Friday 20 July 2012

Oh Kimi

So, apparently North Korea is to 'reform' its economy under the leadership of Kim Kong-un. This has followed in the great traditions of China and the USSR in 'purging' generals in order to wrest control from them. Apparently the main general was pushed out for reasons of illness, but nobody seriously believes that. Evidently, opening up the insular nation and freeing the press were not high on the reformist list of 'things to do'. However, I have very little hope in these economic reforms, at least in the long run.

The cabinet had created a special bureau to take control of the economy, with the control being taken away from the military. What, on the microeconomic level has really changed? Nothing. This is the typical approach of the statist. Some economists of the left might write about how reforms of this nature will help revive the economy, as if it was simply a problem of mismanagement. Another approach, you might call it an Austrian approach, is to view the economy through the various actions individuals, and through them, businesses make to trade. Do they buy goods from X or Y? do they sell at price A or B? It is from this, microeconomic level, that the economy as a whole grows. The failure to merge this properly into macroeconomics is one of the greatest problems I see with modern economics. Modern macroeconomics sees the economy on the macro level acting independently from the micro, the sectors apparently not acting based on what people at the micro end buy and sell. This is why macroeconomists seem to spout such nonsense so often, and why their predictions tend to be way off target.

The problem is, both in Western governments, and more keenly felt in nations like North Korea, the government sees the economy in these narrow macroeconomic terms. Thinking that if you just build a steel industry, you will sell steel products to the world (or at least your own nation), and it will be wondrously efficient. This thinking is what gave the world the Lada and Moskvitch cars and the appalling failures of the Virgin and Idle lands Scheme (which turned large areas of Kazakhstan into desert and resulted in large quantities of grain being imported from Canada during the 1970s and 80s).

For all the zeal that the North Koreans might put into 'reforming' the economy, I doubt they will achieve that much. It is effectively impossible for any North Korean to accumulate capital, so the market economy cannot function. The only way to repair the economy is to free it from government control, to allow individuals to make up their mind as to what they are willing to buy and sell. Ignore the macroeconomists and set the microeconomy flourish, allow people to start a business and create wealth without facing insurmountable barriers. In essence, to fix the North Korean economy, North Korea must abandon the Communist mantra that makes it so famous today. It might not take up many news headlines, but at least the people would be able to eat.

The same solution applies at home, cut bureaucracy, cut government spending and allow the real, micro-level  economy to thrive.

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