I always “knew” that the failure of communism, socialism, and fascism is the failure of central planning. There is also the whole nature of evil and mass murder thing, but (apart from that Mrs. Lincoln, how did you like the play?), from an economic perspective, I think most of us, me included, think central planning just can’t work.
I ran across an interesting book that argues otherwise, The People’s Republic of Walmart. In the best tradition of the internet, I haven’t actually read the book. Goodreads calls it, “An engaging, polemical r*mp through economic theory, computational complexity, and the history of planning”.
Large successful megacorps, Walmart, Amazon, etc., , the size of many nation states, are often used as examples of the wealth that market economies generate. The book argues that, in fact, megacorps are examples of successful central planning. Megacorp operations are not the outcome of internal free-market competition but are centrally planned from the C-suite. They argue that not only is planning on vast scales possible, we already have it and it works.
It’s a thought-provoking idea which is probably deeply flawed. Has anyone read it?
I think somebody made the same observation about China. Used to be wheels-spinning-in-the-mud typical evil communism … then prosperous, wealth producing centrally planned, government run capitalism.
The flaw in the argument is that it ignores that central planning works for the planners at the expense of the rest of the world. Shoppers have alternatives but citizens of a nation do not. Citizens have just one nation to live in.
It worked for China as it took it out of poverty but then evil central planning took over and there are lots of protests about it.
Yes that’s true. Until megacorps become monopolies. But even then, small businesses can flourish in the cracks and grow, perhaps ultimately displacing the megacorp and becoming a monopoly itself. Nation-states are permanent monopolies with armies.
Haven’t read it, but the summary above leave out an all-important factor of economic feedback. Top management can and does make decisions. But deciding, for example, that the company is only going to build two-bedroom houses will run into the buzz-saw of economic/market reality feedbacks which are lacking or sluggish in a government planned economy.
Governments don’t have binary outcomes, only shades of gray. On a scale of 1 to 10 how good is your government? No government will ever get a perfect score of 1 or 10.
I think this misunderstands the reasons why economists believe economy-wide central planning can’t work.
The traditional economic argument against central planning is that central planners don’t have the information they need to make the economy run efficiently. In a market economy, no central planner decides how whether resources should be allocated to making carrots vs. t-shirts vs. video games vs. electric can openers. Firms choose whether to make those things (and at what price), and customers choose whether to buy those things (and at what price), and the innumerable interactions between firms and customers convey the information necessary to reach a somewhat efficient allocation of resources.
In central planning, none of that happens. The planners decide how many carrots or t-shirts or automatic can openers to make. But they have no way to accurately find out how many of each of those things they ought to make. They lack most of the information they would need, and if they try to collect that information from other people (firms or customers), those people’s incentives don’t usually line up with giving accurate information.
The criticism from economists is not that nothing can be centrally planned at scale, even very large scales. It’s that an economy can’t be centrally planned that way.
A firm like Wal-mart is only engaged in an exceptionally narrow range of activities, over which is does have enormous information, and relies immensely on market interactions to gain information about pricing and allocation - especially from their customers and suppliers. And much of it isn’t centrally planned.
Imagine this thought experiment - you go to Walmart, and you tell them that they’re no longer allowed to have prices for their goods. Walmart can set an annual price for “membership” in Walmart - but when customers come in, they don’t get to pick and choose what they want. Instead, Wal-mart will have to choose for the customers what goods they will give them. You can see how this would destroy their operational ability - without a way of knowing what customers want (or at least what they choose to buy), they wouldn’t know what they should stock the shelves with and what to give the customers. They wouldn’t know whether they were stocking (or handing out) enough carrots vs. t-shirts vs. automatic can openers.
Central planning has flaws, but by far the biggest is not information flows (bad as they often are), but
CORRUPTION, VAINGLORY, AND STUPIDITY
Adam Smith nailed this. Russia and increasingly now China exemplify it.
A modern Adam Smith might use ecological thinking as a model. Ecologies are tough and resilient and extremely complicated and messy, and cheating is not only not allowed but is un-conceivable. Planning, especially central planning, does not like mess nor complexity, and so falls back on ever increasing suppression of bad news and issuance of edicts.
I guess I’m disappointed that people have such a misconception of China’s economy, Entrepreneurs are celebrated and supported in China. Foreigners can set up wholly owned businesses in most cases or partner with Chinese local firms in a few special sectors, depending.
There are all the same sorts of things you have to go through as there are here - or in any economy, really. You have to register with the government, describe what the business is going to be and do, have an understanding of the regulations which cover the activity which may - or more likely may not - mirror those in other countries, and so on. It may be difficult because China is so vast, and indeed has areas that are entirely different from each other (hello: New York and Montana), banks have different requirements for loans and so on.
