China

Enlightened Chinese Industrial Planning Will Crush U.S. Free Markets, Said Pundits: Maybe Not

Reminding pundits Tom Friedman, Robert Reich and others of what they said.

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As the world watches China's Communist Party leaders try to order markets around, my mind turned to those pundits who earnestly recommended that the United States emulate the brilliant beneficient Chinese planners in running our economy. The most fulsome China booster was New York Times columnist Tom Friedman. Included below are a few choice obervations:

On September 8, 2009 Friedman adivsed:

One-party autocracy certainly has its drawbacks. But when it is led by a reasonably enlightened group of people, as China is today, it can also have great advantages. That one party can just impose the politically difficult but critically important policies needed to move a society forward in the 21st century. It is not an accident that China is committed to overtaking us in electric cars, solar power, energy efficiency, batteries, nuclear power and wind power. China's leaders understand that in a world of exploding populations and rising emerging-market middle classes, demand for clean power and energy efficiency is going to soar. Beijing wants to make sure that it owns that industry and is ordering the policies to do that, including boosting gasoline prices, from the top down.

So enamored of China's industrial policy was Friedman that in 2010 he likened Chinese economic planning boldness to making "moon-shots." He specifically cited Chinese government subsidies to support the innovative electric car company Coda as an example, and predicted that the company would soon put thousands of its vehicles on California's roads:

China is doing moon shots. Yes, that's plural. When I say "moon shots" I mean big, multibillion-dollar, 25-year-horizon, game-changing investments. China has at least four going now: one is building a network of ultramodern airports; another is building a web of high-speed trains connecting major cities; a third is in bioscience, where the Beijing Genomics Institute this year ordered 128 DNA sequencers — from America — giving China the largest number in the world in one institute to launch its own stem cell/genetic engineering industry; and, finally, Beijing just announced that it was providing $15 billion in seed money for the country's leading auto and battery companies to create an electric car industry, starting in 20 pilot cities. In essence, China Inc. just named its dream team of 16-state-owned enterprises to move China off oil and into the next industrial growth engine: electric cars.

Coda declared bankruptcy in 2013.

And then there is the inevitable Robert Reich. Reich, who is a former Clinton Secretary of Labor, has never been right about anything when it comes to economic policy prescriptions. For example, Reich was convinced in the 1980s the Japan would bury the United States due to the planning acumen of that country's savvy bureaucrats. In 1982, Reich co-authored Minding America's Business with Ira Magaziner which recommended that the federal government start directing the economy. A few excerpts below:

U.S. companies and the government [should] develop a coherent and coordinated industrial policy whose aim is to raise the real income of our citizens by improving the pattern of our investments…

Perhaps the most striking feature of the U.S. industrial policy apparatus is the absence of a single agency or office with overall responsibility for monitoring changes in world markets or in the competitiveness of American industry, or for easing the adjustment of the domestic economy to these changes…

The failure of U.S. industrial policy is not simply a failure of organization, of course. It is a failure of substantive strategy. The industrial policies of Japan, West Germany and France have been more successful than U.S. policies because they have explicitly and consciously aimed at improving the international competitiveness of their businesses.

Just shy of 30 years later Reich sang the same stale tune in 2011, only instead of Japanese planners, he was praising the the wonders of Chinese industrial planning:

Here's the real story. China has a national economic strategy designed to make it, and its people, the economic powerhouse of the future. They're intent on learning as much as they can from us and then going beyond us (as they already are in solar and electric-battery technologies). They're pouring money into basic research and education at all levels. In the last 12 years they've built twenty universities, each designed to be the equivalent of MIT.

Their goal is to make China Number one in power and prestige, and in high-wage jobs.

The United States doesn't have a national economic strategy.

As late as 2012, Richard D'Aveni, a Professor of Strategy at Tuck School of Business at Dartmouth College, declared in The Atlantic that "The U.S. Must Learn From China's State Capitalism to Beat It."

Free markets alone won't be enough if we want to keep pace with China. It's time for some new-fashioned industrial policy …To win, we must to add to our repertoire of free-market tools the tools of managed capitalism. We cannot rely only on free-market policies of the 1980s and 1990s. We must learn new capabilities to beat a form of capitalism that is overwhelming our old formula for success. 

Perhaps I am wrong and the "reasonably enlightened" autocrats who rule China will beat the forces of the market … but I wouldn't make any bets on it.

