Outwardly, everyone condemns the Chinese government, run by the Chinese Communist Party (CCP). Their society is authoritarian and “anti-democratic” while in America, as the song goes, “at least I know I’m free.”
Yet, no one seems to believe freedom leads to greater economic prosperity or human happiness. Inherent in every political discussion about China is the idea that authoritarianism produces better results and the United States is handicapped by its devotion to freedom. Americans enviously note that when China’s central government decides to do something, they are not encumbered by adversarial processes inherent in the US Constitution.
This is also the assumption underlying the trade wars. China has “taken advantage of” the United States by being more economically mercantilist while the United States has foolishly allowed its industry to migrate to China and other countries because of relatively freer trade policies.
That is demonstrably false. Manufacturing still comprises about the same percentage of real GDP as it has throughout the post-WWII period. The problem with American manufacturing isn’t the amount produced but what is produced. American manufacturing is far too skewed towards producing weapons and other items without utility, misdirected by a monetary system that allows resources to be directed towards unproductive ends.
The emergence of China as an economic power certainly provides the United States new competition, but that emergence is not a result of China’s authoritarianism. On the contrary, China’s economy has grown exponentially in the past thirty years because it is significantly less authoritarian, especially in the economic sphere, than it was previously.
Americans never seem to ask themselves why a country with four times the population didn’t have a much larger economy than the United States during the twentieth century. The answer is simple: communism. China had as authoritarian an economic system as has ever existed in human history. While they are by no means laissez faire now, they are far more “capitalist” in relative terms. This is the key to their success, not the authoritarianism that remains from the communist years.
The United States, on the other hand, is relatively less free than it was at almost any time in its history, with the exception perhaps of the 1930s and 40s. And its trajectory is towards more and more government intervention into the economy and life in general.
The United States became the most powerful economy in the world for the same reason the United Kingdom, comprised of two tiny islands with relatively small populations, was the most powerful before the United States. It had the freest markets. It was the most “capitalist,” for lack of a better single word.
The United Kingdom squandered its wealth trying to maintain a vast global empire that gave its government prestige but drained its wealth and led it to debauch its currency. Sound familiar? Empire may be made possible by capitalism, but it is not an inherent part of capitalism. Empire is anti-capitalist. Capitalism is about property rights and voluntary exchange. Empire demands taxes and misdirection of capital into production of arms and other imperial necessities that do not add to the happiness of the taxpayers.
Weapons, soldiers, and military infrastructure beyond what is needed for defense have no utility. Sooner or later, the productive part of the imperial economy can no longer afford to subsidize the unproductive part.
This has been the end of every empire in history. It is also the reason the USSR had a much more painful transition from communism to capitalism than China—it had an empire of other communist republics draining its already misdirected resources.
While the global standing army the United States maintains is a significant reason for its economic decline, it is not the only reason. In all areas of economic and social life, America has become less free with each passing year.
Americans have become accustomed to its government surveilling its phone calls, e-mails, and financial transactions. The New Deal regulatory structure, under which bureaucrats in executive branch agencies make most of the laws by fiat, rather than Congress in an adversarial process, continues to metastasize. Its entitlement programs, designed to cover the last few years of life, now demand the resources to cover decades of life beyond retirement.
Democracy was not the key to American freedom; it was limited government.
The privilege of printing the world’s reserve currency has done the most damage to the dynamism of the American economy. All inflation leads to malinvestment, but the inflation made possible by the global dollar standard has led to bubbles that very well may comprise half of U.S. GDP.
Certainly, there are millions of people employed in the cartoonishly bureaucratic education and healthcare industries who are adding no value to consumers. As guaranteed student loans have redirected trillions towards the education industry, millions of administrative jobs have been added to the system that aren’t necessary to teach reading, writing, and arithmetic. Meanwhile, the education results continue to decline.
Healthcare is in much the same shape. That part of the industry on the cutting edge, where profits and losses are still available, which operates under the most capitalist circumstances, continues to produce miracles of innovation. But the rest, the heavily subsidized, increasingly bureaucratic part, is sclerotic and in decline.
In many ways, routine American medicine is still practiced the way it was in 1970. Why? Because it has no reason to improve. It’s on the dole, with half of all healthcare spending comprised of government spending. There is no reason to improve medical or business practices when your income is guaranteed by taxpayers. See the DMV.
Just ask yourself why you’re still asked to fill out multiple forms capturing your insurance information when the office already has it. In fact, they wouldn’t even give you the appointment until they not only got your insurance info but verified your eligibility with the insurer. But they still ask you to write it down on two different forms when you get to your appointment. Non-subsidized industries cannot afford inefficiencies like this.
If America wants to regain its economic power in a post-dollar dominated world, it must stop imagining China’s success to be a product of its remaining authoritarianism.
What made America richer and more powerful in the past was being significantly freer than any other country in the world. And by “freer,” I do not mean more “democratic.” Democracy was not the key to American freedom; it was limited government. It was the fact that the vast majority of American economic and social life was not up for a vote. Rather, most decisions were left to the discretion of the private sector and the individual.
What made China destitute during the same period was its complete lack of freedom. There was nothing else keeping China from building the economy it has today. But since the late twentieth century, America has headed in one direction on the freedom scale and China in the other. It is not unreasonable to ask whether they haven’t now met at a point far lower than America’s freer past.
There is no reason for Americans to fear China eventually having a larger economy than the United States. That would be the natural result of having so much larger a population. But if America wants to regain its economic power in a post-dollar dominated world, it must stop imagining China’s success to be a product of its remaining authoritarianism and get back to what created America’s wealth in the first place: far more limited government, freer markets, and maximum individual liberty.
The post Why China Is Surpassing the United States Economically was first published by the Foundation for Economic Education, and is republished here with permission. Please support their efforts.