[gitah]

When you have a hammer everything looks like a nail. My problem with these kind of analysis is that it pretty much only looks at things from a financial perspective thinking it's the be-all-end all.

However, on first level principles, money is simply an abstraction; it's a medium for trading your services for other people's services. And if you become more efficient, you can buy more services with the same amount of effort and vice versa. The root cause of this increase in efficiency is technology.

As a developing country, China has lots of easy productivity growth just by adopting current technologies on the technological frontier. Therefore, I think an analysis on how fast China is advancing in various technological areas and their industrial policy would be much more useful than one just at a financial level. Are Chinese companies as a whole becoming more productive and creating new technology?

[spangry]

As a developing country, China has lots of easy productivity growth just by adopting current technologies on the technological frontier.

High rates of growth in developing countries, with the rate slowing as they 'catch-up' to more developed countries, is also what the bog-standard macro-growth model (Solow-Swan) predicts.[0] To simplify, developing countries will have lots of labour inputs and relatively few capital inputs. Therefore the marginal factor productivity of each capital input will be high. Eventually, as the economy reaches capital saturation, the marginal productivity of capital will decline and the economy will settle into a low 'steady-state' growth level, where real growth is largely the product of technological advances.

This is why I've always been puzzled by economic commentators who assume China will continue to enjoy 7-9% GDP growth rates forever. Although I'm not suggesting that there's "nothing to see here" in this particular case. China does indeed have a bubble (and massive oversupply) in its residential property market, mostly due to the stimulus deployed just after the GFC. It could make one hell of a pop.

[0] https://en.wikipedia.org/wiki/Solow%E2%80%93Swan_model#Condi...

[valarauca1]

Solow-Swan model is based on neoclassical economics that assumes a closed market with zero technological growth. In the event of technological growth it assumes a steady state is still reached. And I quote, "Due to Common Sense." [1] How TF do you consider this a valid scientific theory?

This is a theory based on NeoClassical economics which modern Behavior Economics finds that the models of NeoClassical economics fail in nearly every situation [2].

The Solow-Swan model has no rigor, predictions, or testable results to justifying its usage nor faith in its system. Science is a quantitative game, yet economics isn't?

[1] https://academic.oup.com/qje/article-abstract/70/1/65/190377...

[2] http://www.slembeck.ch/pdf/learning.pdf

[spangry]

I don't have the time atm to get into much detail (but will come back in 8ish hours after work), but very quickly:

- This is just a simplified description of probably the simplest macro-economic growth model you'll learn if you study economics. It's basically the model you learn in Macro 101. I didn't really want to write a super-long post going through all the extensions of the base model (not to mention the more complicated micro-economically founded concepts, models and theories you'd learn if you study developmental economics) as one of the predictions of the simple model that I thought relevant, that economies experience slower rates of growth as they reach capital saturation, is empirically supported.

- It's not intended to accurately reflect all aspects of a actual economy. No model is. If a model did this, it wouldn't be a model. We would probably just call it 'the economy'. It's just a simplified model from which a number of more complex extensions have been made, but I didn't feel were worth going into.

- It doesn't purport to make realistic assumptions, and no-one with any sense would think that to be the case. In addition to what you've pointed out, it also assumes the economy only produces a single good, has no government, no international trade, and constant returns to scale. All of these are almost certainly incorrect to varying degrees. Despite these simplifying assumptions, that does not mean the model is useless, or that it does not make any testable predictions. No-one in their right mind would think these assumptions are correct.

I'm honestly not sure what level of realism you expect an economic model to have. Just because a model is strictly wrong (as all models are; hence the name: model), does not mean it isn't useful. You mention empirical results from behavioural economics, which strongly suggest the neoclassical assumption of perfect actor rationality is incorrect. Again, this is just a simplifying assumption under which models can still yield accurate predictions in the large. Is Newton's law of gravitation completely correct? No, and it's been superseded by general relativity. However, is it still useful? Yes.

I can't really think of any economists (and this is certainly true for those I work with), let alone any people in general, who would believe any of these assumptions accurately reflect reality. There are a whole bunch of others too, like the implicit assumption that the labour-capital split of income remains constant. This is also almost certainly not correct as well.

