One other thing about the Chinese communists is that their leaders are mainly technocrats, engineers and scientists. They have nurtured China’s wealth creating capabilities while the western neoliberals have been destroying ours.

They are comming unstuck now because their customers are insolvent. Insolvent because we could not compete and win against these technocratic communists while practicing our neoclassical economic theories.

I think that retrofitting a solution from the 17th century (when the volume of international trade was small compared to GDP) to our globalised economy is simply a very naive idea.

You are going to have to work very hard to convince me (or anyone else) that the buy and sell we do today is fundamentally different to the buy and sell done centuries ago. The only difference that I see is that modern governments can create money with a wave of the hand (and a nod from the bankers), which IMHO is a backwards step from the 17th century (and eventually I expect we will relearn this).

A standard gold “leaf” is 35mm by 35mm, and 1000 leaves weigh 20 grammes, so 80 metric tonnes of gold is sufficient for 4,000,000,000 such leaves and I’m sure that would serve the purpose of any physical exchange between hands. There is nothing to prevent half and quarter leaves being in circulation, gold is one metal that can be subdivided in astoundingly small portions.

Of course, as I already pointed out, Australia is a major producer so we have a steady supply of new gold coming online all the time, and China is also a major producer so they do too.

The liquidity argument is a complete furfey.

The use of gold as currency does not preclude electronic trading either, providing suitable audits are regularly conducted. Some people will demand the metal in their hand (as personal preference might have it), others will enjoy the convenience of an electronic system. Buying or selling goods on account (e.g. 30/60/90 day terms, or hire purchase, or other mutually agreeable contract terms) would remain unchanged… the risk would be on the shoulders of those party to the credit agreement and when the gold finally changed hands the account would be paid and cleared.

I agree that if gold were accepted as currency then the price of gold (relative to other goods) would rise substantially. I don’t see anything shocking about this, adjustment of price between supply and demand is one of the things about economic theory that has been well supported by real-world observation. Shortages push up prices, surplus pushes down prices. Yes there is some instability in the process, but it can’t stay substantially out of balance for a long period. You still have not explained where you expect all this gold to get consumed?

Then there is the whole political dimension of the instability I described – possible meddling of a foreign power (any of them) to seize direct control of the assets if local liquidity problems arise.

Foreign ownership is really a completely different problem. If our balance of payments is consistently bad then the choice of what we use as a currency is irrelevant to the pressure to sell assets to foreign powers. The ability for the government and banks to print money does not protect us in any way from foreign takeover, gold will offer neither better nor worse protection.

In order to block foreign ownership, a government of the day merely needs to have the balls to stand up and disallow the transaction. That’s all there is to it.

Consumption level is maximised in our economy because people vote for politicians who promise good living and “wealth”. Also because reducing it would affect the retail and services sector. One day we will have to confront this problem anyway.

With gold as a currency, the politicians lose the ability to create false wealth with a wave of the hand. That is the only thing that changes. Everything is business as usual except the honesty of a transaction is enforced by the physical world, rather than being trusted to those least likely to be trustworthy.

The Austrians and some neo-conservatives would suggest abandoning the controls.

Using gold as currency removes the need for artificial monetary controls. That’s all it does. This is a control in and of itself.

Personally I am against propping up the unsustainable growth but technological progress is in my opinion the only chance to escape the problems cause by shrinking resources and disrupted environment.

I am in complete agreement. However, I’m not one to use technology for the sake of technology, nor do I discount something merely because the design is old (especially with a strong and proven track record). If you look at the basic things people have and use in their day to day lives, most of them are largely unchanged designs that might range from hundreds of years old to thousands of years old. We use them because they work.

You may not like Kevin Rudd but he is not like Adolf Hitler and our government is not even nearly as bad as the government of Austro-Hungary sending millions of people to die for nothing.

