Chinese Prognosis

No Virtuous Circle of Creative Destruction

The Communist Chinese regime has had to walk a tightrope over Mao Zedong and his disastrous Cultural Revolution.  On the one hand, Mao is portrayed as the revered Father of the Nation; on the other, his Cultural Revolution is acknowledge as a cruel, barbaric fiasco.  

Associated Press has reported:

China’s official media reaffirmed on Tuesday the Communist Party’s longstanding judgment that the Cultural Revolution was a catastrophic mistake after staying silent on Monday’s 50th anniversary of the start of the decade-long upheaval.

The official party mouthpiece People’s Daily published an opinion piece on its website precisely at midnight on Tuesday unequivocally praising the 1981 party resolution that condemned the bloody political movement launched by Mao Zedong to enforce a radical egalitarianism. “Our party has long taken a solemn attitude toward bravely admitting, correctly analyzing and firmly correcting the mistakes of our leadership figures,” the piece read.

What, then, is the lesson of the Cultural Revolution?  The (official) People's Daily confirmed what the government thinks should be the "takeout" from Mao's great leap forward.

In a separate commentary, the Global Times newspaper published by People’s Daily said the events of 50 years ago had inculcated an abhorrence of disorder and craving for stability among the Chinese public.  “Completely denying the values of the Cultural Revolution is not only an understanding throughout the party, but also a stable consensus of the whole of Chinese society,” the paper said. 

Order and stability, a "stable consensus of the whole of Chinese society"--those phrases go a long way to reveal the mind and priorities of the Chinese Government.  It explains why the government does not really embrace free markets, which, as Schumpeter observed back in the 1950's, operate on a virtuous circle of creative destruction.  Progress more often than not is messy.  The Chinese Government does not like mess, relative chaos, and creative change.  Yet, paradoxically,  without it, sustainable economic growth will not  occur.

Because China wants its economic growth and development to occur in an orderly fashion, via a "stable consensus of the whole of Chinese society" the government and bureaucrats must take the lead role.  This means that when the corrections and the intrusions of creative destruction occur--as they inevitably must--they are more likely to be right up the Richter scale.

Free competition relentlessly moves markets to equilibrium.  The faster they get to an equilibrium of supply and demand, and market price points, the smaller the creative destruction.  But that leads to the next round of creative destruction, turmoil, change, followed by another equilibrium point.  It's the heart and soul of productivity and economic growth.

China's current model will produce great booms, followed by long, lingering recessions.  It will limp its way forward.  It's the price of the Chinese productive engine being driven by a "stable consensus of the whole of Chinese society."  It will boom in a hasty leaps, and bust in long lingering limps.