China market collapse Hitoshi Yamada/ZumaPress

China’s Political Interventions

In a planned economy like China’s, where policymakers use various tools to influence asset prices, the instability that arises from overvalued assets could, in theory, be avoided. But, in practice, that does not seem to be the case.

TOKYO – In the last week or so, stock markets around the world have been hit by an upsurge in volatility, with large price swings confronting traders in New York, Tokyo, London, and beyond. And the entire global financial spasm has been largely blamed on a single culprit: China.

In a free economy, market mechanisms can produce stability or instability. An increase in the price of a tangible good would typically cause demand to fall, leading the market toward a new equilibrium. By contrast, an increase in the price of an asset like a stock raises expectations of a further increase, causing demand to rise, potentially to excessively high levels.

In a planned economy like China’s, where policymakers use various tools to influence asset prices, such instability could, in theory, be avoided; indeed, the Marxist view is that government intervention to stop crises is precisely why controlled economies are superior to their free-market counterparts. But, in practice, that does not seem to be the case.

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