Redefining Capitalism in Global Economic Development

By Kui-Wai Li

Redefining Capitalism in Global Economic Development reconsiders capitalism by taking into account the unfolding forces of economic globalization, especially in Asian economies. It explores the economic implications and consequences of recent financial crises, terrorism, ultra-low interest rates that are decades-long, debt-prone countries and countries with large trade surpluses.

The book illuminates these economic implications and consequences through a framework of capitalist ideologies and concepts, recognizing that Asia is redefining capitalism today. The author, Li, seeks not to describe why nations fail, but how the sustainability of capitalism can save the world.

• Merges capitalist theory with global events, as few books do
• Emphasizes ways to interpret capitalist ideas in light of current global affairs
• Reframes capitalism via economics, supported by insights from political science, sociology, international relations and peace studies

• Language: English
• Publisher: Academic Press
• Release date: Jun 7, 2017
• ISBN: 9780128041970

Kui-Wai Li

Dr. Kui-Wai Li lectures on the Asia Pacific economies, including the China economy and specializes in the areas of financial and economic development, industry and trade, political economy and globalization. He served as the Visiting Fellow at the Economic Growth Center, Yale University, and attended an executive program at Harvard University in 2000 and 2001, respectively. During his sabbatical months in 2010-2011, he taught a course in the Department of Political Economy, University of Geneva, and Faculty of Economics, Vilnius University in Lithuania, and visited the Munk School of Global Affairs, University of Toronto, and the Center for International Research on the Japanese Economy, University of Tokyo.

Book preview

Redefining Capitalism in Global Economic Development

Kui-Wai Li

The Kui-Wai Consultancy for Economic Development, Inc., Toronto, Canada

Table of Contents

Cover image

Title page

Copyright

List of Figures

List of Tables

Preface

Section I: Challenges to Capitalism: The Analytical Structure

Section I. Challenges to Capitalism: The Analytical Structure

Chapter 1. The Individual

Abstract

I Introduction

II Beginning with the Individual

III Externality and Ethics

IV Competition Versus Competitiveness

V Complementary or Dichotomous?

VI Maximizing Private Cost, Minimizing Social Cost

VII Why Supply-Side Economics is Preferred

VIII Conclusion

Chapter 2. Inequality, Poverty, and Opportunity

Abstract

I Introduction

II Income Inequality: Basis of Comparison

III Poverty: Stock Versus Flow

IV Inequality and Development

V Growth and Economic Opportunity

VI Conclusion

Chapter 3. Role of Government

Abstract

I Introduction

II The Developmental Role

III The Monitorial Role

IV The Redistributional Role: Demand-led Approach

V The Redistributional Role: Supply-Led Approach

VI Minimum Wage or Maximum Wage

VII Business Leaders Versus Government Leaders

VIII Conclusion

Chapter 4. Conceptual Differences Between Economics, Welfare, and Politics

Abstract

I Introduction

II Economics Versus Social Welfare: The Spending Side

III Economics Versus Politics: Who Serves Who?

IV Political Business Cycles

V The Role of Democracy

VI Conclusion

Chapter 5. Capitalism and Socialism: Sustainability Versus Popularity

Abstract

I Introduction

II Comparing the Essence of the Two Ideologies

III Why Is Socialism Popular?

IV Why Is Capitalism Sustainable?

V Conclusion

Chapter 6. Economic Relativity and Capitalism

Abstract

I Introduction

II Absolute Outcomes: Systematized and Personalized

III The Relative Nature of Economics

IV From Absolute to Relative Outcome: Peace Agreements

V Capitalism as the Suitable Vehicle

VI Conclusion

Section II: The Global Economy: Performance, Classification, and Challenges

Section II. The Global Economy: Performance, Classification, and Challenges

The World Divided

Chapter 7. The Top 10 World Economies

Abstract

I Introduction

II GDP Trends

III Fiscal Performance

IV Public Debt

V Trade

VI Reserve

VII Foreign Aid and Donors

VIII Foreign Direct Investment

IX Military Expenditure

X Conclusion

Chapter 8. The Five Groups of World Economies

Abstract

I Introduction

II Fragile States

III Emerging States

IV OPEC and the Middle East

V Russia and China

VI The Advanced Countries

VII Global Political Economy

VIII Conclusion

Chapter 9. Cases of Economic Vulnerabilities

Abstract

I Introduction

II Political Economy of the 2008 Crisis

III Financial Socialism and the Low Interest Rate Trap

IV Embracing Social Cost: Greece

V China: At the Crossroads or a Turning Point?

VI Conclusion

Chapter 10. Reviving Capitalism

Abstract

I Introduction

II Reorientating World Resources and Policies

III International Economic Alliances

IV Canada: A Promising Economy

V Eastern Europe: Greater Marketization

VI Conclusion

Section III: Capitalist Development: Asia Lessons

Section III. Capitalist Development: Asia Lessons

The Economics of Push and Pull

Chapter 11. The Japanese Economy: Successes and Challenges

Abstract

I Introduction

II Drive to Economic Superpower

III Response to the International Community

IV The Turning Point

V Paths for Revival

VI Conclusion

Chapter 12. East Asia: Flying Geese Against Wind Currents

Abstract

I Introduction

II Take and Give in Development

III Export-Led Versus Import Substitution

IV Progrowth Regimes

V Siege Mentality

VI Protected by Protectionism

VII Lessons of Asian Financial Crisis

VIII Singapore: A Supply-Driven Economy

IX South Korea: Staying Competitive

X Taiwan: A New Chapter in Development

XI Conclusion

Chapter 13. The Latecomers: Opportunities, Challenges, and Comparisons

Abstract

I Introduction

II Europe Versus Asia

III Economic Cooperation

IV Regional Multilateralism

V The ASEAN Countries

VI China in Asia

VII Conclusion

Section IV: The Frontier of Capitalism: Chinaversus Hong Kong

Section IV. The Frontier of Capitalism: China Versus Hong Kong

Why China and Hong Kong?

