Archive for December 13th, 2009

Sunday, December 13, 2009

Weekender: What’s Wrong with Overcapacity?

The European Union Chamber of Commerce in China (EUCCC) has warned that Beijing’s stimulus spending had fuelled massive overexpansion in steel and other industries that could force companies to boost exports, thus igniting protectionist backlashes abroad. China’s leaders themselves also appear to be worried, and the EUCCC’s findings were reported by China’s overseas radio service CRI in November.

just as if it wanted to satisfy the hunger of the whole world

just as if it wanted to satisfy the hunger of the whole world...

But not everyone is that worried.

In an article for Phoenix Television‘s website, Hu Yuexiao (胡月晓), an analyst with Shanghai Securities (上海证券研究所), reasons that worries about China’s production overcapacities are going too far. Alan Wheatley, China Economics editor for Reuters, said pretty much the same, with similar arguments, in English some time earlier. Both Hu and Wheatley take the trouble of reminding us of what we once learned from our economic schoolbooks: that only some overcapacity will enable competition. Neither of them denies that there are structural challenges that need to be addressed, but they seem to find the current debate out of proportions.

Up to here, it all looks more or less familiar to me. A collection of articles on the other hand which puzzles me is several years older than the news above.

Henry C. K. Liu published a long series of articles on The Coming Trade War with the Asia Times in 2005. It’s an opulent lot of food for thought online, which I’d rather have expected to come as a book. In part 4 of his series, he dismisses the economic law of scarcity as a baseless myth, and blames man-made maldistribution rather than natural laws for scarcity. Apparently, his statement can only be true if peoples’ desire for material possessions is limited, rather than endless. Liu basically blames Western concepts for creating the idea of scarcity, but he also blames China for adopting the concept.

Overcapacity is not merely a temporary under-utilization of capacity; it is the systemic inability to achieve full or at least optimum utilization. Yet overcapacity is a structural condition in the world of scarcity economics, because excess capacity is the condition needed to prevent the emergence of shortages, which is another name for scarcity. But scarcity is needed to maintain economic value as expressed in market prices. Thus the market model of neo-classical economics must constantly be plagued with the curse of scarcity while simultaneously preventing scarcity with the more fatal disease of overcapacity. This contradiction is the internal paradox of neo-classical economics that traps the market economy in an arrangement of never being able to enjoy the full capacity of its productivity.

The insecurity generated by looming scarcity drives savings, which as investment add to overcapacity. And savings reduce current consumption, meaning lowering demand, which adds to overcapacity. The challenge of a market economy in an age of structural overcapacity then shifts from how to produce more to how to sell more. Marketing becomes the critical task of management. The answer for decades has been to use planned obsolescence to ensure recurring demand. Another answer was to lower prices to broaden the market. Advertising stimulates the desire for goods, but only rising income increases demand for goods.

The idolization of scarcity, Liu’s article suggests, is wanted both by the U.S.  – or OECD countries in general -, and China*). But the illogical – or  outrageously preposterous –  thing, he writes, is that the U.S. in particular and the West in general keep blaming China for having maintained its overcapacity:

“It is not possible, let alone moral, for 4% of the world’s population to consume the full productive capacity of the world. For the global economy to grow to its full potential, the whole population of the world needs to be allowed to participate with its fair share of consumption.”

It’s an interesting read, and it’s probably no coincidence that I see myself in no position to actually assess the validity of Liu’s points. College and university taught me the basics of economics as written by the establishment, and the curriculum ended long before alternative models might have come into play.

But Liu’s idealism doesn’t really look trustworthy to me either. The main aim of his criticism is the West:

The small nations of the world, unlike Brazil, China, India and Russia, are too weak to resist oppressive policies foisted on them in the name of free trade by international trade and finance organizations controlled by the rich nations.

Yes, the small nations of the world are too weak. They will also be too weak to resist oppressive policies which will soon be foisted on them by a coalition of the West and Brazil, China, India, and Russia.

And another of Liu’s statements could come right from the desk of a tradititional Confucian scholar two-hundred years ago, living on the backs of miserable peasants (who were fortunate enough to have no jobs either, and only a bit of slave-work to do):

The job is the creation of the industrial revolution. Prior to that, under agricultural feudalism, people had livelihoods, doing what they excelled in and enjoyed. The job is a venue through which impersonal labor and time are sold for money at a rate that prevents the worker from buying and consuming all of what he or she produces so that the excessive production can be turned into profit, what Marx called surplus value.

Oh, innocent China!

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Footnote
*) Liu differentiates between nations and elites, both in the West and in China. He believes if current terms of trade continue, much of the GDP in the newly rich nations would be owned and controlled by the currently rich nations:
… if current terms of trade continue, much of the GDP in the newly rich nations would be owned and controlled by the currently rich nations.
Yet
there are signs that the rich economies are determined to resist this equalizing prospect by trying to co-opt the elite in these developing economies as a new comprador class to help perpetuate the historical dominance of the rich nations.

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Related:
Weekender – Politics and Science, August 15, 2009
Is AGOA good enough, August 5, 2009

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