China's outlook through prism of two economic theorists

China's outlook through prism of two economic theorists

Their modern day adherents usually don’t like to admit it, but Adam Smith, the founder of liberal economics, and Karl Marx, often seen as a doyen of central planning, had much they agreed about.

Both men took the view that economies develop in a sequence, from hunter gatherer, to agricultural, to industrial, with the progress through each phase driven, in Smith’s mind, by trade, and from Marx’s point of view more by technology.

Smith believed that the benefits of ever freer trade would lead to technological development anyway, and that the benefits were infinite, meaning industrial capitalism would be the final stage of human development. 

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Trade would make interactions ever more efficient, and therefore cheaper, and so would constantly increase the affordability of goods, thereby boosting demand in the economy, and spurring economic growth.

Marx believed technological improvement was the driver; that it would be this which would cause the price of goods and services to fall and people to grow wealthier. Smith believed the benefits of trade becoming freer were infinite, meaning a market economy was the final stage.

Both Smith and Marx took the view that governments were the enemy of the system they regarded as optimal, and for the same reason.

Marx believed the existing order was not keen on technological advance, as it would threaten their incumbent position. Smith, on the other hand, took the view that governments would always side with the existing dominant firm in a market, and those firms do not want free trade to happen, as it can reduce their dominant position.

China’s rise

The rise of China over the past 40 years has offered much vindication for both. As the economy moved away from central planning, people became richer, while some Marxists would argue that the speed of progress from an agrarian to an industrial economy was far faster than in the west because of central planning.

The impacts of China’s rapid growth have been felt throughout much of the world.

Advocates of Smith would point to the outcome of the global financial crisis of 2009. Here, in contrast to the events of the Great Depression, there was another buyer prepared to step in: China. For them, this indicated that developed economies could trade their way out of trouble as long as humanity continues to progress to every freer trade.

Fans of Smith would also point to the deflation that the growth of China created around the world. This deflation meant lower interest rates, allowing for an expansion of global bank lending, boosting global demand.

This created a scenario in the years immediately prior to the global financial crisis where inflation remained persistently low but growth continued, and appeared to be a vindication of the ideal of free trade.

Others suggest that China will eventually stop exporting deflationary pressures to other economies. At that point, inflation will rise and growth will fall, leading to the economic condition known as stagflation, and to a reordering of the economic system.