In 2007, I had the opportunity to take out a $800,000 loan (and with no down payment) to purchase a beach-front property in Revere, Massachusetts, USA. At the time, I was making $55,000 per year. Had I taken out this loan, I would have lost the property and been indebted to a bank, for shortly after in September of 2008 the real estate market collapsed. Such crashes are a feature of neoclassical economics. This has often been explained away as ‘creative destruction’, as advanced by the Austrian School under Joseph Schumpeter.
Today in 2025, we in the West still administer our economies according to a neoclassical scheme, which tolerates the ups and downs of market fluctuations, even though since the last century the stock market in the United States has been increasing overall from year to year (see Figure 1). One of the issues that is discussed by classical (i.e., non-neoclassical) economists (e.g., Hudson 2023; Norton 2024; Varoufakis 2023) is the issue of rent in an economy. Here a clear distinction is made between rent-seeking and industrial productivity. Rent seeking can be understood as the type of economy that was being managed by Fred Trump in the 1970s; he and his son were charging New Yorkers rent to live in low-income housing. This type of productivity by itself does not make society more prosperous even though having a place to live is necessary but not sufficient for productivity.
As has recently been promulgated by the President of the United States, Donald Trump, true prosperity comes about through the creation of new products to enhance employment. The activity that transpires on Wall Street, although important for securing investments, can be contaminated by a Ponzi-scheme mentality if not regulated. For example Bernie Madoff, who had been chairman of the Nasdaq Stock Exchange, was imprisoned in 2008 for running a Ponzi scheme that defrauded 20 billion dollars from investors. Such imprisonment, however, was rare following the crash of 2008, and most investors were compensated by taxpayers, justified as the only way to save the civilian economy.
Interestingly, in China, unlike the United States, the stock market is not central to the prosperity of the economy (Norton 2024). Over the past two decades the stock market of China did not increase in value (see Figure 2, bottom gold curve) but its economy continued to grow (see Figure 3). The government (not the market) provides direct investment to industry. The control of investments by the government is a way of minimizing rent-seeking behavior (Norton 2024). This suggests that China has adopted a classical approach to its economy thereby prioritizing the interests of its labor force over free-market investing. The Chinese believe that it was free market investing that destroyed the Russian economy in the 1990s, and we in the West believe that it was such investing that created the contingencies that enthroned Vladimir Putin.
Figure 1: Valuation of the Standard and Poor’s (S&P) stock market from 1928 to 2020. (bible_012.jpg)
Figure 2: Relative value of the stock market is plotted for the S&P of the United States (top blue curve) and for the Shanghai Composite (bottom gold curve) starting in 2009. (file: bible_013.jpg)
Figure 3: Per capita GDP (gross domestic product) growth of China between 1978 and 2022. (file: bible_014.jpg)
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China blends classical economics (e.g., capital accumulation, infrastructure investment) with state capitalism and strategic industrial policy. While some tools echo classical theory, China's success is more about adaptive economic planning, tight regulatory control, and tech-sector dominance than purely following classical models.
Your post seems to criticise the US while praising China whereas the charts and recent history say otherwise. As shown in your figure 3, China experienced economic prosperity following the successful economic polices of Deng Xiaoping who adopted Western-style private capitalism. Deng's achievement was near-miraculous and lifted millions out of poverty. The world needs more leaders like him. However, economic advancement has stalled under the current leadership, particularly with the permanent loss of capital by citizens in the spectacular collapses of the large property developers in recent years in which citizens had invested in unfinished apartments - which were always leasehold anyhow. Central government oversight of the economy has not succeeded as shown in your figure 2 and the tail-end flattening of figure 3. Chinese graduates are now entering a non-prospering economy and labour market. By contrast, figure 1 shows the unparalleled success of the US stock market driven by the US economy's underlying fundamental value. Why you conflate that with Bernie Madoff's ponzi scheme suggests you are trying to tarnish the US achievement. We need to follow the US example, not criticize it.
While China doesn’t strictly follow classical economics, it strategically blends state-led industrial policy, market liberalization, and export-driven growth in a way that leverages classical principles like comparative advantage and capital accumulation, thereby challenging U.S. dominance via a hybrid economic approach rooted in pragmatism more than doctrine.
La interrogante sobre si China utiliza la economía clásica para superar a Estados Unidos es fascinante y, desde mi perspectiva como doctor en economía y negocios internacionales, revela una profunda discrepancia en los paradigmas de desarrollo. El caso chino desafía la ortodoxia neoclásica occidental al demostrar que el crecimiento económico sostenido no requiere un mercado de valores central y desregulado, ni la tolerancia a las crisis cíclicas.
