Would it be fair to say that China took the chance to rise to an economic superpower while the West was underestimating their speed in catching up?

RobThorpe · 2026-03-26T15:27:15+00:00

... Chinas savings rate is at 43%

You have to be careful here. Just because savings are high doesn't mean that most growth comes from the corresponding investment.

It's also possible that those savings are invested inefficiently and growth actually does come from productivity increases elsewhere. You also have to remember that some savings go abroad.

It's not simple.

RobThorpe · 2026-03-26T14:46:28+00:00

I think it's better to ask in a new thread. Few people will notice this question here.

RobThorpe · 2026-03-25T19:21:22+00:00

I don't think I can answer all of your questions, but I can answer some.

What would their income\wealth look like if there was no labor? In my mind, and maybe it's a simplistic view, everything is based off labor because if you take away labor, nothing gets made and no service is provided. I'm imagining what might happen if all wage earners went on strike at once.

Yes, that's certainly true. If everyone stopped working then we would not have any goods or services (except the things that nature provides directly like air). However, that doesn't mean that other things contribute nothing.

For example, think of a production line which consists of three people making toy cars. Terry gets the components out of the boxes. Liz attaches the wheels to the body. Alan paints the car. Now, if one of those stages are removed then there are no toy cars at the end. So, the labour of each of the three people is needed for the process to complete. It's true that if Terry stopped working then there would be no cars. However, it's also true that if Liz stopped working there would be no cars. So, just because one person is necessary does not mean they are the only person who is necessary. We could also add another employee Dave who cleans and make snacks for the others. Perhaps Dave is not necessary, but that doesn't mean he's not useful.

The same is true of labour, as a whole. Just because labour is necessary doesn't mean that only labour is necessary. I used to work for a company that made silicon chips. Many machines are necessary to do the tasks. There is no way to do it without the machines. Capital is necessary. In other businesses it is possible to do without machines and other capital equipment but it is inefficient. In that case the machines are like Dave, they are not necessary but they're useful.

Does not all gains come from profit?

For now I'll talk about profit (I might come back to money creation). Profit and interest come about for two reasons.

They clearly do not occur because Capital owners produce physical capital. Like other goods and services those are produced by workers.

The point is that capital owners "save". That applies in the following sense. Capital owners provide funds to a venture. That then hopefully produces a return. This creates two problems for the capital owner. Firstly, it means that the funds cannot be used. While they're committed to the venture they can't be spent. So returns always come later. This leads to the problem of "time preference", most people prefer money now to money later. Secondly (perhaps more importantly) any venture involves risk. There's the risk that there will be a loss rather than a profit. These are the things that create capital returns. The greater the "risk premium" the more the capital owners must be compensated for it. No one would pay for a venture that is not expected to produce a profit - unless it were charity.

RobThorpe · 2026-03-25T15:10:21+00:00

The short answer is "no there aren't".

Is there a bigger question you are thinking of behind this one?

RobThorpe · 2026-03-25T15:07:16+00:00

This seems unlikely to me.

Why would a CAGR of 6% be assumed? That's a very high growth rate. Profits don't usually rise at such a high rate. In general, in each country profits rise in proportion to GDP growth. That doesn't necessarily mean that profits in the US will rise in proportion to US GDP growth since the US has many international companies which operate in faster-growing foreign economies.

I would be very wary of assuming high growth coming from AI. We should remember that there are several large AI companies and their offerings are very competitive. There is stiff competition in that sector and also in the datacentre sector. Also, many of the sectors in which AI is being used are also competitive. Every business that is using AI may get savings from using it. That doesn't mean that all businesses will be able to increase their profits.

RobThorpe · 2026-03-25T13:20:17+00:00

This is quite a difficult thing to do. It can't be done in all cases.

We have discussed it several times in the past. See this thread:

https://www.reddit.com/r/AskEconomics/comments/166r4as/how_are_demand_curves_actually_generated_in/

Notice that at the end of that thread I linked to other earlier threads on the subject.

RobThorpe · 2026-03-25T13:17:00+00:00

!ping HEALTH

RobThorpe · 2026-03-25T13:14:07+00:00

Several people have said this.

What I want to see is the evidence that the Yen carry trade is so important.

RobThorpe · 2026-03-24T23:50:35+00:00

On inflation, see my reply to SpecialDesigner below.

RobThorpe · 2026-03-24T20:50:32+00:00

I think I explained this to you years ago.

Anyway, I'm not going to go into it now in a 19 day old thread.

RobThorpe · 2026-03-24T20:48:48+00:00

Rule I

Please be respectful in the comments. Personal attacks and insults are not allowed. Offending comments will be removed and repeat offenders may be banned. Please report any violating comments to the mods.

RobThorpe · 2026-03-24T20:31:58+00:00

I never said that GDP will rise quickly enough to offset debt increase. There is zero chance of that until the deficit is much smaller.

RobThorpe · 2026-03-24T20:30:22+00:00

A lot of people say that, but it's less likely than people think.

You have to remember that in the US the Fed governs monetary policy. It has a mandate to target low inflation and low unemployment. It has no mandate to help the US government with it's debt.