It, and its extensions which account for 'human capital' (which has a multiplicative effect when combined with physical capital) which the simplified model just rolls into the solow residual (i.e. total factor productivity), do make a number of testable predictions, some of which have actually been tested in cross-country econometric studies. For example, here's a paper that examines a number of extended models, and among other things, examines the evidence for absolute vs conditional convergence (http://www2.stat.unibo.it/brasili/file/2009-2010/COSDI/chap1..., see pages 48 & 49).

You can literally just look at the model equation, do some simple algebra to turn one of the independent variables into the sole dependent variable and, presto, you have a prediction. Here are a few:

- An economy will converge to a balanced-growth equilibrium, regardless of its starting point. At this point, the growth of output per worker is determined solely by the rate of technological progress.

- At equilibrium, the capital/output ratio depends only on savings, growth, and depreciation rates.

- Countries with higher savings rates will accumulate capital at a faster rate (if all other relevant features of these economies are the same, which they aren't).

- If productivity is the same across countries (which it isn't), then countries with less capital per worker will have a higher marginal productivity of capital and provide a higher return on capital investment. Consequently, in a world of open market economies and global financial capital (which does not exist, and probably can't), investment will flow from rich countries to poor countries, until capital/worker and income/worker equalise across countries.

All that said, if you are able to produce a model that makes no incorrect assumptions, accurately accounts for bounded rationality, and all its predictions in every real world scenario are accurate, you'll win a nobel prize (and will also become filthy rich by investing according to this super-model's predictions).

Given us economist have simply just been 'doing it wrong' this whole time, because we foolishly didn't realise SF computer programmers held a much deeper understanding of macroeconomics, I'm really excited to being a first-hand witness to, what will be, a quantum leap in our understanding of macroeconomic dynamics and development economics.

I'll try to make sure to list every relevant caveat (the above is only a partial list, at best, for this particular model btw), before daring to discuss an unscientific subject like economics (which I apparently know nothing about).

EDIT: Oh fuck it. I quit.

[graphitezepp]

I wonder what the ratio of attempts to make a point fully and well ends in "Oh fuck it. I quit." compared to attempts that actually succeed.

[ryandamm]

Great, detailed response -- I learned a lot from this, so thank you. Also, I think it's hilarious/curious that the actual economist's response is buried in a thread.

Internet message boards (yes, even HN's) are not kind to actual expertise.

[grzm]

> Also, I think it's hilarious/curious that the actual economist's response is buried in a thread.

> Internet message boards (yes, even HN's) are not kind to actual expertise

Would you elaborate on this, in particular what you mean by buried? I'm assuming you're referring to 'spangry's responses. Given the nature of threading and where 'spangry chose to respond, I don't see how it could be anywhere other that where it is. As of the posting of this comment, both of 'spangry's responses are the highest of its siblings. Are you thinking of a different model of threading or highlighting highly-upvoted comments?

[ryandamm]

Sure, I'll elaborate, but it may not be terribly illuminating.

As for why it's "hilarious" (okay, overstatemetn) -- it's not really a critique of how comments work -- more just that this is sort of an off-topic subject matter for the audience, and spangry is trying to reply to a comment.

If I were spangry, I would've replied to the post itself. I think HN commenters are pretty thoughtful, and his detailed post probably would've risen to the top, and enhanced the overall conversation.

So the right way to read my snark is more as a commentary on the fact that economics is a technical subject, but most technical readers at this site are technical in different ways. I would assume the top comment (and attendant conversation) would be spot-on for the latest framework or software technology, though.

[leoc]

> However, on first level principles, money is simply an abstraction; it's a medium for trading your services for other people's services. And if you become more efficient, you can buy more services with the same amount of effort and vice versa. The root cause of this increase in efficiency is technology.

Pettis does discuss this at length.

[gitah]

Can you elaborate?

From the article, Pettis assumes the following is true:

  1) China has overinvested in infrastructure and manufacturing capacity to such an extent 
  that in the aggregate the cost of additional 
  public sector investment exceeds the present 
  value of future increases in productivity generated by 
  the investment

and

  2) China's long-term sustainable growth rate is substantially below the economy's current GDP growth target

Why does he make these assumptions without also analyzing the technology improvement aspect? I don't see anything about that in this article.

