Sunday, March 16, 2008

Spinning Adam Smith

Greg Clark reviews a book;

In Adam Smith in Beijing (Verso, 2007), Giovanni Arrighi, an economic sociologist at the Johns Hopkins University, sees the rise of the East as representing an opportunity to escape an international order based on oppression and exploitation. In the Arrighi cosmology, a ruling class of capitalists, first in Britain, then in the United States, has dominated the world since the Industrial Revolution, having their wicked hegemonic way with the weak. The riches of the West were created by the oppression of the rest.

Arrighi, along with Samir Amin, Andre Gunder Frank, and Immanuel Wallerstein, is one of the leaders in world-systems theory. This school has extended Marx's idea of exploitation within societies to international relations. Trade between rich and poor countries is not equal exchange, according to this view, but instead systematic exploitation of the poor. Arrighi's earlier books, particularly The Long Twentieth Century: Money, Power, and the Origins of Our Times (Verso, 1994), are widely cited. This latest work, however, illustrates why world-systems theory has found little purchase except in the most intellectually undemanding environments (including, apparently, sociology departments).

In 1800, China, before being overwhelmed by the military might of the West in the 19th century, had attained as high a level of economic development as Europe, Arrighi argues. But unlike Europe, Chinese growth did not depend on the exploitation of subordinate classes and countries. Militarily defeated, however, late imperial China was forced into subordination, and thus impoverishment, by the hegemons.

The Communist Revolution in China eventually created "extraordinary social achievements," as Arrighi puts it, in literacy and health care in the Mao era that laid the foundation for recent economic growth. China has now returned to its earlier, noncapitalist, nonexploitative economic system: "accumulation without dispossession," in Arrighi's parlance. As its income has risen, China has emerged as an economic and political competitor to the United States in international relations. It now offers to poor societies, he says, "attractive alternatives to the trade, investment, and assistance of Northern countries."...

The likely success of the Chinese model, he predicts, will mean that the United States will not be able to "impose coercively upon the world its right to an extravagant way of life." In other words, the rise of China will imply a decline in American living standards as cooperation internationally replaces exploitation.

How does the Adam Smith of the title enter this story? Arrighi wants to show that, ironically, modern Chinese growth represents the true fulfillment of Smith's vision in The Wealth of Nations.

In Arrighi's interpretation, Smith, the champion of capitalism and individual freedom, so beloved of the right, turns out to have been an enemy of unfettered liberty, and instead a friend of the Chinese bureaucratic-capitalism vision of growth. Milton Friedman, the Chicago School, and the whole economics establishment completely misread him. He was not an advocate of limited government and free markets.

Rather, Arrighi would have it, Smith's main concern was the promotion of big government as a constraint on the evils of the market: "The dogmatic belief in the benefits of minimalist governments and self-regulating markets … were completely alien to Smith." Further, Smith saw, even in 1776, "China rather than Europe as a model of the kind of market-based economic development that was most advisable for governments to pursue." The Chinese model was to be preferred because it was a natural, inward-focused growth as opposed to the unnatural trade-driven growth of Europe, which relied on the expropriation of the raw materials of the rest of the world. The recent reforms of the Chinese economy also follow the approved Smithian path, Arrighi writes: "As Smith would have advised, Deng's reforms targeted the domestic economy and agriculture first."

How plausible is Arrighi's interpretation of the current juncture of West and East?

A crucial failure in Arrighi's thinking is his obsessive misconception that all economic growth in the West since the Industrial Revolution has been provided by the brains and brawn of the dispossessed of the developing world. Yet generations of research by economic historians — David Landes, Deirdre McCloskey, and Joel Mokyr, among others — show that the wealth of the West was homegrown, the result of a stream of Western technological advances since the Industrial Revolution.

Arrighi, for example, reflexively assumes that in the 19th century "Indian workers were forcibly transformed from major competitors of European textile industries into major producers of cheap food and raw materials for Europe." In fact, technological advances in England, not any compulsion by colonial profiteers, drove out the much cheaper Indian workers from the cotton-textile industry. The East India Company, the ruler of much of India until the end of the Industrial Revolution, had every interest in maintaining the export of Indian muslins, one of the most valuable Indian exports in 1760.

Similarly the United States became an industrial colossus in the early-20th century through advances in techno-logy that included an ability to extract from American soil all the raw materials needed for its growth. Only in the late-20th century did imports of raw materials become of any importance.