We send fewer people out to die for nothing (and kill for nothing), making us proportionately less evil. The oil in Iraq or the opium in Afghanistan are very much the same as “die for the honour of the house of Hapsburg and the interests the elites” with a name changed here and there. They only get away with it to the extent that they can keep the population confused and distracted.

None of this has anything to do with using gold as currency. Gold won’t stop wars, it will merely throttle the ability for the government and the elites finance these wars by stealth (until they find some other way to convince the masses to support their cause).

I really wanted to save it for another day or for Steve to comment…
However, briefly:

1. We have to distinguish between Stalinism (end of 1920-ties..1956) and so-called Real Socialism period (1956-1989 or 1991). Stalinism was as evil as Nazi ideology and it was The Totalitarianism. Below I will discuss Real Socialism only. I don’t agree with Zbigniew Brzezinski that late Real Socialism in Poland was totalitarianism.

Here comes a short story to prove my point:
I was asked to take part in the official celebrations of the May Day at school but when I refused I was only threatened by the principal with expulsion. Nobody was sent to Siberia. In the Soviet Union or GDR (DDR) it was a bit different but if you weren’t interested in politics and didn’t want to make a career you could pretty much ignore the whole system. Even members of the Communist Party were going to church to baptise children – although covertly.

Dysfunctional economy, food rationing, queues for everything – this was a real problem.

2. In China Cultural Revolution was an equivalent of Stalinism. They did have hardcore communism and killed millions of people.

3. The main difference between China and Eastern Europe was the endemic poverty in China.

4. The main feature of the socialist economy was that all the means of production were owned by the state (or centralised cooperatives) and that central top-bottom planning was in place. It was a kind of top-bottom system of micromanagement. It was controlled by the organs of communist party. Since nothing belonged to individuals a lot of things were stolen and corruption was widespread. People had no incentive to work. Imagine that in such a fertile country as Poland we have food rationing even in 1988. Nobody was hungry but we had coupons for meat, shoes, sugar, (vodka was made of sugar), vodka proper, petrol, chocolate etc.

There was a constant threat of inflation due to constant lack of goods but in order to preserve social stability artificially set prices of consumer goods were frozen. When they were increased in 1970 people went to streets of my home city and the communists shot many of them.
When crisis started to bite again in 1980 strikes broke out and Solidarity trade union was formed also in my home city. My dad was an activist, later had problems with the Secret Police when the movement was suppressed in 1981. So now you know why I am so interested in politics…

5. The capitalist (market) system works differently – what F.A. Hayek discovered: “freely formed and freely adjusting market prices contain information about the plans and intentions of millions of market participants. Because of this, changes in prices reflect changing relative scarcities for factors, goods, and services, and they thereby enable market agents to plan and to bring their subjectively formed perceptions and expectations about market conditions into line with actual conditions.”

http://www.britannica.com/EBchecked/topic/257751/F-A-Hayek/236426/Economics-and-knowledge

Hardly surprising this works better than system with central planning especially if you want to make computers not kalashnikov rifles.

6. So now the reasons for undoing of Real Socialism are obvious. If anyone has doubts I can provide a few more stories from every-day life in the 1980-ties or throw a few links.

Not everything was bad for example education was quite good and health care was acceptable.

The system collapsed because of its inherent inefficiency. People had had enough but the communists and Soviets maintained iron grip over the society in most of the countries except for Poland and maybe Hungary.

Another reason for undoing of Real Socialism in Poland was the foreign debt. Sounds familiar?

7. There were numerous attempts to reform the system but because the state ownership of almost everything and central planning were still in place all failed. Privately owned small farms and small businesses were allowed in Poland and these worked fine.

8. Perestroika in the Soviet Union was the final attempt to reform the system by allowing for some elements of genuine democracy and some elements of market economy. It failed and suddenly it was all over – we were free in Poland. But very poor and a bit dazzled. In the former Soviet Union things went worse though and they entered a period of instability.

