ZeEa5KPul
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I will not be venturing much in presuming that every reader is at least casually familiar with the term “economics”. It’s what the Wall Street Journal writes about in every issue, it’s what talking heads on CNBC natter endlessly about like gossiping teenagers – usually with all the knowledgeability of gossiping teenagers. It’s what everyone has an opinion about and, of course, the solution to all that ails it. Whatever one thinks of the merits (or lack thereof) of the field of economics, I aim to show here that it’s woefully inadequate to the task of understanding strategic affairs among nations, particularly as it applies to China.
That’s no knock on economics – understanding strategic affairs is simply not what it was conceived to do. That task is better suited to what I’ll unimaginatively call “geo-economics”, and what I hope this essay will briefly introduce and provide a rationale for. To grasp the principal shortcoming of economics in our enterprise, we must first understand a crucial insight: economics – especially popularizations of it – is, to the exclusion of almost everything else, concerned with investment.
Doubtless the reader might think this a gross oversimplification, and I’ll not deny an element of truth to that. In my defence, I’ll point out that most practising economists work for major banks and financial institutions which, for all their bewildering variety, have one thing in common: their ultimate concern is money in vs. money out. Investment. Every column writer and talking head is opining on where they think some market is going, what policy this or that central bank will adopt, which companies are earning how much, etc. All this has a specific purpose: channelling investment. Whatever economic work is done outside this domain is certainly very far from the popular imagination, and has no role to play in the mental framework most people carry when they try to apply economic reasoning.
It cannot have escaped the reader that economic coverage of China is uniformly negative. It’s even entered American presidential politics, with Donald Trump thumping his chest and boasting that his trade war has caused China’s economy to grow at the slowest rate in however many vigintillion years. Criticism of this claim is usually shallow, pointing to other factors that were slowing China’s economy. But a deeper criticism must look at the question more profoundly: why is China’s economy widely taken to be in trouble at all?
The simplest answer is that China used to grow at double-digit percentage rates and it no longer does so, therefore its economy is in trouble. QED, yes? Not quite, as the following simple demonstration would show: If China grew at 10% (the smallest double-digit rate) for the next 30 years as it grew for the last 30, it’s PPP adjusted GDP and per-capita GDP in 2019 dollars would be $480 trillion and $350,000, respectively. The respective numbers today are roughly $27.5 trillion and $20,000. We can safely say that the odds are against this scenario. The natural entailment would be that China’s growth is bound to slow sooner or later, simply because planet Earth is a finite thing. As an aside, at its present trajectory of ~6% growth, China’s PPP adjusted GDP and per-capita GDP in 2019 dollars would be a more modest $160 trillion and $120,000, respectively. As we can see, “slow” is a relative term.
Here we come to what might be called the First Axiom of Geo-economics, and what crucially distinguishes it from popular economics: the size of what’s growing matters every bit as much as how fast it grows.
Yet if a demonstration as trivial as this serves to refute the prevailing ludicrous characterization of China’s economy, why does it persist? I often hew to the maxim that one should never attribute to malice what can be adequately explained by stupidity. While it might be too cruel to characterize these entrenched biases as “stupidity” - especially as they do a passable job when one doesn’t venture too far from their narrow, specific domains – they certainly foster fallacious reasoning.
In that spirit, consider this second example: Let’s suppose we have two economies A and B, with A growing at 12% and B growing at 6%; let’s also stipulate that investment risks are equal between the two economies. Any competent investor would greatly favour A to B, as that is where he is mostly likely to maximize the return on his investment. If he’s of notable wealth and prominence, he’d undoubtedly be invited to write a column in the Journal or be interviewed on CNBC, where he would crow on and on, declaring A the future and instructing everyone to invest in it. In some narrow sense, he’d be right.
Whatever issues A would face as a result of this flood of hot money is a topic for another essay.
The reader will surely have noticed that the investor did not give one whit about the size of A and B’s economies. That’s because that’s at best a tangential factoid to investors. All an investor cares about is money in vs. money out and how much risk hangs over that money. If B is a hundred times larger than A, then good for B – how is that going to make me more money? To our hypothetical investor, a tiny economy growing at 12% is vibrant, while a gargantuan economy growing at 6% is moribund.
