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Could the crash lead to enthusiasm for central planning?

Central planning | Could the crash lead to enthusiasm for central planning? Anthony Harrington

China has enjoyed two decades of 10% growth and this has caused some in the West to speculate that perhaps command capitalism, run by an authoritarian central government, is not such a bad thing. After all, the new found appetite for re-regulating the financial sector and for stimulating the economy with billions in new public debt has little to do with laissez faire capitalism. Neither, of course, does bailing out the banks. (The essence of market discipline is that if you get it right you make a profit, if you get it wrong you pay big time… Fudge that and there’s not much left – instead of shrewd risk taking you get crazy risk taking, plus side bets that drive the original stake onwards and upwards.)

However, or so the argument goes, if we are bailing out banks and intervening to the left and to the right, perhaps the state should step in more decisively to end some of the “ills” of unfettered capitalism. The President of the French Republic, Nicolas Sarkozy, for example, would like to see the prices of commodities fixed by general consensus rather than by the market, according to his speech at the World Economic Forum.

From here it is but a hop or two to Chinese style five-year plans and the imposition of a centrally-planned economy. After the disasters of Soviet five-year plans Western economies took it as a truism that leaving it to the markets was the only sensible way to go, and that grandiose five-year plan-setting by some central government department would be sheer folly. Today, however, China’s ability to set clear goals for its economy via five-year plans while still deploying “capitalism” to achieve those goals, is attracting some admiring attention.

In an interview with the Institute for New Economic Thinking (a body funded in part by George Soros to stimulate new thinking after the crash) an old China hand, Orvill Schell, Director of the Centre on US-China Relations at the Asia Society, actually called China’s ability to set five-year plans “a competitive advantage”.

He pointed out that it enables the government to marshal many of the resources of the economy to ensure that they pull in the general direction of the goals of its new plan. He also, to give him his due, hedges his comment about with cautionary notes, but it is worth quoting at some length:

"Even although China has been very successful and very dynamic it is also fraught with substantial weaknesses, so we don’t want to get too carried away [with extolling the merits of the Chinese system]. This is not to say that suddenly they have everything right and we don’t. We have been here before with the Japanese [model] and they did not have that so right, so we have to have a perspective... We looked on China five, certainly ten years ago, and on its business plans as very retrograde, Stalinist, part of a command economy that was almost quaint in its antiquarian nature. We prided ourselves on our innovation and our ability to jump to occasions and not to be hemmed in by such structures. Now we come to a new global world where there are very large problems that can only be solved in a multilateral context, and we can suddenly look at a five-year plan as a godsend.

"China is about to have another five-year plan and they are setting direction, goals, targets, and they are saying 'Listen up folks, here is where we are going to go, and everyone has to play ball so we get there'. We in the West not only have no five-year plan, we have no plan whatsoever... We have no capacity, so it seems to do any planning at all, and there is no conceivable way that we are going to solve the problems of energy and the climate, for example, without planning. Businesses don’t know how to plan, they don’t know how to invest and they don’t know how to look ahead. Businesses now in America are begging the Congress: tell us what you want to do, whatever it is we can adjust to is, but if you don’t tell tell us, you deny us a competitive advantage. China is doing this, so that is a tremendous competitive advantage for them.”

So what is wrong with the Chinese model? Actually, a great deal. Private property lies at the heart of modern capitalism. If you have capital, you are free to deploy it in whatever way you see fit. That at least is the theory. In practice of course, business is increasingly hedged around with regulatory and compliance issues. However, since the regulation is the same for all players in the sector, it is not seen as a disadvantage within an economy. (It might, of course, be a competitive disadvantage if there are players in other countries with either no such regulatory regimes or much lighter regulatory regimes).

Much of the lobbying by business that goes on in western democracies is aimed at diminishing the pinch of regulation or planned regulation on this or that activity. However, what is not at issue is the right of each enterprise to set its own strategic goals and to deploy such resources as it has in the attainment of those goals. Government can set policy, of course. The UK, for example, is not exactly short on policy directives. There are directives on transport, on energy, on alternative energy. But setting policy just tells business where Government’s thinking lies, i.e. that it is safe to take a punt on alternative energy, since the support structure for more expensive forms of energy generation is going to remain intact. That is a very different state of affairs from commanding companies to invest in this or that.

China gets away with its peculiar combination of capitalism and state planning at present by being extremely careful and tactically very astute on the one hand, and, on the other hand, by leaving key business and financial institutions under no illusion that they are subject to state control if they don’t take friendly guidance from Big Brother.

Does this produce “evils”? Absolutely. They just don’t make headlines at the same instant that people are feeling warm about state planning. Any glance at the history of China’s property market over the last five years would see a sorry tale of malinvestment, squandered resources, massive trespassing on the rights of peasants and villagers as they are dispossessed of land to the benefit of speculators, and, of course, corruption on a grand scale. All this followed from a “detached” central planning edict to “lend more”. So lend the banks did. Neither wisely nor well, but what the hell, lending is lending…

The fact that the west has its own sorry property market tale of malinvestment, squandered resources and, yes, more than a touch of fraud and corruption, doesn’t make the two systems equal. The problem with central planning is that you end up with politicians or civil servants setting goals and prices on a grand scale, and that always ends in tears, no matter what benefits it seems to confer in the short term.

Further reading on the Chinese economy and central planning:

Tags: capitalism , Central Planning , China , five year plans , fraud , state control , The Asia Society
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