9. In China Deng Xiaoping saw the problem differently – he allowed for market reforms but didn’t loosen the grip of power. Basically he got rid of inefficiency of centrally controlled system and removed the micromanagement of everything by the Party. He allowed for private companies to work for profit.The overall control is maintained and there is a lot of unofficial control as well. But the basic advantage of the market system is fully harnessed to improve the efficiency.

10. The Communist Party has been transformed into a kind of technocratic oligarchy and ideology has as much power as a king in the constitutional monarchy. Nationalism (but not too aggressive) is also present.

11. All the power comes from the political structure. If you are rich and own a multinational corporation you may be tempted to exercise influence…
http://business.smh.com.au/business/murdochs-china-dream-shattered-20080125-1o77.html

Good luck Rupert in China.

12. In western countries however politicians and parliamentarians are not technocrats. Power comes with money. Want to change law? No problem. Just a bit of lobbying and it’s all yours. For example:
http://news.cnet.com/Copyright-lobbyists-strike-again/2010-1071_3-5811025.html

So now we are back in our reality.
Questions:
1. Is Chinese system still communist, socialist or just authoritarian (“moderated democracy”)?
2. Is it better for us to be led by corporations or by technocrats? Are there any other options?

My answer to question 2 is that I still prefer our democracy (not anarchy, obviously not real socialism, not rule of big corporations, not libertarian minimal state and definitely not society moderated by a technocratic oligarchy however it is called).

I want more democracy not less. Period.

In some counties though (China and to some extent Russia) technocratic oligarchy works. Putin got rid of western corporations which bought mineral assets almost for free and put some of Russian oligarchs to prison. He restored the stability but he violated human rights. You may not like him. But this doesn’t mean that his system is not working better than Jelcyn’s “cleptocracy”.

Whenever I read news about GFC I have a strong feeling of deja vu. Do you know why?

Thank you Steve for waking me up. Democracy is the solution. I haven’t changed my views since 1988.

the competitive de valuation of the yuan,

and the yanks are mighty urked!

this sort of thing happened in the 30′s as well, a devaluation race to the bottom.

what odds on trading blocks and currency enclaves also making an appearence in the not to distant future.

one of the striking things about the “communists” in china are how spectacularly more successfull they have been in the economic development race as oppossed to their eastern block comrads.

one of the main reasons for this is that they started with a relatively clean sheet. they didnt have the antiquated socialist industrial architecture to dismantle or work around like in the soviet block. just ask the germans!

it just may be that the so called communists in china werent the died in the wool communists we thought they were, and that underneath all these labels, what motivates them is the same as what motivates us

hope the wedding goes well, and the marraige goes even better

In your references to China;

“I can’t see any systemic problems inside their country”

I can. It’s called communism.

And as a means of organising human society, it is proven as flawed because it is based on a concept that is anathema to basic modern human instincts : ie the right to own and protect one’s private property and the desire to live free from oppression.

China’s current variant of a “system” is extremely immature. It began with Deng in the early 80′s, after the late 40′s variant started imploding. Hardly a model worthy of emulating on that basis let alone it’s deplorable approach to the rights and freedoms of its citizens.

“The political system is efficient and stable”.I’m sure those sentiments can be found in the 30′s too with Hitler’s rise – at one time he too had a cathartic effect on Germany’s ills.Even Stalinist Russia would have been considered among other things “efficient and stable”.

Your admiration for the benefits bestowed by China’s system is very well articulated. Thanks.

I like most of your comments on here, but I have to pick up on this one regarding China, “I can’t see any systemic problems inside their country”, you only “see” of China what they want you to see.

I agree that China are on a long march but I don’t think their major problem will be economic. Their problem is going to be political and that is why they are on the long march. The Communist party is trying to work out how to make China the dominant country in the world (both economically and militarily) while keeping it’s people under control.

I am sure they are aware that as people become more wealthy the more that want and expect. This is why they don’t want the yeun to increase in value.

