Lords, bondage, Hegel, and ... the US-China current account balance

Current global imbalances are mostly the mark of what is happening in the United States and China. And how the two are interacting, one could argue, is all that is going to matter. Pessimists view the current imbalances as the result of large domestic distortions and problems in international financial and monetary markets. Optimists consider the situation to be part of a normal adjustment and everything will automatically be fine.

Célestin Monga tries to reconcile both views using Hegel's approach of self-consciousness and the lordship-bondage relationship. Yes, we can apparently understand global imbalances using philosophy. The idea is the following: The Unites States and China have become largely interdependent and cannot ignore each other. Even if one has dominating position on the other, it can exploit the situation. Think of a fight to death between two adversaries. The winner becomes the master, but there is nothing left to dominate as the other is dead. The same would happen with the other winning. Both realizing that they so reliant the other, the solution is not to kill the loser, but to enslave him. But over time, the slave adapts and makes the master totally dependent on him and becomes more powerful.

How does this brings us to US-China relations? First ignoring each other, the US takes center stage with the Industrial Revolution, and China's 5000 year history takes a back seat. But since China has regained economic power and is on the verge to become the second economy in the world, both economies wage a battle for economic supremacy, best visible on the position with respect to the "manipulated" renminbi/dollar exchange rate (US position) and the "concerns" about the US dollar (China position). But both cannot ignore how intertwined they are, just have a look at the trade and capital accounts. This implies that they cannot unilaterally take policy decisions without considering very seriously how they other would react. They are locked in a Nash equilibrium, and at this point both are masters and slaves.

Should we not use philosophy and psychology instead of macroeconomics to understand global imbalances? Is this an example of behavioral economics going too far? We tend too often to think that countries act like a representative agents, and this analysis takes it to the extreme. One cannot ignore that some factors here are solely dependent on government decisions (exchange rate, monetary policy), that make it look a country acts as one, and is thus locked in a two player game. But this hides considerable heterogeneity of agents within, but while they face the same prices, their impact varies a lot: some are exporters, some importers, some directly, some indirectly. And government policies are a reaction to all this heterogeneity. I think our macroeconomic models are still more useful than Hegelian conjectures.