In the western world, the study and practice of economics are neoclassical syntheses, Neo-liberal, Austrian economics and Keynesian (especially during the crises). If a country is not following the same principle of liberalism or classicism, then it is supposed to be cheating and defying the science of economics. The punching bag of such economic agents is usually socialism/Marxism/central planning, which is often ridiculed of its existence. The blog post describes neither the existing western neo-liberal order nor Marxism. It mainly describes a large scale experiment of 'the German model' pioneered by Friedrich List, in China and in the East Asian Countries before China's emergence. Friedrich List's development model comes from his study of the United States of America in the 19th Century.
Friedrich List described the lessons of history (in 1850) and the backbone of his thesis in the form of following stages -
"1. The first stage is adopting free trade with more advanced nations as a means of raising themselves from a state of "barbarism", and of making advances in agriculture.
2. In the second stage, promoting the growth of manufacturers, technology, fisheries, navigation - trade employing commercial restriction.
3. In the final stage, after reaching the highest degree of wealth and power, by gradually reverting to the principle of free trade and of unrestricted competition in the home as well as in foreign markets, that so their agriculturalists, manufacturers and merchants may be preserved from idleness, and stimulated to retain the supremacy which they have acquired." [Friedrich List, The national system of political economy]
List's theory was not original at the time of the publication of the book. The observation from the great 19th-century American growth was the backbone of his thesis. Before List, Alexander Hamilton's (who was killed by then vice president of the US - Aaron Burr, 1804) - 'The report on Manufactures' theorized the concept of industrializing through restrictions and protectionism. On a sad note, he couldn't see the miracle that he envisioned in his report to congress. List's goal was not academic, and he wanted to take his observation to Germany and develop Germany as the next industrial hub of the world, hence his model is also called the German model.
In the 18th and 19th centuries, the British Empire developed itself as the world power by trading with its colonies. The British Empire put tariffs on imported goods and exported to its colonies, forced to embrace free trade policies. In the 19th century, the US became an industrial hub by exporting to Britain and putting protectionist tariffs on its imports. Between the 1870s to 1910s, all countries embraced such policies (supply-side development model) leading to war among significant nations. For example, both Germany and Japan followed the footsteps of the US under Bismarck and Okubo during those period. Post first world war, colonialism failed, demand weakened, following by Great Depression because of financial system failure, high debt, low demand and high unemployment. Post-1945, the US replaced the British empire in the third stage (of Friedrich List), which helped Japan, Germany and South Korea grow through the German model of growth. South Korea and Japan being under the power structure of the US, were not able to migrate to the highest level of power and wealth. China abandoned the centralism of economics and adopted List's state-led development model in the 1970s. Currently, China is at the edge of the 2nd and 3rd stages of List's model, and the US needs to restart industrialization (through protectionism) to regain its power and wealth in the world order. If looking at the lens of this model, the changing structure of world order becomes more natural to explain.
If you are further interested in the model of Friedrich List and the changing world order from the 14th Century to the 20th Century, then I would recommend the first part (Part 1. History) of- The National System of Political Economy by Friedrich List.
Adam Smith understood the role of the market, and his thesis was simple if countries would do what they can do the best, they could increase their wealth and also the wealth of the world. Division of labour was at the core of the thesis where work stripped away at multiple layers divided best by what nature has to offer and the current status of the economic agents (individuals).
In the world of Adam Smith, an agricultural country will always be agriculturist, industrial countries will stay industrialists, and merchants (capitalists) will allocate resources most efficiently. Capitalists would be at the highest class in the three classes - 1. Landlords, 2. Workers and 3. Capitalists of class(ical) economics.
If everyone would have followed the code of Adam Smith, then the wealth disparity (distribution) between nations would always remain the same. But the world is made of humans and social structures, and as Marx said: "Men make their history." So did the Americans in the 19th century. Another important distinguishing factor is the role of institutions and state in the development of the nation in List's model vs laissez-faire (let it be) approach of the development in the neo-liberal and neo-classical economics.
I am deliberately excuding other economic syntheses such as Neo-liberal by Marshall (stripped away politics from political economics to just economics) in the early 20th century, Keynes, Schumpeter and Hayek's economic synthesis of mid 20th Century, the famous Milton Friedman and Chicago school economics of the 1970s and new neo-liberal left economics of Krugman and Stiglitz. I would come to these economists in some other blog post.