[ryandamm]

He elaborates on technology improvement in other articles, but it boils down to: technological improvements have a range of returns, but even the most optimistic of historical returns to technological progress can't paper over the debt-fueled boom China is currently undergoing.

Basically, qualitatively, you're right. Technological improvements can generate growth from scratch. But when you look at the historical data to try to quantify it, you see it's quite modest. Big gains have come from: women entering the workforce, electrification, containerization. The rest is incremental enough it doesn't matter in the same way.

(Part of this is how it's measured; the fact that consumers get much more value for their dollar isn't well captured, but the point remains because it's about debt-servicing, not consumer value.)

[mattmanser]

Containerization? That's really interesting. I knew it had a big effect on how shipping worked, but didn't realise it was as important driver of change to the world economy as electrification.

My Dad used to work as a merchant seaman, I believe he got up to first officer and had passed his captain's exam.

But then the big container ships came along, and they needed a tiny fraction of the captains, officers and seaman they needed previously per tonne and he ended up coming ashore to pursue a different career. His stories from those times are pretty amazing.

[gitah]

I don't get it. US workers still have 5x higher average income than China. Doesn't this suggest there are still a ton of technological improvement left to exploit? Why can't China just keep walking the same path of technological improvement as the US?

[ryandamm]

The average disguises a few things. One, I assume that's in absolute terms and not, say, purchasing power parity (which accounts for lower consumer prices in China).

Two, the 'average' in China includes huge numbers of the rural poor. They are living in the third world; an office worker in Shanghai is not, but her income's contribution to the average is diluted by rural subsistence farmers.

This does suggest that there is room for growth via urbanization and modernization: if subsistence farmers switched to commercial farming, and the excess labor moved to productive cities, in theory you've got a productivity boom. But China's productivity is predicated on the world's ability to absorb their excess production, which is not actually unlimited. That said, the central government is taking deliberate steps to encourage urbanization (while simultaneously not undertaking some reforms that would help, like overhauling the hukou system).

[paradite]

Similarly, if you use Western standards to measure economic metrics of China, everything looks weird.

China is still pretty much a planned economy, where the government is in control of major state-owned corporations. I wouldn't worry too much about the debts that they owe to the state.

[hackuser]

> I wouldn't worry too much about the debts that they owe to the state.

Why not? The state can forgive the debt, but when those resources disappear from the economy then many people will lose out.

[Mtinie]

> ...when those resources disappear from the economy then many people will lose out.

My initial reaction is "...and?"

Not because I'm trying to be obstinate or lacking empathy, but because I'm trying to hard visualize a situation (re: China) where those who lose out legitimately can do anything about it.

They can't realistically move, or revolt. They can starve[0], but that's happened in the past and the State really didn't suffer for it.

--- [0] https://en.m.wikipedia.org/wiki/Great_Chinese_Famine

[JumpCrisscross]

> They can't realistically move, or revolt

Some can. Those are the ones who matter. No man rules alone--political leaders are only powerful insomuch as they can incentives or coërce others to act for them. A ruling class whose living standards is falling is a ruling class more willing to entertain other leaders.

"Certain types of unemployment are likely to be perceived as more politically costly than others - e.g. because returning to family farms acts as a kind of safety valve, even though a significant fall in living standards, unemployment among migrant workers is likely to be less costly, or because university graduates are presumably more communicative and have higher expectations, their unemployment might be more costly" [1].

[1] http://carnegieendowment.org/chinafinancialmarkets/66221

[Mtinie]

The vast masses of Chinese citizens are not those people.

History isn't in agreement, and time after time, the peasants will starve before the bourgeoisie suffer to a point that they feel enough pain to revolt.

It's economically cheaper for the State to continue to pay for the ruling classes' requisite "hookers and blow" than it is to pay for social programs.

[JumpCrisscross]

> The vast masses of Chinese citizens are not those people.

I can't recall a single civilization where the majority of people were "those people". The point is there are enough who demand enough that mortgaging the non-influential majority to pay for "those peoples'" bread (or as you put it, "hookers and blow") will be a short-term patch at best. (Reverse wealth transfers are not uncommon in a regime's dying days. Case in point: Venezuela.)

[nickgrosvenor]

Lots of Charlie Munger type language in this comment.