Chinese model of the economy of future

As it turns out, mechanisms of economic crisis prevention really exist. At the heart of these mechanisms lays the doctrine of self-destroying economy, elements of which are already introduced in China. What is the main point of this new model of the Chinese economy? What are its political, economic and psychological consequences?

1. Threshold of a global crisis

 

        Today a lot of specialists agree that world economy approached the critical point of its existence. Apartments, houses, cars, cloths, food, mobile phones, computers and other things are produced in such a great amount that soon their production growth will stop or will be too small. What the world should do then?

        Globally there are two ways out of such a crisis of overproduction. The first one is connected with the appearance of new goods and services, and therefore, of new markets; rapid development of such markets re-start the economic spiral and economic growth continues. At the heart of the concept “economies of innovations” lays hope that continuous generation of innovations will run new markets infinitely.  The second way out is connected with artificial destruction of existing goods. War appears to be classic expression of such an economic radicalism. Destroyed values are subject to recovery, and this leads to new economic spiral coil and postwar revival. However today the problem is that the first way out of the crisis is close to exhaustion, because mankind invented everything that is possible and the second way out is not so attractive to people because of its frank brutality. Is there another way out of the coming global crisis? And could the economy exist and evolve normally in the condition of total absence of significant economic growth?               

The situation is intensified by other circumstances – today physical and ecological limits of economic growth bother a lot of economists. If every person on earth has a big  house (apartment), car and a possibility to travel, our planet will not be able to withstand such an anthropogenic load.  In due time Immanuel Wallerstein wrote that so far only 5-10% of the world population could make a travel just for once. However, today tourism is extremely destructive, if ecosystem reboots. And this happens even taking into account that 80% of the world population is totally deprived of the possibility to travel [1, page.149]. And everything is clear about spot housing development and car maintenance.

 

2. Doctrine of self-destroying economy

 

        Theorists and practitioners look for an alternative to spontaneously growing economy. Society has the awareness that the era of unlimited economic expansion, which was described in theories of Adam Smith and Karl Marx, ended, and that the world, which was perfectly reflected in Tomas Malthus’s theory, exhausts the planet’s resources.

        How is it possible to cope with Malthus’s overpopulation in the 21^st century?

        The answer lies on the surface. It is necessary to move on to globally regulated and totally planned economy, where the production of new goods would go hand in hand with the destruction of old material values. In this case there is no destructive accumulation of produced products in the system; it transforms into the form of permanent substitution and renewal of goods. By that the growth of new production is gained by “killing” and utilizing of old goods. In other words, in order to become immortal, system as a whole (civilization) should methodically, systematically and timely “kill” its separately “aged” parts (markets).

        In Russia this concept is more actively advocated by Igor Lavrovsky, who pays attention to the fact that the threshold of this new approach already exists in some  branches of the economy [2, page.141-142]. For example, the company «Intel» always upgrades its chips, also adjusting advertising and trading campaigns: the directory of the company waits till the old chip developes the market, and after this they launch the new version. The same policy is applied by software developers. The actions of these developers don’t leave choice for people – after a while some types of software service can’t be run, something can’t be read, something doesn’t fit, something can’t be installed, etc. It results in purchase of the new computer while the old one physically is working.  Something similar is happening when the programs of recycling of old cars are launched; the main point of this program is that consumers receive cash bonuses and special benefits for refusal to use the vehicle.  The same mechanism is applied when depreciation benefits for new equipment are introduced; it happens when keeping old technologies becomes unprofitable.

        Of course, these are the first and primitive consequences of the appearance of the new and self-destroying economy. Moreover, for consumers and producers all approaches of its initiation are voluntary or almost voluntary. Meanwhile more radical option can be proposed, when the renewal of goods goes invariably in accordance with legislative rules and state plans.