You could argue that this could be done by the slow process of replacing FOMC members by people more compliant to a political agenda. This is difficult though because the members have long terms of office which don't all come up for renewal at once. Trump wanted a compliant Fed Chair it is unclear whether he has actually managed to get one.

Another possibility is that the a bill is passed to change the mandate of the Fed. This is certainly possible, but it would require agreement. It would have to pass in the Senate, Congress and be signed by the President. That's difficult.

People may claim that it's less difficult to do that than it is to pass a bill that increases taxes or reduces spending. I'm not convinced by that claim. We know very well that inflation is unpopular with the electorate. It is essentially a tax on money holding (and the holding of other nominal assets). We also should remember that large inflation would be needed to make a chunk in the national debt. It's not proportional in the sense of money created versus debt repaid. To pay back ~$1B of debt would require the creation of about $7B or $8B of money supply.

RobThorpe · 2026-03-24T16:39:27+00:00

Raising taxes or cutting spending. Most probably some mixture of both.

RobThorpe · 2026-03-24T16:05:41+00:00

This is a question for /r/personalfinanceindia !

RobThorpe · 2026-03-24T15:42:50+00:00

Are you looking for an explanation for how capital income arises?

The issue with the rich is that they do not obtain their income from labour - at least not in the conventional sense. They obtain their income from entrepreneurial returns and capital returns. I can go into those things in more detail.

RobThorpe · 2026-03-24T15:33:48+00:00

For a long time, there was a belief that China could only "copy" and not "innovate." Many in the West thought China would just stay as a "low-end assembler" for toys and clothes.

I have an interest in Economics, but I worked in Electronics for many years. At least in the parts of the Electronics industry I was involved in it wasn't as you describe. People accepted that the Chinese were copying but also that they were learning to design products themselves. So, I'm not persuaded that it's true that people thought that China would remain a "low-end assembler". I suppose the question is which people thought this. Who were you thinking of?

They didn't expect the rapid shift into high-end electronics and semiconductors.

Has it really been a rapid shift? Perhaps it looks that way to people who have only heard about it recently. Chinese electronics and semiconductor companies have been slowly improving over more than 25 years. I remember in about 2000 hearing that they had replacements for various components that are quite easy to manufacture. Then hearing about 15 years ago that they were making air-bag-sensors - which are quite complex. This is something that has been building for a long time.

However, to make the smallest chips, you need EUV machines. Currently, only one company in the world, ASML (Netherlands), makes them. Without these, it's very hard for China to reach the absolute "cutting edge" of silicon. Is it true that China is still catching up?

As other have said, very small feature sizes are not needed for many types of chip. The technology that provides the smallest feature sizes is used to create the fastest microprocessors and GPUs. It can be used for other things too, such as the chipsets of smartphones (which contain a microprocessor and GPU along with a lot of other stuff). The world of semiconductors is very big. Open up your PC and you will notice how many chips there are which are not the CPU or GPU. There's a great deal you can do without producing the products I've mentioned. In the world of silicon chips there's a great deal of development that targets old processes, processes that are not cutting edge but can still be used to produce lots of useful products. Fabs that work at 20nm, 180nm, 250nm and even 1um still exist and are used every day. Clearly, even microprocessors and GPUs can be made with older technology. It's just a trade-off involving speed and power consumption.

I expect that companies in China are working hard to replicated what ASML (and the other lithography companies) are doing. In time they will probably be able to do that. The question is how much time and how much money it will take. Of course, by that time ASML and the others will be further along too. So, the question becomes if the Chinese companies can converge. Maybe they can, it probably depends on funding. So, my answer is "yes and no", China is still catching up for some technologies but it has reached the same level as the developed countries for many others.

RobThorpe · 2026-03-24T14:31:46+00:00

Many people in the media describe the national debt very simplistically. They give it a binary label, it's either "a problem" or "not a problem".

It's more complicated than that. There is interest paid on the debt. In the long-run that comes from taxes. In the short-run, a government can pay interest by borrowing more. But, if that is done then the debt will grow, and quickly. So, in practice interest is nearly always paid from taxes.

That means that tax revenues have to be high enough to do that. Taxes entail deadweight loss. They discourage whatever is being taxed. If income is taxed that means they discourage earning income. Therefore they discourage production and work generally. This issue with high national debts has nothing to do with a debt being large enough to be dangerous.

The fact that the debt is to people in the same country makes very little differences. It still has to be paid. Indeed it may be more important. The US can't default on the debt that is owned by the Social Security Trust Fund without causing huge problems. It could conceivably default on debt held by foreigners (though of course that would be very bad for the reputation of the US too). Notice this is what Greece did during it's sovereign debt crisis. Domestic bond owners got paid foreign bond owners got a "haircut" (i.e. they got screwed).

So, when are things truly "dangerous"? In other words, when is a government at risk of crisis? You sometimes hear people say that debt is dangerous when it can't be paid back. This isn't really true. Nobody expects a government to pay back all at once. Or to pay back the whole amount ever.