If you think that they have developed into a market economy I would disagree. While private ownership and entrepreneur’s are allowed you still need approval from the local communist party member before you can start any enterprise, plus if they decide someone else is more deserving of the enterprise (say the local party members son or nephew) they feel it is well within their rights to “distribute” your property as they see fit. Central planning and corruption is still alive and well over there.

They may look stable from the outside but I can see there is going to be some major conflict as the middle class looks to break free of the controls that have been placed on them while the Communist party and the army asserts itself. Will be interesting times, can’t say when but I see it is looming.

Let me put what you’ve written in the context of the real world. I strongly disagree on the surface but I may agree in the deeper sense.

“If balance of trade is out of whack, and China ends up getting more of our gold than we get back from them, then there is less gold in circulation in Australia so our local prices fall, and our goods become more attractive to buy. How difficult is this?”

It is difficult to agree because the temporal dimension has been ignored. What you have written sounds to me as yet another application of the “equilibrium” theory.

The time scale at which any adjustment regarding local production can occur is several years. For example we import most of our textiles and building new factories would take a year or so (imagine this in a country depleted of currency, you need to buy machines, would foreign investors come to rescue?)

The amount of currency (gold) which can be in circulation is very small compared to consumption of imported goods. Gold reserves in Australia are 80 tonnes.
http://en.wikipedia.org/wiki/Official_gold_reserves

80 tonnes of gold is worth 3.2 bln AUD at 40000AUD/kg. Even if you assume that the price of gold goes up and that privately owned gold goes into circulation this is still a small amount of money.

We have a temporary surplus now ($2,108m in March 2009) but for several years in the recent past we were making deficits at 2 billion/month. So it would take a few months of deficit at that level to drain the currency completely and cause severe liquidity problems.

http://www.abs.gov.au/AUSSTATS/abs@.nsf/mf/5368.0?OpenDocument

This system can be modelled (I can do it on your request) but I think that the descriptive argument is good enough.

Then there is the whole political dimension of the instability I described – possible meddling of a foreign power (any of them) to seize direct control of the assets if local liquidity problems arise.

I think that retrofitting a solution from the 17th century (when the volume of international trade was small compared to GDP) to our globalised economy is simply a very naive idea.

I do agree however with an implicit observation coming from your model. We cannot live forever in the asymmetric world where we import speculative capital and consume more than produce. This is yet another overconsumption and “wealth creation” device. False wealth I would say.

People may hate me but I think that the solution would be very simple – instead of encouraging foreign investment indiscriminately we have to restore control over capital inflow, encourage productive investment and discourage speculative. Let the currency depreciate (this is a free market process not any “socialism”) and restore the conditions where local production makes sense.

Yes some false “wealth” will go and the consumption level will fall but if we don’t do that we will keep accumulating foreign debt. You cannot print your way out of this situation if the debt is denominated in a foreign currency (we may piggyback on the fall of USD though).

Consumption level is maximised in our economy because people vote for politicians who promise good living and “wealth”. Also because reducing it would affect the retail and services sector. One day we will have to confront this problem anyway.

I think that misusing the controls is the actual mistake, not the fact that the governments have means to control the amount of currency, interest rates and other macroeconomical parameters. But we have what we wanted, we voted for our government and it is our ultimate responsibility what happens here.

The Austrians and some neo-conservatives would suggest abandoning the controls.

I think that this would be catastrophic as our most of our trade partners, competitors and friends overseas use them with good results.

I would suggest using them in the right way by the democratically-controlled government. Getting it right will take time but I’m optimistic as we live in a democratic country we just need to be educated.

That’s why I think what Steve is doing is so important and I don’t think I am wasting my time writing this post. Maybe someone will read it and not everything I have written is rubbish?

The lesson from China and other rapidly developing countries is that the controls available in the modern credit-based financial system combined with the robust market economy can be used to promote growth of productive capacities and as a result to improve live of people. This means a decent and sustainable level of consumption as well. Yes this may sound as a socialist idea but this is exactly the explanation of their success I think.

Personally I am against propping up the unsustainable growth but technological progress is in my opinion the only chance to escape the problems cause by shrinking resources and disrupted environment.

