China Has to Stop Central Planning If It Wants to Progress Further
In economics, nobody likes it but everybody has to live with it: uncertainty. It makes business decisions difficult and wreaks havoc on economic models. This is why mainstream economics oftentimes ignores it and assumes we have complete certainty in economic planning.
In real life, this assumption never pans out, which is part of the reason mainstream economics is notoriously bad at predicting financial crises.
Not so for Horace “Woody” Brock. A mathematical economist by training, he embraced Economics of Uncertainty and founded his consulting firm Strategic Economic Decisions after doing extensive research at Stanford University.
His most recent book is titled “American Gridlock,” where he proposes common sense solutions to economic crises.
Epoch Times spoke to Woody Brock about why infrastructure spending is the magic bullet to rekindle growth in the United States and why China has overdone it; why workers don’t need to fear competition from robots; how the standard of living for the average person is actually rising despite an increase in income inequality; and how China needs to completely change its economic model to reach the next stage.
Epoch Times: How can China develop further?
Mr. Brock: The problem with China is that it does not understand the five stages of economic growth. The first three stages, when you go from a low-investment, low-scale, low-productivity, agrarian economy to a consumption-driven high-productivity economy, in the first three stages of this transition what’s needed is a pharaoh, a thug.
There will be corruption, but the people building the pyramids know if they don’t get them completed on time they’ll be buried alive inside of them. They do it.
It’s top-down. That’s what China did. But stages four and five, which China is desperate to implement now, transition into a consumption-driven economy, is entirely bottom-up.
Epoch Times: You mean private enterprise?
Mr. Brock: It’s you and me starting a business on Monday, him and someone else on Tuesday. Like South Korea and Taiwan and Hong Kong—billions of little businesses create fabulous growth.
The government should stay out, but the Communist Party in China, which has refused to liberalize the state-owned industries … won’t get out because they’re corrupt.
The problem is, as Lord Acton told us in 1857, “power corrupts, and absolute power corrupts absolutely.”
When you have an ever-stronger Communist Party, by definition the requirements for optimal growth aren’t there.
The Communist Party, the massive level of corruption, the crony capitalism, the state-owned enterprises don’t matter in stages one, two, and three. But the price, in terms of growth extracted from even the same level of corruption as you enter stages four and five explodes exponentially.
Because you and I both won’t start a business on Monday and he won’t on Tuesday and she won’t on Wednesday, if you know that, the result of doing so is when the big guy needs to, he’ll pay the judge off to put you out of business.
We stay in bed like North Koreans and we don’t ever start a business. Growth and the success of nations and the failure of nations has nothing to do with interest rates. It only has to do with incentive structures.
Epoch Times: What are the right incentives?
Mr. Brock: Give people the right incentives and growth can be fabulous. Not for two quarters, but for 50 years. Give people the wrong incentives and North Korea, with many more resources than South Korea, grew at 0 percent and now they’re eating each other in the far north, so end of that story. That’s my concern about China.
What will they do to create the conditions for a bottom-up story? You have to have private property, sanctity of contract, and non-bribable judges, or it won’t work.
Epoch Times: And education and innovation?
Mr. Brock: Education is simply a small part of the whole. That’s part of capital investment. Obviously the government must provide public goods. It provides the army, it provides education, it has to do a good job.
There is no need for infrastructure in stage five. You need to get out of the way. Get out of the way; government doesn’t exist.
What impedes innovation? The Communist Party? Of course. Innovation means people who know that they can get rich if they try and not have it stolen, or get tortured for it. I mean it’s so obvious.
Silicon Valley is unregulated, there is no government. It’s the most successful innovation story in the history of the earth, by far.
This point about what causes success and failure, just look! If you want a Cultural Revolution you too can grow at -2 percent—just simply kill everyone who can read.