Earlier this year an intriguing article appeared under the title China’s domestic problems a ‘recipe for regional disaster,’ by David Wroe and Daniel Flitton. The article was about a paper released by “one of the world’s top China experts,” Linda Jakobson, who warned that China’s new leader is facing “formidable domestic problems.” Overpopulated and suffering from serious environmental degradation, China is not as financially stable as outward appearances may suggest. The ruling Communist Party is corrupt and prone to financial mismanagement of the larger economy.
China is not a country of free speech or political pluralism. There is no alternative to the ruling Communist Party. It may also be said, in effect, that when things go financially wrong there will be no one else to blame; that is, unless an external scapegoat can be found. An authoritarian government, on the brink of a domestic economic crisis, might prefer to redirect blame toward a foreign government through the good offices of an old-fashioned territorial dispute. Better to blame foreign adversaries than admit errors oneself. Therefore it is alarming that China continues to push territorial disputes with Japan and other neighbors.
One method of judging the Chinese economy may be to measure the intensity and number of Chinese territorial disputes. Such disputes may signal approaching economic trouble. The specific causes of this trouble need to be examined and discussed. In Richard McGregor’s book, The Party: The Secret World of China’s Communist Rulers, we learn that the Chinese Communist Party rules the economy from behind the scenes through special party committees that issue orders to executives in many corporations. Thus the alleged independence of Chinese corporations is largely a façade. From the point of view of investment, of course, this situation is disastrous. Furthermore, the banks in China are government-controlled entities adhering to Communist Party control.
As the Austrian School economist Ludwig von Mises explained in Human Action, malinvestment is a serious problem wherever and whenever government imposes a plan to stimulate growth through credit expansion. Whenever government allocates resources instead of relying on the free market, the process is not sustainable and will almost certainly lead to a financial dislocation (whether in America or China). It is very doubtful that the banking manipulations of recent years — in Europe, China or America — will be able to save the situation. “The credit expansion boom is built on the sands of banknotes and deposits. It must collapse,” warned Mises. “The breakdown appears as soon as the banks become frightened by the accelerated pace of the boom and begin to abstain from further expansion of credit.” So here we are.
Market decisions should be made by business leaders who understand the market and not by political committees who decide with regard to political requirements. Government interference of this kind is always economically devastating in the long run. In addition, such a system is wide open to massive financial/political corruption. Decisions under such a system are often made for the sake of the enrichment of the government’s “friends.” Thus, economic logic is further distorted by the logic of organized crime to the detriment of the whole.
According to McGregor, the Chinese political market system is so corrupt that a bureaucratic career in the anti-corruption field is likely to be short-lived and thankless. The case of Li Youxing, an anti-corruption bureaucrat in Zhejiang province, is instructive. As noted by McGregor, Li’s wife would wake at night, “screaming in fear about the threats [made] to kill them.” Corruption is an ugly business which invariably attends excessive government involvement in the economy. With increasing regulations the United States as well is suffering from accelerating corruption at all levels.
“An analysis of [government] interventionism would be incomplete if it were not to refer to the phenomena of corruption,” wrote Mises. “There are hardly any acts of government interference with the market process that … would not have to be qualified either as confiscations or as gifts. As a rule, one individual or a group of individuals is enriched at the expense of other individuals or groups.” In this manner politics becomes a means to great wealth, and the incentive to corruption proves irresistible. Those who do not pay bribes suffer at the hands of those who are less scrupulous. And if power corrupts, then absolute power over the economy corrupts absolutely. “There is no such thing as a just and fair method of exercising the tremendous power that interventionism puts into the hands of the legislative and the executive,” noted Mises.
We must imagine, therefore, the seething anger which the Chinese public must inevitably feel at being cheated when things go badly for the entire country. The aforementioned article about “China’s domestic problems” being a “recipe for regional disaster” quotes a top U.S. naval intelligence officer, Capt. James Fanell, who says that China has been “taking control of maritime areas that have never before been administered or controlled in the last 5,000 years by any regime called China.” Fanell says that Chinese territorial claims are fabricated “to sustain the Party’s control.”
In a democratic country an economic slowdown typically leads to the election of an opposition party. Under a Communist dictatorship this is not an option. An unpopular authoritarian regime must use other means to deflect unpopularity. Such may include repressive measures against the population, foreign military crises or the demonization of ethnic minorities. Given what is happening in China today we may suspect that the ruling Communist Party knows its popularity is in decline.
In recent days a further slowdown of the Chinese economy has been reported by various media. At the same time China has announced a new Air Defense Identification Zone (ADIZ) over the East China Sea. The United States, refusing to accept this latest provocation, tested China’s readiness for a fight by flying B-52 bombers into the ADIZ. Fortunately the Chinese did not attempt to intercept these bombers, but the dispute is far from over. In fact, major wars have started from less. In August 1939 Adolf Hitler, who was then provoking a territorial dispute with Poland, famously said, “I would be an idiot if, on account of the measly [Polish] corridor question, I should slide into war like the incapable nitwits in 1914.”
Meet the “incapable nitwit” of 1939 whose miscalculation resulted in sixty million deaths, including his own. We should hope that Chinese, Japanese and American leaders will not be regarded as “the incapable nitwits of 2013 or 2014.” But as history shows, there are always incapable nitwits.