        We have to say that the idea of periodical “unloading” of material baggage accumulated by mankind has its deep analogs in the circulation of capital. So, the meaning of capital is infinite accumulation and extension. However, the appearance of crisis is connected with over-accumulation of capital and with inability to use it effectively.  In such cases capital market is “cleaned” by destruction of its specific part. This destruction is done by inflationary devaluation of cash assets, by commercial failures of one companies and decrease in the capitalization of others.  In any case extra capital should be liquidated; otherwise crisis is becoming permanent. Now the question is about whether this trend will cover cumulative wealth of civilization.

        In order for the doctrine of self-destroying economy to transform into active development instrument two conditions for its realization are needed – global application of the principle of set life cycle of material goods and stabilization of population size at a reasonable level. How realistic is it?

 

3. China as an ambassador of new economy

 

        At first sight, doctrine of self-destroying economy could seem naive and unrealizable in practice. At least, in the short term. However, this is not true. Today in China some norms are already established, and with these norms you can say that the world is on its way of development of new economic model.

        Without a close look at the organization of the Chinese economy, we will point only on such its features, which are essential in the context of our topic. Herewith we will focus only on three very symptomatic regulatory examples.

        The first example is liquidation of the traditional Institute of Real Estate. According to current practice of government regulation, there is no private land property in China. This means that no one could buy it or sell. If the house is under construction, private real estate development company can rent from the government one specific plot of land for 70 years. Afterwards apartments in the house built on this plot of land would be sold to individuals, who will receive the right to sell, devise and give their apartments   only within these 70 years. While the apartment is getting old and the time to its “death” is decreasing, its value, generally, is reducing. When these 70 years pass, the house is demolished and the new house is built in accordance with valid for that time tech norms. Residents of an old house are moved out without getting an alternative place to live. It means that each citizen, who lives in these  apartments, should buy the new apartment on time.

        Literally such measure seems to be revolutionary, because it introduces nationwide standard of real estate update – maximum 70 years. Such standard opens great opportunities for state housing fund update. Moreover, each citizen of China will have to take care of housing, even under condition of inheriting the apartment. Therefore, Chinese government forces its population to be economically proactive.

        Of course, such a drastic measure goes in line with a sound policy of low interest mortgage loans. Aside from this, 70 years’ life cycle of real estate leads to the appearance of totally amazing housing market, where you can buy an apartment for a short period of time (5-10 years), left till its “death”,  and for not so high price.

        Second example – regulation of automobile’s life cycle. According to Chinese law, automobile of domestic (Chinese) production should be utilized in 10 yeas after its production. For vehicles of foreign producers the favor of 15 years was made. An alternative method to determine the degree of wear and tear was created – it should be done depending on its mileage. However, this method could reduce normative period if the vehicle is operated at a too high rate; but the maximum lifetime of the vehicle, even if it was standing in a garage all the time, is limited to 10-15 years. Of course, there was no compensation for the recycled cars.

        There is no need in explanation of the fact that this norm opens great opportunities for the update of the car park of the country. For housing and for cars this update for sure would lead to the growth of their quality due to new construction and production technologies.

        Third example – valuation of burial date. We have to say that in Chinese cities practically all cemeteries were eliminated; today dead people are cremated.  However, high-income people possess the possibility of elite burials. For example, not so far from the city Luoyang, close to the legendary Shaolin Temple, there is one religious place named Talin, famous as “Forest of padogas”, which is used as cemetery. But such burials are valid for 20 years, and after 20 years the grave is “updated” for another client. Thereby in China the place of last human rapture lacks its integrity and complies with the general rule of permanent updates.

        So China is on its way of global order of consumption. Today this system is already introduced in housing and automobile markets. And, it seems that the Chinese government won’t stop here, it means that in the near future the doctrine of self-destroying economy could take a mature shape.    

        The consequences of this system of economic regulation are truly epochal. First of all, people’s mind radically revises the role of accumulated wealth in the direction of its devaluation. The dream of the majority representatives of the traditional capitalistic society in the form of their own house is totally destroying. Even under socialism of the Soviet Union the dream of an ordinary man comes to the triad “apartment-car-house”. Chinese practice crosses out such aspirations. Mercantile dreams are replaced by the new philosophy, according to which life is a continuous renewal. Secondly, the attitude toward the past and the history is revised. Continuous renewal of the housing stock and the technology park of the country leads if not to denial of history, but, at least, to showing less interest in its material artifacts. We can say that in the minds of the nation very curious “turn” of the arrow of time takes place – from the past to the future.