Chapter 14. China’s 1911 Revolution and Sun’s Legacy

Abstract

I Introduction

II Three Principles: Realities and Implications

III Missed Opportunities

IV The Suitable Economic Ideology

V Conclusion

Chapter 15. China’s Economic Reform Path

Abstract

I Introduction

II Cultural Revolution: Economic Legacies

III The Nixon–Kissinger Initiative

IV Economic Reform: First Decade, First Crisis

V Reform of the 1990s: Banking and State Enterprises

VI Trade, Finance, and Excess Liquidity

VII Dichotomies and Dualities

VIII Conclusion

Chapter 16. Frontier of Capitalism: The Sino–British Negotiation

Abstract

I Introduction

II The Basic Law

III The British Strategy

IV The Chinese Strategy

V Interpreting One Country, Two Systems

VI International Implications

VII Conclusion

Chapter 17. Hong Kong: Pathway to the Freest Economy

Abstract

I Introduction

II Laissez-Faire Policies

III Performance Prior to 1997

IV Macroeconomic Performance

V Ability to Restructure Post-1997

VI Absolute Versus Comparative Advantage

VII The Economic Cushion

VIII Conclusion

Chapter 18. Hong Kong 1997–2047: The Political Scene

Abstract

I Introduction

II The Political Trend

III Shade Hunting: Communist Mind, Capitalist Life

IV Proestablishment: Infiltration, Capping, and Free Lunches

V The Three Waves of Democratic Movements

VI Effective Governance: The Half-Cup Argument

VII Conclusion

Section V: Why Has Capitalism Succeeded?

Section V. Why Has Capitalism Succeeded?

Centuries of Theories, Decades of Practice

Chapter 19. Why Has Socialism Failed?

Abstract

I Introduction

II Communism: Power Concentration

III Socialism: Amassing Social Cost

IV The Brexit Lessons

V Conclusion

Chapter 20. How Capitalism Works

Abstract

I Introduction

II Untying Global Economic Knots

III Leadership of Industrialized Countries

IV The Best Among All Evils?

V Can Capitalism Save the World?

VI Conclusion

References

Index

Copyright

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List of Figures

List of Tables

Preface

Kui-Wai Li, Toronto

Since the turn of the 21st century, there have been a number of accumulated international issues that challenge world peace, stability and economic development. While the world community is consuming oil exports from mainly Middle East OPEC members, much of the oil revenues have not been used productively and may have been deployed to fund terrorist and religious extremist activities. Ironically, the world community buys oil from the oil exporting Middle East countries which have been faced with multilevels of conflict, and instead of looking for solutions within the region, some of these conflicts in turn spread and came to haunt the rest of the peaceful world. The unpreparedness to look for solutions would spill over to other international issues.

Since the end of the Second World War, economic growth in many western economies has also led to expansion in technology and industrial outputs, but the adoption of demand-side economic policies by prowelfare political regimes that aimed at redistribution using such fiscal instruments as tax and welfare spending generated unfavorable long-term results. While business cycles fluctuated, welfare spending and high taxation regimes tended to stay, resulting in continuous fiscal deficits and accumulated national debts. Indeed, the redistribution policies were often politically-oriented, but the unfavorable consequences were exhibited in the economics. Typically, those that were visible were the level of inequality and the size of poverty, but the invisibles would include the departure of capital resources as investors looked for business-friendly destinations, and the rising cost of production together with higher tax rates and large welfare provisions eroding the economy’s competitiveness in terms of fall in output, employment and exports. The fall in economic competitiveness in the home economy as capital departed would mean a rise in competitiveness in the host country. A worse result was that the home economy would have to import back from the host economy the industrial products that otherwise would have been produced at home, thereby increasing pressure on the home currency.

The Cold War lasted for decades, but it was the ingenuity of the Reagan–Thatcher diplomacy that eventually brought it to an end, with the subsequent collapse of the former Soviet Union which gave independence to other Eastern European and West Asian states along the southern border of the former Soviet Union. Unfortunately, different Russian leaders have taken different attitudes towards the west, and due to the lack of resources and economic progress, there was every possibility that Russia could slip back to the former ideology and became confrontational to the west. The Nixon–Kissinger initiative that attempted to lure China to the side of the United States in the Cold War in the early 1970s led to mixed results. Politically, China was invited to the United Nations to replace Taiwan, thereby lifting communist China from a closed-door economy into the international arena. The economic phase that began in 1978 led to large inflows of capital into communist China, taking advantage of China’s low costs of production. These two sequences of events, however, did not alter China’s ideology. China and Russia have become the two dominant socialist countries.

One can keep listing various international issues that would produce unfavorable results in the global economy, such as the prolonged use of low interest rates that were supposedly to promote investment, but could have led to speculation that distorted both the financial sector and the real economy, and the lack of economic progress among the fragile states that would only survive on international assistance but could not even maintain basic stability. Many of these fragile states were former colonies, which exploited the history of imperialism as the cause of their underdevelopment, but they gained political independence after the end of the Second World War.

