Page 3 of 5 CHINA'S DOLLAR MILLSTONE, Part 5 Restoring China's national destiny
By Henry C K Liu
a fundamental issue is whether socialist China, whose national destiny is
inseparably tied to socio-economic revolution towards an equitable society and
a just world order, should allow itself to be lured into the role of a
"stakeholder" in the collapsing neo-liberal capitalist world order of financial
neo-imperialism.
National destiny and national interest
A nation's destiny determines its national interest at a specific time in
history. China's national interest in the 21st century is focused on national
resurgence through socio-economic redevelopment along the path of its
historical socio-cultural tradition of harmonious socialism. The purpose of
redevelopment is to maintain socio-economic growth by increasing the national
wealth to support the continuing advancement of Chinese civilization, which in
turn contributes to the advancement of world civilization.
The national wealth is the sum total of all wealth within a nation. All
economic systems, feudal, capitalist or socialist, strive to increase national
wealth. The national wealth is affected by a nation's system and pattern of
ownership and its distributional configuration, defined by the ratio between
collective ownership of the means of production and the private sector based on
individual private property rights.
Wealth is defined by Webster's Dictionary as a large aggregate of real
and personal property; an abundance of those material or worldly things that
people desire to possess; riches; also the state of being rich. That state is
derived from abundance. The national wealth includes state property and
individual property. The net benefits of wealth lie in its consumption.
Security is provided by surplus wealth that can be consumed at a future date.
However, a surplus of wealth is not synonymous with a wealth of surplus; it is
in fact the opposite. The former is economically unproductive while the latter
can facilitate qualitative growth. Surplus wealth is by definition economically
inert. A wealth of surplus can advance civilization to a higher plane.
In measuring a civilization, focus is placed on wealth of tradition, of
culture, of creativity, of morality, of social justice, of knowledge, of
expertise, of spirit, of compassion, and so on. Value placed on non-material
assets is indicative of the state of advancement in a civilization. Highly
developed civilizations move from high valuation of materialistic wellbeing to
higher valuation of spiritual wellbeing.
The Greeks glorified beauty and the Romans worshiped power. Greek civilization
enriched humanity with a wealth of philosophy based on aesthetics while Roman
civilization gave the Western world a wealth of laws based on order. Christ
taught the Christian world to love the poor and the weak and to celebrate only
the spiritual wealth of the meek. Early Christians were the first socialists.
Chinese civilization is built around the family of men as brothers. Chinese
political culture operates on the vision of community from which the individual
cannot detach without damaging his/her humanity. It does not recognize the
Western notion of the economic man operating out of self-interest, which
Chinese culture views as deviant behavior.
In classical economics, wealth is an abundance of all material objects which
have economic utility in a world of natural scarcity. Wealth then presupposes
inequality. Neoclassical economics introduces the concept that scarcity
enhances the marginal utility of wealth. In neoclassical economics, scarcity of
a commodity enhances its exchange value while aggregate scarcity depresses
wealth. Scarcity is a necessary condition for a functioning market. Abundance
denies the necessity for trade.
In a knowledge scarce economy, knowledge is wealth and in an information scarce
economy, information is wealth, even though knowledge overkill and information
overload are frequent problems that can cause economic stagnation. Thus
abundance alone does not solve the problem of scarcity, the solution for which
can only come from fair distribution. Scarcity cannot be eliminated by wealth
creation alone, since wealth is a function of selective scarcity. Scarcity can
only be eliminated by equitable wealth distribution. Therein lies the
structural dilemma of capitalism, which depends on scarcity to create wealth.
Currencies and international finance
Currency hegemony distorts distributional equity in trade. Under dollar
hegemony, the distribution of the benefits of trade is distorted mainly because
the dollar is scarce in all trading economies except the US, which can produce
dollars at will by fiat. Dollar hegemony emerged when the US discover how to
transfer the cost of fiat dollar creation to her trading partners. This
dollar-based international finance architecture allows the US to become the
world's largest debtor nation by assuming debts denominated in dollar that the
US can produce endlessly at no cost to itself.
The cost of dollar depreciation from oversupply is transferred to foreign
holders of dollars. The question is seldom asked why a country that can produce
dollars at will needs to borrow dollars from its trade partners. The answer is
of course that the US borrows not out of its need for dollars, but to reinforce
the need for dollars on the part of her trading partners. This
dollar-denominated debt owed by the US to her trade partners is a debt the US
never has to pay back, or if forced to do so, the US can pay this debt with
more dollars she can print at will.
In economics, annual gross national product (GNP), a measure of goods and
services in the nation in a year, adjusted by foreign factor income, has been
the generally accepted indicator of the economic potential of a nation. GNP is
not a measure of the national wealth, which is the sum total of net assets of a
nation. But GNP is only a measure of the monetized wealth derived from the
national asset for a given timeframe, not the asset itself. A low GNP can
result form a large national asset, which is the definition of
underdevelopment. All developing national economies, including that of China,
can raise their GNP by fulfilling the productive potential of their national
assets.
