China’s pretty weird

I have two more exams in between me and summer! I’m feeling pretty good about both of them, just because I’ve been living in the library for the past week. I really only have to go over China for my Comparative Economic Systems class, and then study the whole entire culture of India for my India class.

Alright, so China’s economy.

China is like that really awkward looking kid you used to make fun of in middle school, that surprised everyone in high school by getting really strong and hot. 

It’s true. China was doing awesome in the 1800’s. Their world output peaked in 1820, and they were thought to be this really awesome country that would someday rule the world economy and technology, and output. Nope. Something went wrong, and by the 1900’s, China was a backwards agrarian society. Ouch.

First of all, I should mention that China has never used democracy to rule the country. Weird huh? They’re all about socialism and communism. China was ruled by dynasties until 1911. After the Opium Wars (1839-1842), China basically just got run over by most other countries, including France, Germany, Russia, the US, Britain, and Japan. How embarrassing.  Because so many other countries were occupying the country, war broke out. Mao Zedong led followers on the Long March in 1935 – 1936.

The Long March was a 6,000 mile march from the South to the North of China by leading Communist Chinese activists at the low point of their power. Mao Zedong then became the party leader, and veterans of this march became top government officials.

From 1949 to 1978, Mao implemented a planned economy. This planned economy did not work, mostly because Mao tried to adopt the Soviet Model. China could not really do the whole Soviet thing, because the main focus is on heavy industries. In the 1950’s, China was a very poor agrarian country. There was no real use for banks for the majority of society, since farmers lived in such sparse areas. Farmers saved money, just not in banks. Because 90% of the population was comprised of farmers, there was also a very small surplus of capital. Plus, exports from China at this point were basically non-existant, so any foreign exchange was very expensive. To have an economy focus on heavy industry, you need lots of capital, the ability to import capital, and lots of savings to turn into investment. China had none of that.

Mao tried to control the country even more, to create this heavy industry focus against all odds. He took over light industries, so that people would not invest in lighter industries that would not give them more of a profit. During this period, Mao promised a golden age for national capitalists where investments would be protected from foreign competition. To do this, he controlled most industries, and ever controlled all managers, so that the government made all decisions, to help industries on top of the agenda succeed at any cost.

The traditional economy in this case would be defined as distorted prices of factors and products, highly centralized and planned allocation of resources, and powerless managers. Because of this control, output of certain industries skyrocketed. Even though China was poor and income was unequal, the standard of living and output of the country was rising, and fast.

By 1958, Mao cooked up another scheme: The Great Leap Forward. This failed. Miserably. The Great Leap Forward was implemented in an attempt to create self-sufficient communes of farmers – on average a collection of 10,000 farmers for each commune. The commune became the production unit, so that it could go after larger irrigation and agricultural projects.

This led to the biggest famine China has ever seen. The distribution of food was based on need and not on performance, and the incentive to produce more individually disappeared. By 1962, the people’s commune remained, but the production team was reduced to 20 to 30 households instead of 200.

Mao took the blame for this catastrophe, but then decided to throw China into turmoil again in 1966, with the Great Proletarian Cultural Revolution. He wanted ultimate communism. This threw China into anarchy in 1967. Mao wanted China to rely on itself, and no other country. Foreign trade dipped, and output in general decreased as well.


By the time of Mao’s death, there was some major issues in China. Even though investment was rising, growth was sluggish. The standard of living was still low, and there was a population boom. Technology was also lagging.

Deng Xiaoping took over after Mao’s death, and he reformed (thank god). He committed to a gradual change over to a market-oriented economy, instead making a grand leap to capitalism. Taking a look at the agricultural system, Deng noticed a few things: low prices made farmers apathetic to efficiency, communes were inefficient because of the lack of specialization, and most villages were self-sufficient after the removal of farmer’s markets. So, Deng took care of business and opened up markets, raised prices, and scaled down production.

In 1979, the household responsibility system was created by the people at first, then backed by the government, which eliminated communes, made households the primary unit of account, and allowed for free sale by households of products above quota. Quota sales would be under market price, and above quota sales would be made at free market prices.