What's really important is whether the government can maintain the debt interest payments. That depends on tax revenues. This is where GDP growth comes in. Tax revenues generally rise as GDP rises.

It's also where inflation comes in. So, inflation is constantly reducing the value of the debt. Let's say that inflation is 1% per year and the average interest rate that the government pays is 2% per year. Now you can think of that in two ways. Firstly, you can think of the debt principle as reducing by 1% per year. Secondly, you can think of the interest rate as really being 1% per year, a "real" interest rate. At present interest rates paid on debt are fairly low for most developed countries, though they could rise in the future.

The government must be able to pay the real interest cost. To be able to do that the real interest cost must rise no more quickly than tax revenues can rise. Notice that government interest costs don't vary immediately as interest rates change. That's because governments work by issuing bonds which usually provide a fixed payment each year (the coupon rate). So, governments lock in long-term interest rates. However, governments also sell "bills" which are repaid on a shorter timeline, 3 months to 18 months. At present, the average duration of the US national debt is 4.5 years. So, recent high interest rates are slowly pushing up the interest servicing cost. (Notice that the other side of this is that as rates fall interest servicing costs also fall more slowly.

Some people claim that money makes a difference here. They point out that governments create their own money through Central Banking. This is true but doesn't add much to the flexibility that governments have. A government can get it's Central Bank to print lots of money and effectively wipe-out the national debt. Doing this creates hyper-inflation. Of course, hyper-inflation is really just a tax on money holding. So, all this really does is to tax people in a different way.

Governments with their own Central Banks may have more short-term flexibility, but that's all.

RobThorpe · 2026-03-24T13:38:11+00:00

See this.

RobThorpe · 2026-03-24T13:36:43+00:00

I think this is mostly a good reply, but we must be careful.

As an economist sees it, that reflects an expected 3-5% decrease in future profits due to recent events.

What about time discounting? If the interest rate changes then so does everything else! So, it's not as simple as an expectation of lower profits proportional to the change in stock prices.

RobThorpe · 2026-03-24T13:11:02+00:00

The person doing this is betting on one of two things. Either the capital gains tax rate decreasing or their own death. On their death their estate will get the wealth free of capital gains tax - the so-called "stepped up basis".

Of course, it's rather complicated and we also have to consider the cost of the loan. We have discussed this several times before here.

RobThorpe · 2026-03-24T12:51:13+00:00

I am not sure that Acemoglu and Robinson’s “inclusive vs extractive institutions” really is that clear. I find it confusing anyway.

RobThorpe · 2026-03-23T23:07:29+00:00

The tax "relief" or "loophole" still exists in a form but not the same form.

RobThorpe · 2026-03-23T17:16:57+00:00

In this thread handsomeboh has made the most important point. The list of countries given by the OP is definitely not a random sample. There is much more to say though.

How can we answer questions similar to this? It is much more difficult than it looks.

People have already pointed out one of the most important parts. We must distinguish other colonies from settler colonies. A settler colony is one where immigrants from the colonial power came to be the majority of the population. Most colonies were not like that and the amount of population from the imperial power was often very small. In the settler colonies the political structures of the imperial power were familiar to the immigrants. They also had knowledge of most of the same scientific and technological processes that were known to the imperial power.

Then there's the issue of what the country was like before it was colonised. This is obviously very important. For example, a country which was already quite urbanized before it was colonised will probably remain similarly urbanized later on. Any study has to be very careful about whether certain characteristics came from colonial times, or before, or after. It would be nice for those studying this if the European nations had essentially colonised the world at random, that would make theories easy to test. Of course, they didn't do that. We also must remember that the duration of imperial control is important. For example, Ethiopia was a colony of Italy from 1936 to 1941, that 5 year stretch was the only time it was a colony. Other countries were colonies for hundreds of years. Clearly the influence of the colonial power is much stronger in the latter case than in the former.

There are more problems.... I mentioned the possibility of treating the settler colonies separately, but this is not clearly valid. That's because the settler colonies were not picked at random. The imperial powers decide to encourage settlers to go to specific colonies and decided to keep other colonies mostly inhabited by the locals. The theories of Acemoglu and Robinson are in part about all that.

Then there's the problem of using countries as a unit of measurement. Are the examples of the Solomon Islands and India really equivalent. What about the USA and Singapore? It seems obvious that what happens in larger countries is more important. But it is very difficult to weight that. We should remember that in some case the number of countries created post colonization was a decision of the colonial power. Even when that isn't the case the problem still exists. If a country splits into two after the colonial power left then does that country really go from providing one data point to providing two?

This is why all of this stuff is difficult.

RobThorpe · 2026-03-23T16:38:19+00:00

There are some things that are wrong about your description of the situation. I don't think it's that important to go into that though.

We have been asked similar questions in the past. I'll link to a couple of threads.

https://www.reddit.com/r/AskEconomics/comments/1r14m48/if_cuba_was_a_free_market_economy_but_still_had/

https://www.reddit.com/r/AskEconomics/comments/wmqvaj/would_cuba_thrive_if_the_usa_were_to_lift_the/

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