China can use tech to prove planned economies work

Linda J. Dodson

To this day, perceptions of planned economies are shaped by stories of the Soviet Union’s economic inefficiencies and distortions, either turning out shoddy goods that nobody wanted or unusable ones, like quantities of unpaired shoes. Among the most sought-after privileges was access to the foreign currency shops that sold the things people actually wished to own.

The obvious lesson from the discredited Soviet model is that bureaucrats are not the best arbiters of what people want or how much they will pay for it. Judgment without good information does not work.

But what if those bureaucrats had better information? Might central economic planning then work? Until recently it was virtually impossible to test this thesis. But today is it possible that China will become the laboratory where technology might actually answer the question.

China is wrestling with its economic identity. Its ideological roots and legitimacy stem from its asserted commitment to communism at the same time as it acknowledges the effectiveness of price discovery in a market economy. The result can be a system pulling in two directions at once.

Its DNA leads the Chinese Communist Party to favor state-owned enterprises over private ones. It has never fully trusted its entrepreneurs even as it has to acknowledge their greater efficiency and role in job creation. Moreover, the party will never compromise its control in the interests of untrammeled economic freedom, seeing that as the beginning of a process that leads inevitably to demands for political freedom.

Thanks to technology, Chinese bureaucrats have more access to granular data than any government has ever had before. Moreover, they also have access to the data of the country’s awesome consumer tech companies as so much economic activity moves online. And as the People’s Bank of China gradually introduces a digital yuan, it will have even more data about its people’s spending habits.

One reason Kevin Mayer moved from Disney to ByteDance is that the latter has created what many executives — even within Disney itself — concede are the best personalization metrics of any company, better than Amazon. The more interaction with its subscribers, the better ByteDance’s recommendations to them are. That in turn becomes an almost insurmountable barrier to entry to potential competitors.

Other advantages of a market economy may also prove possible to replicate in a planned economy. For example, skeptics of the virtues of a planned economy point out that a big contributor to the function of capitalist economies is an incentive structure rewarding innovation which a socialist system cannot reproduce.

A planned economy “doesn’t encourage innovation because innovation is also unpredictable,” says Martin Wolf, a former World Bank economist and current Financial Times columnist. “By definition it can’t be planned for. How do you discover demand for a new thing which doesn’t yet exist?”

Yet that does not always have to be the case. Although the Soviet Union and its clones did not have a satisfactory incentive structure, there is nothing that bars a socialist economy from creating one.

China already encourages some kinds of innovation. The government treasures its scientists and researchers and is willing to tolerate a degree of freedom for them it denies to most of its people and even most party cadres.

Returnees have research budgets that are seemingly unlimited. They can travel outside the country for conferences far more often than the twice a year restrictions imposed on most party members. They have free access to the internet, there is no digital Iron Curtain. Arguably, over time, the incentive structure Beijing is putting into place to encourage breakthrough technologies and breakthrough research — rather than today’s incremental innovation — will pay off.

By contrast, in the U.S., the infrastructure that has always supported such breakthroughs, whether in the National Institutes of Health, the National Science Foundation or the research arm of the Department of Defense, are becoming dysfunctional, politicized and less generously funded.

Moreover, Western governments will have a far greater role in their economies after the crisis, setting prices for companies that have received support and subsidies.

Indeed, it is conceivable that in a post-COVID world, there will be ways in which China combines elements of central planning and market efficiencies more effectively than in the West.

In the future, applying machine learning to its vast amount of data, Beijing can do a much better job of predicting. At the same time, though, given the power of those analytics combined with social — and controlled — media, it becomes possible to go from predicting to influencing and from there to determining preferences, perhaps without the consumer even being aware of that manipulation. At which point, economic efficiency threatens to become something far more dystopian.

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