SOEs were given more freedoms, and were allowed to keep more of their profits or losses, instead of having them be absorbed by the state. This allowed visibility as to who was efficient, and who was slacking. However, since SOEs were given more freedom, there was more room for them to cook the books, and not report all of their gains or losses.This forced the state to create contracts with each manage of a SOE, but this also provided room for rent-seeking behavior.

TVEs were also very important to industry reforms. TVEs, or Town and Village Enterprises, were outside of the planned economy, and had no social expenditure obligations. These TVEs were beneficial to local government, and employed about 20% of the country.

Special Enterprise Zones and Economic and Technological Developmental Zones were developed as well to boost trading. SEZs are areas in which foreign investors are allowed to operate freely. These primarily coastal cities were operating in a market capitalist system, within the broader socialist country. ETDZs were similar coastal cities, but focused more on open trade, and were not as free as SEZs were.

Deng also made a change in the labor market. He switched the credentials for higher wage, and allowed for good publicity for efficient companies, and bad publicity for inefficient companies. Wages were then based on qualifications and productivity.

All in all, these reforms have done wonders for the country, and China continually is shifting more and more towards a market economy. Unfortunately, because of the gradual transition to market from planned, corruption is out of sight. The dual track of planning in some markets, and laissez-fair in others is causing a lot of rent-seeking behavior. So why not end planning altogether? SOEs are just too big to fail. Sounds familiar America, doesn’t it? Really, the only way out is to privatize, get rid of corruption, add competition to the choosing of managers, and let capitalism do it’s thing.

The labor market in China was nonexistent before the reformed period, not optimal for mobility within occupations, and businesses did not hold the right to hire or fire. By the 1980’s, firms gained some independent rights, and mobility is steadily increasing.The state rearranged the safety net in 1997. Mostly everyone works in China now a days, and most jobs are in farming. Minimum wage was introduced in 1993, but is not effectively introduced.

So basically – China started out with dynasties, had a communist fanboy rule the country who tried to control the country’s economy, which was mostly farming, which caused a famine. He tried again to control everything, and failed. He died, and a new guy took over, who’s a little smarter about how free markets help an economy, and is trying to fix what Mao did. It’s turning out to be like, really hard. So thanks Mao.

Nowadays, there are other problems to solve, as if China doesn’t already have things to worry about. First of all, there’s a threat of security, especially against the United States. Theorists are speculating that as China is becoming the 2nd largest economy, imperialist attitudes will spark again, and China will try to start something. While communications day to day are fine between the US and China, the conversation between the two countries generally are getting more stiff, and an attitude of general mistrust is taking hold worldwide. Well, crap.

China does have a reason to be cocky though; it’s become the largest manufacturer in the world, and might just take out the US for the largest economy. There’s still room for worry though. Some analysts believe that China is becoming like Japan, and will soon experience an export boom with lots of investment, only to be followed by a bout of stagflation. China is so hellbent on creating more consumption and fostering growth, they’ve been heavily relying on new investment. This could cause a huge problem in the future, with many loans not performing, creating a buildup of bad debt.

Peasants in China also seem to be getting abused. Officials are forcing farmers to give up their land and move to more compact housing, so that their arable land can be sold off to development projects. To make more of an incentive for country side dwellers to move to cities, one reform was stated as letting these citizens move, allow them to keep their land, and allow them to enjoy city welfare benefits. This was abandoned, because it would be hella expensive. Local governments don’t really have the means to be very convincing in moving peasants away from their land.

SOE reform is turning the state sector bigger and badder recently as well. Many SOEs have been disbanded, but the ones left are huge. The government has a hand in every single sector that can make a profit, and privately owned companies are understandably having a hard time keeping up. China is planning on working on innovation, pouring money into 7 industries it feels will be on the verge of technology.

China’s getting old, too. Their aging population, and a shrinking labor force will change things quite a bit. Still, there is a battle of ideologies going on, one side fighting for democratic change, and the other fighting for the preservation of authoritarianism. Match that with China’s new attitude that it should be the most powerful, and we’ve got a problem. They think the West (us) are going to anything we can to stifle their growth, which means hostility toward the US.

China also abuses their environmental resources, and is putting democratic goals on hold, to focus on the goal of making their people happier, shifting away from GDP goals. Seems silly, as a lot of their future depends on what industries will grow, and how.