As I concluded in a recent on-line debate with China idolizer economist Dambisa Moyo over Chinese economic policies at Cato Unbound:

The [Chinese Communist] Party leaders evidently are still in thrall to the failed ideology of economic central planning and the ultimate results of those policies will not be pretty.

For more background on what the Chinese government actually should do, see my article, "China Needs the Rule of Law."

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  1. And then there is the inevitable Robert Reich. Reich, who is a former Clinton Secretary of Labor, has never been right about anything when it comes to economic policy prescriptions.

    That may well be the truest thing every posted on the internet.

  2. It’s easy to look like a brilliant central planner when you run a country that has been economically backward for a few decades. You’ve got tons of cheap labor and you can immediately take advantage of decades of technological development without having to do the work to get it. All you have to do to succeed is not be completely evil and corrupt.

    1. Just a spoonful of corruption makes the economy grow strong, the economy grow stro-ong, the economy grow strong…

    2. Driving a twisty mountain road at night is always easier when you can follow the taillights ahead of you.

    3. No kidding–when you look at it, Chinese culture hasn’t actually invented anything of technological significance since the Middle Ages. Most technological developments are simply stolen or reverse engineered, and then created into something that’s of shittier quality than the original.

  3. Clearly, China and Japan just had the wrong Top Men.

    REAL communism and socialism haven’t been tried yet

    When we get the right Top Men and try REAL socialism, THEN it will work.

    /USA USA USA

  4. If someone subscribes to the idea that one country can ‘beat’ or ‘outpace’ another economically, it’s a pretty good indicator that anything they say should not be taken seriously.

    1. Especially when ‘beating’ involves having more exports than imports. When you think about that on a household level, it’s just stupid. Why would you want more goods leaving your home than coming in? Isn’t the goal to have more stuff? The logical conclusion of exporting more than you import is going broke.

      1. Exports == Imports, unless you are giving stuff away. In which case you are importing good feelings.

        1. Following up on that and my Japan post, in the 80s we imported cars from Japan and exported NYC skyscrapers and Hawaiian golf courses to Japan.

          But they didnt count those in the export totals.

          1. Or we’ll import goods and export American dollars, which people like to have because it’s historically been a stable currency. So even if we’re just giving people dollars they still get something of value out of it.

            1. Those dollars eventually come back in the form of foreign investment. But oh no we can’t allow furriners to invest in our country! That’s…. bad!

              1. I the old days, gold shipments balanced it out.

            2. Well, those dollars only exist as Treasury bills in the current accounts of those importing countries and are used as collateral to purchase dollars to devalue their own currencies, so not really a great thing for the citizens of the developing countries necessarily.

          2. “Following up on that and my Japan post, in the 80s we imported cars from Japan and exported NYC skyscrapers and Hawaiian golf courses to Japan.”

            We still export higher education, and that never shows up in the tally, either.

        2. unless you are giving stuff away.

          Which is the case when the government subsidizes industries that couldn’t otherwise compete.

        3. Also depends on the imports and exports. If I export fifty t-shirts but only import one gaming desktop I made out well.

    2. If someone subscribes to the idea that one country can ‘beat’ or ‘outpace’ another economically, it’s a pretty good indicator that anything they say should not be taken seriously.

      I’m confused by this comment. Are you saying that some countries (groups of people) aren’t more economically productive than others?

      I agree ‘countries’ don’t outperform – people outperform, but for purposes of measurement, people are currently grouped into entities called countries (for better or worse), so empirically, some countries do ‘beat’ others.

      1. I think what he’s trying to say is that it’s folly to predict that one country is going to be the global economic pace-setter for decades to come, as neo-liberals like Reich and Friedman like to do. Given how global markets work, it’s pretty much impossible for one country to dominate because the system overall is so complex.

  5. It was Japan in the 80s.

    Once it was an obvious failure in the 90s, we copied them in the 00s.

  6. It’s time for some new-fashioned industrial policy ?To win, we must to add to our repertoire of free-market tools the tools of managed capitalism.

    We need new-fashioned industrial policy – you know, policy that is identical to what China’s been doing since the 80’s and is also very similar to Mussolini’s Italy.

    Really new-fangled ideas, you know?

    1. To win, we must to add to our repertoire of free-market tools the tools of managed capitalism.

      Something abandon free market principles in order to save it something BOOOOOOSH!

