China: A Tale of Two Economic Theories

[Valin]

Via Meadia:

Walter Russell Mead

8/13/12

 

It was the best of times, but it may soon be the worst of times for the Chinese economy, says Tyler Cowen.

 

Subscribers to the Keynesian school of economics think China’s government can solve its economic problems:

 

Keynesians would argue that Beijing has the tools to stoke aggregate demand. It could, for example, adjust interest rates and bank reserve requirements, instruct state-owned banks to maintain lending, or deploy some of its $3 trillion in foreign exchange reserves. The government also appears to have many shovel-ready construction and infrastructure projects that could help the economy glide to a soft landing and then bounce back.

 

But Cowen thinks the more pessimistic Austrian school of economics provides the more prescient view. The Chinese government has been intervening in the economy for decades, subsidizing exports and manufacturing through currency intervention and loans and building massive infrastructure projects, including completely new, still-empty cities. This artificial boom can’t last, according to the Austrians:

 

(Snip)