Still have two or three, r six more hours of studying to go. Who really knows. Wish me luck!

Studying some more (look at me go!)

Alright, I’ve got to get through two more countries for my Comp Econ review: Japan and China. The ignorant American in me wants to say that they’re basically the same. The ignorant American in me is mostly wrong, and I’ll tell you exactly why.

Japan is like that really smart, but mean kid in elementary kid that would get a perfect on all his spelling tests and would shove it in your face every time. But it’s okay, because that kid always ends up getting picked last in freeze tag.

Japan took a lot of China’s culture and made it their own in the beginning. Then they got all offended, and basically shut itself off from the world for 250 years starting in the 1600’s because apparently a bunch of other areas tried to control it, or whatever. Really, Japan? Grow up, that’s what bratty 5 year olds do. Anyway, once it decided to play nice with all the other surrounding countries, it paid off its samurai (most of them became business men), gave farmers land, and opened the country to outside influence.

Through the early 1900’s, Japan really wanted to take over other places, and mostly succeeded.Their economy grew rapidly through the 1930’s, mostly because of the army buildup. Then they tried to screw with the United States. Haha, they lost.

America then took over Japan in 1945, demilitarized it, and made Japan more capitalist. Japan used to have these things, zaibatsus, which were basically huge conglomerate groups that worked together. Well, America stopped that, and made corporations fend for themselves.

1955 marked the creation of the Liberal Democratic Party, a conservative group. Fun fact, this group still rules Japan! That’s a super long time.

Japan’s economy has been pretty successful for a while. But why? Some attribute it to it’s familistic groupism, where basically everyone acts like one great big family, and everyone has each other’s backs. In firms, this is acted out by way of the three sacred treasures. These treasures are unfortunately metaphorical (bummer I know), but they are: lifetime employment, seniority-based wages, and enterprise unions.

Having a job guaranteed for life may seem awesome, but in reality it’s only guaranteed for about 30% of the labor force. And if it’s guaranteed, the company basically owns you. This theoretically creates loyalty, and makes people more productive.

Seniority-based wages also is supposed to build loyalty, and is built of the Confucian belief of respecting elders. However, when wages aren’t built off of productivity, productivity tends to decrease. Many firms are moving away from seniority-based wages and towards efficiency-based wages.

Enterprise unions are labor unions within a specific corporation, as most workers just move within one single firm for the majority of their lives. These unions account for the small wage differentials between the higher-skilled workers, and the low-skilled workers within a firm.

The Japanese use a different kind of industry organization as well, called the keiretsu. Horizontal keiretsus are pretty much like zaibatsus; they’re firms in different industries linked through one bank and a trading company. Horizontal usually follow the three sacred treasures. Vertical keiretsus are usually a set of suppliers linked to one major producer through a long-term contract. These keiretsues don’t usually follow the three sacred treasures.

It’s also said that the Japanese follow a J-mode type of organization. This J-mode is characterized by the attitude of sharing results horizontally. For example, companies getting together and telling each other what worked and what didn’t from their own experiences. This depends on long-term relationships between workers and firms, and banks and firms.This is also carried out through consensual decision making – basically making sure everyone involved in a decision on board. that’s why the Japanese take forever to make business decisions. Something else that is encouraged? Ringi-sho, which is basically the little people of the company sending memos up to the big guys, letting them know what they’re doing wrong. I think that’s pretty cool, you know? Everyone gets a voice! Yay!

The rapid growth of Japan may also be attributed to the Ministry of International Trade and Industry’s industrial policy, which involves them investing in promising parts of the economy and getting the pay off from it.

Japan also saves a lot, creating a lot of opportunity for investing, but with the population aging like it is, this may decrease saving significantly.

Japan was been characterized as a market capitalism with elements of a traditional economy, and indicative planning and guidance. They’ve got a huge debt problem right now, as they keep spending more money, since the people aren’t.

The income in Japan is equally distributed better than most other countries, probably from the set up of labor-firm relations. However, the Japanese also work a helluva lot more, and take less vacations. Not to mention their pollution problem, and their lack of fossil fuels. The fossil fuel problem is opening up a new efficient energy market in Japan, which may offer more growth for their economy.

