Tuesday, January 3, 2012

China on the verge?

It has become increasingly common to suggest that on top of the European debacle and the sluggish recovery in the United States, China might be on the verge of a collapse, and with it the last bastion of economic growth in the world economy would also be gone. Not only the center is stagnant, but also the periphery of the global economy is very fragile. But the probability of a Chinese slowdown is greatly exaggerated.

Paul Krugman, who has been correct about the need for fiscal expansion in the United States, and about the European Central Bank (ECB) mismanagement of the Greek crisis, for example, has suggested that China is in the middle of a housing bubble that can burst at any time (see also Jayati Ghosh and C. P. Chandrasekhar here for a similar, but broader view of the dangers in 2012). This view insinuates that growth in China is fundamentally dependent on domestic demand, but that the sources of the expansion are fragile. It, further, suggests that China now looks very similar to the US before the Lehman Brothers crisis in September 2008.
Read the rest here.


  1. The trouble with the "China is on the verge of collapse" view is that the Chinese leadership seem to understand well what happened in Japan in the 1990s after the collapse of their real estate bubble: deleveraging and debt deflationary dynamics.

    I think they well act quickly to avert it: this is the opinion of Richard Koo (the expert on balance sheet recessions) whom the Chinese leadership have consulted on this issue.

    Listen to Koo's comments here:

    Other links


  2. Do you think the Chinese have read Lerner and understand functional finance, or do they just want to fuel growth so badly that they will do whatever it takes to keep the engine humming?

    In either case, perhaps the west could learn something from the Chinese (other than suppressing dissent).

  3. Unrelated to this post, but I am very grateful for your thoughts on the "Garegnani" thread, and have one other question:

    What do the Sraffians make of Keynes's marginal efficiency of capital concept?

    I have recently read this:

    Robinson, J. 1979. “Garegnani on Effective Demand,” Cambridge Journal of Economics 3: 179–180.

    And was surprised by Robinson's remark:

    “[sc. Keynes] made a fatal mistake in offering a quasi-long-period definition of the inducement to invest as the ‘marginal efficiency of capital’, that is, the profit that will be realised on the increment to the stock of capital that results from current investment and, still worse, identified the profitability of capital with its social utility. This was an element in the old doctrine from which he failed to escape."

    Do you have any Sraffian/personal views on this?


  4. Another view (income distribution) on China, India and other BRICS can be seen here:


    @Lord Keynes,
    Sraffians and Keynesians both reject the MEC for its neoclassical/marginalist character and being based upon the widely discredit concept of capital as factor of production.
    The disagreement between some Keynesians (Joan Robinson) and some Sraffians (Garegnani) is the concept of prices of production as”centers of gravity " in which Garegnani believes and Robinson (and others Sraffians as Roncaglia) not.

    The differences and possible points of agreement between Sraffians and Keynesians can be seen here:


  5. CMD they don't need to read Lerner to get that government spending generates growth. By the way, I don't think politicians in the US don't know that, the thing is that they are not trying to get growth, just more money to the wealthy (Wall Street is doing fine).

    LK on the negative relation between MEK and the interest rate, which comes from the marginalist theory of distribution, the problem is that it means that there would be a rate of interest low enough that would produce full utilization of capital (a natural rate, something that Keynes said he wanted to get rid of). Mind you he got Sraffa's critique of Hayek, but the capital debates were after Keynes' death. Note that he kept the marginal productivity of labor in chapter 2, but when Tarshis and Dunlop noted that it conflicted with pro-cyclical wages he discarded it in his 1939 paper and suggested that Kalecki's theory was on the right track. So Keynes accepted changes to the GT.

    My views on Sraffa and Keynes (and Kaldor) are spelled out here http://www.econ.utah.edu/activities/papers/2010_07.pdf

  6. Thanks very much for these comments and the paper.

    I will read it with great interest.

  7. Antonio, gracias por el link a tu artículo.

  8. Matías,
    En esa misma revista, un monográfico dedicado a Sraffa, puedes encontrar artículos de Garegnani(qepd), Roncaglia, gente de la Revista Circus etc.


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