Friday, May 30, 2014


'Visible and invisible hands'
China Daily, 30 May HERE

President Xi Jinping's recent emphasis on the necessity of the government and the market correctly playing their respective roles to promote the sustainable and healthy development of the economy should serve as a timely reminder that any over-use of either the visible hand or the invisible hand will produce the opposite effect.

The Third Plenum of the 18th Communist Party of China Central Committee held in November vowed to give the market a decisive role in the distribution of resources, the highest status the market has been extended since the launch of reform and opening-up in 1978, but this does not mean the negation of the government's role in economic development.

China's government-led economic model has helped the country score an economic success, but it has also caused serious imbalances in its economic structure and resulted in a series of contradictions, whose resolutions depend on more market vitality and the upgrading and transformation of the country's economic structure, said an article in 21st Century Business Herald.

To give the market a decisive role, the government should reduce its direct interventions into the distribution of resources and microeconomic activities and set up an open, competitive and orderly market system. One in which market forces can play a greater role in those economic activities that should be free of the government's visible hand.

The government should refrain from directly intervening in the market, transform its function, tighten market supervision, strengthen public services and promote social equity and justice.

To facilitate such a transformation of its role, the government should deepen the reform of its administrative system, innovate its management methods and improve its regulatory system.

Regrettably, local governments have not done enough to push forward corresponding reforms. At a time when the country's economic growth is slowing, there are voices calling for the government to use its visible hand to stimulate economic development, something that would obviously be a regression for the market mechanism.

With the economic slowdown being used by some local governments as an excuse to delay some reforms and transform their functions, President Xi's stress on the invisible and visible hands playing their proper roles should be heeded to ensure sustainable development in the future.
Chinese political dialogue has always headed under banners of pith sentences. The latest are to sloganise the “visible” and the ‘invisible” hands.
These are an inversion of the reality of how governments and markets work.

The same terms are used in the UK and USA.  Social Democrats in the UK Labour Party are fond of making the same distinction and commonly use the “visible hand” to refer to government interventions (honest!) and “invisible” for market activities (suspicious).

Yet the reality is the exact reverse: Markets operate - can only operate - by VISIBLE PRICES and governments work by INVISIBLE POLITICAL PROCESSES protected by the Official Secrets Act).

No market anywhere works through invisible prices - nor is there an “invisible hand”.   Such is the falsity of the proposition that there is such a miraculous entity working in markets, nobody can write a mathematical term for it in any mathematical equation relating to markets.  Such is the inevitable failure to agree what the “invisible hand” does in market exchanges, economists choose to describe the “invisible hand” variously as: supply and demand, the (visible) price system, “markets”, Pareto’s theorems, even “general equilibrium” (a wholly imagined state in an equally imagined universe that does not exist).  None of these constructs are applicable, or necessary to describe market exchanges and none can do better than the VISIBLE prices that are absolutely indispensable for markets to work.

Anybody equated with government decision-making processes, both in democracies and in dictatorships, knows that these processes are mostly invisible to outsiders who nevertheless constitute the majority of a population.  That’s why retired politicans publish their memoirs to self-justify the hidden secrets of the decisions made or not made while they were in office. Classicaly, this week we learn that the public inquiry into the key decisions taken by governments to invade Iraq are to remain secret ‘for ever’.

Look at the words I marked in bold reporting the 3rd Plenum of the central committee of the CCP: “free of the government's visible hand” while it “tighten[s] market supervision”; and “reform[s] its administrative system, innovate[s] its management methods” and improve[s] its regulatory system”. Meanwile “government [is] to use its visible hand to stimulate economic development, something that would obviously be a regression for the market mechanism” and, piously "invisible and visible hands [will play] their proper roles”. 

Undoubtedly there is a shift in public rhetoric towards more market freedoms and, regretably, openings for many more corruption scandals that plagued earlier looser market forms under the bribable supervision of key party functionaries across government, while each side supposedly plays “their proper roles”.  (To be fair, China under total government planning was a mess, with corruption scandals even more serious and millions also died and suffered for decades).

The 3rd Plenum took place in November 2013.  Its decisions are now coming to light after months of internal invisible government decision-making.  That’s how governments work politically.  Turning a Chinese government’s political decisions into administrative procedures and operating them through the millions employed in the state agencies is no less ‘invisible’ to the millions of citizens affected by them. But every participant in markets can operate knowing the visible prices in front of them and act accordingly. 


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