        At a first glance, it may seem that such a cruel violation of traditional capitalistic values by the Chinese authorities should result in the growth of the public discontent. However, as it turns out, Chinese population calmly perceive so radical innovation and don’t show any dissatisfaction. New system didn’t lead to the activization of people’s emigration from the country. Moreover, it didn’t scary those who left the country and now is returning back to China. It seems that a modern person psychologically is ready for introduction of the doctrine of self-destroying economy. All this allows us to say that Chinese experience could be repeated by other countries too.

 

 

 

 

4. Revolution in political economy

 

        What does the described Chinese experiment mean from the point of view of political economy?

        Here it is necessary to look at two aspects.

        The first one is erosion of the concept “real estate”. Real estate as a long-term asset, sometimes increasing its value, stops to exist. According to the Chinese regulatory doctrine, an apartment and a house turn into durable commodities. In the life of Chinese people these new commodities don’t differ from televisions and refrigerators. And like any other durable commodity which looses its value as it starts to deteriorate physically and morally, the apartment with a house continuously deteriorate and decrease in price too.  And as the refrigerator in the end of its lifecycle should be thrown out and utilized with the following replacement with the new one, so the house should be “thrown out”, broken and replaced with the new one. At the same time a person is not compensated for the cost of the refrigerator and is not given the new one, the same situation happens with apartments – no one automatically receives the new apartment, a person should take care of it by himself in advance. The difference between apartment and a house is entirely quantitative – lifecycle of the apartment is longer than of the refrigerator.

        Such an equalization of housing and an ordinary durable commodity such as refrigerator leads to totally new economic philosophy. The absence in China of the land market is supplemented with the absence of the real estate market. Instead of the real estate market appears the housing market, which represents the sum of new and “secondhand” apartments.  Such market doesn’t differ from the market of new and secondhand clothes. Moreover, even refrigerators and clothes don’t have strictly regulated period of physical deterioration, whereas housing market has it.  In addition to this, automobiles as a serious durable commodity get extra limitation of a lifecycle to 10-15 years. Such system has a negative impact on the institute of inheritance, because Chinese people can inherit only “one part” of the lifecycle of the parents’ house. 

        Another consequence of this system is connected with the impact on rent relations. Impossibility to buy and sell the land leads to the impossibility of its rent, and hence eliminates the phenomena of the land rent. All rent remains in state treasury. Moreover, this system affects negatively the institute of rentier. For example, theoretically it is possible to buy several apartments and then lease them, but it involves psychological discomfort, because the owner of the house should always remember about the time limit of his ownership.  Roughly saying, you can become the rentier only for a short period of time, but not for a long-term.

        Finally, the system of housing renewal stimulates life activity of people, because simple calculations show that with the apartment’s lifecycle of 70 years all generations would have to buy their own apartments. For example, a person who got the apartment at 25 years old and has been living there for 55 years, could not give this apartment to his son, who would have to buy by himself the new apartment; at best he could inherit it to his grandson. If the generation gap is 30 years, grandson will get an apartment with the remaining life span of 35 years; this period of time is not enough.  Actually when 5-10 years are left till the end of the apartment’s lifetime, grandson will also have to put some efforts in order to but the new apartment. 

        Such a diaphoretic system of housing puts an end to a welfare mentality and forces practically each person to go a hard way of earning money for future accommodation. This system, which was introduced somewhat artificially, represents infinite cyclical demand stimulation for building services.

        Second aspect of this system is a shift of focus from the concept “stocks” to the concept “flows”. As it is known, values of two types appear in the modern economic science – stocks and flows. For example, one of the main economic indicators together with the GDP, being an indicator of flows, is national wealth, being a cumulative indicator of stocks. However, continuous renewal of a material real estate fund of the country leads to the fact that new construction will not result in the growth of the national wealth; it will lead to its qualitative renewal, but not to simple quantitative growth. By that many traditional economic concepts and indicators loose their meaning. This has one more negative impact on old economic ideology.