Finally let me disagree with the Austrian mantra that “government is evil”. The historic roots of Austrian economics and philosophy are in Austro-Hungary and the misery after the lost WW1.

Basically the bureaucracy level before WW1 was enormous and every-day life during the war full of criminal absurd. During WW1 the Austro-Hungarian state kept sending thousands of young Hungarians, Croats, Polish, Czechs, Jews (and also Austrians and many others) to die for the honour of the house of Hapsburg and the interests the elites.

I visited battlefields of WW1 in Slovenia and Italy. When I saw the scale of that criminal absurd my mind was blown out.

“Cumulative casualties of the numerous battles of the Isonzo were enormous. Half of the entire Italian war casualty total – some 300,000 of 600,000 – were suffered along the Isonzo. Austro-Hungarian losses, while by no means as numerous were nevertheless high at around 200,000 (of an overall total of around 1.2 million casualties).”

http://en.wikipedia.org/wiki/Battles_of_the_Isonzo

Before you even try reading von Mises please read Franz Kafka and have a look at this http://en.wikipedia.org/wiki/The_Good_Soldier_Svejk

The social philosophy of Austrians only makes sense to me in the historical context of fallen pseudo-democratic and bureaucratic countries in Central Europe in early 20th century and totalitarian regimes of Hitler and Stalin taking away basic freedoms.

I think that we simply cannot apply the Austrian social philosophy and abstract concepts of “open society” out of its historical context.

You may not like Kevin Rudd but he is not like Adolf Hitler and our government is not even nearly as bad as the government of Austro-Hungary sending millions of people to die for nothing.

Let’s think about our reality not abstract “ideas”. We can be inspired by them but not enslaved.

MACCA:

The Chinese are known for long marches. It is irrelevant if their production falls by a single digit number for a few months as long as they maintain social stability and keep the massive trade surplus.

I can’t see any systemic problems inside their country – they started from a very low level of development and can sustain healthy growth for decades. The political system is efficient and stable (even if I don’t like the lack of freedom). We have reached natural limits of energy-intensive growth I think but they haven’t. Of course something bad may happen in China as well but I expect it rather in the US.

I am sorry but I think that looking after wealth of a single social group (in the context of retirement plans) cannot be used as a basics to make major economical decisions especially if the country as a whole may suffer. There are other people in this country as well not only investors.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aNqEbScHtIgo

“China Power Production Fell 3.9% in Early May, Securities Says”

http://www.reuters.com/article/ousiv/idUSTRE54K0MV20090521
“China cheerleading gives way to caution on economy”
“Zhu Hongren, an official with the ministry, told Xinhua that weak economic activity, especially reduced external demand, may exacerbate industrial overcapacity. “Caution is needed before we can say that the Chinese economy has bottomed out,” Zhu said.”

http://www.ft.com/cms/s/0/46f39c02-440d-11de-a9be-00144feabdc0.html?nclick_check=1
Beijing stimulus plan held up
By Jamil Anderlini in Beijing
Published: May 19 2009 03:00 | Last updated: May 19 2009 03:00
“China’s much vaunted Rmb4,000bn economic stimulus package is being delayed by local governments unable to raise their share of financing, according to a report from the state auditor.
The survey, published yesterday, is the first official indication that China’s stimulus measures have not been as effective as the government claims”.

This is dated, but nonetheless an insight into how China manipulates it’s economy. 2 words come to mind – Central+Planning.
http://chinesepolitics.blogspot.com/2008/11/dear-all-in-boston-now-but-here-is-new.html

Seeking to promote major changes to the life and plans of other people, couched in economic slieght of hand (changes to taxes within a wealth re-distribution agenda) will elicit some kind of a response or challenge.It may be best to expect that even when it is not comfortable when your views are challenged.

Everyone is entitled to their personal view on what is considered rational. But, no need to hide behind the “personal attack” defence when there was obviously none.