The profit problem

I know the economic crisis is a serious — and, for many people, tragic – business, but I couldn't help smiling when I read an article recently in the Wall Street Journal Europe about falling profits. Here are some of the comments from the article; I have left out certain key words:

• "A string of dire profit warnings has signaled a rapid deterioration in the financial health of _________ companies ... putting more pressure on the government to enhance its stimulus efforts."
  
  
• "Weaker private-sector investment means _________ growth this year will be even more dependent on the success of the government's big spending plans."
  
  
• "Profits and profitability in 2009 will be very poor, and this is the key reason why I do not expect much private investment — especially in the manufacturing sector, where _________ suffers from an overcapacity problem."
  

So why was I smiling? Not out of any sense of malice or schadenfreude, I promise you. Instead, from a sense of irony about all these warnings that profits — so important to economic growth — are falling dramatically and will continue to do so.

But what irony exactly? Well, when I tell you that the missing words in the texts were "Chinese", "China's" and "China", I hope you see my point.

China, the communist superpower, has a problem with the most capitalist of concepts: profits. And not a theoretical problem, you understand, but a practical one: profits in the private sector are too low.

Indeed, China's communist-capitalist economy is even more dependent on retained profits for investment than the economices of western industrialized nations. Which is why it is hit so badly by a profit downturn.

Some unreconstructed Marxists will no doubt say this proves that capitalism is bad. I'm sure that's not the lesson the Chinese leaders will draw. They know that they need the dynamism of capitalism to raise living standards.

Karl Marx is probably also smiling ironically in his London grave. For the full Wall Street Journal Europe article, see here.