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STRINGER SHANGHAI/Reuters

Loretta Napoleoni, an Italian economist best-known for her work on global money-laundering and the financing of terror networks, has turned her attention to China. In her latest book, Maonomics, she concludes that the Communists have turned into smarter capitalists than us.

It only seems logical that Ms. Napoleoni, a Marxist who lectures on ethics at Cambridge's Judge Business School, would have high praise for China. But she is well aware that the Chinese leaders are no Marxist theoreticians.

And her purpose is less to laud China for its remarkable transformation of the past two decades than to highlight the failings of the Western capitalist model, which features widening income disparities, structural imbalances and under-regulated markets. "It's a critique of our system. That's why I wrote it," the jet-lagged author said on a recent visit to Toronto. "I'm no China expert. I could have chosen Brazil. I just used China to show our failures."

Here are some of Ms. Napoleoni's thoughts on the state of economics, the euro zone's future, what students are thinking these days and other global developments.



Q. From your vantage point in London, how do you see the euro-zone crisis unfolding.

A. It's a disaster. The crisis very likely is going to break the euro. They're not handling Greece the way they should. Frankly, Greece is beyond repair. These austerity programs aren't working, because of the contraction of the GDP -- 7.3 per cent on a 12-month basis. People have no income.

What should the Europeans have done?

They should have given the €9-billion that the Greeks needed in January, 2010. This stability fund should have been in place before. But they had nothing. It didn't make sense, because anything can happen.

Will China come to the rescue?

No. The Chinese are only buying what they need. The Chinese said clearly: 'We will buy some businesses, some sector of the economy. We're not going to buy your government debt.' I don't see why China should save Europe. What's the advantage?"

What's the economic message we should take away from your book?

The message is that there's no one system that works better than any other. Economics is not an exact science.

Some people say it's not a science at all.

Exactly. We don't have sufficient new theories [to explain what's happening] Since Milton Friedman, we haven't produced anything. And frankly, I don't even think that Milton Friedman's [monetarism]is a theory. We don't have any systematic, cohesive theory, as we had with the classics. Friedman produced sort of an interpretation. It's definitely only a monetary theory. It's not a global theory, as Marx produced, or Smith or Ricardo. So that's one big shortcoming.

Any others?

No theory works perfectly. There are moments in time in which one theory works better than another. But the bottom line is that where we went wrong is because of arrogance. The theory whereby the market works better than anything else -- the magic of the market -- clearly doesn't work. Because nothing works forever. In that, the Chinese were very clever. They realized that communism would not work either. Why did the Soviet Union collapse? It collapsed because the economic system imploded. There was no growth. You can't carry on for too long without any growth. No matter what theory you apply, the economy must grow. And the economy cannot grow only in monetary terms. Financial growth is not sufficient, as we have seen. Financial growth does not produce sufficient labour demand. It does not produce real industrial growth. You have to produce something; you cannot only invest.

That seems pretty basic.

Well, to be honest, to make people understand where things went wrong, we have to backtrack to an incredibly simple language. Because only through simple language can you see the stupidity of what's happened over the last 20 years. You can talk about derivatives, credit default swaps, all of that stuff. But at the end of the day, we are facing the basic problem that we thought we could print money. And that's what we're doing. Eventually we're going to have wild inflation.

We're seeing worsening inflation in the emerging world, including China.

Yes, but Chinese inflation is due to an overheating of the economy. The economy is growing too fast. That's healthy inflation. We're printing money.



So you're seeing a return to the stagflation of the 1970s, when the economy was weak and inflation strong?

Yeah. As soon as this deflationary phase turns.

Any risks of the Chinese making the same mistakes?

I don't think we're there yet. What China really wants is to be self-sufficient in economic terms. The Chinese aren't interested in the world. It is a headache for them to deal with us. The domestic [Chinese] market is big enough for them to be completely self-sufficient. They're also learning from our mistakes. What happened in the Asian crisis [of 1997-98] was fundamental for them to refuse opening up their financial system to deregulation [and outside capital] They were very tempted, because they needed the money. But they realized [from 1997]that that was extremely dangerous.

What's your prognosis for the global economy.

I think we're going through a major shrinkage. The only countries that will continue to grow are the emerging markets, but they are only a small fraction of the global economy.

What impact will that contraction have on the emerging world.

Less than in 2008, because there is a lot of south to south trade. We're going to see something similar to 2009-2010. We run the risk in the West that the whole thing will collapse.

So commodity producers should be okay.

Canada will be fine. Canadian banks are absolutely fine. The only negative side is that because the Canadian dollar is involved in the currency war, you will have a [further]appreciation of the currency.

You teach business ethics. What's the attitude of your students?

They're all disconcerted when they start, because it's a completely unstructured class. You have to think in my class, and they don't like it. They want money and they want jobs. Nobody wants to save the world. Nobody wants to invent anything new.

Maoonomics is published by Seven Stories Press. (384 pages).

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