http://www.bradford-delong.com/2018/04/joseph-schumpeter-on-liquidationism-hoisted-from-the-archives.html
Hoisted from the Archives: Joseph Schumpeter on "Liquidationism": Three things strike me while rereading Schumpeter's 1934 "Depressions" (and also his 1927 Explanation of the Business Cycle):
How much smarter Schumpeter is than our modern liquidationists and austerians--he says a great many true things in and amongst the chaff, which is created by his fundamentally mistaken belief that structural adjustment must be triggered by a downturn and a wave of bankruptcies that releases resources into unemployment. How much more fun and useful it would be right now to be debating a Schumpeter right now than the ideologues calling for, say, more austerity for and more unemployment in Greece!
How very strange it is for Schumpeter to be laying out his depressions-cause-structural-change-and-growth theory of business cycles at the very same moment that he is also laying out his entrepreneurs-disrupt-the-circular-flow-and-cause-structural-change-and-growth-theory of enterprise. It is, of course, the second that is correct: Growth comes from entrepreneurs pulling resources into the sectors, enterprises, products, and production methods of the future. It does not come from depressions pushing resources into unemployment. Indeed, as Keynes noted, times of depression and fear of future depression are powerful brakes halting Schumpeterian entrepreneurship: "If effective demand is deficient... the individual enterpriser... is operating with the odds loaded against him. The game of hazard which he plays is furnished with many zeros.... Hitherto the increment of the world's wealth has fallen short of the aggregate of positive individual savings; and the difference has been made up by the losses of those whose courage and initiative have not been supplemented by exceptional skill or unusual good fortune. But if effective demand is adequate, average skill and average good fortune will be enough..."
How Schumpeter genuinely seems to have no clue at all that the business cycle is a feature of a monetary economy--how very badly indeed he needed to learn, and how he never did learn, what Nick Rowe and company teach today about the effects of monetary stringency on economic coordination.
(1934): Depressions: What Can We Learn from Past Experience?
The problems presented by periods of depression may be grouped as follows: First, removal of extra economic injuries to the economic mechanism: Mostly impossible on political grounds. Second, relief: Not only imperative on moral and social grounds, but also an important means to keep up the current of economic life and to steady demand, although no cure for fundamental cases.
Third, remedies: The chief difficulty of which lies in the fact that depressions are not simply evils, which we might attempt to suppress, but--perhaps undesirable--forms of something which has to be done, namely, adjustment to previous economic change.
Most of what would be effective in remedying a depression would be equally effective in preventing this adjustment. This is especially true of inflation, which would, if pushed far enough, undoubtedly turn depression in to the sham prosperity so familiar from European postwar [i.e., World War I] experience, but which, if it be carried to that point, would, in the end, lead to a collapse worse than the one it was called in to remedy.
Fourth, reforms of institutions intended to remedy the situation but suggested by the moral and economic evils of both booms and depressions: The crucial point of these reforms lies in the coincidence of a political atmosphere exceptionally favorable, and an economic situation exceptionally unfavorable to their success. No doubt they will always be carried amidst enthusiastic clapping of hands. But they will also be stigmatized in the future by their tendency to prevent or retard recovery. This should not blind to us to any merits they may have, but it is a plain and undeniable fact.
The Atmosphere of Periods of Depression: We have seen that the course of events in all periods of depression presents a significant family likeness. So do the attitudes of the people. Defeat on the battlefield destroys the prestige of military rulers and their confidence in themselves; crises destroy whatever of both these things business leaders may enjoy. Their cry for help is the more damaging for them the more they disapproved of government interference before. For the time being, the majority of people grows out of humor with the economic system under which they live, and becomes inclined to favor what in some cases we call reaction and in others radicalism. In fact, it makes astonishingly little difference which way they more politically. The consequences are much the same in both cases....
The Upshot: There is on reason to despair--this is the first lesson to be derived from our story. Fundamentally the same thing has happened in the past, and it has--in the only two cases which are comparable to the present one--lasted just as long. We are more keenly alive now to human suffering, and we are dealing with the situation under political pressure by political methods, but substantially we are confronted only with problems which the world was confronted with before.