Beginning in the mid-19th century, various inadequacies that appeared in the early stage of capitalism led to the emergence of communist thoughts and ideology, with the argument that communism could provide a better form of societal organization. In much of the 20th century, however, socialism and communism were practiced through either revolutionary movements, in the case of the Soviet Union and the People’s Republic of China, or by the election of prosocialist governments that adopted prosocialist economic policies in the name of equality and redistribution through high tax rates and large government spending, but ended up with a loss of economic competitiveness and accumulation of huge national debts that effectively limited the development of future generations.

After the exercise of different degrees of socialist and leftist practices and policies over the entire 20th century, it is time to make an assessment to see if there has been an excessive application of socialism. Indeed, the tables could have been turned, and the situation in the 19th century when advocates were looking for an alternative to capitalism would be the inverse of the situation in the 21st century when extensive application of socialist policies had done harm and should be reversed, and capitalist economic policies would be needed to rejuvenate the world economy to a new phase of development. The various socialist policies have impeded parts of the world economy from growing, and at the same time slow growth has been faced challenges from terrorist activities, instabilities in different world regions, and the ideological challenge from socialist countries.

By redefining capitalism, this book makes a bold attempt to point out that the century-long practice of socialist policies has caused the freer part of the world economy to face unprecedented and unfavorable challenges and problems, and that a revision and revival of capitalist economic policies is required. Socialist policies have been implemented in the domestic and external policies of industrialized countries. Domestic issues include redistribution, accumulation of deficits and debts, and the prolonged use of low interest rates that expanded only the financial sector, while external policies include economically aiding ideologically unfriendly countries, absorption of debts from neighboring countries, and extending open arms to refugees that would pose burden to tax payers.

It would be a back-to-basics kind of intuition that the various challenges facing the free world would mean the need for economic revival, regaining competitiveness, increasing output, and growing industrially. Capitalist and supply-side policies would have to be adopted in order to enable industrialized countries to achieve recovery, revitalization, and rejuvenation through further application of technology, appropriate pricing of industrial goods, and expansion of the domestic economy by giving priority to internal growth and employment rather than exporting capital to other parts of the world economy, especially those who would turn ideologically to challenge the freer countries in the global economy.

The various discussions, hypotheses, intuitions, and conjectures in this book are divided into five related sections. Section I is basically conceptual and intuitive, as the six chapters are intended to address six related issues in the redefinition of capitalism in the contemporary world. Beginning with a discussion of the individual in an economy, the analysis considers the fundamental elements of capitalism and is extended to the distinction between private cost and social cost, the relationship between economics and politics, and between economics and welfare provision, and understanding the difference between income inequality and poverty. There is a need to clarify the different impacts and consequences of demand-side and supply-side economic policies. Of course, no economy can avoid the role of the government, even though there have been debates on the size of the government. Given that governments have to exist, the concern is the relevant role the government can take in policy and development terms. Section I ends by outlining the practical differences between capitalism and socialism.

Section II contains four chapters that begin by using world data to examine which have been the top ten countries since the 1980s using a total of nine economic variables. While numerous technical empirical analyses on globalization examine the global economy in different aspects, the data used in Chapter 7, The Top 10 World Economies, show the performance of the strongest and weakest countries in the world economy. The data reviews some obvious situations, but also shows some surprising results. Nonetheless, these are real data that provide a true picture of the world economy. The performance of some countries could be strong in some macroeconomics, but the same countries could show weak performance in other variables. The data do show the changing trends in the global economy.

The analysis on the top ten would be useful in reclassifying the global economy into five contemporary groups that reflect more of the similarities between countries within the groups. Such a grouping of countries should be pioneering when compared to the general usage, contrasting between developed and developing countries. There are indeed vast differences between developed countries and developing countries. While the discussion focuses on the economic features in each country group, analyses concentrate on outlining both the strengths and weaknesses in each of these groups. Strengths include their potential, while the weaknesses reflect the possible problems that could have externality effects.

Having further analyzed the global political economy, Chapter 9, Cases of Economic Vulnerabilities, uses three cases of vulnerability that the capitalist world is facing. These three cases actually reflect the problems of adopting prolonged interest rates in the monetary economy, and the drawback of heavy debt accumulation. The third case relates to the lack of ideological improvement in China, given its continuous economic progress. Discussions in Chapter 10, Reviving Capitalism, attempt to provide the solution, by pointing out the various possibilities of economic reorientation. Indeed, the need for both domestic improvement and international cooperation is stressed. By using the Canadian economy as a sample economy, and with discussion of the potential of the countries in Eastern Europe as the next new comers on the global economic development ladder, the intention is to lend support to the importance of supply-side economics.

The successful economic development in East Asia forms the focus of discussion and analysis in Section III. Each of the three chapters has a clear purpose. Beginning with Chapter 11, The Japanese Economy: Successes and Challenges, an account of the successful economic performance of Japan is shown as the benchmark in Asian development. The post-Second World War development in Japan has shown both successes and recessions, but the economic rise of Japan has turned out to be a blessing to the world economy, especially its foreign direct investment as all foreign countries welcomed investment from Japan. The East Asian economies have followed Japan’s footsteps in their economic growth, though supply-side factors have equally made a major contribution. In addition to a large number of analyses that explain the economic success of East Asia, Chapter 12, East Asia: Flying Geese Against Wind Currents, stresses on some of the major causes. The three East Asian economies of Singapore, South Korea, and Taiwan have their share of success and drawbacks, depending on how these economies steer their supply-side economic policies. Of course, there are new factors contributing to their next phase of development, typically China, who holds a completely different ideology and geopolitical reality which could be destabilizing. Chapter 13, The Latecomers: Opportunities, Challenges, and Comparisons, examines the Asian region interregionally, by making comparison with countries in Western Europe, and intraregionally, by looking at the performance of different countries in the region. Southeast Asian economies are shown to have potential as the next new comer in global development, but the China factor could make a difference in the region, as China’s involvement in the Asian region will not be confined only to economics, but will touch on geopolitical, ideological, and military considerations.

