A Colbert Report: The Chinese Revive a 17th – 18th Century Economic Philosophy?

 

Nassau, Bahamas:  Chinese Dignitary arriving at Junkanoo  1/2/12
Nassau, Bahamas: Chinese Dignitary arriving at Junkanoo 1/2/12

          What are the Chinese up to in Africa when they buy up natural resources and agricultural capacity?  Why are they doing in the Bahamas, a ‘brass plate’ tax haven and tourist destination?

           In an enlightening piece in The Boston Globe for July 14, ‘Colbertism failed in France. Will it work in China?’, old friend Jake Soll, a USC history professor, looks at Chinese acquisitions and sees the principles personified by Louis XIV’s first finance minister, Jean-Baptiste Colbert (1619-83).

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          Colbertism is what we learnt in economics and early modern history to disparage as ‘mercantilism’.  Says Jake:

Mercantilism is the idea that the world’s supply of gold and raw materials is finite, and that whichever country dominates these supplies will, in turn, dominate the world economy.  And that entails a state managing its economy directly.

           If this is what China is doing – and, I agree with Jake, it is – has it swapped a failed 20th century dogma for a failed 17th century model?  With a major reservation about China’s ability to control human capital, he sees China succeeding where Louis XIV didn’t.

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           The French system worked like this:

 …Colbert created a program of state-sponsored colonies, scientific academies, industries, and monopolies, while taxing and, sometimes, forbidding imports of foreign goods.  The idea was to amass natural resources, close the French economy to outside competition, and ultimately dominate the world export market.        

 Sound familiar?  Jake continues:

Colbert’s administration issued strict rules and regulations, and the state became a vast industrial machine. Colbert built entire ports and ship-building cities, cloth and porcelain factories, and giant infrastructure projects, like the Canal du Midi, which created a national transport network for internal trade.

           Colbert’s system ended badly, but as Jake describes it, the United States, as well as China, should consider its lessons:

…Most of his projects failed to make profits and compete with the Dutch. Colbert had to force merchants to invest in the money-losing East India Company.  Millions of livres disappeared into unprofitable, state-subsidized factories, and many of Colbert’s rules and regulations stifled industry.

           Here a free marketeer would interject that government should never try to pick winners.  Progressives might respond by citing the bailout of the financial services industry that remains ongoing.  Leaving aside the US government’s transportation and IT successes, which almost anyone can cite, one wonders what the failure rate of business lines for Fortune 100 companies since the age of corporate gigantism began around 1900.

           How many of those failures resulted from top management trying to ‘pick winners’?  Isn’t that what they’re supposed to do?  How is that different from government?

           American corporations have their legal, cultural and organisational roots in 17th century British government.  Their successes and failures – large corporations’ and governments’ – in ventures will, therefore, have more in common than not.

          And, there will almost always be more at work than a simple inability to pick a successful line.  The Depression and World War II were as responsible for delaying television’s success to the 1950s as the development of the technology.

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           Omniscience never characterises regimes – or companies – based on omnipotence, whether Louis XIV or Stalin occupies the top box.  The quest for it leads, inevitably, to a key flaw in French mercantilism:

 …Colbert saw economic success as tied to state secrecy and absolute power.  He organized a police, spying, and censorship network….  Even before the mass expulsion of Protestants in 1685 [two years after Colbert’s death], many businessmen, skilled artisans, and influential thinkers fled to the freer air of Holland, England, and the British North American colonies….

           The lesson here, which is clearer yet in Jake’s fine book, The Information Master: Jean-Baptiste Colbert’s Secret State Intelligence System (2011), Americans should consider as they tighten clamps on information and speech.  Whether the Chinese have learnt it is his big question.

           From my perspective, more limited than Jake’s, I think they have.

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           One lesson the Chinese have learnt is the one traditionally cited for the pathetic end of the Sun King’s reign.  Says Jake:

Louis [XIV] spent scarce state funds on frivolous continental wars and building pleasure palaces….  French industry was not profitable enough to support itself and endless war.

           Wars of choice, like Louis’s War of the Spanish Succession (1701-14), have sapped neither Chinese coffers nor its military nor its civic spirit as they have America’s since 2001.  They have not been so smart about secrecy and suppression.  Neither have we.

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           Occasional visits to the Bahamas over the past five years have suggested to me the Chinese have gotten Colbert right.

           Banking on the Bahamian government’s desperate need for tourism and gaming revenues, China has, for instance, financed the US$3.4 billion Baha Mar resort and the infrastructure to deliver tourists from the airport.

           These are investments, not foreign aid.  As a condition for the financing, over 8000 Chinese workers will build Baha Mar with mainly Chinese materials.

          From a distance, it would seem China has diversified its portfolio.

           It has gained leisure and gaming-dependent interests.  It has become an important, if not essential, economic prop for a ‘brass plate’ economy – a tax haven which gains it access to the shadow world economy.  All in an island nation with container facilities suitable for transhipments 1200 miles from Panama and 200 miles from Miami.

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           In 1936, as the Great Depression ground on, John Maynard Keynes noted:  ‘The mercantilists were the originals of “the fear of goods” and the scarcity of money as causes of unemployment….’[1]

Mercantilists were conscious that their policy would, as Professor [Eli F.] Heckscher puts it,”kill two birds with one stone”.  “On the one hand the country was rid of an unwelcome surplus of goods, which was believed to result in unemployment, while on the other the total stock of money in the country was increased”, with the resulting advantages of a fall in the rate of interest.[2]

 In the Bahamas, the Chinese have used their stone effectively.

           Why is it important that China has invested in the Bahamas?  Again, Keynes:

It is impossible to study the notions to which the mercantilists were led by their actual experiences, without perceiving that there has been a chronic tendency throughout human history for the propensity to save to be stronger than the inducement to invest.  The weakness of the inducement to invest has been at all times the key to the economic problem.[3]

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           Keynes, the greatest of the worldly philosophers, could have gained the title from this insight alone.

           I may be blinded by the disinvestment in America (as I last wrote about here) that has characterised American public policy since Ronald Reagan took office.  Democrats and Republicans alike have bowed, scraped to the savings god though the Republicans never implemented austerity except when the Democrats held the executive branch.

           In my frustration and rage, I may see the Chinese government as wiser than mine where it comes to wars of choice and investments with strategic objectives.  ‘For now we see through a glass, darkly….’

          Whether or not I have given the Peoples Republic of China too much credit for foresight and shrewdness, I am certain Keynes and Colbert hold the answer to our travail.

           Without government-induced, government-guided investment – and a lot of it committed over a couple of generations – the frayed edges of our civilisation will become an unraveled skein.

  

Notes

           1.  John Maynard Keynes, The General Theory of Employment, Interest and Money (New York: Harcourt, Brace & World, 1936) [photo. reprint 1997], p. 346.

           2.  Id., p. 347.

           3.  Id., pp. 347-48.