This week on King World News financial strategist Robin Griffiths is interviewed on a range of macro topics. Around 13:00 into the MP3 file Griffiths says (approximately transcribed):
I do think that being a command economy and not a democracy is an advantage for China at the moment, because if it finds that it’s moving in the wrong direction, as it recently did, it can just suddenly say to the banks “right now I want you to do these different things and cool it,” and it instantly starts to happen…but It’s a very efficient form of government at the moment to keep their show on the road
Just after (the new Year) we will get a new five-year plan from China. And I understand that will amount to a massive plan to stimulate the domestic economy and switch the emphasis away from selling exports to America through Walmart. As long as they do tend to deliver on their five year plans…having a five year plan out there will encourage people to invest and keep the show on the road.
Some questions for Griffiths:
- How would the central planners know what is the “wrong direction” for the economy?
- Without prices and a profit/loss system how would the planners know what instructions to give to banks (or any other firms) in order to get the results they want?
- How can central planners monitor whether banks are carrying out their instructions?
- Without prices and a profit/loss how can central planners have any idea of what to plan?
- Why does consumption need to be “stimulated”? Why is it necessary to plan consumption? Doesn’t everyone want to consume goods?
- How will the central plan ensure that the that what gets produced are the goods that people want to consume?
I have been a skeptic of the Chinese growth miracle for some time. Last year, I blogged about a Chinese ghost town built by central planners but never inhabited. Via a friend I received amazing satellite and ground photos of Chinese ghost cities. These mind-blowing photos show multiple cities, some of which have a few dozen cars owned by central planners parked around government offices, others totally vacant. In my view these empty cities are more indicative of the results of central economic planning than the fantasy world that Griffiths lives, in which central planners snap their fingers and the results they want arrive.
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A story about Russian planned production in the 1970′s. Russian furniture production was of course state-run, and they carefully measured production in tons shipped. The factories met their quotas by building large, heavy furniture. This didn’t work out well in a country with tiny, walk-up apartments.
A commenter at CafeHayek wrote: Over 20 years ago, while in grad school, I had an Econ Professor who while visiting the Soviet Unioin, saw a nail plant manager being awarded the Order of Lenin, due to his high nail production. The plant manager achieved his goal by manufacturing thousand pound nails!
There are a million ways to go wrong. Only a free market of self-interested, independent agents is going to find the few ways of doing things right.
People will bend the rules to extract a profit from a government which is intent on breaking the laws of economics. No amount of regulation will fix this. Unlike private enterprise, producing useful products and services is not a requirement in the game of serving the government.
Oh man, I’ve heard so many Soviet Union stories like that. If I may, allow me to share more:
-Coal production was measured in tonnage, and thus the cars had a lot of dirt along with the coal.
-Lumber was measured in board feet, and thus you started to have really, really thin pieces of lumber.
-The version of the nail story that I heard was that they measure by how many actual nails were produced. So you started to get nails that would completely buckle under a hammer.
-With regards to healthcare, Yuri Maltsev relates a story that the hospital had a quota of the ratio of people admitted to the hospital and people who died. So, as I’ve heard, Yuri was admitted to the hospital during a simple check-up, and not allowed to leave until after 21 days.
If I recall correctly, the original version of the nail/lumber tale comes from Solzhenitsyn and is about bolts- a bolt factory received its target one year in terms of numbers of bolts, and so produced the right number of exceedingly tiny bolts. The central planners caught wise to this scheme and the next year specified a specific weight of bolts. The factory manager produced one gigantic bolt. The story may be apocryphal but these two are not:
-In response to a mandate to reduce hospital mortality, hospitals began discharging the dying just before death, sometimes literally throwing them into the street to die.
-The biggest cause of house fires in Moscow in the 1980s was… wait for it… exploding television sets. Soviet televisions were so poorly made they would sometimes literally explode, killing the viewers and setting the building on fire.