The battle between capitalism and communism can best be seen in the China–Hong Kong relationship in the 50 years of 1997–2047. Section IV contains five chapters that discuss extensively the ideological battle between China, the richest communist country, and Hong Kong, the freest capitalist economy. As a British colony for over a century since 1842, the sovereignty of Hong Kong was returned to communist China in 1997 in the one country, two systems framework when China promised autonomy, self-rule, and the capitalist way of life in Hong Kong for 50 years. Chapter 14, China’s 1911 Revolution and Sun’s Legacy, begins by looking at China’s 1911 revolution, the ideology of the Nationalist government and the missed opportunities. Given the rich resources China has geographically, had and the entrepreneurial attitude of the Chinese people, business development should have been the more appropriate mode of economic production than collectivism. Chapter 15, China’s Economic Reform Path, deals extensively with China’s reform after 1978, outlining the key issues in China’s market socialism.

A discussion of the Sino–British Negotiation over post-1997 Hong Kong is given in Chapter 16, Frontier of Capitalism: The Sino−British Negotiation. Other than the different schools of thought in the negotiation, the issue of the change of sovereignty could cause legitimate concern, as post-1949 China was not a signatory in the treaties and lease concluded by the Qing government, and post-1949 China was not a continuation of the Qing government. Indeed, post-1949 China has lost no territory to any foreign government through colonialism. This chapter also touches on the strategies between Britain and China, and the way that one country, two systems can be interpreted, or misinterpreted. The last two chapters in this section showcase the economics and post-1997 political situations in Hong Kong.

The two chapters in Section V serve as the concluding section. Chapter 19, Why Has Socialism Failed?, outlines the drawbacks and inadequacies of socialism and communism. Power concentration in communism and the large burden of social cost in socialism are the consolidated criticisms. The chapter also raises the Brexit case by making the hypothesis that the British economy could be better off leaving the European Union, as that should reduce the social cost burden from the influx of refugees, and the ability to chart its own path of development. Brexit should be seen more as an arrangement than a change or reduction in fundamentals. Chapter 20, How Capitalism Works, starts by discussing how various world economies can be improved by choosing supply-side economic policies, and how economic revival is highly feasible. While the global economy is still influenced and directed mainly by the industrialized countries, the comparison between the two ideologies clearly shows that capitalism is the lesser evil, as freedom, flexibility of individuals, market forces, and functions of civic institutions produce ample room for individuals to progress, businesses to prosper, governments to develop, and economies to grow. It is only through a reduction in socialist economic policies and in turn, the adoption of capitalist economic policies, that the industrialized countries can be revitalized, reenergized and rejuvenated to lead the global economy.

Although this book primarily touches on the economics of the global economy, the political economic framework has been used extensively. The entire structure is first to concentrate on the conceptual aspects, followed by the way the world economy could be considered and interpreted, before using the Asian development experience as a ‘showcase’. The two ideologies are highlighted in the discussion of the relationship between China and Hong Kong, as their relationship is ongoing, and the outcome can definitely be historic.

The ultimate message is that the excessive application of various socialist policies in the last century have generated numerous world problems that can only get worse, and there does not seem to be a light at the end of the tunnel. As such, the use of capitalist policies should be the better alternative. By putting back more vigor to individuals and business achievements, by pursuing supply-side policies and trimming the size of governmental institutions, by lowering the desire to redistribute and instead encouraging more able individuals, by focusing more on domestic economic strength through the reallocation of resources from the financial sector to the real economic sector, and by adopting the use of appropriate technology and pricing strategies, the world economy would turn around as these policies would definitely revitalize the economic strength and competitiveness of the industrialized countries, which in turn could foster development in friendly emerging countries.

This book is ambitious, as it touches on a multiple number of economic and ideological issues, countries, and regions, but the discussions are timely, contemporary, and should provide foresights to the next stage of global development. It can serve as a manifesto of capitalism in the 21st century, or it can be criticized as discussions just shot in all directions in general. Nonetheless, it is hoped that this book provides food for thought to the advocates of capitalism, or a stimulus to critics to have a second thought about ideological choices. As this book covers a wide range of the global political economy, it is possible that similar arguments are used on more than one occasion in the book. The arguments are not meant to be repetitive, but are used appropriately in the context of different chapters. Readers should find and relate the arguments in the context addressed in each chapter.

In writing this book, I have received assistance from a number of institutions and individuals. The institution to which I was formerly affiliated, the City University of Hong Kong, has facilitated me with time in the writing and related research work. During my sabbatical in the Fall of 2015–16, I visited George Mason University in Fairfax Virginia, US, and benefitted from discussions with many prominent scholars including Peter J. Boettke. During my stay in Washington, D.C., I also visited the Federal Reserve and the Institute of Humane Studies, and met with prominent scholars. My sabbatical visits also took me to Hosei University and Aoyama–Gakuin University in Japan. In the course of writing this book, I have been data-assisted by a number of research assistants, teaching assistants, and postgraduate students, including Coleman H. M. Cheung, Yuen-Hoi Lau, Gobin Rana, Tianyu Wang, Penne P. Y. Wong, Angela J. Yao, and Jimmy Siyang Ye.