On top of all of this, Japan is mean. Women don’t get paid a lot, and they really don’t like foreigners, which really doesn’t help their trade relations, at all.

Japan’s slowing growth is worrying the Japanese government – and so Abenomics is born. Abenomics is the combined expansionary fiscal policy, increased monetary policy, and reform heavy plan that Abe, the current prime minister of Japan, is trying to use to turn Japan around.

This could fail miserable. Who knows how successful “reforms” actually are in the political realm, and Japan is already in tremendous debt.

Uh oh Japan, better start playing nicely with all your trading buddies, and stop spending all your money in one place!

Indirect Studying

I don’t know what it is about a little box to type in in a Safari window, but this is so much more fun than typing in a Word document. Therefore, I’m going to tell you everything I know about Germany’s economy so I don’t fail my Comp Econ Exam.

This class is pretty interesting, you just really have to get into it and focus (which I’m really bad at).

Germany is like one of those people you grew up with that went through a really weird phase in middle school, then got semi-normal in high school, but you still won’t talk to them because you’re still a little bit scared of them.

And when I say that, I mean it. First of all, Germany in the beginning wasn’t even a Germany, it was a bunch of little tribes hellbent on ruling all of Europe. I’m sorry, but if you want to rule an entire continent, you should at least get your tribes together into one uniform state first, I mean am I right. Otto von Bismark was just that guy. He got all of the little tribes together to make the German Kingdom in 1871.

After 1871, it was pretty much smooth sailing, that is up until WWI (oh lord). Germany grew astronomically after that, mostly because the Germans are pretty awesome with science and technology.

Moving on to 1919. The Versailles Treaty was just signed. Germany’s got a lot of debts to pay, and a lot of land being taken from them. The government thought it would be a good idea to start printing money to pay these debts. Hint: never do this if you are pres of the Fed. It will basically devalue your currency. The country went into a huge hyperinflation, with the currency decreasing in value almost by the hour in the really intense bouts. Luckily this was brought under control by 1923 – just in time for the Great Depression to take over the assault of Germany in the 30’s.

The Great Depression hit Germany, and hit it hard. Things were so bad, the people were looking for anyone that could fix their situation. Who could blame them? Hitler came in, and was all “I can totally fix this guys, chill”, and instead took power, outlawed all other political powers, and oversaw the Holocaust. Seriously, worst person ever.

It hurts me to say this, but Hitler’s economic choices did help Germany out of the Depression. Germany’s GDP doubled between 1932 and 1938. Hitler imposed a command capitalist system, and held corporate state standards (basically, Hitler made corporations and workers get along, no matter what). He imposed price controls, dumped a ton of money into the war, created a ton of cartels to keep people employed, controlled trade with other countries and tried to dampen that to become more self-suffiicent as a country, and built a lot of highways and bridges and stuff.

World War II happened, and Germany was split up faster than you could say “Ya lost, Nazis.” The country was split up into 6 zones. West and East Germany was created. The West, called the Federal Republic of Germany, was helped by the US, and the East, called the German Democratic Republic, was owned by the Soviet Union.

It’s sad really, because the FRG focused on becoming for of a laissez-faire economy, but with a huge sector for helping people out (technically speaking, a social market economy), and the GDR was basically stripped of it’s factories, infrastructure, and resources, and kept it as more of possession than an area to be fixed and you know, not repressed. Compare to: Dudley as FRG, Harry Potter (pre wizarding world) as GDR, and the US being Dudley’s parents.

Let’s ignore our poor wizard for a second, and talk about Dudley. Some great things happened to the FRG after the split. First of all, Ludwig Erhard is the man. He believed in a strong government that could split up cartels, and support free markets, and large social safety nets. Basically, the best of both worlds.

Erhard had this crazy idea, to create a new currency which was equal to previous wages, but basically devalued all debts, to remove all but a few price controls, all in the span of a few days, and without telling anyone. Now that is power. And guess what? It worked. Boo yah. This was deemed the Big Bang approach (in german words – Wirtschaftswunder), and the economic awesomeness and growth that ensued was called economic miracle. 