But to think China and Russia have similar systems is to fundamentally misunderstand what is going on. Russia has for a century, and continues to be centrally planned with targets and prices set by abstruse committees who report to (apparently no one) the Planning Committees.
By contrast China target certain sectors they believe ripe for development and important to the country and support them with lavish subsidies and benefits - up to a point, at which time it’s all taken away and there is a Darwinian struggle to survive. We are about to see that in the EV segment, which is now robust enough to stand on its own, or at least to have survivors who can.
We have seen this before in such areas as solar panels, flat screens, steel, green energy (windmills, notably), Pharmaceuticals, and others. Photovoltaics and battery technology are among those still enjoying government largesse, but I expect that will end as others have - when the PtB decide it’s been enough.
The one area that is truly a debacle, real estate, came from a different mother, that of local governments financing themselves with the sale of land to developers who paid handsome after-the-fact fees as the developments were sold. This is a game that went far too far, and is as dumb as the system that led to our own mortgage meltdown in 2008. Nothing is perfect.
Yes, and China isn’t that. There are no government inspectors patrolling and telling Starbucks what prices to set for their lattes or Nio how to make their EVs. They are operating within an open market system, with the exception for subsidies et al noted above. (Just as we have subsidies for all sorts of things, from farm prices to oil.) There are business failures in China (but it’s harder, some say impossible to escape thru bankruptcy); the “market” decides how many carrots to sell or T-shirts to make.
In our version of late-stage capitalism our subsidies seem impossible to reign in once established, in Russia (well, forget Russia, it’s a basket case), in China a group of (apparently) astute leaders choose when to cut the cord and let the market shakeout begin.
I have argued for some sort of intelligent industrial policy in this country but am constantly shouted down, even by people I would think could understand it. China’s industrial policy has taken them from subsistence farming and famine to world power in manufacturing and technology in a single generation. I would think there is something to be learned there.
Only when they win. The losers are castigated in multiple ways.
Excerpt -
…
Chinese venture capitalists are hounding failed founders, pursuing personal assets and adding them to a national debtor blacklist when they fail to pay up, in moves that are throwing the country’s start-up funding ecosystem into crisis.
in its recent report on redemption rights, said they had turned entrepreneurship into a “game of unlimited liability"
Once blacklisted, it is nearly impossible for individuals to start another business. They are also blocked from a range of economic activities, such as taking planes or high-speed trains, staying in hotels or leaving China. The country lacks a personal bankruptcy law, making it extremely difficult for most to escape the debts.
…
Good post and I agree with most of your points, especially about doing “certain forms of intelligent industrial policy,” although I always couple that with intelligent immigration policy.
However, China under Xi suffers not only from the idiocies of local governments (which go far back in time), but also of the central government in the last decade. The most obvious screaming-out-loud symptom of the worst of Chinese “planning” is the ongoing falsification of crucial statistics, from population figures to economic outputs. For good reason people fear the Wrath of Xi, which looks something like this:
When I wake up in the afternoon
Which it pleases me to do
Don’t nobody bring me no bad news
'Cause I wake up already negative
And I’ve wired up my fuse
So don’t nobody bring me no bad news
Xi and those around him making decisions literally often have no idea what is really going on….
The review I read said that one of the points of the book is that in today’s data intensive landscape, central planners in government could have the information they need, and they should emulate megacrop leaders in using modern data science to do central planning.
As with government spending, the argument is not against planning, it is who the planning benefits. Things like zoning and building codes are deemed “good for the general population”, by government. But “costs to be minimized” by “JCs”. We old phartz remember the howling about MITI, in the 80s, when the results of MITI’s central planning had Japanese manufacturers clobbering their USian counterparts, whose planning was based on their own short term profit.
The 3,000 bureaucrats at CMS who run Medicare aren’t trying to cheat you out of the health care you’ve paid for like the thieves at United Healthcare. The CMS folks don’t get a bonus when they deny a claim.
If Gov’t planners were running the egg industry, they’d design-in enough surplus capacity to accommodate the inevitable Bird Flu outbreak. Only 3% of the flocks have been culled due to Bird Flu. How does that translate into a 400% price increase unless the Private Equity thieves running the program are using scarcity to goose excessive Executive Compensation?
Outsourcing their electronics industry to Malaysia and China? I have had a variety of JVC, Panasonic, Sony, and Toshiba brand product in the house over the last 30 years. The last thing that was actually made in Japan was a Sony subwoofer, that I bought in the early 90s. Outsourcing much of their auto production to the US, in fear of protectionist US trade policy? Do the Japanese count financial manipulation as “product”, like the US does?