There are two groups of people to whom I would like to convey my gratitude. The first group is people who I would like to thank from my heart, and that go beyond the choice of words. The second group of people contains my colleagues whom probably were in my age group having spent much of their time and life career in restricting me from making progress. I thank them for their harshness, as their expectation of me was higher than my own expectation. Instead of feeling dispirited, demoralized, and frustrated, their treatment eventually turned out to provide me with strength, motivation, stamina, and persistence in my writing. In academic writing, it is one’s intellectuality that counts, not how high on the academic administrative ladder one reaches.

Scholars, professions, officials, students and readers are most welcome to communicate with me, and comments and feedback will be most appreciated.

January 2017

Economic relativity is preferable to political absolutism.

Upholding one’s private cost lessens the social cost burden.

Section I

Challenges to Capitalism: The Analytical Structure

Outline

Section I. Challenges to Capitalism: The Analytical Structure

Chapter 1 The Individual

Chapter 2 Inequality, Poverty, and Opportunity

Chapter 3 Role of Government

Chapter 4 Conceptual Differences Between Economics, Welfare, and Politics

Chapter 5 Capitalism and Socialism: Sustainability Versus Popularity

Chapter 6 Economic Relativity and Capitalism

Section I. Challenges to Capitalism: The Analytical Structure

There have been numerous political–economic world events since the turn of the 21st century that have important and challenging economic implications and consequences, and the global economy must locate new directions for the next phase of development or which ideological path would be most suitable to follow. For decades, the world economy has relied on the petroleum supply mainly from the Oil and Petroleum Exporting Countries (OPEC), and the world economy has experienced numerous oil crises as the trade traffic was mainly unidirectional. The huge trade surplus that OPEC countries amassed in turn did not contribute much back to development. The situation was worsened when funds from some oil exporting Middle East countries were used in noncivic, war-like, and terrorist activities that were mixed with religious, political, racial, territorial, military, ideological, and historical conflicts and differences, whereas the application of economic development as an alternative peaceful solution has been missing.

Second, the ideological debate between capitalism and communism in much of the 20th century has resulted in a few industrialized countries following a pro-welfare or socialist-oriented doctrine in pursuit of equity. Policies on economic redistribution conducted by pro-welfare or socialist-oriented governments were geared to attract votes for their political platform but such policies were unsustainable and not growth-oriented. While economic growth went according to the boom and bust of business cycles, committed welfare expenditures had to be made even in times of economic downturn. Over the decades, prolonged reliance on welfare support has not only reduced the economy’s competitiveness, it also drained the government’s fiscal ability. Economic debts have increasingly accumulated and the burden of the welfare the current generation have enjoyed will have to be paid by the future generation. Even though we have institutions that protect children, animals, and environment, there exists no institution that speaks on the danger, damage, and drawback of a debt-prone economy that would constrain its future economic possibility. A few key countries since the turn of the 21st century have come to the brink of economic collapse when the huge cumulated national debt could not be rescued. Prolonged welfare economic policies cannot be sustained, and it would be utterly unfair for the overspending behavior of the current generation to pass on their debt burden to the future generation. Rewinding socialism and welfare policies must take place by instituting a more productivity-oriented policy.

Third, the emergence of the two socialist countries of Russia and China has opened up a new global phase. Due to the prolonged economic weakness under communism in competing with the Western world, the collapse of Soviet Union in 1991 ended the Cold War. However, Russia has since built up its foreign reserve through the export of oil and gas and its regional interference in Ukraine in 2014 has shown a revival of the Russian ambition in territorial annexation. China since its economic reform in 1978 has built up a much stronger economy than Russia, claiming to be the largest socialist economy by the first decade of the 21st century. Being one of the poorest countries before the 1980s, China has over the years attracted much international aid, official assistance, foreign direct investment, and repatriation of investment funds by overseas Chinese. Assisted by the massive supply of workers, China has turned itself into a production house, generating massive exports and attaining the largest foreign reserve in the world. With its economic strength, China is building up alternative international relationships with countries from different continents, and a few Asian countries are worried as its military build-up could raise territorial and military uncertainties. While one is the political leader and the other is the economic leader in the socialist world, one concern is whether Russia and China would cooperate or compete in their different leading positions? Would Russia tolerate the economic power of China, or would China’s economic power overtake Russia’s political dominance? Their bilateral relationship would generate further dissemination to other issues in the world economy.

In the Western world, the decades-long ultralow interest rate in the United States and much of the developed world has boosted the world financial market, but it becomes increasingly difficult to distinguish between investment and speculation. In theory, a low cost of borrowing would mean erosion in the store of value function of money. Equally, the prolonged period of low-interest rates is meant to stimulate productive investment, but unfortunately, it could have stimulated speculation and contributed to the 2008 financial crisis and subsequent world economic recession.

These various world events have led to a number of scholarly, intellectual, and political debates, including: (1) whether the ideology of capitalism is out of date, and new economic paradigms are needed to explain and solve contemporary world problems; (2) whether the prolonged period of low-interest rates could revive the world economy and whether the huge financial support in the form of quantitative easing in much of the developed world has led to overfinancing, and countries are trapped in a low-interest rate, low growth scenario; (3) whether trade surplus countries can rechannel their resources to help the weaker world economies or generate new hegemonies; (4) whether there are new economic alternatives that can balance the unfavorable impacts from activities conducted by political and religious extremists; and (5) whether China’s economic success in the new century would repeat the path of Japan’s success in the 1970s, or whether China’s successes and difficulties would spill over to other world economies.

