China, the world economy and Marx's overcapacity cycle

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Subprime JD's picture
Subprime JD
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China, the world economy and Marx's overcapacity cycle

These are two posts discussing China its problems. They both discuss Marx "the overcapacity" cycle.

POST 1

Here is what Charles Huge Smith thinks about China,

"Of the many misconceptions about China's spectacular economic growth, perhaps none is more misleading than the assumption that the capital and surplus profits being made in China will stay in China. Despite the much-touted public ownership of joint-venture companies, much of the profitable production in China is owned by non-PRC (People's Republic of China) companies based in Taiwan, Japan, Korea and the West.

From a more clear-eyed perspective, China has been colonized by advanced economies to lower the cost of production and to establish a dumping ground for environmentally unsound production which their domestic citizenry will no longer tolerate. As with all colonies, the profits are extracted and sent elsewhere while apologists are hired to tout the glories of employment for China's teeming millions.

Until, of course, Marx's overcapacity cycle kicks in. Now that China's stupendous production capacity exceeds the potential demand of the entire world, including its own mostly impoverished domestic populace, then capital is fleeing China in its usual pursuit of higher returns, leaving behind tens of millions of unemployed workers and a toxic landscape.

The Chinese State is now attempting to counter this cycle by spending its own capital on stimulus, but State spending is not a replacement for capital or organic demand. Even worse, the Chinese State saddled its own banks with hundreds of billions of dollars in uncollectible debt in a vain attempt to prop up thousands of State-owned enterprises which racked up gigantic losses even during the boom.

The Chinese State attempted to staunch this open wound by closing thousands of its factories but the uncollectible debts remain, buried by accounting tricks within the books of its four major banks and government finance ministries.

The bloom is off the rose now that the overcapacity in China is no longer profitable to global capital and in essence the Chinese State is left holding the bag: stupendous losses in its own financial system, horrendously costly environmental damage and an industrial infrastructure which is losing value as capital shifts elsewhere."

POST 2

"Until, of course, Marx's overcapacity cycle kicks in."

Thank you...imo, you have put your finger on the real problem. The problem that caused governments everywhere to intervene in markets and misdirect capital investment. The problem that Adam Smith did not see coming. Smith understood the great advantage of division of labor but not when the labor was usurped, to a large degree, by robotic machinery...making much human labor redundent. 

Marx understood very well that capitalists economies would run into the problem of excess capacity but, like Smith, Marx did not see the robot revolution on the horizon. Marx had not a clue that overcapacity could become so large a problem due to digital robotic machines.

Capitalist theory suggested that supply and demand would always be equal at some price point. Few economists or government leaders thought that supply could absolutely overwhelm demand...driving prices below costs and keeping them there for long periods. Theory predicted that production would fall until prices rose to a level that allowed some small margin of profit for the factories...but what if the country contains billions of people that will riot and destabilize the government if factories close and worker's wages stop? Governments do not want that to happen...then they will be out of work (I use the word loosely). Can markets be found elsewhere for all those widgets the automated factories are cranking out? Can Chinese factories find buyers in Africa, or anywhere, for widgets being produced for 2% over cost? Some African countries can offer oil for widgets which the Chinese turn into more widgets. Does this cycle make any sense? I don't know...it makes me dizzy thinking about it. 

Capitalism requires constant expansion or it dies. Billions of workers need employment or they die.

Captialism has been so successful at devising complex machinery to reduce labor costs that billions of workers are no longer needed.

200 years ago 97% of all employment in the US was farm labor. Now, because of very efficient machinery, 3% of all US workers are employed on farms.

The shift to efficient machinery in agriculture has been replicated in almost all industrial production.

No current economic doctrine has an answer to the current problem; too many workers chasing too few jobs...even though many of the jobs being chased offer wages that provide only for basic human sustenance.

The old capitalist solution to the business cycle, let the weak be liquidated, is exactly the wrong prescription for what ails us. If the weaker, less efficient companies that employ more people are liquidated those companies are replaced by more efficient companies with more robots and less human employment. Is this a paradox? Does someone have a practical solution to this problem? If so, I have not heard it.

Large wars used to disrupt the loser's, and sometimes the winners, production capacity and entire economy. Factory overcapacity, and excess labor, were eliminated. imo, wars are no longer an option because nuclear war would destroy our home, the earth...there would be no winner.

The real problem for governments everywhere is what to do with billions of people that have been replaced by machines in ever more efficient factories. Misallocation of capital into excess housing and exotic financial instruments are symptoms and were caused, primarily, by governments experimenting with economies while seeking a solution to excess labor. Of course a lot of frauds and thieves rushed in to offer ludicrous, but expensive, advice on how to cure the excess labor problem...no crisis is wasted.

 

BMT: I love libertarian government and believe that free markets are the best allocators of capital. However, Marx's critisisms of capitalism are beginning to make sense. This "overcapacity" theory is strange but is now starting to make sense as so many people around the world have "nothing to do" anymore as capacity has been outsourced and been made ever more efficient.

Thoughts on this issue are welcomed. I find the overcapacity cycle fascinating.

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Carl Veritas
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Re: China, the world economy and Marx's overcapacity cycle

 

    Private property and the presence of those profit-seeking, loss avoiding capitalists are largely missing in the Chinese economy.  Over capacity comes from over production.   This leads us to the root cause:   monetary manipulation.    Marx saw this same boom and bust in his time and believed that the problem lies deep within the market system,  and that government needed to intervene in the economy to correct this flaw.  He could not have made the link between the phenomena and the arrival in 17th century England of modern banking (the practice of lending other peoples deposits).     Here is an interesting article I read about this interesting subject  

  

http://mises.org/mobile/daily.aspx?Id=3127

By the way Marx also thought that the market price of a good comes from the labor input, as opposed  to what a buyer would pay determined by his capacity and the value he places on the good going forward.


