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Thursday, November 29, 2012



Power and Prosperity started with a question about the Soviet Union: whether or not a dictatorship, to enforce free market policies, would be necessary to restore that country's well being.  Olsen looks at that question all throughout the book, bringing forward the system that was used to create a powerful Soviet economy, and how it started to fall when groups of people started acting in their own welfare-maximizing interests.

China, for a time, emulated the Soviet system of state owned enterprises (SOEs), before famously moving in the direction of a more capitalist system.  That being said, they still retain some SOEs.  I know this because of a Reuters article, "Chinese state-owned enterprises defend further growth," by Charlie Zhu and Lucy Hornby.  The article presents arguments concerning the limitation of the remaining SOEs, how, unless they expand, they could hamper China's continued growth.  Furthermore, the article is heavily weighted with the conclusions of experts that it needs to expand for this reason, while still noting that the employment growth comes from the private enterprises.

The question is interesting.  China's stability and growth in recent decades clearly indicates that they were well within their production possibility frontier, to borrow a neoclassical phrase.  Yet, China has also had a managed currency for a long time, and I have heard analysis to the effect that it is the steady backbone of SOEs that have kept China more stable than the rest of the world in recent years.  I honestly don't know what this data is telling me: is control to this degree good or bad?  Moreover, how much does it depend on the nation's cultural expectations?

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