Looking for Austrian perspective on China's Ghost Towns

Miscellaneous General
1

Hello, and thank you for taking the time to check out my post. I am brand new to the forums though I have been a visitor to the website many times in the past 6 months or so. I am a mathematics graduate student with a casual interest in economics, so my economic theory isn’t quite airtight. I do consider myself an anarcho-capitalist and relate with the discourse on Mises.org. But let’s get to my question:

Today I was talking to a fellow student and he mentioned something that piqued my interest. He explained to me that for the past few years, the Chinese government has been spending billions of dollars to construct new cities that have yet to be inhabited. Check out this link for a quick description:

http://articles.economictimes.indiatimes.com/2011-06-20/news/29679756_1_cities-skyscrapers-towns

After learning about these “Ghost Towns” we began to discuss the economic implications of such policy. To me the program seemed like terrible policy. I explained that it is a massive misallocation of resources, as one can see by the fact that no one is utilizing the real estate. I mean, these state-of-the-art cities are just sitting there waiting for residents. I also tried to explain to him that by building so many new homes, the government devalued existing homes. Not too mention, the government had to steal the money via taxes to pay for those new cities. Or if they didn’t, then they had to print money thus devaluing the currency which is really a tax in itself.

To me it made good sense that this policy was absurd and wasteful, but my colleague didn’t agree. He saw new homes, fresh cities, efficient public transportation, and employment. From his perspective the Chinese people are a wealthier people than they were before the cities were built.

What is your analysis on the issue? I realize this may be a fairly basic topic for some, but I think I could extract some interesting perspective from the posters on this forum.

2

Jobs in themselves are not an end, but a means to an end. Employment in digging ditches and filling them back up doesn’t create wealth because it doesn’t increase the productivity of a people. On the contrary, it removes labor from being directed to more useful tasks.

When talking about China with its planning of cities, the matter becomes a tad bit more difficult. I have heard that Chinese cities are banged full of people, so in fact construction of a new city may not be misallocation of resources when viewed from afar. Had there been a market, the cities might have been built much earlier. However, the problem then is knowing what sort of buildings and infrastructure a city will need. From my understanding, cities should evolve organically. The paths in a park should be created after footpaths by people show the best and most efficient places for the paths to be. Similarly, you should not create shops and residence buildings through central planning because you are highly unlikely to predict what the free market would have done.

Concluding, it is difficult to pass judgment on whether the Chinese government should have built these cities. On one hand, it’s playing catch-up to what history would have been like with capitalism (even the crony capitalism in the US). On the other, the cities themselves are artificial and centrally-planned.

The solution? Remove all of the central decision making.

Discussing two policy alternatives while retaining the central planning legitimizes a false dichotomy which hides the underlying problem - the lack of a free market.

3

The Broken Window Fallacy rears its ugly head once again - I’m sure you’re familiar with this. There are numerous forum threads, journal and daily articles, and blog posts on this on mises.org - search for those terms there (also search Youtube for some videos illustrating this).

Also see:

Hazlitt, Economics in One Lesson

Bastiat, That Which is Seen and That Which Is Not Seen (you can find this in the Bastiat Collection in mises.org literature section).

4

Thanks for the quick reply. I am familiar with the Broken Window Fallacy and I was even tempted to use it to make my point earlier today, but it didn’t quite seem analagous. My understanding of the BWF is that the window had to be destroyed to put the glazier and others to work. To me it seems like China’s central economic planners didn’t have to destroy anything to put their laborers to work on the cities (except maybe the value of other homes after the fact, or the value of the currency like I mentioned above). Perhaps I’m missing a something. Care to clarify?

5

As I understand (and feel free to debunk me) they “destroyed” productive time doing things that were not needed instead of things that are needed. Practically, digging a hole… and you know the rest..

6

Yes, it’s a matter of productive efforts and resources actually being productive. Your friend sees the new houses and such and thinks it’s all useful stuff. But if it’s so desired, and so useful, why is no one using it?? I covered this from the jobs angle here, but Hazlitt actually has a relevant section in chapter 4 of Economics in One Lesson…

A bridge is built. If it is built to meet an insistent public demand, if it solves a traffic problem or a transportation problem otherwise insoluble, if, in short, it is even more necessary than the things for which the taxpayers would have spent their money if it had not been taxed away from them, there can be no objection. But a bridge built primarily “to provide employment” is a different kind of bridge. When providing employment becomes the end, need becomes a subordinate consideration. “Projects” have to he invented. Instead of thinking only where bridges must be built, the government spenders begin to ask themselves where bridges can be built. Can they think of plausible reasons why an additional bridge should connect Easton and Weston? It soon becomes absolutely essential. Those who doubt the necessity are dismissed as obstructionists and reactionaries.

Two arguments are put forward for the bridge, one of which is mainly heard before it is built, the other of which is mainly heard after it has been completed. The first argument is that it will provide employment. It will provide, say, 500 jobs for a year. The implication is that these are jobs that would not otherwise have come into existence. This is what is immediately seen. But if we have trained ourselves to look beyond immediate to secondary consequences, and beyond those who are directly benefited by a government project to others who are indirectly affected, a different picture presents itself. […]

But then we come to the second argument. The bridge exists. It is, let us suppose, a beautiful and not an ugly bridge. It has come into being through the magic of government spending. Where would it have been if the obstructionists and the reactionaries had had their way? There would have been no bridge. The country would have been just that much poorer.