Mientras que en Occidente, el modelo neoclásico, con su inherente volatilidad de mercado (como la crisis inmobiliaria de 2008 que implicó pérdidas de billones de dólares en riqueza de los hogares en EE.UU., según la Reserva Federal), prioriza la rentabilidad financiera y la "destrucción creativa", China ha optado por un enfoque que recuerda más a la economía clásica: el control estatal de la inversión directa en la industria.
La clave está en la distinción entre renta y productividad industrial. China, al subordinar el mercado de valores a la inversión productiva real, ha logrado un crecimiento impresionante. Mientras el Shanghai Composite no creció significativamente entre 2009 y 2020 (como se observa en la Figura 2), el PIB per cápita de China se disparó de aproximadamente $$$150 en 1978 a más de $$$12,700 en 2022 (Fuente: Banco Mundial, Figura 3). Esto contrasta con la "búsqueda de rentas" (rent-seeking) que, ejemplificada por Fred Trump, extrae valor sin necesariamente crear nueva riqueza productiva.
El gobierno chino, a diferencia de la lógica de Wall Street que puede derivar en "esquemas Ponzi" (como el de Madoff, que defraudó 20 mil millones de dólares), ejerce un control significativo sobre las inversiones para minimizar el comportamiento de búsqueda de rentas (Norton, 2024). Esta priorización de la fuerza laboral y la inversión productiva sobre la especulación financiera es una lección crucial. La desconfianza china hacia la inversión de libre mercado se basa en la experiencia rusa de la década de 1990, donde la liberalización económica desregulada llevó al colapso del PIB en un 43% entre 1990 y 1998 (Fuente: Banco Mundial).
Podemos concluir que China no está utilizando la economía clásica en un sentido puro, sino que su modelo incorpora elementos de control estatal y priorización de la producción sobre la finanza especulativa, lo que le ha permitido un desarrollo notable. Esto nos obliga a repensar los dogmas neoclásicos y considerar si un mayor rol del Estado en la dirección de la inversión productiva, y una regulación estricta contra la búsqueda de rentas, son necesarios para un desarrollo más equitativo y sostenible, lejos de los ciclos de auge y caída que caracterizan al capitalismo financiero occidental.
China’s model is better described as state capitalism — heavy state direction, industrial policy, and SOE involvement combined with market mechanisms — not classical laissez-faire economics; its performance reflects targeted industrial policy, scale, and state coordination rather than pure classical economics.
Dear Dr. Arize:
You do have a point. The way China mishandled its real estate market would disqualify a strict Classical approach; the collapse of the real estate market in the US and Europe in 2008 was a standard neoclassical result.
Cheers,
Ed Tehovnik.
I respectfully disagree with the assertion that China is applying a classical economic system—as defined by Adam Smith—to outperform the United States. Adam Smith’s core principle in classical economics was that the government should not intervene in markets under any circumstances, apart from a few essential public functions such as defense, justice, education, and basic infrastructure. His concept of the “invisible hand” assumes that individuals, by pursuing their own interests, will contribute to the overall prosperity of society without direct state control.
China, however, follows a very different path. Rather than embracing a laissez-faire approach, China’s economic management relies heavily on the “visible hand” of the state. In recent years, especially in the real estate sector, the government has actively intervened through policies such as the “three red lines” to limit excessive borrowing, curb overbuilding, and stabilize the housing market.
During its property market downturn, the Chinese government took decisive actions that are fundamentally incompatible with classical economics: lowering mortgage rates, reducing down payment requirements, directing state-owned banks to inject liquidity, and even having local governments purchase unsold housing stock for conversion into affordable housing.
In contrast, the collapse of housing markets in Europe and the United States was largely due to the absence of immediate and large-scale rescue measures. In the 2008 U.S. housing crisis, debates about whether the market should self-correct or be bailed out led to delayed and insufficient interventions, which ultimately failed to prevent a deeper collapse.
Thus, the relative stability of China’s housing market compared to its Western counterparts is the result of strong, rapid, and targeted government intervention. This is not evidence of classical economics at work; rather, it reflects a modern, state-managed economic strategy where the government plays a central, hands-on role in directing market outcomes.
A good reference for understanding Marx as a classical economist: Hudson, M., 2023. Destiny of Civilization: Financial Capitalism, Industrial Capitalism or Socialism. Dimensions.
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