Failed Expectations on China Imply Economics is NOT a Science

An open letter to my lifelong economist friend, Rajnish Mehra, co-discoverer of the Equity Premium Puzzle

LA shipping backlog, WSJ

Hi Rajnish,

You will probably disagree with what I’m about to say, as economists were very much behind this idea 20 years ago.  But I think there is enough data now to say unequivocally it failed.

This article https://www.bbc.com/news/business-59610019 posits that admitting China to the WTO was “the root imbalance behind the financial crisis” [of 2009]. 

In other articles, economists have admitted that they knew there would be high job displacement in the US, but thought the US economy was so robust it would easily absorb those jobs elsewhere.  They now admit it didn’t happen.  (I could go on for hours about how that should have been obvious, but my arguments are mostly psychological and cultural, not purely economic . . . people are not numbers in a computer than can or want to instantly move about the country disrupting their families and re-training, and most people don’t have the energy for either after their early 30s)

Impacts from US financial crisis, Wikipedia, note Ukraine very hard hit, also Russia

Countries I visited in 2009-2011 were heavily impacted by the financial crisis even though they didn’t trade directly with the US.  Maybe they traded with the EU, and the EU cut back because it was trading with the US.  I visited Ukraine 4 times, three different parts of it, including areas now held by rebels.  It was the most severely economically depressed.  There was a direct causal link from the financial crisis to the Ukraine fiasco, which continues into the present and now has your interest at last.  With the reasoning above, the root cause goes back to inducting China into the WTO.

Countries affected by Arab Spring, paper by Okere & Enuka, here

The Arab Spring was kicked off by a worker who immolated himself, crying out “I just want to work.”  This was December 2010, and the countries involved might not trade directly with the US, or even China, but with the EU which did.  So that whole mess . . . still going on in Syria and Yemen, and not having produced anything positive in any of them, can be laid back to China and the economists who advised politicians we could handle admitting China into the WTO.

Observing over my lifetime, I’ve concluded economics is an adjunct of politics more than it is a science.  Economists advised politicians that we could survive, even flourish, with China in the WTO, and politicians believed China would liberalize.  Chinese leaders even “said” (with regard to Hong Kong) that China would liberalize, that that was their expectation. 

Xinjiang’s re-education camps – Australian Strategic Policy Institute

But it didn’t.  It is more repressive now than it was in 2001, and getting more so.  Jack Ma is practically under house arrest.  Celebrities are being erased from social media and disappearing from public view.  Student democracy protestors are getting long, harsh sentences in Hong Kong, which can no longer be considered a “one country two systems” situation.  Military bluster against Taiwan grows by the month, and the Chinese military is now financed by all that money they gained in trade.

Taiwan Semiconductor (TSMC) and UMC are both Taiwan foundries

Taiwan, by the way, is critical to the world economy.  As well as to military technology.  Taiwanese companies supply 63% of the world’s chips.  Including the most advanced ones.  The US only 12%.  https://thefederalist.com/2021/11/01/if-china-controls-taiwans-chip-manufacturers-it-will-control-the-world/  My experience with this is personal.  With NASA I had chips made by US, EU and two different Taiwanese companies.  The most advanced and powerful ones were all Taiwanese.  Anyone with half a brain can read my papers and make these advanced chips sufficiently tolerant of radiation to be used in either spacecraft or weapons in a nuclear theater.  Conditions of the past year show that a disruption in supply can bring the world automotive industry to its knees.  The on-going (and worsening, apparently) supply line disruptions suggest past ideas that it didn’t matter where things were made were, well, wrong.

In Money, Wealth & War on page 109 (I assume you have a copy?) I write:

Trade is most strongly driven by the uneven distribution of resources and climate.  Some countries have oil and others need it.  Some countries have fertile plains that grow wheat, and others need it.  Some countries have exotic spices, but they won’t grow in Northern Europe, and so we must trade.

I want to make something clear.  The notion to trade on specialization is spurious and leads to trade based on the cost of labor.  Trade based on the cost of labor leads to poverty on both sides of the transaction through the extraction of value due to transportation, theft, tariffs and middlemen.  Anything you have heard to the contrary is nonsense.

Apparently, it also leads to concentration of 63% of the world’s semiconductor manufacturing capacity on one small disputed island, which from a reliability engineering perspective is horrible.  Such an economy cannot be reliable.  An unreliable economy leads to, well, Arab Springs and Russian takeovers and financial crises, apparently . . . but not to liberalization of totalitarian governments.  China is not the only one getting less liberal.  Er, ah, it seems most of them, even the US, are getting less liberal.

How far is Europe swinging to the right? NYT

The straw that “broke the camel’s back” came recently, when you chastised me for using the equity premium in a predictive sense.

If we wonder why so many people in the world today do not trust science, maybe we should not look at climate but economics.  Climate impact is mostly still in the future.  But the impact of bad economic theory, mixed with politics, has devastated the world and contributed to the difficulty of addressing climate issues.

It was eye-opening.  In ANY “scientific” discipline such a principal would be predictive.  That is the objective of science.  Otherwise, the finding is only a matter of history, not science.  It is as a consequence of that I realize economics is not a science.  It uses the trappings, like math, but its methods are not adequate.  Its goals are political.

Yours,

Robert

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