In all cases, not only the two which we have analyzed, recovery came of itself. There is certainly this much of truth in the talk about the recuperative powers of our industrial system. But this is not all: our analysis leads us to believe that recovery is sound only if it does com of itself. For any revival which is merely due to artificial stimulus leaves part of the work of depressions undone and adds, to an undigested remnant of maladjustment, new maladjustment of its own which has to be liquidated in turn, thus threatending business with another crisis ahead. Particularly, our story provides a presumption against remedial measures which work through money and credit. For the trouble is fundamentally not with money and credit, and policie of this class are particularly apt to keep up, and add to, maladjustment, and to produce additional trouble in the future...
-- via my feedly newsfeed
LONDON – The world will soon witness a historic test of wills between China and the United States, two superpowers whose leaders see themselves as supreme. In the immediate sense, it will be a battle over trade. But also at stake is the strategic leadership of East Asia and, eventually, the international order. As things stand, China holds a stronger position than many people realize. The question is whether Chinese President Xi Jinping will feel confident or brazen enough to want to prove it.
The test of wills was hardly China's choice; but nor does it come as a surprise. US President Donald Trump's recently announced import tariffs on steel, aluminum, and other Chinese-made goods are in keeping with his brand of economic nationalism. And his decision to accept North Korea's invitation to hold bilateral talks on its nuclear program reflects the same "bring it on" attitude that he applied to the North's earlier threats of war.
The upcoming test will be historic because it promises to reveal the true strengths and attitudes of the world's rising power vis-Ã -vis the weakened but still leading incumbent power. For better or worse, the result could shape the world for decades to come.
On the trade front, China's large bilateral surplus with the US could mean that it has more to lose from a trade war, simply because it has more exports that can be penalized. It is often said that surplus countries will always be the biggest losers in any tit-for-tat escalation of tariffs and other barriers.
But this assumption misses multiple points. For one thing, China is more economically resilient to the effects of a trade war than it used to be. Trade as a share of its total economic activity has halved in the past decade, from more than 60% of GDP in 2007 to just over 30% today.
China also has major advantages in terms of domestic politics and international diplomacy. As a dictatorship, China can ignore protests by workers and companies suffering from US tariffs. In the US, where mid-term congressional elections will be held this November, the outcry from exporters, importers, and consumers facing higher costs will be heard loud and clear.Of course, Trump, too, might ignore protests against his trade war if he is convinced that taking on China will please his core voters and win him re-election in 2020. But congressional Republicans will probably feel differently, especially if their states or districts are among those being singled out by Chinese import tariffs.
In terms of international diplomacy, Trump's trade war will help China present itself as the defender of the rules-based international order and multilateral institutions such as the World Trade Organization. To be sure, not all countries would follow China's lead. The WTO does not recognize China as a market economy, owing to the Chinese government's significant involvement in industry and alleged theft of intellectual property.
But China will have a chance to play the victim, while arguing that the US now poses the single largest threat to the global trading system that it helped create. And if a US-initiated trade war drags on, China's case will become only stronger as more countries suffer the disruptive effects of tariffs.
Of course, China may choose not to fight Trump's trade war at all. With symbolic concessions – such as an agreement to import US-produced liquefied natural gas or promises to offer new guarantees for intellectual-property rights – it could convince Trump to stand down. But if Xi suspects that a show of strength will bolster China's international standing while undercutting that of the US, he may decide to act accordingly.
The North Korea issue is more complicated. But here, too, China will have an advantage. Even barring real progress in the talks, China already looks like a good global citizen. Over the past year, it has been pressuring the North Korean leader, Kim Jong-un, to negotiate. By participating in coordinated economic sanctions against the Kim regime, and by reportedly capping vital exports of oil and other essentials to the North, China has played its part in bringing Kim to the table.
On paper, the fundamental question is whether North Korea will be willing to abandon its nuclear-weapons program, the fruit of more than 30 years of work. And as China well knows, North Korea would never give up its nuclear weapons without major changes in the military balance on and around the Korean Peninsula.
Kim will likely offer to denuclearize solely on the condition that the US withdraw its forces from South Korea, and perhaps from Japan, too. Barring that, he would not feel secure enough to do without the nuclear deterrence on which he has staked his regime's survival. For his part, Trump could not possibly accede to such a condition. At best, he could agree on a process through which such extraordinary moves might be discussed at a later date.
Either way, China comes out on top. In the event of stalemate, it will have gotten Kim to the table and put America in the position of being a refusenik. And if the US does agree to any military concessions, China's strategic position will be strengthened.
The only real question for Xi, then, is whether he wants to assert China's top-dog status now, or sometime in the future.