But to those of us interested in geopolitics, this is deeply misleading. Another arithmetical demonstration would illustrate just how misleading, at a size ratio of 100:1, B – growing at 6% - would add A’s entire economy – as it grows at 12% - in 0.174 years, or two months and change. The geopolitical ramifications of this should be obvious.
I will explore other common fallacies that arise when discussing China’s economy in subsequent parts.
That’s no knock on economics – understanding strategic affairs is simply not what it was conceived to do. That task is better suited to what I’ll unimaginatively call “geo-economics”, and what I hope this essay will briefly introduce and provide a rationale for. To grasp the principal shortcoming of economics in our enterprise, we must first understand a crucial insight: economics – especially popularizations of it – is, to the exclusion of almost everything else, concerned with investment.
Doubtless the reader might think this a gross oversimplification, and I’ll not deny an element of truth to that. In my defence, I’ll point out that most practising economists work for major banks and financial institutions which, for all their bewildering variety, have one thing in common: their ultimate concern is money in vs. money out. Investment. Every column writer and talking head is opining on where they think some market is going, what policy this or that central bank will adopt, which companies are earning how much, etc. All this has a specific purpose: channelling investment. Whatever economic work is done outside this domain is certainly very far from the popular imagination, and has no role to play in the mental framework most people carry when they try to apply economic reasoning.
It cannot have escaped the reader that economic coverage of China is uniformly negative. It’s even entered American presidential politics, with Donald Trump thumping his chest and boasting that his trade war has caused China’s economy to grow at the slowest rate in however many vigintillion years. Criticism of this claim is usually shallow, pointing to other factors that were slowing China’s economy. But a deeper criticism must look at the question more profoundly: why is China’s economy widely taken to be in trouble at all?
The simplest answer is that China used to grow at double-digit percentage rates and it no longer does so, therefore its economy is in trouble. QED, yes? Not quite, as the following simple demonstration would show: If China grew at 10% (the smallest double-digit rate) for the next 30 years as it grew for the last 30, it’s PPP adjusted GDP and per-capita GDP in 2019 dollars would be $480 trillion and $350,000, respectively. The respective numbers today are roughly $27.5 trillion and $20,000. We can safely say that the odds are against this scenario. The natural entailment would be that China’s growth is bound to slow sooner or later, simply because planet Earth is a finite thing. As an aside, at its present trajectory of ~6% growth, China’s PPP adjusted GDP and per-capita GDP in 2019 dollars would be a more modest $160 trillion and $120,000, respectively. As we can see, “slow” is a relative term.
Here we come to what might be called the First Axiom of Geo-economics, and what crucially distinguishes it from popular economics: the size of what’s growing matters every bit as much as how fast it grows.
Yet if a demonstration as trivial as this serves to refute the prevailing ludicrous characterization of China’s economy, why does it persist? I often hew to the maxim that one should never attribute to malice what can be adequately explained by stupidity. While it might be too cruel to characterize these entrenched biases as “stupidity” - especially as they do a passable job when one doesn’t venture too far from their narrow, specific domains – they certainly foster fallacious reasoning.
In that spirit, consider this second example: Let’s suppose we have two economies A and B, with A growing at 12% and B growing at 6%; let’s also stipulate that investment risks are equal between the two economies. Any competent investor would greatly favour A to B, as that is where he is mostly likely to maximize the return on his investment. If he’s of notable wealth and prominence, he’d undoubtedly be invited to write a column in the Journal or be interviewed on CNBC, where he would crow on and on, declaring A the future and instructing everyone to invest in it. In some narrow sense, he’d be right.
Whatever issues A would face as a result of this flood of hot money is a topic for another essay.
The reader will surely have noticed that the investor did not give one whit about the size of A and B’s economies. That’s because that’s at best a tangential factoid to investors. All an investor cares about is money in vs. money out and how much risk hangs over that money. If B is a hundred times larger than A, then good for B – how is that going to make me more money? To our hypothetical investor, a tiny economy growing at 12% is vibrant, while a gargantuan economy growing at 6% is moribund.
But to those of us interested in geopolitics, this is deeply misleading. Another arithmetical demonstration would illustrate just how misleading, at a size ratio of 100:1, B – growing at 6% - would add A’s entire economy – as it grows at 12% - in 0.174 years, or two months and change. The geopolitical ramifications of this should be obvious.
I will explore other common fallacies that arise when discussing China’s economy in subsequent parts.