These stories are funny and not entirely out of the question … but does anybody know of a good text on such things? I’d like to read more, but I half expect the next one to say “Soviet Planners required bars to sell vodka by the liter. So in Moscow, three guys walk into a bar … ”
I don’t know the rest of the joke, but I’m sure it ends “…and I just got back from the Gulag!”
Well the ones I know come from other books on the USSR; the one about television sets is from David Remnick’s Lenin’s Tomb and I can’t recall where the one about hospitals comes from. The one about the bolt factory is from volume 2 of The Gulag Archipelago (I think).
I had a professor that lived in Poland during the Iron Curtain days and knew people who worked at a factory that built tractors. One year, the central planners only gave them the green light to make green tractors. When they ran out of green paint because the paint factory was ordered to produce red paint, the entire factory shut down. Everyone was afraid of producing a red tractor, thus failing to meet the demands of the central planners. At the end of the year, they had mountains of cans of red paint and unfinished tractors.
In case of China, I can’t undertand all these GDP grows e development of everything. What do I have to think of all the growth? Aren’t the chinese people really getting better lives year after year? Where’s the chinese ultra recession which never comes?
The photos show tremendous waste of resources, but the projects are isolated and concentrated in a very large country. In the US, we had a massive amount of overbuilding thanks to our central planners, but it was more spread out. Does anybody here know what the relative amount of vacant new construction is in China vs the US?
I agree that China is screwed up, but the question is are they more screwed up than the US who printed up trillions of dollars and loaned it into subprime. China may have put money and resources into a bunch of stupid housing projects, but unlike the US, they also put a lot of money into factories and infrastructure. I have no idea how the market will value these when left free to do so, but my suspicion is that it will favor China because they seem to be slowly becoming more and more free market while the USA is slowly becoming less and less free market.
Also, it shouldn’t be forgotten that China is peppered with SAR’s like Macau and Hong Kong. While I have little faith in China’s central planners, I have a lot of faith in the SAR’s.
I won’t defend chinese economy or management mode, but most of the questions the author of this article asks are, in my opinion, misguided. Business managers must deal with those same issues every single day. And every single company I know is “centrally planned”. Furthermore, even though distorted by government interference, China is a market economy.
so let’s adress the questions one by one:
1) How would the central planners know what is the “wrong direction” for the economy?
Well, how does a firm manager know what is the wrong direction for the company’s finances? Some thoughts: the company has a large inventory of things no-one wants to buy; it has too much debt, but little revenue; workers are leaving or otherwise demonstrating their insatisfaction; etc. Of course, the scale is much bigger. Even the largest companies in the modern world do not have more than 500k employees. China has 1,3 billion… But the problem of knowledge is essentially the same.
2) Without prices and a profit/loss system how would the planners know what instructions to give to banks (or any other firms) in order to get the results they want?
China is a market economy. There are prices, there are companies that turn in profits and others that fail.
3) How can central planners monitor whether banks are carrying out their instructions?
hmmm… Audits? Just like in the private sector?
4) Without prices and a profit/loss how can central planners have any idea of what to plan?
Again, even though distorted by government interference, China is a market economy.
5) Why does consumption need to be “stimulated”? Why is it necessary to plan consumption? Doesn’t everyone want to consume goods?
Well, someone has to produce the things others want to consume, no?
6) How will the central plan ensure that the that what gets produced are the goods that people want to consume?
How does a company “ensure” things get produced? Besides, there are no guarantees. Plans do fail, whether in the private or in the public sector.
In summary: I do think China has some serious problems, I don’t like the notion that the government should be making plans to direct the economy, and I too am very cautious of the “Chinese myracle”.
But I think the article does a poor job in arguing against the current chinese model (perhaps the article was not planned in advance, who knows?).
Your responses show that you may not be exposed to the “Austrian basics” including “Economic Calculation in a Socialist Commonwealth” by Mises. For example you suggest an “audit” to know whether decisions are being made correctly or if they are being carried out correctly by the managers, and you compare the central planning of a private firm with the central planning of a national economy.
