Economics Ain't Gymnastics: Why China Won't Overtake America

New York Times columnist David Brooks has written one of the most depressing columns I've read in a long time. As he sees it, the 21st century is the Chinese century. Sorry, America, your time is up.

But first a bit of history: Back in the 1980s, liberals were desperately looking for a Big Economic Idea to combat Reaganomics. Instead of looking inward to the core American value of individualism and entrepreneurialism, they looked eastward to Japan and saw a high-tech, economic superpower where big government was dominant. Rather than relying on uncertain and uncontrollable market forces, Japan's elites apparently possessed the wisdom to choose which industries looked the most promising. They then harnessed and directed state resources and favor in their direction.

Of course, by the mid-1990s, the Japanese economic miracle became a decade-long economic malaise. Indeed, later research determined that "industrial policy" played little role in Japan's economic ascendancy. Now it was the apparent success of Japan and its Ministry of International Trade and Industry that really gave weight to the idea of industrial policy. But as William Lewis of the McKinsey Global Institute notes in The Power of Productivity, MITI's success is mostly myth.

Across a broad of range of manufacturing and service industries in Japan, there are only...two instances when MITI's intervention was a significant cause of good economic performance...the standardization of the machine tool industry in 1956 . . . and the requirement that to enter the Japanese market in the 1960s, IBM had to share its computer patents with Japanese companies.... However, these steps were a long way from the conventional view that MITI was identifying and supporting a broad array of "strategic" industries, and that this action was giving Japan a strategic economic advantage over the United States.

For two decades, it's been the American Model, not the Japanese Model, influencing nations on the hunt for economic growth and a rising standard of living. But some elites in this country never quite gave up on the idea that politicians and bureaucrats can actually run an economy. It's like they think America is a giant General Electric with sectors such as technology, autos, and housing merely divisions to be managed, but without the profit motive, of course. And now they have a new national model for spiritual encouragement: China. Listen to Brooks, who should know better, turn his back on the Renaissance and Enlightenment:

...individualistic societies have tended to do better economically.... What happens if collectivist societies, especially those in Asia, rise economically and come to rival the West? A new sort of global conversation develops. The opening ceremony in Beijing was a statement in that conversation. The ceremony drew from China's long history, but surely the most striking features were the images of thousands of Chinese moving as one...we've seen displays of mass conformity before, but this was collectivism of the present—a high-tech vision of the harmonious society performed in the context of China's miraculous growth.... If Asia's success reopens the debate between individualism and collectivism (which seemed closed after the cold war), then it's unlikely that the forces of individualism will sweep the field or even gain an edge.... The rise of China isn't only an economic event. It's a cultural one. The ideal of a harmonious collective may turn out to be as attractive as the ideal of the American Dream. It's certainly a useful ideology for aspiring autocrats.

Me: I actually agree with one of Brooks's points; at least I think it's one of his points. China provides a path toward economic freedom without political freedom for many Third World nations like Cuba and pretty much all of Africa. But that point is surrounded by a miasma of declinism and pessimism. This is the part that really bugs me: "If Asia's success reopens the debate between individualism and collectivism (which seemed closed after the cold war), then it's unlikely that the forces of individualism will sweep the field or even gain an edge."

Gosh, that might be true if...it wasn't through unleashing the forces of individualism that China began to grow. Indeed, encouraging private enterprise was one of the nation's key economic reforms when it opened up. (And eventually, a growing economy will serve as a Fifth Column for Freedom by producing an aspirational middle class that demands political openness.) Going forward, it will take individualism and entrepreneurialism to produce the sort of constantly innovative economy necessary for China to move far beyond its role as low-cost manufacturer to the world. (That's especially true in a light of higher energy prices that makes shipping more expensive.)

And let's not forget the incredible economic challenges the country faces, from a rapidly aging society, to an economic system that still firmly has one foot in the Red China era. In The Writing on the Wall: Why We Must Embrace China as a Partner or Face It as an Enemy. British journalist Will Hutton, former economics editor of the Guardian, argues that the current Chinese economic model—authoritarian, high-saving, export-driven, unproductive, unaccountable—is nearing a breaking point:

China has made the transition from a planned economy to a more market-based economy, has joined the World Trade Organization, and is so obviously successful that the magic ingredient must be its commitment to markets, the profit motive and private property.... But the reality is more complex.... This is an economy and society over which the party seeks and so far has maintained extensive direct and indirect control despite a broad liberalization of prices, a rollback of planning, a boom in foreign direct investment, and substantial autonomy among all forms of enterprise.... China is half pregnant and that is the way the party intends to keep it.

The Chinese model works as far as it goes. But after that, it's the American model that provides the surest path to deep prosperity.