China adopts Keynesian Policies and Wastes Capital on a lot of Hayekian Malinvestments

Posted by PITHOCRATES - January 22nd, 2012

Week in Review

Keynesians love Big Government.  And state capitalism.  Where the state actively intervenes in the private sector.  So you know the Keynesians love China.  As the Chinese leadership loves Keynes (see Keynes v Hayek in China posted 11/17/2011 on The Economist).

The present leadership of the Chinese Communist Party, Hu Jintao and Wen Jiabao, have embraced Keynesian prescriptions with great determination. In response to the financial crisis of 2008 they approved an audacious stimulus package, unbalancing the government’s books and spurring the country’s banks to lend. That helped defend their peculiar brand of capitalism from a crushing slowdown…

Whereas Keynes worried about inadequate investment—too little entrepreneurial spending to keep everyone gainfully employed—Hayek worried about bad investment. If credit were too easy, he argued, entrepreneurs would embark on overambitious projects that take too long to reach fruition and make insupportable claims on society’s resources.

It is not hard to find overambitious projects in China: think of the country’s “ghost cities”, such as Ordos in Inner Mongolia, which is being built by government fiat long before people are ready to live in it…

Spurred on by the government, China’s banks increased their lending by almost 9.6 trillion yuan ($1.5 trillion) in 2009. That is roughly twice the size of the Indian banking system, as Bank Credit Analyst, a research company, has pointed out. In other words, China’s lenders added two Indias to their loanbooks in the space of a year…

China’s authorities now admit what was always obvious: many of these projects will fail to raise enough revenue to repay their creditors. Defaults have already surfaced in Yunnan province and elsewhere. Some of these projects will be abandoned halfway. They are what Hayek would call “malinvestments”, investments in capacity that no one is willing to pay for or wait for.

It is clear that China’s Keynesian policies have produced exactly what Hayek said they would.  A whole bunch of malinvestments.  A great misallocation of productive capital.  Building things that no one wants.  Such as empty apartment buildings in ‘ghost’ cities.  Capitalists could have used that capital to build who knows what.  But we’ll never know.  Because the free market didn’t allocate that capital to where capitalists would have used it to produce things people wanted.  Pretty much anything but empty apartment buildings in ‘ghost’ cities.

If those empty apartment buildings have to demolished a Keynesian would be okay with that.  Because those demolition crews would be paid.  And they would then take those wages and buy stuff.  Thus generating more economic activity.  Just as a Keynesian would be okay with you buying 4 identical flat-screen televisions only to throw 3 away.  Because the purchase of 4 flat-screens generates more economic activity than the purchase of only one.  So if you’re a fan of Keynesian economics and state capitalism you can do your part.  Whenever you buy anything by an extra 3 so you can throw them away.  And see how Keynesian economics makes you, the capital provider, feel.

I’m guessing it may convert you from a Keynesian to a Hayekian.  When you learn how terrible it is to waste good capital, a.k.a. your paycheck.

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