Arrighi's basic misconception leads him to conclude that growth among the rest must imply decline for the West. But the last 20 years, when significant growth has occurred both in China and in India, have been prosperous ones for the United States as well. Real income per person in America has increased by 50 percent in those years, despite the rise of China and India. That rate of increase is similar to the rise between 1950 and 1987, when China and India stagnated. There is no sign that the rise of the East is clawing back the growth of the West. That is because the overwhelming source of growth in the United States is technological advance within the U.S. economy.

The growth of the Chinese and Indian economies will exert pressure on U.S. incomes through the increased demand in the world economy for commodities — most important, oil. If everyone in the world were to consume as much oil as Americans do now, then world oil output would have to be more than five times greater than at present. As Chinese demand for oil has risen, China has been aggressively seeking supplies of oil in Africa and the Middle East, doing deals with countries hostile to the United States such as Iran and Sudan.

But even in that regard, the Chinese impact on American incomes through higher commodity prices will be modest. Even at current prices of roughly $100 per barrel, annual U.S. imports of oil are still less than 4 percent of national income. A further doubling of oil prices, to $200 per barrel, assuming we used just as much oil per person as at present, would consequently reduce U.S. income by less than 4 percent. But since technological advance is increasing income by more than 2 percent per year, that hit to the American economy would be compensated for by less than two years of normal growth.

And there is plenty of room for economizing if oil becomes permanently much more expensive. Currently in America we consume the equivalent in energy of six gallons of gas per person per day. But energy is even now so extravagantly cheap that most of it is squandered. We drive huge distances at the slightest pretext, in giant, gas-hungry vehicles. We live in cavernous houses — the average person in the United States, including each child, has 900 square feet of expensively conditioned, mostly unused space. Towns sprawl across the landscape so that the only way to get to work or to shops is by car. Sidewalks have disappeared in some locations as useless adornments from a bygone age.

Some countries in Europe, such as Denmark, which have by public policy made energy much more expensive, already use only the equivalent of about three gallons of gas per person, with little cost in terms of living standards. Over the long run, even more substantial reductions in oil usage are feasible at modest cost. So however big the future Chinese impact in world commodity markets, a perfectly satisfactory living standard will be feasible. The rise of China and India, with 2.4 billion people between them, is hastening an energy-scarce future. But that future is not one we need fear.

Arrighi's assessment that China now offers poor societies "attractive alternatives to the trade, investment, and assistance of Northern countries" seems a conclusion that only the most ideologically blinkered could hazard. In recent years, Europe and the United States have switched, at least outwardly, to a policy emphasizing the promotion of democracy, human rights, and transparency in their relations with poor countries. There has been reluctance to draw up agreements with governments for access to raw materials when those countries' ruling cliques will appropriate most of the benefit. China's aid and trade policies in contrast have been exclusively rooted in its own economic interests, which in the case of poor economies typically lie in access to raw materials. There has been minimal concern with who actually benefits from these deals.

China has had little scruple in doing deals with corrupt or oppressive governments. It maintains friendly relations with the Myanmar junta, for example, acting as their main arms supplier and trading partner. Myanmar exports raw materials, mainly timber, to China, and it imports manufactured goods. But that pattern of trade is exactly what Arrighi so vigorously laments in the West-rest trade of the previous two hundred years.

In Africa, China has been happy to arrange deals with the ruling clique to get the oil and timber of the Congo Republic, even though President Denis Sassou-Nguesso (who came to power most recently in a civil war in 1997), his family, and his entourage are notorious for their extravagance with national resources while the masses live in squalor. Sassou-Nguesso attained notoriety by running up a $285,000 New York hotel tab in 2006 on a trip to deliver a 15-minute speech to the United Nations at the same time his country was begging for debt relief from the International Monetary Fund and the World Bank.

Arrighi's interpretation of Smith is as contentious as his views on the modern world. There are many ambiguities in Smith's writings. Smith's comments on China in 1776 are limited, and his knowledge of conditions there was sketchy. But nothing in The Wealth of Nations suggests Smith saw China as a model for Europe to follow. Indeed he saw China as a stagnant society that had exhausted its growth potential...

In summary, the evidence Arrighi offers for his sweeping cosmology is astonishingly thin. The book indeed is little more than an extended anti-market, anti-capitalism, anti-Western harangue. Statements of dramatic import are proffered with little explanation: "The decisive battle to contain the rising power of China is still being fought in Iraq"; the Iraq War "aimed at using military might to establish U.S. control over the global oil spigot"; "China is not a vassal of the United States, like Japan or Taiwan."

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