productivity of capital and provide a higher return on capital investment. Consequently, in a world of open market economies and global financial capital (which does not exist, and probably can't), investment will flow from rich countries to poor countries, until capital/worker and income/worker equalise across countries. All that said, if you are able to produce a model that makes no incorrect assumptions, accurately accounts for bounded rationality, and all its predictions in every real world scenario are accurate, you'll win a nobel prize (and will also become filthy rich by investing according to this super-model's predictions). Given us economist have simply just been 'doing it wrong' this whole time, because we foolishly didn't realise SF computer programmers held a much deeper understanding of macroeconomics, I'm really excited to being a first-hand witness to, what will be, a quantum leap in our understanding of macroeconomic dynamics and development economics. I'll try to make sure to list every relevant caveat (the above is only a partial list, at best, for this particular model btw), before daring to discuss an unscientific subject like economics (which I apparently know nothing about). EDIT: Oh fuck it. I quit.
nickgrosvenor 9y ago
Lots of Charlie Munger type language in this comment.

by gitah 9y ago

leoc 9y ago

> However, on first level principles, money is simply an abstraction; it's a medium for trading your services for other people's services. And if you become more efficient, you can buy more services with the same amount of effort and vice versa. The root cause of this increase in efficiency is technology. Pettis does discuss this at length.

deleted 9y ago
[deleted]
gitah 9y ago
Can you elaborate? From the article, Pettis assumes the following is true: 1) China has overinvested in infrastructure and manufacturing capacity to such an extent that in the aggregate the cost of additional public sector investment exceeds the present value of future increases in productivity generated by the investment and 2) China's long-term sustainable growth rate is substantially below the economy's current GDP growth target Why does he make these assumptions without also analyzing the technology improvement aspect? I don't see anything about that in this article.
- ryandamm 9y ago
  He elaborates on technology improvement in other articles, but it boils down to: technological improvements have a range of returns, but even the most optimistic of historical returns to technological progress can't paper over the debt-fueled boom China is currently undergoing. Basically, qualitatively, you're right. Technological improvements can generate growth from scratch. But when you look at the historical data to try to quantify it, you see it's quite modest. Big gains have come from: women entering the workforce, electrification, containerization. The rest is incremental enough it doesn't matter in the same way. (Part of this is how it's measured; the fact that consumers get much more value for their dollar isn't well captured, but the point remains because it's about debt-servicing, not consumer value.)
  - gitah 9y ago
    I don't get it. US workers still have 5x higher average income than China. Doesn't this suggest there are still a ton of technological improvement left to exploit? Why can't China just keep walking the same path of technological improvement as the US?
    - ryandamm 9y ago
      The average disguises a few things. One, I assume that's in absolute terms and not, say, purchasing power parity (which accounts for lower consumer prices in China). Two, the 'average' in China includes huge numbers of the rural poor. They are living in the third world; an office worker in Shanghai is not, but her income's contribution to the average is diluted by rural subsistence farmers. This does suggest that there is room for growth via urbanization and modernization: if subsistence farmers switched to commercial farming, and the excess labor moved to productive cities, in theory you've got a productivity boom. But China's productivity is predicated on the world's ability to absorb their excess production, which is not actually unlimited. That said, the central government is taking deliberate steps to encourage urbanization (while simultaneously not undertaking some reforms that would help, like overhauling the hukou system).
  - mattmanser 9y ago

paradite 9y ago

Similarly, if you use Western standards to measure economic metrics of China, everything looks weird. China is still pretty much a planned economy, where the government is in control of major state-owned corporations. I wouldn't worry too much about the debts that they owe to the state.

hackuser 9y ago
> I wouldn't worry too much about the debts that they owe to the state. Why not? The state can forgive the debt, but when those resources disappear from the economy then many people will lose out.
- Mtinie 9y ago
  > ...when those resources disappear from the economy then many people will lose out. My initial reaction is "...and?" Not because I'm trying to be obstinate or lacking empathy, but because I'm trying to hard visualize a situation (re: China) where those who lose out legitimately can do anything about it. They can't realistically move, or revolt. They can starve[0], but that's happened in the past and the State really didn't suffer for it. --- [0] https://en.m.wikipedia.org/wiki/Great_Chinese_Famine https://en.m.wikipedia.org/wiki/Great_Chinese_Famine
  - JumpCrisscross 9y ago
    > They can't realistically move, or revolt Some can. Those are the ones who matter. No man rules alone--political leaders are only powerful insomuch as they can incentives or coërce others to act for them. A ruling class whose living standards is falling is a ruling class more willing to entertain other leaders. "Certain types of unemployment are likely to be perceived as more politically costly than others - e.g. because returning to family farms acts as a kind of safety valve, even though a significant fall in living standards, unemployment among migrant workers is likely to be less costly, or because university graduates are presumably more communicative and have higher expectations, their unemployment might be more costly" [1]. [1] http://carnegieendowment.org/chinafinancialmarkets/66221 http://carnegieendowment.org/chinafinancialmarkets/66221

spangry 9y ago

As a developing country, China has lots of easy productivity growth just by adopting current technologies on the technological frontier. High rates of growth in developing countries, with the rate slowing as they 'catch-up' to more developed countries, is also what the bog-standard macro-growth model (Solow-Swan) predicts.[0] To simplify, developing countries will have lots of labour inputs and relatively few capital inputs. Therefore the marginal factor productivity of each capital input will be high. Eventually, as the economy reaches capital saturation, the marginal productivity of capital will decline and the economy will settle into a low 'steady-state' growth level, where real growth is largely the product of technological advances. This is why I've always been puzzled by economic commentators who assume China will continue to enjoy 7-9% GDP growth rates forever. Although I'm not suggesting that there's "nothing to see here" in this particular case. China does indeed have a bubble (and massive oversupply) in its residential property market, mostly due to the stimulus deployed just after the GFC. It could make one hell of a pop. [0] https://en.wikipedia.org/wiki/Solow%E2%80%93Swan_model#Conditional_convergence https://en.wikipedia.org/wiki/Solow%E2%80%93Swan_model#Condi...