The predominant asset of a nation is its population. All secular wealth is
derived from human life. Even on a personal level, when life ends, all else
secular, including wealth, ends for that individual, even hope, which is the
wealth of future potential. Material wealth is a poor compensation for poor
health. From this one can logically deduce that national wealth is based
fundamentally on a healthy and fulfilled population. Without population, there
is no nation, let alone national wealth. When the population of a nation
increases, so does its national asset and potential national wealth, unless the
economic system is dysfunctional, in which case the fault is not with
population growth but with the economic system. The physical, mental,
intellectual, cultural and spiritual health of the population in a social
context has a direct and fundamental impact on the national wealth.
Ceteris paribus (all else equal), China with one fifth of the world's
population should have a GNP equaling to one fifth of world 2007 gross domestic
product of $54.6 trillion, or $11 trillion instead of $3.3 trillion. China's
2007 gross domestic product (GDP) was below its asset potential by a factor of
three by world-average standard. By advanced-economy standard, China's GDP
should be five times that of the US ($14.5 trillion in 2008), or $72.5
trillion. Yet China holds a foreign exchange reserve of $2 trillion, about 60%
of which is in the form of US sovereign and agency debt.
The US, with the world's largest GDP economy, and the world's largest debtor
nation, has no foreign debt denominated in foreign currency. All debts owed by
the US to foreigners are US sovereign debts denominated in dollars, not foreign
debts denominated in foreign currencies.
If China, with a population five times that of the US, had the same
productivity as the US, its population would produce five times the US 2007 GDP
of $13.8 trillion. China would have a GDP of $59 trillion instead of $3.3
trillion in 2007. China's 2007 GDP would have been bigger than world GDP in
stead of one third of it. China ranked 100th in world per capita GDP in 2007
($5,400 - half of world per capita GDP of $10,038), behind Swaziland (99th) and
Samoa (98th).
The scarcity dogma
Neoclassical economics subscribes religiously to the dogma of scarcity as a
natural law of economic science to underpin the law of supply and demand. The
dogma states that given an amount of demand, scarcity causes prices to rise.
Thus there is structural incentive to maintain or even increase scarcity.
Prices are allowed to fall only if aggregate sale increases. Scarcity, however,
is never allowed to disappear entirely, at which point markets would stop
functioning.
When clean air and water were abundant, instead of constructing an economic
theory from these happy natural gifts of nature, economists reject them as
non-commodities, external to the concern of economics, until of course clean
air and water became scarce through pollution or simply abusive use. Then and
only then would scarcity make clean air and water legitimate economic issues.
Similarly, population growth in a world of scarcity is considered a rising
burden to the economic system. These economists, Thomas Robert Malthus being
their spokesman, argue for the need of population control based on the dogma of
scarcity.
Malthus (1766-1834), a British economist, sociologist and pioneer in population
theory, in his An Essay on the Principle of Population (1798), contends
that poverty is unavoidable without population control since scarcity is a
condition that naturally increases with population growth. Famine and disease
are natural constraints on population growth and war is a socio-political
constraint. In 1803, Malthus conceded the preventive check of "moral
restraint", paving the way for neo-Malthusian birth-control theories which
influenced classical economists, especially David Ricardo (1772-1823). Birth
control is then viewed as a moral alternative to famine and war.
But as history has since borne out, global food production growth has
long-outstripped global population growth. The biggest problem in modern
agricultural economics is not excessive demand but falling prices caused by
over-production. As to the causes of war, advanced countries of low birth rate
frequently invade developing countries with high birth rate all through
history. Many advanced economies, such as those of France and Japan, have found
it necessary to adopt incentive policies to stimulate population growth in
order to maintain economic growth and national power.
Ricardo's interest in economics was sparked by Adam Smith's Wealth of Nations
(1776). Smith's thesis was that the division of labor (specialization) improves
economic growth to generate wealth for all nations. Smith also saw advancements
in use and creation of machines and international trade as engines of growth
through the facilitation of further specialization. Because saving by the rich
is what provides investment and hence economic growth, Ricardo saw unequal
income distribution as being one of the most important determinants of national
economic growth.
However, Ricardo posited that savings are in part determined by the profits of
stock, as the capital stock of a competition between capitalists for workers
will bid wages up to reduce profit. So lowering the living standards of workers
was another way to maintain or accelerate economic growth. Free markets cannot
include free labor markets that enhance worker market power if economic growth
is to be maintained.
Ricardo provided the "scientific" rationale for the anti-labor mentality of
capitalism. Capital is deployed to enhance labor productivity not to raise the
standard of living of workers, but to increase return on capital. Wage
increases tie to increased labor productivity directly decease the productivity
of capital. Mechanization is a process to shrink labor input per unit of
capital investment, not to raise the cost of labor.
Wage increases can be tolerated only if aggregate wages fall - lay off 100
workers and use the wages of 20 displaced workers to fund wage increases of the
remaining workers who are expected to cover the productivity of the 100 who are
laid off. Most of the growth of the industrial age came from robbing labor of
its fair share by keeping demand for labor shrinking with investment in capital
goods. Surplus labor reduces the market power of labor while it magnifies the
market power of capital. Capitalists fear full employment more than they fear
the plague.
This is why economies operating under market capitalism, including that of
China, will be structurally prevented from achieving full employment with high
wages. For an economy that depends on foreign investment, even surplus profits
do not stay within the economy.
Ricardo's law of rent was seminally influenced by Malthusian concepts on
population. Malthus claimed that population growth
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