Friedman on the US growth model
I cannot say that I have ever wanted to quote Thomas Friedman. He has been such a booster for globalization, full of breathless praise for capitalism. I confess, I have never read any of his books for precisely those reasons. Someone gave me The World is Flat once and I could not stomach it, although I did love Ed Leamer’s critique of the book.
Anyway, here is the 2009 model Friedman:
We have created a system for growth that depended on our building more and more stores to sell more and more stuff made in more and more factories in China, powered by more and more coal that would cause more and more climate change but earn China more and more dollars to buy more and more U.S. T-bills so America would have more and more money to build more and more stores and sell more and more stuff that would employ more and more Chinese …
This sounds a lot like the standard critique of economic growth made by many environmentalists. While I am highly sympathetic to that critique, it is remarkable how often it is not recognized for being a spear chucked at the heart of capitalism. Yes, we should stop the pattern that Friedman decries, but this is requires more than just patching up the banking system.
The other big question the quote raises is whether the symbiotic relationship between China and the US can continue. In The Predator State, James Galbraith makes some very interesting observations about the Chinese model, and argues that its relationship with the US can keep on going indefinitely, simply because neither party has an interest in stopping it. As long as the Chinese (and others) want to hold US bonds in their portfolio, the US must import more than it exports. And ultimately, the US is different from everyone else, precisely because of its central role in the world financial system.
Prior to the crisis, most economists were focused on the issue of “structural imbalances” and lived in fear of a break in the China-US dynamic, where China (and the rest of the world) loses confidence in the US, pulls out their money and causes a dollar crash. Since then all hell has broken loose but still the dynamic seems to maintaining its odd equilibrium, though there may be another shoe to drop yet.
In that context I can’t imagine the US telling China what to do on, um, anything.
I don’t agree it is a given that a low or zero rate of economic growth is a “spear chucked at the heart of capitalism”. It may well require a transition from the variety of state-sponsored monopoly finance capitalism we become familiar with (aka “socialism for the rich”). I think there is still at least the theoretical possibility of a form of “co-operative capitalism” in which financial returns on investment are low but participation in enterprise management is high.
The problem with the current growth model is not simply that it is environmentally unsustainable but that the question of “what it is that grows” has become incoherent. It certainly isn’t middle-class living standards. The metric is broken. And part of the breaking of that metric has been technical know-how about gaming the numbers.
In the Soviet Union there was a cartoon about quotas in the humour magazine, Krokodil, that showed a single, one-ton nail being hoisted on a crane. Factory managers had discovered that the cheapest way to produce their quota of nails was to make VERY BIG ONES.
In the evaluation of social and educational interventions there always has to be concern about “cream skimming”, the practice of serving only the most promising clients so that the success rates look good. Corporate CEOs figured out how to manipulate stock prices by massaging their quarterly numbers. Once upon a time there was a company named Enron…
The bottom line is apocryphal. The GDP aggregates bottom lines. In the old Soviet Union there used to be a joke, “they pretend to pay us and we pretend to work.” Under the regime of finance capitalism, it is just the opposite.
Gideon Rosenbluth and Peter Victor have a theoretical model of a zero growth economy that CCPA published a few years ago:
http://www.policyalternatives.ca/reports/2002/10/reportsstudies393/?pa=bb736455
But while theoretically possible, I think that the essence of capitalism is growth. A workers’ cooperative economy might also be theoretically possible, even desirable, but it is a long way from what we call capitalism.
It strikes me that arguably the Chinese-US system is still unstable, but what it depends on is political. Specifically, at some point the Chinese “Communist Party” leadership may decide that it is time to use the massive industrial system built up for export to the US to instead create prosperity in China. If they decide on policies of promoting internal trade, such as raising wages so that the Chinese consumer can buy Chinese and perhaps applying some protectionism to block outsiders from doing to them what they did to the US, then China won’t need the US any more.
Peter Victor’s new book, based on the same model as the Victor/Rosenbluth paper came out in October, Managing without Growth: Slower by design, not disaster.
Peter Victor is also on one of our PEF panels, Macroeconomic Policy Goals – Growth in GDP, Sustainability &
Wellbeing, at this year’s Canadian Economics Association meetings for those in Toronto (registration required). Should be a fun session.
By the way, that Ed Leamer critique is brilliant. I thought that The World is Flat was excellent in explaining the creation of a new low-cost information platform. But I was also baffled by Friedman’s inability to distinguish between process improvements and the heroism of the entrepreneur. Leamer totally nails it when he says that the Flat metaphor basically means “change” which has nothing to do with level playing fields or a smaller world.