    2. If the Clerisy had any new ideas, they wouldn’t be the Clerisy. They would be out in the world creating wealth. And on some level they know this, which is why they reflexively hate innovators.

  7. They need to follow the Clinton Rule: Nothing can’t be improved by putting a bunch of Yale-educated lawyers in charge.

  8. Note to Mr. Bailey: Reminding pundits of their past stupidity IS NOT OK!

    1. He’s not reminding them of their past stupidity, just capitalizing on a pause in the inevitable upward trend of China’s economy.

  9. Great article Ron.

    There is really no excuse for these guy’s positions. I suspect they are not even wrong. They just spew whatever they think will get them the most favor from their preferred team, truth, logic, and reason be damned.

    I am confident that they will pretend this article doesn’t exist instead of answering it and spew fresh nonsense.

    “Perhaps I am wrong and the “reasonably enlightened” autocrats who rule China will beat the forces of the market … but I wouldn’t make any bets on it.”

    Beating the market is the equivalent of beating gravity, so yeah, I wouldn’t bet on it either.

    1. The thing about the “reasonably enlightened autocrats” meme is that such people have ALWAYS run China. Civil service through competitive examination is the hallmark of Chinese Imperial governance. Oh, there have been periods when military strong men either ruled or fought to rule, but when things settle down, back come the Mandarins, with their rigid hierarchy and their central planning.

      And it. Has. NEVER. Worked.

      1. The only Mandarin that I’m interested in watch run China is Trevor Slattery…

        …although that WOULD explain a lot about the recent economic downfall over there: the People’s Republic had a little problem with…substances, and, uh, ended up doing things, no two ways about it, in the street, that a nation shouldn’t do…

  10. The U.S. Government did take an active role in directing the economy in the eighties, with Lexus-sized unintended consequences.

  11. Is there a Tom Friedman retraction generator yet?

  12. So enamored of China’s industrial policy was Friedman that in 2010 he likened Chinese economic planning boldness to making “moon-shots.”

    The evidence of Friedman’s lack of introspection is right there (in his likening of the Chinese economic planning boldness with making moon-shots) by not realizing the irony of his comparison, considering the real moon-shots were as unproductive as pyramid-building and anything else created to satisfy spendthrift despots. Unfortunately, most of his readers lack the sophistication to see the irony either.

  13. “…Perhaps I am wrong and the “reasonably enlightened” autocrats who rule China will beat the forces of the market … but I wouldn’t make any bets on it….”

    I’m guessing you already have bet against China through your investments.

  14. {Richard D’Aveni, a Professor of Strategy at Tuck School of Business at Dartmouth College, declared in The Atlantic] Free markets alone won’t be enough if we want to keep pace with China. It’s time for some new-fashioned industrial policy ?To win, we must to add to our repertoire of free-market tools the tools of managed capitalism.

    Isn’t it fascinating how history repeats itself, by listening to the fawning words by these crackpots about these demonstrations of economic fascism? It is like harking the 20’s all over again when the world of the future was being built by the likes of Mussolini.

    Obviously this inclination towards central planning by these elitist scholars and pundits is the result of their pedantic mistrust of individual efforts and people’s abilities and intelligence. How can this riff-raff, this rabble, govern themselves? Inconceivable! They’re too… selfish.

    1. The Clerisy love them some central planning, because central planning means committees. They can imagine themselves on such committees. Ideas in a committee aren’t as threatening as ideas pushed by individuals, because everybody on the committee gets to rub the idea with their scent glands and pee on it, so it will smell like them. And at the same time, everybody involved will be able to say “It wasn’t MY idea.” when it fails.

      The Free Market is too scary. Why, if they had to run with their own ideas, they might FAIL. In full public view. That would be Just Awful.

      I sympathize, to a degree. I hate making a fool of myself. The idea of striking out on my own to make my fortune scared the piss out of me in my 20’s. Truth be told, it still does. The difference between me and the Clerisy is that I know goddamned well I am unsuited to run things.

      1. Same here. I have always admired entrepreneurs, including micro-entrepreneurs, and at one time wanted to become one. I never did, however, because I made too much as a professional to take the risk. I, too, was too scared by the very distinct likelihood of failure. Failure would not only wipe out my life savings, but would also be embarrassing.

