Should the Chinese Model American Capitalism?

Should the Chinese Model American Capitalism?

Maybe I'm not as surprised as I should be.  According to a recent Business Week commentary, "China Rethinks the American Way," the Chinese no longer look at U.S. corporate managers as role models.  After all, much of the responsibility for the financial implosion of 2008 lies with reckless U.S. investment managers.  (The Chinese ignore the fact that fault also lies with poorly conceived government policies that laid the groundwork for the financial collapse.  For a thorough discussion of that aspect, see Lawrence White's Cato briefing paper, "How Did We Get Into This Mess?".)

But the Chinese frustration with America apparently goes beyond just our financial sector.  As portrayed in the column, there's a growing nationalist ferment in China, and American cultural and economic values are being attacked.  A book recently published over there called "China is Not Happy," calls for a "conditional split with the West," where China asserts its independence militarily, diplomatically, and of course economically.

Personally, I don't much care whether China models our economic and political system or not.  If they think they can create enough wealth for a billion people through their own version of capitalism, then I predict no amount of foreign counseling will change their minds.

But the clearer thinkers in the Chinese government surely must understand this:  China today can no more separate its economy from the West than we can separate ours from China.  If the recent economic morass demonstrates anything, it is that the world economy is increasingly integrated.  Political attempts to isolate either economy will inevitably lead to problems on both sides of the Pacific — starting with the fact that China's newfound wealth relies heavily on exports to the United States, and inexpensive imports from China have helped keep U.S. inflation in check this decade.  (An interesting analysis of the American-Chinese economic relationship can be found in Ted Fishman's 2005 book, "China, Inc.".)

Moreover, the Chinese are still in the very early stages of their market development.  Their centralized economy has for decades stymied their ability to create wealth, which is why the authorities are hyperfocused on building and maintaining an export-driven manufacturing base.  But despite their success in creating a thriving manufacturing belt which can generate both low-cost and high-tech products, the Chinese have a long way to go to create a self-sustaining economy.  Noticeably absent is a capability to innovate in the area of advanced technologies, which is why the country has bent over backwards to lure innovative American and European businesses to its shores.

The fact is, despite Chinese capitalism's rise over the past decade and all the flaws of American capitalism, the latter remains the greatest wealth-generating machine the world has ever known.  The Chinese don't have to emulate it, but they (and the rest of the world) will reap the benefits from it when our economy kicks into gear again.

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