The Macroeconomics of Chinese Kleptocracy

June 12th, 2012

Damn, Krugman beat me to this yesterday. I thought I would be bringing in a fascinating piece from the fringes of the Australioblogosphere.

Bronte Capital: The Macroeconomics of Chinese kleptocracy.

My basic take is the same as Paul’s:

I have no idea whether this John Hempton piece on China is at all right, but it’s a terrific read, and provides food for thought.

The logic of the piece is very much dependent on the loanable-funds model:

The Chinese kleptocracy – and indeed several major trends in the global economy – depend on copious quantities of savings at negative expected rates of return by middle and lower income Chinese.

As we saw quite clearly in The Great Keen-Krugman Debate, Paul is a firm believer in that model (and obviously Hempton is too). I and many others (notably Keen) have suggested that the model is ridiculous and nonsensical on its face.

If we look at the Hempton piece through other eyes — MMT for instance — does it still hold up? How can we rewrite it to explain things better while retaining its rather convincing insights?

Now here’s what’s fascinating: my hat tip goes to a post two days ago by Craig Tindale at … Steve Keen’s blog — a blog where you find little patience for the loanable funds model.

1. Why do we find an implicitly approving link over there?

2. How did Krugman come across this piece? Has he taken to reading Keen? If so, it seems rather churlish of him to withhold the hat tip…

Cross-posted at Angry Bear.

  1. LVG
    June 12th, 2012 at 11:13 | #1

    The Hempton piece goes to show how MMT is so wrong on all of this. China is actually the purest form of MMT in the modern world. They have state banking, massive spending, etc etc. But MMTers always shy away from China for some reason. And it’s because they know China is corrupt. It’s a massive kleptocracy that starts and ends with state run money.

    MMT always talks about destroying rentiers, but moving the power to the government just shifts the corruption from the private sector into the public sector.

    Just one more thing MMT is wrong about.

  2. Tom Hickey
    June 12th, 2012 at 12:03 | #2


    Still living in la-la, I see. What don’t you understand about Warren Mosler, Hyman Minsky, Bill Black, Randy Wray, Michael Hudson, and today, Janet Tavakoli’s piece at NEP? Parasitism as either economic rent or corruption destroys the efficiency of capital wherever.

    Any economic system yet devised can be hijacked and used to establish privilege and extract wealth through economic rent or corruption. That’s a political problem more than an economic one. The economics follow the politics. Where there is privilege, there is the potential for extraction and capture. That’s the point of Marx and anarchism in general. The task is ending privilege, which certainly did not end with the replacement of feudalism with capitalism or communism. Both systems have been susceptible to capture and hijacking, as well as economic rent and corruption.

  3. LVG
    June 12th, 2012 at 12:12 | #3

    @ Tom Hickey

    And you think we can eliminate corruption by regulating it all away. The USA puts more people in jail than any other country in the world. And there are also more murders in the USA than anywhere else in the world. What makes you think that more regulation is always the answer to everything?

    MMT thinks government can solve all of our problems. When ever there’s a problems the MMT solution is always more government. China proves that state banking is just as corrupt as private banking. And if you think a bunch of politicians just need to better regulate themselves then you’re the one living in la-la land.

  4. Tom Hickey
    June 12th, 2012 at 13:33 | #4


    You are confused about both the issues and the analysis. There is no way to totally eliminate corruption any more than there is a possibility of elimination risk or uncertainty. These are issues that humanity has to deal with.

    Economic rent, crime, corruption and the like are examples of the free rider problem. This is a problem in biology in primitive forms of life also. It is treated in evolutionary theory, sociology and political science in some depth, but not really addressed in economics or politics because the parasites are the privileged class who are in charge and they would not approve.

    Minsky showed that financial instability is also part of the system as one of its inherent imperfections. The task is not to eliminate it but to reduce incentives that exacerbate it and change institutional arrangements that encourage it. But as Minsky observed this is usually done at the end of a long financial cycle after the crash, and the reforms put in place are removed or avoided in the next cycle.

    The fact is that the more privately created money in a system, the greater the instability because privately created money is endogenous credit money, based on private debt, even if banks are given access to the govt managed interbank settlement system and allowed to denominate deposits in currency as the unit of account.

    MMT economists recommend more government where called for and less where called for also. Presently, the financial system is dominated by endogenous money creation and that is resulting in problems that will result in depression without government intervention, which inevitably results in moral hazard.

    The obvious solution at present is to increase the percentage of government-created money relative to that of privately generated money through credit, but the financial sector is resistant to that since that would mean less rent going to them.

    In a well-functioning democracy, which we do not have btw, the electorate could address corruption at the voting booth. In a free market system run iaw market fundamentalism, there is no recourse through which extraordinary privilege that permits parasitism can be addressed politically short of revolution. This is also what the Chinese leadership has to fear, since the Chinese are a lot more volatile politically than Americans, and recent events have shown that they can revolt successfully at the local level.

  5. LVG
    June 12th, 2012 at 14:13 | #5

    “The task is not to eliminate it but to reduce incentives that exacerbate it and change institutional arrangements that encourage it. ”

    And more state control is the way to achieve this? First off, Minsky was a socialist so he always believed the government could do things better. I’ve noticed that many of you MMTers are also socialists and admitted communists so it makes sense that you think the government fix all of our problems. And when things don’t work out you just say the system is imperfect and that it wasn’t the government’s fault. Who even cares what MMT says any more. It’s been exposed as a socialist policy agenda.

  6. Tom Hickey
    June 12th, 2012 at 17:35 | #6


    LVG, two things you don’t seem to get. With too little regulation and oversight there is collusion and corruption, guaranteed. As Warren notes, regulation in not really the best way to deal with this matter, since regulators can be can be captured and suborned, and regulations either worked around or watered down if they are effective after getting through the political process with all the lobbying and the revolving door. The solution is to revise the institutional arrangements to get rid of perverse incentives and doorways to economic rent-seeking instead of productive contribution.

    Secondly, neoliberal philosophy — free markets, free trade, and free capital flow — lead not to the equal opportunity that is claimed but create an opportunity to established a new privileged class based not one land wealth but on ownership of the means of production and accumulation of financial wealth. It’s a neo-feudalism in which the great accumulators become the new aristocracy. The upshot is a reduction of the percentage of government created money in favor of credit money created by the financial sector, which is the road to debt serfdom. Moreover, instead of direct issuance governments are required politically through influence to issue public debt, the interest on which is a subsidy to the wealthy for being wealthy.

    Do you really think this is a good deal for anyone other than the top of the town? Your “freedom” is essentially a chance at winning the lottery.

Comments are closed.