The Political Economy of List vs Mercantilism
Friedrich List was referred to as mercantile economist, but this is a gross miss casting of his theories. We could debate that his opinion was post-mercantile, but I would differentiate List's approach vs the other two in the following points -
1. List considered himself as a post-Smith economist rather than pro-mercantile. He wanted to 'politicize' what he thought was a purely economistic (Smith) approach that was not informed by the concrete political realities of the world.
2. He believed that in the real world, economies are 'national,' and each government must decide what is best for the nation in competition with other rival national political economies - and what is best for the country might not be what is best for individuals.
3. Thus, for example, if the nation as a whole benefited from the development of a canal system to build a national infrastructure (strategic intervention), then this should be promoted (and funded) by the state even though this development would harm the interests of some.
4. He believed that Smith focused too much on the exchange of products in the cosmopolitan world, and not enough on the production by individual nations.
5. List went beyond the mercantilism emphasis on 'natural capital' (land, sea, rivers, mineral resources and so on) to include 'material capital' (machines, tools and other factors used in the production process) and 'mental capital,' which included skills, training and enterprise as well as the more traditional means of state power (armies, naval power and so on).
6. All other things being equal, the more time and money that any government devotes to mental capital, then the more successful the nation will be in the long run.
7. In his view, "the English were the greatest bullies and good-for-nothing characters in Europe". Their supremacy as an industrial power put Britain in a position to exploit its comparative advantage through the promotion of free trade with those areas that could not compete. But where Britain did not have a comparative advantage, it threw away its laissez-faire ideology and instead resorted to high tariffs to defend domestic producers. As a result, German states had been unable to move forward and compete with the dominant power.
The China Model
First, China is one of the largest economies and one of the most populous countries in the world. Simplifying China into a single model would be a gross error. For reducing complexity, I am trying to look at the growth of China with the lens of List's theory. China's approach best described by the quote "Crossing the river by feeling the stone." Each circumstance will require a different solution, and the best approach is through gradual development rather than an uneven development. For example, the various models- - of economic structures within China. "The political economy of Zhejiang, where small-scale private industry dominates, is somewhat different from the more mercantile political economies of Chongqing and Shanxi, which are different again from social norms in Henan that have some links with China's Marxist/Maoist past."
China borrowed significantly from the East Asian Model of Development (influenced by List):
1. "Land to the tiller" agricultural reform:
a. Increasing yield by breaking up big estates of plantations and creating a class of rural smallholders,
b. Buying surplus would be cheaper from individuals than big estates with political connections,
c. and finally using the surplus resources to invest in industry and infrastructure.
2. Export-oriented manufacturing ~ First, export agriculture, accumulate capital, invest in technological infrastructure for industrial building, upgrade industrial supply-chain and standards to sound quality, and compete with global peers with lower production cost (labour costs).
3. Financial Repression ~ This refers to a set of practices to control financial markets so that the state can direct capital to the sectors favoured by its development strategy.
Two essential ways China's development strategy is different from East Asian peers -
1. China has relied far more heavily on state-owned enterprises (SOEs),
2. The second big difference between China and East Asian models lies in the extensive use of foreign direct investment (FDI).
To go back to List's model -
1. The first stage is adopting free trade with more advanced nations as a means of raising themselves from a state of barbarism, and of making advances in agriculture.
2. In the second stage, promoting the growth of manufacturers, technology, fisheries, navigation - trade employing commercial restriction.
3. In the final stage, after reaching the highest degree of wealth and power, by gradually reverting to the principle of free trade and of unrestricted competition in the home as well as in foreign markets, that so their agriculturalists, manufacturers and merchants may be preserved from idleness, and stimulated to retain the supremacy which they have acquired.
China has completed the first two steps theorized by List. The last stage is opening up the markets for competition locally and internationally. China has planned to open up its financial markets starting this year.
Some interesting questions for the readers:
1. Will China open up entirely as the US did in 1945?
2. Will the short-term crises affect their long term trajectory?
3. Will the US hamper the capital and goods flow to and fro from China?