There are recent publications that have attempted to bring new explanations to contemporary events, especially development in much of the developing world. For example, recent studies (Acemoglu and Robinson, 2012; Kruger, 2012) have provided an explanation on failures in the establishment of institutions, especially in the developing world. The discussion touched on some of the truth on the problems in developing countries, but the other aspect of the truth is that some weaker developed countries, such as Greece, also faced severe economic recessions. Since the 2008 global financial crisis, there has been a series of debates on capitalism, with various scholars asking more questions than providing answers (Przeworski, 1985; Thurow, 1996; Parijs, 1997; De Soto, 2000; Rogoff, 2011; Becker, 2012; Piketty, 2014). By reading these pioneering articles, one concludes that there is a need to redefine capitalism and new insights are needed to reinvigorate the virtues of capitalism in the context of the contemporary world. While many economic activities in the new century probably have challenged the functions and mechanics of capitalism, unsophisticated opinions have equally become popular. On the contrary, one can argue that capitalism that bases itself on the success of individual activity can be adjusted and reformed and can remain as an evergreen and sustainable ideology. Proper and sophisticated interpretations are needed to explain contemporary world problems. Parallel to the discussion on capitalism are the numerous publications that explain differences in growth. For example, the debates on endogenous growth and regional difference have been considered in economic development. Socioeconomic variables have been examined in studying the economics of globalization (Sen, 1992; Aghion and Howitt, 1998; Barro, 2000; Bhagwati, 2004; Milanovic, 2005; Li and Zhou, 2010; Zhou and Li, 2011).

In many ways, there is no single answer to all these challenging world problems. What is more important is to see how many of the superficial events can be explained by more in-depth intuition, conceptual understanding, and theoretical frameworks. It is against such global events that a redefinition of capitalism is needed to reinterpret the capitalism ideology in the modern context, highlighting the virtues of classical economics and how it can be used to solve contemporary global problems. One can argue that recent world events are not due to the growing irrelevance of capitalism, but rather are due to a lack of renewed understanding and the need to reorientate the various elements and texture of capitalism in light of the global events. Indeed, many economic activities in much of the modern world have deviated from the origins of capitalist economic principles.

This book attempts to use capitalist concepts to explain contemporary world events. There are five sections in this book. The first section is theoretical and conceptual, explaining the fundamentals of capitalism, elaborating the conceptual strengths and how human economic activities can still be best conducted within the framework of capitalism. In many ways, this section is intended to redefine capitalism using contemporary language and concepts, and set the scene for the analysis. Section I relates to the individual, interpretation on inequality, the role of modern government, the relationship between economics and politics and welfare needs, the contrast between capitalism and socialism, and finally discusses the relative nature of economics in capitalism.

Section II examines the global economy, data on the world’s GDP, and debts, and how fiscal deficits and trade deficits and reserve are used to compare the economic performance of different world economies over the last few decades. Instead of referring the global economy to advanced countries and developing countries, this section dissects the world economy into five categories of capitalist countries, socialist countries, religion-dominant and oil exporting countries, newly emerging countries, and the remaining fragile states. A total of three contemporary global events will be discussed within the concepts of capitalism. This section concludes by raising some issues and identifying economies that can help to revive world capitalism.

Section III concentrates on the economic development experience of Asian countries, and how it can be used as lessons for other developing countries. The growth and development experience of Japan since the 1950s shall be used as a showcase of success. The discussion is then extended to the other flying geese in East Asia and various development issues will be elaborated. This section will end by examining the growth and development of the late comers, namely the countries in the Southeast Asian region and China, contrasting their development and the growing China economy.

Discussion on the China economy is extended in Section IV by considering the two economies of China and Hong Kong, as Hong Kong’s sovereignty reversion in 1997 produced an interesting and living case where the largest socialist country took over the most free capitalist economy. Both the China economy and the Hong Kong economy will be studied appropriately in order to reflect on their essential ideological differences, systemic divergence, and economic strength. While sovereignty reversion took place in 1997, Hong Kong has been promised self-rule in the form of a one country, two systems framework over the 50 years from 1997–2047. The systemic issue has become political since 1997 as trust in the central government has not been built up. The cumulative political crashes over the years led to the Umbrella Movement in 2014. Divergent political views have been sharpened, including a discussion on the legitimacy issue as Hong Kong was ceded to Great Britain in 1842 during the Qing Dynasty which was overthrown by the Nationalist Government, while the People’s Republic of China was established only in the 1949 revolution that removed the Nationalist Government. The China – Hong Kong relationship can be considered as the battle front between the two ideologies of socialism and capitalism.

The various conclusions in Section V serve a number of purposes. The first intention is to argue and conclude that communism and socialism have failed to bring growth, peace, and advancement to the world economy. On the contrary, it is appropriate to understand how capitalism serves as an ex ante condition in the next phase of development in the contemporary world. Indeed, many industrialized countries need to adopt a self-strengthening strategy so as to reinvigorate their economies to ensure growth, productivity, and trade. Having cleared the discussion on the two ideologies, the purpose is to identify the possible growth regions in the world. The prediction is that the next growth regions shall consist of medium-sized countries which are prepared to adopt capitalist market ideologies, as the promotion of medium-sized promising economies shall bring stability and inter- and intraregional competition.