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Re: China, the world economy and Marx's overcapacity cycle

Thoughts on this issue are welcomed. I find the overcapacity cycle fascinating.

http://www.edhardysall.com/

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Re: China, the world economy and Marx's overcapacity cycle

How does one measure "over capacity"?

Of course there are many subjective ways but I would suggest that employment figures are the best indication.  High unemployment means that there is not enough money and opportunity in the system to maintain and conduct commerce and productivity.  Under this measurement, the United States, and most of the western world, are heavily "under capacity" with over 20% unemployment.

China to hold unemployment rate within 4.6% in 2010  - China plans to keep the urban registered unemployment rate no higher than 4.6 percent and create over 9 million new jobs in urban areas this year, according to a government work report to be delivered by Premier Wen Jiabao here Friday.

China created 11.02 million new jobs in urban areas in 2009 amid the lingering financial crisis, while the country's urban unemployment rate stood at 4.3 percent, with 9.21 million people being registered to be unemployed.

I would suggest that the linked article totally misses the point in suggesting that "over-capacity" is inherent to communists systems.  China has been preparing for the demise of the west by increasing the domestic demand through higher wages.  ”This is the first time in history that China has surpassed the US,” [car sales] said Michael DiGiovanni, GM’s head of global sales and industry analysis.  And, even GM (Government Motors) now sells more cars in China than the U.S.

Larry

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Subprime JD
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Re: China, the world economy and Marx's overcapacity cycle

Carl said,

By the way Marx also thought that the market price of a good comes from the labor input, as opposed  to what a buyer would pay determined by his capacity and the value he places on the good going forward.

The main reason why companies outsource to third world nations is due to higher labor inputs in western nations, including the US. Payroll is close over 50% of operating costs for many companies. Thus, it follows that by going to third world slums, companies can lower their labor inputs and thus make more profits. Marx was very much correct in his assertion that labor input has a substanial effect on prices.

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goes211
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Re: China, the world economy and Marx's overcapacity cycle
bearmarkettrader wrote:

Carl said,

By the way Marx also thought that the market price of a good comes from the labor input, as opposed  to what a buyer would pay determined by his capacity and the value he places on the good going forward.

The main reason why companies outsource to third world nations is due to higher labor inputs in western nations, including the US. Payroll is close over 50% of operating costs for many companies. Thus, it follows that by going to third world slums, companies can lower their labor inputs and thus make more profits. Marx was very much correct in his assertion that labor input has a substanial effect on prices.

Bear,

What you say is true but that is not what Carl is refering too.  Marx claimed that a goods cost was a function of how much human labor went into it as opposed to how much a buyer was willing to pay.  It is not that labor has no effect on costs, it is that labor has little effect on value.  If two companies do a job but one does it inefficently and requires twice the human labor, would you expect that the product is worth twice the amount? 

In reality if both products are the same, buyers would probably pay the same amount for them.  In other words, labor determines cost, not value.

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Re: China, the world economy and Marx's overcapacity cycle

Louis-Vincent Gave of GaveKal says China no longer has surplus workers. He lists several reasons why their wages will go up. Here is part of a report on that phenomenon.

Higher Labor Costs Are A Genuine Paradigm Shift

"Three years ago China's leading labor economist, Cai Fang of the Institute of Population and Labor Economics of the China Academy of Social Sciences (CASS), published a controversial book arguing that China's economy was about to hit a crucial turning point: the supply of "surplus labor" from the countryside was on the verge of drying up. Cai built on the development theory of British economist Arthur Lewis, who showed that early-stage industrial economies had two distinct sectors operating in parallel: a traditional agricultural sector with low productivity, and a modern capitalist sector with high productivity growth. In the early stage of industrialization, the impoverished traditional sector provides a large labor pool for the modern capitalist sector, which offers higher wages. This pool is at first effectively infinite, because the capitalist sector can continuously raise its demand for labor without raising real wages--or at any rate, raising wages well below the rate of productivity growth in the capitalist sector. But at some point--a moment dubbed the "Lewis turning point"--the pool of labor in the traditional sector becomes smaller than the demand for labor in the capitalist sector, and this changed supply-demand balance requires real wages to rise. In the first industrial revolution in the United Kingdom, real wages were static from the late 18th century until about 1840; after that they grew smartly. Japan hit its 'Lewis turning point' around 1960 and experienced very rapid wage growth thereafter. Cai's book asserted that China was about to hit the same turning point.

"With the supply of young workers entering the labor force set to drop by onethird over the next dozen years, it now seems obvious that Cai was right and 2010 may well mark the year in which China hit its 'Lewis turning point'. This is a momentous change: for years, businesses have simply assumed that China has an unlimited supply of young people who can be had for modest wages and replaced at will. Over the next 15 years this will cease to be the case: businesses will have to pay more for entry level workers, and then work harder to retain them for longer, because they will not be so easy to replace.

The macroeconomic consequences of the Lewis turning point are large. Before the turning point, the capitalist economy grows mainly through an accumulation of factors - labor and capital. The efficiency with which those factors are used - in economists' jargon, "total factor productivity" or TFP--is secondary. After the turning point, sheer factor accumulation slows down, and efficiency or TFP gains must become the main driver of economic growth. In our view, this is now the most important question confronting Asian bulls such as ourselves: can Asia evolve from growth through accumulation of factors, to growth through productivity?"

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