Three years ago, Keynesian economics was official Chinese policy. The 2008 financial crisis had encouraged Chinese policy-makers to gloat over the failure of the free-market Washington consensus and to tout the Beijing model of government intervention. Following an export slump, the Beijing dictators allocated $3.5 trillion – or approximately 50 per cent of China’s income – in bank loans and direct spending. This was the Big One – the largest Keynesian stimulus package relative to gdp in the history of the human race.
But the Keynesian stimulus package has failed – indeed has failed on a magnitude equivalent to that of the experiment itself. Beijing’s stimulus fed a false investment boom that stoked asset bubbles. Then the drug wore off as the government tightened monetary policy. Although the dictators cover their derrieres with statistics that suggest a growth rate of 7.6 per cent year-on-year, skeptics believe that the number is closer to 4 per cent. One London-based research institute has calculated it at 1 per cent per annum. These are numbers that, if accurate, are harbingers of a coup d’etat.
Such outcomes are also harbingers of revolutions in economic thinking. Specifically, the collapse of the Beijing model has thrust Zhang Weiying, a now-prominent Beijing economist, to center-stage in the Chinese policy debate. Zhang Weiying represents a Chinese reincarnation of the great Austrian economist, Friedrich von Hayek. The $64,000 question is whether Zhang can achieve what Hayek evidently could not – burying Keynesian economics in the waste cycling dump of history.
As early as 2009, Zhang was preaching from the Austrian bible. The financial crisis, he argued, was caused by easy money – the Greenspan-Bernanke fallacy – and as such it could not be solved by more of the same medicine.
“The current economy is like a drug addict, and the prescription from the doctor is morphine, so the final outcome will be much worse.”
Zhang argued forcefully, that, if China’s economy was not allowed to adjust on its own, a minor bust would be followed by a much bigger bust. His prediction proved to be correct. The sheer size of the subsequent collapse suddenly has China’s elite paying serious attention to his thinking. He is now a favored speaker at policy-making meetings across China.
Like Hayek before him, Zhang was a radical thinker from the onset of his career. In 1983, he courted jail-time by arguing in a newspaper article that money was not the root of all evil. There followed a real threat to deny him the right to graduate. In 1984, with Deng now well-established, Zhang proposed that China should make use of two price systems – one controlled by the central government and the other by the market. The State Commission for Reforming the Economic System, listened and adopted his proposal.
Zhang then left for Oxford University, where he obtained his doctorate and a better grounding, somehow, in free-market economics. Returning to China in 1994, he co-founded the China Center for Economic Research at Peking University. From that Ivory Tower, he preached, in accordance with Aristotle and Thomas Aquinas, that there is such a thing as natural law and that the right to property is ‘passed prior to sovereignty’.
In 2002, Zhang was proclaimed economist of the year by the state-controlled CCTV. He was appointed Dean of the Guangua School of Management. But then the tide turned once again. The old guard, responding to Hu Jintao and Wen Jiabio, returned China to statist policies. The new mantra in Beijing became – gou jin, min tui or the state advances, the private sector retreats – and Zhang was forced out of his Guangua post in 2010.
Zhang Weiying retains a Hayekian optimism as he moves through cycles of dislike and adulation:
“We human beings always seek happiness’, says Mr. Zhang. ‘Now there are two ways. You make yourself happy by making other people unhappy – I call that the logic of robbery. The other way you make yourself happy by making other people happy – that’s the logic of the market. Which way do you prefer?’
Hat Tip: Abheek Bhattacharya, ‘China’s Anti-Keynesian Insurgent’, The Wall Street Journal, October 13, 2012