        In general, creation of the Chinese model represents a logic step in theoretical western discussions about social justice. For example, American billionaire Warren Buffett, making a report in 2007 before the Senate about changes in the inheritance tax rates, said that huge fortunes should not be inherited, because it increases social inequality [3]. Chinese response on such an offer turned out to be unexpected – to limit real estate inheritance.

 

5. Why exactly China?

 

        All mentioned above leads to a logical question: why exactly China turned out to be at the forefront of a civilized experiment of building the new economy? Why USA fell behind China? Doesn’t it mean that China is doing something wrong and choosing the wrong direction?

        Answer on these questions is fairly simple: the problem is overcome by those for whom this problem is too pressing. China, being notable for its huge over-population and becoming the world factory, run in physical limitation of its economic expansion. Shortage of land leads to the fact that Chinese cities grow up and not in breadth. That is why in China houses are built as skyrockets and not as cottages.  If to freeze housing for an indefinite time, over some time there will be no place for construction. This situation resulted in introduction of unprecedented norm of the housing renewal without any social commitments from the government.

        This standard, involving the eviction of the residents from “dead” houses, is totally understandable. The government physically can’t provide half billion of Chinese people with free housing. The only solution is to force each citizen to take care of his future in advance. At the same time each citizen will be given the opportunity to get a long-term loan at a low interest, and this will also warm up the credit market and the capital market. Such measure kills three birds with one stone: eliminates physical limitations of the economic growth; leads to the quantitative renewal of the economy and society; continuously supports the economy in the condition of a moderate “heating”.  

        Nor USA, no European countries, nor even Russia are able to introduce such radical measures, because they didn’t reach the physical limit of the economic growth; they still possess soil bank.  It appears that in this sense China left behind the other world and became a total leader in building a totally new economy.  It seems that the most developed countries for a long time will be very slow in introducing globally the doctrine of self-destroying economy.

        There is another self-evident reason of an unusual Chinese leadership – socialistic ideological society with the communist party at the head. For such country it is easier to “smash” or to “crush down” the institute of private property in comparison with the countries where private ownership and land ownership are sacred.

        China also has some accidental circumstances, which support the new system. For example, a huge demographic imbalance in favor of men could be seen for a long time in the country. This could be explained really easily: working hands, especially men hands, were needed in villages; after the wedding son stayed at parents’ house and took responsibility of maintaining them, whereas daughter left the family and didn’t support her parents. All this led to the fact that during pregnancy at early stage parents after determination of the child’s sex were getting rid of girls and keeping boys.  Today this situation has changed and has led to total inversion of values. Shortage of women resulted in huge competition for them among men. Today parents’ permission to marry their daughter means that future husband has an apartment and a car; otherwise all negotiations automatically end. By that earlier appeared demographic imbalance works in favor of the doctrine of self-destroying economy. A man, who wants to have a family, automatically has to make Herculean efforts in order to buy a car and an apartment, which in future he will have to renew. Thereby in China with some civilized lag forms very cruel economic model of a family. By the way, today due to such social changes in Chinese families a “reversed” desire prevails – everybody wants to have daughters, because they are in a great demand and there are no problems with them, whereas son carries extra costs, because his parents will have to give him a start in life so that he could start his own family.   

        Mission of China as a pioneer in the world of new economy is also connected with a specific Chinese ideology. We won’t mistake saying that in the Chinese public mind dominates the principle of Homo Economicus – An Economic Person. This manifests in peaceful China’s exploration of many areas of interests. For example, some analytics believed that China in the near future would dare to join Taiwan in an armed way, however their expectations didn’t realize: China “joins” Taiwan in a peaceful way, building close relations with business-elite and political upper circles and also increasing mutual trade exchange.