The five sections together pose the message that capitalism is the viable solution to many worldly issues, and the emergence of right wing governments in the industrialized countries will bring transformation to revive the world economy. Indeed, countries in the industrialized world shall be better off by redirecting its resource usage, especially in reducing dependence on oil consumption, by shedding the redistributive and pro-socialist policies that have eroded their competitiveness and productivity, by effectively cutting their government spending and reducing the growing debts, by rejuvenating their own industrial growth and development, by re-engineering domestic production, especially focusing investment in the real sector to create jobs and mobility, and by promoting other medium-sized emerging countries which have taken up market instruments in the next phrase of their development path.

Chapter 1

The Individual

Abstract

By elaborating on the endowment of the individual as the starting point, this chapter outlines the foundation of capitalism on the part of the individual as a person. Any individual differences and spillovers are considered within the context of externality and ethics. At the macroeconomic level, there is a need to distinguish between competition and competitiveness, as each would carry different economic implications. The latter part of the chapter discusses the stages of capitalism in its path of development, as the early stage of capitalism would face various inadequacies, while most industrialized countries are experiencing a stage of mature capitalism. The highlight in the political economy of capitalism concentrates on the awareness between private cost and social cost, and how one affects the other when individuals pass on their private cost to society and add to the social cost. The importance and relevance of supply-side economics could be another foundation stone in capitalism.

Keywords

Ethics; political economy; supply-side economics; private cost and social cost; competitiveness and competition

Outline

I Introduction 5

II Beginning with the Individual 6

III Externality and Ethics 7

IV Competition Versus Competitiveness 8

V Complementary or Dichotomous? 10

VI Maximizing Private Cost, Minimizing Social Cost 12

VII Why Supply-Side Economics is Preferred 13

VIII Conclusion 15

I Introduction

Societies are composed of individuals, as economic decisions are mostly conducted by individuals. Although modern economics owes much to the monumental works of Adam Smith (1776) and Paul Samuelson (1947), some economic philosophers argued that the earliest teaching of Confucius (551–479 BC) had already established the relevance and importance of individuals looking after their own welfare achievements (Hofstede and Bond, 1988; Zhang, 1999, 2000). Had the Confucian doctrines been elaborated more scientifically and extensively, then the Confucian idea of individuals pursuing their own gains could have been the foundation of modern capitalism. Unfortunately, the discipline of economics as an academic subject was absent at the time of Confucius. On the contrary, it was Adam Smith’s (1776) metaphor of the invisible hand that had piercingly symbolized the advantages of individuals’ achievements, the capitalist mode of production, and the minimum role of the government in conducting economic activities (Butler, 2007). When all individuals utilize their own endowments to achieve their utmost, society is said to have reached its maximum level of growth, development, and output capacity (Sowell, 1974).

However, individuals perform differently, with some being more successful than others, with some having more individual endowments than others, and with some exposed to more economic opportunities than others. In economics, the capability of an individual is indicated by that individual’s productivity. It is true that through education and training, society produces individuals who would take up different professions and jobs that yield different productivity, and are therefore rewarded differently. Unfortunately, not all individuals show the same level of productivity. In the productivity hierarchy, there are always more low-productivity or low-endowment individuals than high-productivity or high-endowment individuals. At the extreme, low-productivity individuals could face a survival problem if their pecuniary earnings are not sufficient to pay for their survival cost. Hence, the discussion on capitalism would extend to the role of government, and the need for redistribution, while the contrary argument would be the extent of disincentive on the part of high-productivity individuals (Wade, 1990; Tanzi and Schuknecht, 1997).

The debate on economic redistribution leads many to a discussion on income inequality, which has received academic and policy attention, though for decades the magnitude of global income inequality has remained. Growth versus inequality has been debated in a large number of studies, and the relevant question would be whether a high degree of income inequality would result in a higher rate of economic growth, and whether income inequality has inevitably led studies to examine poverty reduction (Kuznet, 1955; Sen, 1973; Atkinson, 1983; Mosley, 2015; Ravallion, 2016; Summer, 2016). Ultimately, the inequality debate is mixed with politics, involving discussions on ownership of resources, coordination of workers, and economic sustainability (Schumpeter, 1942; Friedman, 1962, 1981).

As an introduction, this chapter clarifies some fundamental concepts in capitalism, leaving the bigger and more controversial issues to the following chapters. Depending on their personal endowment, each adult individual will have to participate in the production process. Differences in endowments would mean difference in productivity, contribution, and returns. Similarly, not all individuals’ production would contribute positively, and externality would emerge when some economically bad outcomes are produced. A distinction between competition and competitiveness is needed to understand capitalism, as that can explain how and why capitalism is a sustainable ideology. It is equally important to understand the relationship between private cost and social cost. This chapter also discusses the relevance of supply-side economics, as it is the more suitable strategy when compared to demand-side economics in promoting long lasting growth.

II Beginning with the Individual

Each individual possesses some personal endowment, such as skills, experience, qualifications, knowledge, information, and wealth, which can be turned into a stream of earnings through either working for employment or establishing a business. In a free and dynamic market economy, individuals can gather information on the marketability of their own endowment. While an employed individual can progress by switching to jobs with higher wages when the individual’s endowment has become more marketable, the individual could pick up new skills or learn a new profession if the existing endowment is losing its marketability or competitiveness. If an individual prefers to establish a business, the market should provide sufficient information on the marketability of the individual’s business skills and other environmental factors, such as the rate of profit tax, rental cost, and market demand. Similarly, a business person would switch between businesses when there is a more profitable alternative. Either the individual works as an employee or starts a business, and the market economy should provide sufficient room for all individuals to maximize the return on their endowments. Given the choice in the market and the possibility of changing jobs, the worker–employer relationship should be seen more as complementary, or of mutual assistance where both are needed for the success of the business rather than as conflicting opponents, where workers and employers are seen as opposites in pursuing their economic interests. Workers who receive wages are given certainty of their pecuniary rewards, while employers who may get a bigger profit are faced with market risk.

