When it comes to running an economy it is the Chinese who have the right to lecture us. In the UK we have increasingly adopted the approach of letting the market run free with fewer and fewer restrictions. In some sectors this can indeed be very effective. The best way to get a vibrant and successful software industry or put yourself at the forefront of the telecommunications revolution really is to let the market decide which solution is a winner and get the state out of the way of the innovators. Provided, of course, that the state has invested heavily in the training of those innovators and made borrowing money for business start ups easy, cheap and easily accessible.
It is, however, becoming blindingly clear that this naive faith in markets always having the right solution has created huge problems for the UK. Removing effective external governance and control over banking can hardly be described as a success. In 2008 it created a panic which almost destroyed the entire capitalist system and it required heavy state intervention and the printing of £350 billion of money in the UK and over $2,000 billion in the US to repair some of the damage. Similarly selling off council housing and relying on the free market to home everyone has also not worked. It simply hasn't provided enough housing of the right kind in the right places for the right people. Wealthy foreign investors now own much of the housing stock in our capital city whilst our young people are being promised by David Cameron that he will fix it for them by requiring housing developers to build a few starter homes costing only £500,000. If this is his idea of who is poor or how to help them then he is further out of touch than I thought. The poor will need an income of £166,666 a year to raise the mortgage on such starter homes.
Narrow minded insistence on an ideology rarely works. As Mao illustrated when he went to the opposite extreme and tried to run the entire economy on state planning. Instead of a great leap forward he generated a famine that killed over 30,000,000 people. His extreme faith in the wisdom of state planning, provided of course that he was the wise leader guiding it, reduced the entire country to living on the breadline. People were scared to dress differently to anyone else let alone voice an idea that there might be a better way of doing something than blindly following a stupid order from above.
The myth amongst the extreme free market philosophers is that the reason China has grown so fast is that it completely dumped all that state planning nonsense and as a result achieved 10% growth for around 30 years. Like most myths it is based on a partial truth. Getting rid of an extreme faith that only state planning can work really did help. Deng allowed a lot more people to run their own enterprises in their own way and used the market to let people decide what they wanted to buy instead of allocating them the products that the state thought they should want.
But China's success has never been the product of letting the free market rip without any guidance. It has been produced by a really determined conscious combination of state planning and free markets. So the massive improvements to the transport system which have helped spread the benefits of economic success haven't come about because some brave entrepreneur decided to fund a railway line. They have come about because the Chinese state decided to direct a lot of resources to where it thought they were most needed. That was just as important a reason for China's rapid growth as the introduction of a partial free market. Similarly, when the Western economies slowed up after 2008 and there was a risk of significant unemployment in China, the approach was not to shrug shoulders and decide that nothing could be done. Instead the government engineered a huge investment boom mainly driven by local government.
The worry that is now being raised by many commentators is that there is only so much investment that China can make to keep an economy moving. Sooner or later it will need a greater variety of customers either through local citizens buying things or through international economies returning to growth. As a result some wild predictions are being made that Chinese growth is going to collapse, its banks and its financial markets will follow and the whole Chinese miracle will unravel.
This is, of course, possible. But the power of state planning in a country like China should not be under-estimated. Achieving growth figures of over 10% for 30 odd years is an astonishing illustration of what you can achieve when you combine free markets with planning. A government with a heavy balance of payments deficit and a huge uncontrolled banking sector like the UK is vulnerable. A government with vibrant manufacturing, relatively small foreign imports and complete control over the power to create currency is in a much better position. It can do an awful lot to positively influence how fast that country grows and can manage potential failures in banks by pumping in whatever money is needed, even if it requires gigantic debt write offs.
The Chinese government can also do wonders to redirect investment into new and more productive areas so that it transforms the Chinese economy in ways that help it respond to the next wave of technology. For example, Chinese government state planners have started to realise that it is no longer in their interests to have heavily polluted cities and a horrible dependence on filthy fossil fuels. They are therefore organising massive investment in green energy and in the switch to a different kind of production. This could take decades to complete, as their current heavy industry is heavily polluting, but the clear determination to switch direction and drive their economy towards much less dependence on foreign raw materials and energy will rapidly begin to improve the situation. It certainly gives more hope for the planet than Cameron's cancelled subsidies for solar power and the consequent loss of thousands of UK job losses in this important future industry.
Clearly there are very real and very hard problems ahead for the heavily state guided Chinese economy. It will find it hard to let new creative industries prosper if it continues to control the free interchange of ideas. It will find it hard to maintain peace within its borders if it continues to take an imperialist domineering attitude towards its minorities. The country also risks being hobbled by arrogant party leaders who are so corrupt that they allow chemical factories to be built and explode in the middle of major cities, schools in earthquake zones to be built with such shoddy materials that they fall down on the children, and baby milk to be sold that has so many dubious additives that it kills children.
But if you had to pick which economy had the biggest problems at the moment it would be a brave person who would choose China ahead of the UK.
The UK has a massive balance of payments problem, a huge dependence on a banking sector that has lost its all important reputation for competence and honesty, and a dangerous reluctance to use the power of government to guide its economy. Cameron & Osborne clearly think the UK is so lacking in technological capability that there isn't an organisation or company in the country that could build and run a nuclear power station. Equally clearly they think that the state run Chinese nuclear industry could. They might like to consider the consequences of letting China get even further ahead of the UK technologically. And they might like to think a bit longer about the extreme risks involved in nuclear power. Particularly when you put the contracts in the hands of Chinese companies with such a dreadful track record on health and safety.
Maybe someone could replay for Osborne all those pictures of the Tianjin chemical explosion followed by those from Chernobyl before he gives out the contract! He might then take a moment to ponder what UK industry could achieve if he followed the Chinese example and applied a bit of intelligent state direction to the wild excesses of the free market.