        The more interesting is China’s relationship with Tibet. In general Chinese people realize that Tibet can separate sooner or later, but today can be seen not so much the desire to keep Tibet by military force, as the desire to “squeeze” Tibet economically before this moment comes. Chinese logic approximately looks like this: barren Himalayas are useless for China; only economic topping of Tibet represents true value. And according to Chinese people, Tibetan medicine is this economic topping, and not the tourism.  That is why today China started a great campaign of teaching the doctors some methods of Tibetan medicine, so that to open on the continent clinics of Tibetan medicine and to direct the world demand on these types of services to these medical centers. Now fantastic plans are developed for such not so big clinics - in a year to gather 80 thousand clients from all over the world. It means that with such an expansion and with Chinese people winning the market Tibet at the time of its separation will not be of any economic interest for China, because its economic base, being subject to commercialization, will be transferred to the territory of China. Such a combination of economic pragmatism and strategic Chinese mentality leads to unexpected decisions, to which also refers the formation of self-destroying economy.

 

6.  Will China keep its civilized leadership?

 

        Now it is difficult to say if China maintains its leading positions in the formation of the new economy or not. However, the main result of its social experiment consists in that this experiment became an example of new architecture of the national economy. It appears that in future we will witness the process of imitation of the Chinese social innovations in various countries and with different adaptations. And likely this second experiment would be more successful than in China.                                                                    

        Previously we haven’t analyzed the Chinese model of self-destroying economy from the position of “good-bad”. Objectively to do it is quite difficult, but it is obvious that the system introduced by Chinese people could surprise and shock, but not to please and amaze. For the majority of people with western mentality such system is totally unacceptable, if not to say more – it scares and discourage. Unlikely such hard version of new economy is going to function without failures and contradictions. The model behavior of the government in the situation when many people would not be able to save money for a new apartment on time, is not entirely clear. The question about business-motivation of people who don’t have possibilities to buy complete property remains open. All this puts under question the Chinese experiment.

        China unlikely could maintain the role of a social reformer. They have too many problems. First of all, it is a shortage of land, huge over-population of the country, high presence of rural population, ineffective transition to the western way of life. There is a feeling that China has started to put into life the doctrine of self-destroying economy too late, when its internal discrepancies in development reached large sizes. It is possible that softer and more effective model of the new economy would be introduced in such countries where over-population has not reached its peak. And it seems that the future will be in hands of those who could introduce on time this new system. Otherwise, permanent crisis with all the following consequences will happen.

        We consciously leave aside very serious question about the fact that the doctrine of self-destroying economy organically is connected with production of “disposable goods”.  It is true that the reduction of the product’s moral lifecycle leads to senselessness of the extension of its physical lifetime. From here we can make a conclusion that it is unprofitable to repair the broken technical device, it makes more sense to replace it with the new one. Very often it is impossible to repair the broken photo camera or video recorder – it should be thrown away and the new ones should be bought. But then the goods themselves should be less expensive and simpler. We are witnessing now the tendency, when, for example, metallic automobile details are replaced with the plastic ones. This picture can be seen in the aircraft manufacturing too. To what will it lead in the long run?

        And what if the ideology of “disposable goods’” production will be carried on to housing construction? Till now houses were built in view of maximum physical “survival”; stone buildings could stand for centuries, that is there always has been some strength reserve. But if now it is not necessary and in 70 years even a very good house is destroyed, why do meaningless expenditures on the prolongation of this term exist?  Will the mankind receive quite chip, but short-lived housing?  And can we consider this situation normal?

        These questions have no answers. It is possible that the absence of economic crisis will call for some sacrifices. Maybe on the whole these sacrifices would be justified. But it will be another world, not the one we live in now.

 

References

 

        1. Wallerstein I. Historic Capitalism with Capitalist Civilization. Moscow: KMK Scientific press Ltd., 2008.

        2. Lavrovsky I.K. Democracy and market. Moscow: Kontako, 2010.

        3. Ohio N. Billioner Buffett opposed inheritance of fortune// «Vedomosti», 15.11.2007 (http://www.rb.ru/topstory/economics/2007/11/15/160142.html).

 

COMMENTS:

THERE ARE NO COMMENTS YET.