China’s Dilemma of Economic Sustainability
Skyrocketing macroeconomy. Massive production glut. Artificially low wages. Déjà Vu?
American businesses in the 1920s caught a wave of technological advance. Ford’s assembly line technology was catching on everywhere, and workers were becoming more and more unnecessary as automated machines replaced humans in all sorts of sectors. With this key new technology arriving from the automotive sector, the auto industry is in fact strikingly parallel to the American economy on the whole.
Ford Motor Company, the pioneer of the assembly line, had a strikingly progressive mindset: In 1914, Henry Ford cut the labor hours of his workers, as many other companies were doing in light of new automated capital expenditures, but in doing so, did not cut their pay. In fact, Ford for a long time was a leader in the automotive industry in wages. After all, without money, how would his employees buy his cars?
If only the rest of the industry had such a long-term outlook. GM under the leadership of Charles Kettering took the view that “The key to economic prosperity is the organized creation of dissatisfaction“. This, along with the short-term profits mindset, led GM and most heavy industries to replace workers with machinery, pay as little as possible to stay competitive in the job market, and watch profits soar.
Now look at China. Vast, austere and impersonal, the average Chinese corporation has the cost-cutting, profit-maximizing mindset of the 1920s American corporation taken to a ridiculous extreme. With little regard for even the lives of the consumers, Chinese corporations unscrupulously substitute cheaper parts and ingredients to shave costs. Wages are suppressed far below any standard ever held by Americans, and they, like America of the 1920s, produce far more than their population can absorb.
So what’s the difference? Why did America crash, and will China do the same?
As Federal Reserve Chairman Marriner Eccles put it, “mass production has to be accompanied by mass consumption”. Because wages were kept low, companies like GM tried to force out mass consumption in a massive advertising blitz according to the aforementioned Kettering philosophy. Consumers were forced to buy on credit, which was in the long run an unsustainable income supplement for such a large number of people. Now China would certainly be in a position even worse than we were; the income disparity has been consistently rising since 1985, and their population has far less purchasing power on a whole than the American population of the 1920s. The difference, however, is that China’s production glut is not intended for its own population.
Now that we’ve established in economic terms what everyone already knew, we can look at the consequences of China’s structural choices. While they will continue to grow as long as the West - the primary absorbent of their overproduction - does, if the West ever runs out of steam or if China somehow catches up economically, China will have nowhere to go. Their continued growth depends on our continued consumption, and if we for whatever reason stop absorbing their glut, then China will be in exactly the same situation as America of October 29, 1929.
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