The idea behind Adam Smith’s invisible hand is that through the available information, choices, and opportunities, individuals in the market should on the one hand find their best possibilities, and on the other hand maximize their individual welfare with minimum assistance from the government. The market serves and directs individuals and allocates resources to their most productive outcomes, meaning that individuals could not obtain any higher pecuniary return in the market, and resources are allocated to their greatest possible usage. In economics jargon, output is maximized when it is produced at the lowest possible marginal cost. By maximizing individuals’ welfare and minimizing producers’ cost of production, the economy is said to have reached its maximum output at any point in time.

Given the limited resources in an economy, individuals will have to compete in the market for resources and opportunities. In theory, the analysis in the Pareto-efficiency argues that resources are efficiently allocated when no person can be made better off without some other person being worse off (Debreu, 1954). The idea is that when there is an idle resource, individuals will utilize the resources to further their economic gains. This will occur until all the available resources are exhausted, and no further gain can be made unless it occurs at the expense of another unit of resource. The Pareto-efficiency assumes a situation of open competition, and that the economic activities of individuals would utilize all available resources. An economic optimum is said to have been reached when individuals and businesses have decided on what to produce and how to produce it through the market mechanism. In economic theory, the market equilibrium is reached when the market price of a good or service equals the marginal cost of producing it.

As the market situation changes owing to the ups and downs in business cycles, and at the same time the individual may improve their endowment through increase in experience, skill, or education, the individual would always look to the market for a better possibility of jobs and employment. Indeed, the market could even provide information to individuals if they should remain in employment or switch to start their own business. In the upturn of the business cycle, one would expect a rise in economic activities and jobs would be forthcoming. On the contrary, unemployment rises in an economic recession and businesses run down. Basic microeconomic theory of supply and demand tells us that business cycles will swing up and down due to dynamic changes in aggregate supply and demand. Changes in aggregate supply and demand do generate economic forces, variations, and volatility unpredictably. It is true to say that individuals make use of the market information, but the activities of individuals in the market also generate economic changes. The market forces work both ways so that individuals observe and react to market information, but at the same time information enters into the market for others to observe. The invisible hand does the allocation through market operations, but one individual may not know what another individual does. Thus, the effect is twofold.

At the macroeconomic level, when all individuals are in charge of their own economic activities, economic progress would produce positive spillover effects. One advantage is full employment, and improvement in personal experience would result in rise in wages and earnings, which in turn would lead to improved economic welfare or even upward social mobility for the individuals. If the individual engages in business, the rising demand and business prosperity would equally result in higher profit earnings. The first principle in economics is Say’s law, which states that supply creates its own demand (Sowell, 1972). The implication is that economic growth would spread through the multiplier effect to other businesses and create additional demand for other goods and services.

Another advantage is that the more able and capable individuals are, the greater their chance of securing jobs with handsome pecuniary returns and, subsequently, decrease the need to seek welfare subsidy. With the growth in jobs and employment, the advantages to the government are twofold: the government would have a higher ability to collect both salary tax and profit tax revenues, and with a fall in unemployment, the number of individuals relying on government welfare subsidy would fall. Eventually, the government needs to spend less on welfare. Putting these two effects together, the outcome is that the government will likely have a fiscal surplus that can be used to expand and enrich future economic capacity, such as building a stronger infrastructure, nurturing better human capital through education, and engaging in research and development that would enrich the capability of industries. With the economic path being drafted for future generations, the individuals in turn have more to do for the future. Economic growth will eventually exhibit a virtuous circle of growth and individual welfare expansion.

The economic advantage could even be cross-generational, as the welfare generated by individuals will pass on to their children, who will then have a better personal endowment through family support when they grow up. Ultimately, there will be a fall in the overall poverty level. With ample job opportunities, individuals with different levels of endowment can have their desired jobs and employment, and the rise in their economic welfare ensures a reduction in poverty. With a virtuous circle, the increase in earnings will result in upward social mobility, and a reduction in the need for redistribution permits the government to accumulate a fiscal surplus that can be used for economic capacity enlargement.

The ultimate advantage of capitalism is its ability to regenerate and rejuvenate economic activities despite the emergence of business cycles that result in economic volatility, as it is the individuals who know best their marketability given the different and changing economic conditions. In economic cycles, some businesses make profits while others experience losses, but market dynamism would always permit new businesses to emerge and prosper. Capitalism allows automatic market replenishment through the voluntary activities of individuals.

III Externality and Ethics

The economics of externality, commonly known as market failure, argue that while people are maximizing their economic welfare, it is possible that their activities infringe on other people and resources, either positively or negatively (Buchanan and Stubblebine, 1962; Trenery Dolbear, 1967; Dahlman, 1979). However, there can be complications, such as the availability of required information and the number of individuals involved. The cost of bringing the case to justice through legal action can be high and time consuming. A clear definition of property rights is crucial in the analysis of externality (Demsetz, 1967). When both private cost and private benefit arising from the externality are quantifiable, mutual or legal settlements can eventually be formulated. Illegal activities are cases of negative externalities, when individuals or firms infringe on the legal rights of other persons and firms. Complications arise when social cost and social benefit are involved, or they differ from private cost and private