        Between the three of them, Robert Reich, Tom Friedman, and Barack Obama couldn’t profitably run a hot dog stand. But, for some reason, they think themselves qualified to establish an industrial policy that dictate every stage of production from the feed lot fattening up pigs and steers to the retail delivery of a hot dog. Even more ridiculous, this knuckleheaded Clerisy thinks itself qualified to establish industrial policies that address incomprehensibly complex industries such as IT, medicine, energy, etc.

  15. Any one that wants a ‘national policy’ for any business should be used as grass trimmer bait then put in the wood chipperer. This goes double for those who believe the entire country can be powered by ‘green energy’ and that it can replace all uses for oil.

  16. Related:

    New Zealand fears Chinese control of the real estate market.

    FTA:

    We have chosen, for example, to avert our gaze from the obvious effects of Chinese intervention in the Auckland property market for fear of offending Chinese opinion. More importantly, we have apparently not recognised that the Chinese interest goes beyond merely buying our products in a normal trading relationship, but extends to obtaining control of the productive capacity itself.

    1. Dumb.

      Yes, real estate markets have been inflated due to foreign purchases, but what are those foreigners gonna do? Pick up the properties and move them to China. That hard asset stays put. While rising prices disadvantage locals who want to purchase now, the inevitable bust will provide nice bargain prices later.

      The same thing happened in NYC in the ’90’s. The Japanese bought up a lot of real estate (Rock Center) but later sold for a loss when their markets tanked. There’s term for people who buy high and less low: suckers.

    2. Looks like Canada (or at least some of the provinces) will be boarding the same boat soon.

      http://www.cbc.ca/news/politic…..-1.3192749

  17. China’s leaders understand that in a world of exploding populations and rising emerging-market middle classes, demand for clean power and energy efficiency is going to soar. Beijing wants to make sure that it owns that industry and is ordering the policies to do that.

    Capitalism just does not work. Under capitalism, a thousand people pursuing riches would try a thousand different ideas for producing clean power and energy efficiency in a profitable manner and who knows what the hell they might come up with? How can we allow that sort of chaos to exist and how can you expect that sort of chaos to just serendipitously produce something people might want? The Chinese government just orders that it be done and there’s no chaos, no wasted time and money and resources on pursuing multiple paths to unknown destinations. (Although, there is that nagging little question in the back of my mind as to why, if China can simply command this to be done now, why the hell didn’t they command it be done in, say, 1953? And the nagging question as to why new, valuable stuff seems to come out of the capitalist economies where people can get rich inventing stuff people didn’t even know they wanted until after it was invented rather than the command economies where the government can just order industries to produce new, valuable stuff.)

    1. I also think the concern over China getting ahead of us is a little misplaced when Japan is right next door, and it is Japan that is a much bigger threat. Those dirty Japs are killing all the whales and once they’ve harvested all that precious whale oil what the hell am I supposed to put in my lantern so I can have some light in my hut? You think those stupid,greedy, short-sighted capitalists are coming up with some new way to acquire whale oil? Hell no. You can bet in a command economy some forward-thinking Top Man saw the whale oil shortage coming and ordered whale farms to be built so they would never have to worry about running out of whale oil. Where’s our goddamn whale farms you stupid bastards?

  18. It’s always been the same argument from these power hungry assholes: TOP. MEN.

    Oh, by the way, they’d like you to know they are themselves qualified TOP. MEN. and should be put in positions of some authority. Jeffrey Sachs is another more sophisticated version.

    First the we couldn’t compete with the wonders of the Soviet five year plans, then Japan would bury us with their cooperative capitalism (corporatism), then the anti-democratic EU, now Red China’s gonna finish the job. Pleezzzzze, bitches.

  19. We have “free” markets?…ha!

    Everything is relative, I guess.

  20. Nobody “beats the market.” The market will always win. The market will always correct itself to what it ought to be. The more you try to manipulate the market, the worse it will be when it does so.

  21. Can we do an “I Told You So” every now and then?

    It boggles the mind that supposedly smart people so completely fail to understand how markets work, or why government interference in said markets makes things worse, not better. Especially after the results of essentially the entire 20th century. Smart people learn from their mistakes. Really smart people learn from other people’s mistakes.

  22. In the same manner as we were crushed by Japan Inc, in the 80’s-90’s.

  23. Why not just use shovels and employ everybody? We miss you, Milton.

    1. Because then the only tool left in the arsenal will be to use spoons

  24. Regulators spouting Facsist pap will always be buried by history. So buried, in fact they can never quite glimpse the rear view mirror showing they made a wrong turn. Pity !

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