Here again the government spenders have the better of the argument with all those who cannot see beyond the immediate range of their physical eyes. They can see the bridge. But if they have taught themselves to look for indirect as well as direct consequences they can once more see in the eye of imagination the possibilities that have never been allowed to come into existence. They can see the unbuilt homes, the unmade cars and radios, the unmade dresses and coats, perhaps the unsold and ungrown foodstuffs. To see these uncreated things requires a kind of imagination that not many people have. We can think of these non-existent objects once, perhaps, but we cannot keep them before our minds as we can the bridge that we pass every working day. What has happened is merely that one thing has been created instead of others.

Just for the record this has been documented many times on the Mises Blog at least as far back as 2009. These may offer more insight as well…

Is China’s Economic Growth Real?

Chinese Ghost Town

Chinese Ghost Town, part 2

Chinese Ghost Town, part 2(b)

The World’s Largest Mall is a Ghosttown

The Inevitable Result of Central Planning: China’s Ghost Cities and Malls

I don't understand China
Broken Windows
7

The short answer is that taxes are broken windows.

This should clarify it some more:

https://forum.freecapitalists.org/t/discussing-with-a-keynesian-broken-window-fallacy-need-some-help/20836/24

I recommend reading Bastiat’s original description of the broken window fallacy. Also, the thread linked above contains some good discussion on the topic.

8

First of all it seems like you really know your stuff and that you handled yourself quite well, good to have you around the forums

It is undeniably a waste of resources. This is because the point of a ghost city is that there’s no one there who is inhabiting it. You can say that in the future people will come and live there, but big deal, all the resources used to make the city are needed NOW. You want to know what the per capita income of china is? About 7000. Want to know what the average income is? A few thousand less than that. And so with literally HUNDREDS OF MILLIONS of people hanging right around the poverty line that those resources in the form of money, labor both skilled and unskilled, and the various building materials, should be spent on EMPTY CITIES???

There are certainly arguments for erecting a city when it is filled in a year and there is a massive housing shortage, not much of one because that’s how bubbles are blown up and there’s the obvious question of “why doesn’t the private sector build new houses?”. There are none when they are empty cities in a country where millions need that money and those resources NOW.

Time matters, men do not live in an economic time void as many modern economists would like to believe in everything but business cycle theory.

9

Your colleague is out of his mind. Honestly, I can’t begin to fathom how he’d think the Chinese people are a wealthier people with these “ghost towns”. What good is more stuff if no one’s using it?

10

I’m thinking they might be preventing people from using the cities.

11

So China’s not the only one…

Myanmar’s new capital: a vast, empty city

12

It -is- the broken window fallacy. In short it’s unporoductive labor because it’s not fulfilling a need, just as breaking a window and then repairing didn’t fill an existing need. So too building a house no one needs is a net loss to society.

13

I wish my commute to work looked like that!

I especially like how pedestrians are safely crossing a 20 lane highway because there’s almost no traffic.

14
I don't understand China
15

Well, people did buy the property…

16

They bought some apartments. Just like a lot of Americans bought houses that were built in the US. That doesn’t mean everything is fine and dandy. What’s more, no figures were mentioned for the rest of the city. And if you notice, no one is living in them. I’m gonna go out on a limb and guess those two things are related. Most people don’t live in cities where there isn’t any commerce.

17

House Prices Plunge in Chinese Ghost Town

Even Joe Biden knows that the Chinese have 30 million plus in vacant apartments. Only neo-con Jonah Goldberg and Obama-crony Andy Stern seem to be completely clueless and buy into the fake Chinese boom. Here’s Reuters with the latest report on cracks that will lead to a massive crash.

http://www.youtube.com/watch?v=5Vm7DRQ6tPU

18

I explained that it is a massive misallocation of resources, as one can see by the fact that no one is utilizing the real estate. I mean, these state-of-the-art cities are just sitting there waiting for residents.

Check.

I also tried to explain to him that by building so many new homes, the government devalued existing homes.

1. If no one is buying the new houses, how do they devalue the old houses?

2. As stated, this is an argument against all prosperity. The old computers lose their value when new ones are made etc etc.

Not too mention, the government had to steal the money via taxes to pay for those new cities.

Check.

Or if they didn’t, then they had to print money thus devaluing the currency which is really a tax in itself.

Check.

On the other hand, somebody in China has trillions of dollars in a huge pile. Better he build a ghost city with the money than watch its value disappear.

To me it made good sense that this policy was absurd and wasteful,

Check

but my colleague didn’t agree. He saw new homes, fresh cities, efficient public transportation,

Would he say the same thing if they were built on the moon, or under the sea with no oxygen? Nobody wants them; they may as well not exist.

and employment.

Yes, a common mistake that is practically universal. People do not realize that parasitic jobs are worse than no jobs at all.

From his perspective the Chinese people are a wealthier people than they were before the cities were built.

Once the govt had the money, the q is what to do with it. Ghost towns are better than paper money, but certainly not a good thing in itself.