China’s President Xi Jinping is a devotee of Austrian economics. Unfortunately, he does not follow the enlightened and intelligent economics of the “Austrian School” — Eugen von Böhm-Bawerk, Ludwig von Mises, and Friedrich Hayek. Instead, China’s attempts to dominate the economies of its neighbors through “Belt and Road” investments, its use of slave labor, its exploitation of foreign investment through intellectual property theft, its protectionism, and its military buildup and adventurism, together follow the economics of a different Austrian. Yes, you know who I mean!

Before it got itself mired in death camps and the snows of Russia, the Third Reich had an internally consistent economic policy, albeit one that bore little relationship to free market capitalism. It revived the economy through government spending, as Keynes recommended – indeed Keynes commented gleefully in the first German edition of “General Theory” published in 1936 that an authoritarian regime made it easier to carry out his program than in boring Western democracies.

The Third Reich used many tools to do so, not all of them compatible with a free economy: direction of resources and labor, including an increasing amount of unpaid slave labor, a massive armaments program, a Four-Year Plan formulated in 1936, and state control of imports and exports. It also made bilateral deals with the countries of south-east Europe, with respect to certain commodities, with prices and exchange rates fixed by Germany in its favor, by which it linked their economies with that of the Reich. Internally, while the government did not nationalize the means of production, it set prices and compelled domestic companies to follow the dictates of the Four-Year Plan through the Office of Production Management in respect of employment and investment.

China’s economic policy follows a similar trajectory. Through the “Belt and Road” scheme it imposes subordinated relationships upon a larger collection of smaller nations than the Third Reich could have dreamed of (many of them still being British or French colonies at that time.) The Third Reich did not have investment capital to spare – its banking system had collapsed only two years before its advent – but China’s use of foreign capital investment to tie weaker nations to its orbit is fully in the Third Reich spirit. Its banking system is also used for massive infrastructure investment – the high-speed rail and megacities of China replicate on an immensely larger scale the autobahns and sportspalasts of the Reich, both dwarfing their populace and impressing foreigners with their architectural quality. Even the Olympic Games (2008, 1936) was used to similar effect.

Like the Third Reich, China has engaged in a massive armaments program and uses the technologies of its private sector to make its armaments more effective (the Third Reich’s ability to build the Luftwaffe came largely from Germany’s superlative engineering sector, for example). China’s spies are electronics firms like Huawei, rather than suave but ineffably cruel uber-mensch clad in spotless black leather, so they are correspondingly more effective.

Like the Third Reich, China governs the direction of the economy through central planning – in China’s case, a series of “Five-Year Plans” and uses the state’s absolute power, with no effective “checks and balances” to ensure that its Plans are in the main carried out. A decade ago, the Chinese private sector was truly private, operating mostly outside the dictates of state planning; as the takedown of Alibaba and Jack Ma indicated, that is no longer the case. Moreover, the behemoths of Chinese nationalized industries, already given preferential access to credit, have become more powerful and more heavily favored in the last decade, and now dominate China’s economy much more than they did. There is also apparently considerable use of slave labor, as in the Third Reich.

The problem with China following this particular Austrian’s economic policies is that the policy mix is self-defeating. The massive investment in military hardware, together with that in infrastructure that is dictated by political glory-seeking rather than economic need, eventually causes the system to run out of money. Central Planning results in massive misallocation of resources, as damaging in the Reich as the mass empty provincial city tower blocks of China – the German banking system had little time to build up the gigantic ziggurats of bad debt that now overwhelm the tottering Chinese banking system.

Even the most famous and innocuous of the Third Reich’s investment projects, the autobahns, were built far in advance of economic need since Germany in 1939 had very few private automobiles. The autobahns became private racetracks for the very rich and the Party elite, on which Britain’s Lagonda V-12 inflicted the ultimate humiliation on the Reich by setting the speed record averaging over 100mph on the newly opened Frankfurt-Mannheim autobahn.

Germany attempted to solve its increasing resource scarcity by invading its neighbors, acquiring the Skoda armaments complex in Czechoslovakia and massive oil resources in Romania. China’s resource scarcity has been assuaged by imports, paid for by the massive exports of manufactures produced by its billion poorly-paid or even slave workers, but that advantage becomes less as world trade barriers are erected and China’s demographics become less favorable. “Belt and Road” was an attempt to solve the resource problem without physically invading China’s neighbors; only in a few especially benighted and impoverished places such as Afghanistan is it likely to succeed in the long run.

Given China’s constraints and the dangers of nuclear confrontation, it would be insane to adopt the Third Reich’s solution to resource shortages – of global aggressive war. It will be the principal task of American and other Western diplomacy to keep this reality firmly top-of-mind for Xi and the other Chinese leadership. Rather than follow his chosen Austrian all the way to the destruction of humanity, Xi needs to look seriously at the alternative of changing Austrian economic ideals, to those of the great Austrian school of economics.

With an Austrian economic view, he can see clearly that the over-investment and Keynesian “stimulus” of the Chinese economy in the last 20 years has been a terrible mistake. The “malinvestment” – all those unoccupied office blacks, all those catastrophically loss-making steel mills — needs to be liquidated. To quote a finance minister far greater than any China has had – or anywhere else in the last 40 years — Andrew Mellon:

“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.”

The parts of that quotation beyond the first sentence also matter. There is a great deal of rottenness in the Chinese system, not least in its one-party state and totalitarian politics, that must be purged. The artificial glitzy prosperity brought in the big cities by low-interest rates and easy credit must be brought down to a sustainable level that assuages rather than inciting social unrest.

The Chinese hardly need to be taught to work harder, but leading a more moral life, ceasing to devise ways of controlling their less conformist fellow citizens, and ceasing to steal Western intellectual property are essential before the rest of the world can trust them at the level needed for their own citizens prosperity to be maximized.

Values must be adjusted, in particular to the spirit of Confucius, not that far from the spirit of those who have made all human advances including the Industrial Revolution.

Finally, enterprising people must pick up from less competent people, allowing good capitalists and small businessmen to sweep away the party apparatchiks who have grown bloated at public expense since 1979, but especially in the last decade.

Beyond liquidation, Xi should set up a truly free capital market in China, with privately-owned banks, a currency tied to a commodity standard (which by all means, following the Chinese tradition, can be silver rather than gold), and the free flow of capital at least within the Chinese domestic economy.

If Xi changes Austrian economic inspirations in this manner, he will find true Chinese prosperity returning, for all the people not just the city-based intelligentsia, and his people becoming sufficiently contented that he can be freely re-elected for as long as he wants. Communism, or the economics of the wrong Austrian, are both false gods.

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