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Q&A: Global Dominance

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4. Economy

Revised
8 April 2015

Only a country or region with a very strong economy can achieve global dominance. It was the intrinsic weakness in the centralized command- and control system of its communist economy which led to the downfall of the Soviet Empire. People sometimes believe that China's economic reforms were implemented by its leaders to improve living conditions for the country's poor citizens. But Chinese leaders seldom cared about their subordinates, as proven by numerous disasters afflicted to the Chinese populace by its scrupulous leaders, such as the "Great Leap Foreword", which killed some 35 million people between 1959 and 1961. It is more likely that economic reform was implemented in China, because the leading class realized that without a strong economy China would be reduced to geopolitical irrelevance. There is widespread academic debate about what makes an economy strong and successful. For our purpose we assume that four elements are essential:
Entrepreneurship & qualified labor
Every economy requires entrepreneurs and a qualified labor force to flourish. New products and services are not created by government programs, banks or financial investors, but by people with the specific talent to imagine particular products for potential markets. These people usually have a fiercely competitive spirit, exceptional imagination and distinctly hands-on pragmatism. But these economic innovators and leaders would be lost without a disciplined and qualified labor force that can actually produce the products or provide professional services. Great products must be manufactured in high quality and marketed efficiently to generate long-term economic growth.
Markets, regulations & standards
Some of the greatest economic disasters were certainly produced by the notoriously inefficent central planning departments of communist economies. Today this specific type of economic mismanagement seems to be restricted to some fossil communist states, such as North Korea or Cuba; but only 50 years ago, centralized economic planning was a major "disease" spreading from the USSR into many regions of Africa, Latin America and Asia. Is it possible that China or Eastern Europe might go back to these economic structures?
One of the greatest human inventions are markets. They are an ingenious mechanism for smoothly matching demand with supply of goods and services. The regulative function of a free market is absolutely essential for a prosperous economy. It is the quickest and safest mechanism to root out economic inefficiency, poor quality of products, or lack of consumer orientation. However, markets do not work well for public goods and natural resources that are usually exploited without compensation. When industries use rivers, lakes or the atmosphere to dump their waste without appropriate compensation the costs of their economic production are inaccurate. They can deliver products that are far cheaper than what they would cost if the real costs of environmental destruction and pollution would be included. An economic system that does not pay for the use of certain natural resources, that pollutes the environment and exploits its labor force is not sustainable and will not be successful in the long run. To prevent such economic excesses in a market economy, governments must implement rules, regulations and standards that protect the environment and the labor force. Where can we find the best market mechanisms and economic regulations - in China, Europe or the United States of America?
Private property & responsibility
Marxist economists and utopian socialists have always seen private property as the ultimate sin - causing economic exploitation, poverty and ultimately, economic crises leading to revolution. Particularly private property in land and in the "means of production" is seen as an instrument of exploitation. Today, these ideas about private property are widely considered absurd by people in western societies, perhaps with the exception of some hard-core Marxists in academic circles. But we should not forget that China - widely considered the emerging economic superpower - still does not know private property in land and strictly regulates and limits private property in production facilities and real estate. Private property is an essential element of economic activity, because it provides the legal protection for the means of production. Farmers, who do not own their land, will not take care of it, which inevitably lowers soil fertility. The decay of state-owned real estate or industrial machinery through vandalism, sabotage or neglect in communist states is well documented. Private property is also necessary to generate savings and investments. Why should you spend money on a company that in the end belongs to the government? Without private property people would immediately consume what they have.
However, with private property enormous wealth, and therefore power, can be accumulated in market economies. It is therefore only appropriate if such concentration of wealth is linked to greater responsibility. Rich individuals or corporations should contribute more to their society than the poor or the middle class. Taxation (perhaps even progressive taxation) and philanthropy must balance a concentration of wealth - otherwise a market economy degrades into a cut-throat system of ruthless exploitation that creates unproductive social tension and conflict.
Incentives & controls
The conventional measure of GDP growth is an inappropriate indicator of wellbeing. As Binehocker and Hanauer have correctly pointed out "prosperity in a society is the accumulation of solutions to human problems" (Beinhocker / Hanauer, 2014).  Market economies are particularly good in solving human problems, because they weed out sub-optimal solutions and are able to scale up production and dissemination of products and services to reach the widest possible population. But most importantly, market economies are able to unleash incredibly human creativity and initiative, by giving great incentives to invent better products and services. This is why market economies have lifted hundreds of millions of people out of poverty (particularly in China and other Asian countries) and have greatly improved living standards worldwide. Countries can only hope to play in the "first league" of global economics, if they have sufficiently strong incentives to economic activity.
However, not all incentives are positive. The recent economic crises of 2008 was clearly triggered by wrong incentives in financial markets. Participants were driven to maximize profits with financial products that were totally decoupled from any real economy. Like gamblers in a betting frenzy investors bought "trash" without any real value, just because of the incentive that the rally would go on a little longer to make more "bucks". Everyone (actually) knew that the "bubble" would explode, but was driven by the incentive to "ride the tiger" till the last moment. Quite a few didn't get off the "tiger" in time. Economies can only be successful in the long run, if they have the right incentives - otherwise they just re-distribute money without contributing to solutions for human problems.
Some excellent environments with the right incentives in history which created great economic wealth were the US space program, the "Marshal Plan" for Europe after WWII, or China's economic reforms. All of these were ultimately frameworks implemented by wise governments. They all instituted controls and incentives that triggered enormous economic growth. We have to ask, what country or region - China, Europe or the United States, has today the most powerful incentives in place to unleash economic potential?
Links to comparative analyses (in preparation)
Below are links to analyses in which we will compare China, Europe, and the USA. We will ask, which of them has the most active entrepreneurship and qualified labor force, the most efficient markets, sensible regulations and standards, the best guarantees of private property with appropriate responsibility, and the right incentives for beneficial economic growth. These will be our criteria to asses each country's or region's comparative economic advantage:
Links to on-line articles
 

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Schwartz - States Versus Markets Sachs - Age of Sustainable Development Piketty - Capital Reich - Beyond Outrage

Herman M. Schwartz (2010)
States Versus Markets. The emergence of a global economy. 3rd Edition. Palgrave Macmillan

Jeffrey D. Sachs (2015)
The Age of Sustainable Development. Columbia University Press

Thomas Piketty (2014)
Capital in the Twenty-First Century. Belknap Press

Robert B. Reich (2012)
Beyond Outrage. What has gone wrong with our economy and our democracy, and how to fix it. Vintage

       
Pontusson - Inequality and Prosperity Pomeranz - The Great Divergence  Egan - Single Markets Peet - Unhappy Union

Jonas Pontusson (2005)
Inequality and Prosperity. Social Europe vs. Liberal America. Cornell University Press

Kenneth Pomeranz (2001)
The Great Divergence: China, Europe, and the making of the modern world economy. Princeton University Press

Michelle Egan (2015)
Single Markets. Economic integration in Europe and the United States. Oxford University Press

John Peet / Anton La Guardia (2014) Unhappy Union. How the Euro crisis - and Europe - can be fixed. The Economist

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Creative Commons License

"China-Europe-USA" by Gerhard K. Heilig is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License. First published: 2004; Completely revised: 2015