valarauca1 9y ago
Solow-Swan model is based on neoclassical economics that assumes a closed market with zero technological growth. In the event of technological growth it assumes a steady state is still reached. And I quote, "Due to Common Sense." [1] How TF do you consider this a valid scientific theory? This is a theory based on NeoClassical economics which modern Behavior Economics finds that the models of NeoClassical economics fail in nearly every situation [2]. The Solow-Swan model has no rigor, predictions, or testable results to justifying its usage nor faith in its system. Science is a quantitative game, yet economics isn't? [1] https://academic.oup.com/qje/article-abstract/70/1/65/1903777/A-Contribution-to-the-Theory-of-Economic-Growth?redirectedFrom=fulltext https://academic.oup.com/qje/article-abstract/70/1/65/190377... [2] http://www.slembeck.ch/pdf/learning.pdf http://www.slembeck.ch/pdf/learning.pdf
- spangry 9y ago
  I don't have the time atm to get into much detail (but will come back in 8ish hours after work), but very quickly: - This is just a simplified description of probably the simplest macro-economic growth model you'll learn if you study economics. It's basically the model you learn in Macro 101. I didn't really want to write a super-long post going through all the extensions of the base model (not to mention the more complicated micro-economically founded concepts, models and theories you'd learn if you study developmental economics) as one of the predictions of the simple model that I thought relevant, that economies experience slower rates of growth as they reach capital saturation, is empirically supported. - It's not intended to accurately reflect all aspects of a actual economy. No model is. If a model did this, it wouldn't be a model. We would probably just call it 'the economy'. It's just a simplified model from which a number of more complex extensions have been made, but I didn't feel were worth going into. - It doesn't purport to make realistic assumptions, and no-one with any sense would think that to be the case. In addition to what you've pointed out, it also assumes the economy only produces a single good, has no government, no international trade, and constant returns to scale. All of these are almost certainly incorrect to varying degrees. Despite these simplifying assumptions, that does not mean the model is useless, or that it does not make any testable predictions. No-one in their right mind would think these assumptions are correct. I'm honestly not sure what level of realism you expect an economic model to have. Just because a model is strictly wrong (as all models are; hence the name: model), does not mean it isn't useful. You mention empirical results from behavioural economics, which strongly suggest the neoclassical assumption of perfect actor rationality is incorrect. Again, this is just a simplifying assumption under which models can still yield accurate predictions in the large. Is Newton's law of gravitation completely correct? No, and it's been superseded by general relativity. However, is it still useful? Yes. I can't really think of any economists (and this is certainly true for those I work with), let alone any people in general, who would believe any of these assumptions accurately reflect reality. There are a whole bunch of others too, like the implicit assumption that the labour-capital split of income remains constant. This is also almost certainly not correct as well. It, and its extensions which account for 'human capital' (which has a multiplicative effect when combined with physical capital) which the simplified model just rolls into the solow residual (i.e. total factor productivity), do make a number of testable predictions, some of which have actually been tested in cross-country econometric studies. For example, here's a paper that examines a number of extended models, and among other things, examines the evidence for absolute vs conditional convergence (http://www2.stat.unibo.it/brasili/file/2009-2010/COSDI/chap1EconomicGrowthBarro&SalaYMartin.pdf http://www2.stat.unibo.it/brasili/file/2009-2010/COSDI/chap1..., see pages 48 & 49). You can literally just look at the model equation, do some simple algebra to turn one of the independent variables into the sole dependent variable and, presto, you have a prediction. Here are a few: - An economy will converge to a balanced-growth equilibrium, regardless of its starting point. At this point, the growth of output per worker is determined solely by the rate of technological progress. - At equilibrium, the capital/output ratio depends only on savings, growth, and depreciation rates. - Countries with higher savings rates will accumulate capital at a faster rate (if all other relevant features of these economies are the same, which they aren't). - If productivity is the same across countries (which it isn't), then countries with less capital per worker will have a higher marginal productivity of capital and provide a higher return on capital investment. Consequently, in a world of open market economies and global financial capital (which does not exist, and probably can't), investment will flow from rich countries to poor countries, until capital/worker and income/worker equalise across countries. All that said, if you are able to produce a model that makes no incorrect assumptions, accurately accounts for bounded rationality, and all its predictions in every real world scenario are accurate, you'll win a nobel prize (and will also become filthy rich by investing according to this super-model's predictions). Given us economist have simply just been 'doing it wrong' this whole time, because we foolishly didn't realise SF computer programmers held a much deeper understanding of macroeconomics, I'm really excited to being a first-hand witness to, what will be, a quantum leap in our understanding of macroeconomic dynamics and development economics. I'll try to make sure to list every relevant caveat (the above is only a partial list, at best, for this particular model btw), before daring to discuss an unscientific subject like economics (which I apparently know nothing about). EDIT: Oh fuck it. I quit.

nickgrosvenor 9y ago

Lots of Charlie Munger type language in this comment.