Here’s a great discussion about China’s amazing economy from James White, responding to the question, “How do you incentivise capital to invest aggressively at low returns on capital?”As I’ve discussed, the Chinese have no problem doing this. Like the rest of the world it enjoys surplus capital. The price tells us that. But China is able to mobilise this cheap capital in a way no-one else does. Partly it’s the extraordinary initial profitability to 2007, partly it’s capital controls and mainly it’s political. Political advantage in China comes from investing and creating higher levels of activity, either as entrepreneurs or cadres.
The solution to the problem is public sector investment. It’s investment in infrastructure, in the platform of the economy that creates growth. It is, and this addresses Krugman’s first point, also a matter of thinking about reforming patent and copyright law. China is an open-source economy. This makes it terrible for capital. It’s the worst place in the world to invest. But it creates a strong platform for growth and with the platform for growth comes usage payments: taxes.