With that much growth all at once, there was bound to be a slowdown. Unemployment is rising again, and some problems are starting to surface, which could be blamed on a number of things, including the global slowdown, or the European Union slowdown.

Meanwhile, poor little Harry Potter was stuck in the cupboard under the stairs, AKA the GDR was being ransacked by the Soviet Union and basically left for scraps. The GDR adopted a command socialist system, so basically the state owned everything. They had these things called Kombinats, which were started in 1979. The Kombinats were huge combines owned by the state that were directed by steering mechanisms, which were not focused on gross output.

Let’s stop and think for a second. Germany was split in two. One was taken over and made into a command socialist economy, with the state owning basically every part of production, and the other was taken over by a guy who believes in the invisible hand. Two very systems, two very different outcomes.

The GDR had really low unemployment, greater large-scale economic stability, a little more extensive social safety net, and greater income equality. The standard of living was lower, and productivity was lower. The FRG was way more efficient, had a higher standard of living, and took care of their environment more. Comparatively though, both the FRG and GDR had pretty similar social safety nets.

In 1990, the two parts of Germany were unified. Yay right? Nope. This was really expensive and complicated since one was socialist and the other was capitalist. The tried the big bang economic transformation again, to try and get the socialist part to become capitalist. This was really lame and difficult, because they adjoined currencies, and they were SO not worth the same amount in either area. The GDR currency was overvalued, and the FRG became undervalued. The output of the GDR collapsed. Unemployment rose in the East. The THA was created to privatize in the East what the Soviet Union messed up. Germany reluctantly gave up their own currency and now use the Euro through the ECB, which is located in Germany.

Germany’s labor market is a littler weird too. They do what’s called codetermination. The workers are elected to both an advisory board that overlooks worker’s day to day worries, like wage, hiring, firing, etc. Workers are also elected to a supervisory board which oversees higher management things in bigger firms (500+ employees).

Nowadays, Germany is trying to spur growth again, but is also scared of the impending shrinking of their skilled engineer pool. They still have a pretty extensive social safety net, and pretty high taxes, but not anywhere close to Sweden’s burden. They rely heavily on exports, and manufacturing. Bonus points for: having the biggest economy in Europe, and having the highest  GDP per capita (even higher than the US, good on you!), having the smallest government deficit, AND having the highest growth than most of Europe, even though their growth rate is slowing a little.

Good job Germany, you go. I will not be judging you for your awkward weird phase back in middle school (AKA the Holocaust and Nazis). 


Unrelated Micro Math (again)

Since we didn’t have a class yesterday due to the snow (rain) day, I figured I’d blog about the math I’m doing in other classes. 

I know I already mentioned how my Micro class is talking about the production function, but the production function is also related to math in other ways!

Every class in the past two weeks has included my micro professor something along the lines of: “If you’ve taken (linear)(vector)(topology) before…this would be easier”. To someone who’s only in FOM so far, it’s a little intimidating, but interesting at the same time. 

The reason he brings it up is because we’re talking about the long run production function right now. This entails the equation Q = F(K,L), where (in the long run), Quantity, Capital, and Labor are all variables. This means that all three deserve an axis to show change (since econ is ALL about those graphs). If vector had been a pre-req, we could use the 3D graph to show the area of a long-run production function with all three as variables, but alas, most of us in the class probably haven’t even taken Calc 1.

Therefore, we keep Quantity constant, and graph all of the possible combinations of Labor and Capital that will produce that Quantity. 

BOOM! Learn something new every day. And by something, I mean copious amounts of things usually associated with econ or math. 

(Semi) Related, Non-FOMy, Econ-ish Math

So today in class, Casey split us up in groups with post-it notes of different numbers, and post-it’s with a function and domain. The thought was that function people had to find the max and min of the function to find their group members. It was at that point that I had a That’s So Raven flashback.

Yesterday, in Microeconomics, we started talking about where supply for a good comes from. Guess where it comes from?

Inputs (like capital and labor) are put into the production function, to get outputs (aka goods). Which is exactly what we’re talking about in FOM. Go figure.

The reason the whole “max” concept with functions made me think of this is because the production function takes inputs, and gives you the maximum amount of outputs you can get from those inputs.

Weird how all my classes are connecting like this.