First, what would the planners audit? Certainly they would be able to ensure that these apartments are being built as opposed to the managers absconding with the funds. But how does one “audit” if these apartments are being built in a manner desirable to potential tenants? And how does a central planner know that consumers wouldn’t rather have new agricultural tools than move into a urban/suburban apartment with similar production costs?
Second, private “central planners”, or entrepreneurs, differ from national planners because they themselves have resources on the line that are being risked to attempt to satisfy external actors, consumers. National central planners only have their own subjective values of “success” or “failure” that rely not on using resources effectively or meeting the demands of other people, but solely of being able to construct things that meet their own egotistical notions of “how things should be”.
Private firms building these empty apartments would quickly realize that the project did not use the resources as effectively as they thought, and they would be driven to alter their behaviors to better use their money. National planners instead feel no personal loss when the apartments go unsold, apart from the political pressure of not having a great success to help glorify the party. And they do not see this failure as a failure of their design or plan, but one of “the people” not knowing what is good for them. They do not leave the situation asking “what else could I have done to satisfy others”, but instead “why do others not appreciate what I have done for them.”
Finally you insist that China is a “market economy”. While market factors will never disappear from human action, China does not rely on firms experimenting and succeeding or failing in using natural resources to their most desired ends, as would a market economy, but instead relies on the State taking their natural resources and dealing them to other economies that are subject to market prices. It is more sophisticated that the Russians looking to the Sears catalog to set internal prices, but it is no different in practice.
In conclusion, even if you don’t buy the differences between “private” and “public” central planners, your statement that, “Besides, there are no guarantees. Plans do fail, whether in the private or in the public sector,” would you rather have failures affect only the individuals who voluntarily invested in them, or would you rather have those failures socialized across an entire nation of people that have no control over how the plans were made?
iawai,
thank you for your reply. another forum member also replied to my message, so I’ll attempt to present my comments to both of you in the same message, below.
The experts in the accounting department give him a run down on current profitability and projected estimates.
There are, what?, four or six trillion people nowadays? The vast majority of productive businesses is fundamentally small to medium businesses.. this is the fundamental driver for USA economy. When businesses fail the investors, owners, management, and employees are the ones that suffer. They are the ones that are responsible for causing the company to fail and they end up taking the hit. Customers just move on to a different company and since you have competition the chances in a free market that everybody makes the same mistakes is vanishing small.
When governments fail they just tax the shit out of everybody in compensation, rulers isolate themselves from consequences, and end up causing major economic damage to everybody. In the USA we have major distortions caused by the Federal banking system, fiat currency, government regulation. Our current economic woes are caused by the fact that a huge precentage of our economic output is absorbed by regulation, foreign wars and other state mechanisms.
We have something like a 50% taxation rate and a very significant amount of company expenses (upwards to 90% depending on the industry) are directly going to regulatory compliance and not economic purposes.The whole sub-prime housing disaster is a symptom of the problem, not the cause.
Government interference is to the economy as a toddler’s fingers are to butterfly wings. That is to say that a semi-free market is not a functional one. It all depends then on the quality and intelligence of central planners at that point, which is going to lead to failure one way or another.
augusto
You have not addressed the questions.
1/. So consider, just how would the central planners know which was the “wrong direction” for the economy? This calls for a direct answer. Stating that the operators of a notional private company might have too much inventory etc. fails to address the question. Similarly stating that the notional company faces the same knowledge problem as the central planners fails to address the problem (apart from being dead wrong).
The problem that the author was directing your attention towards was discussed by Von Mises when he addressed the impossibility of socialist calculation. It is fatal for socialism (fatal for any centrally planned economy). Even the leading socialist economists and apologists, such as Lange, were unable to solve this problem- it is insolvable.
An important point to notice is that a centrally planned economy is unable to efficiently respond to what the market requires due to the fundamental conceit of the central planners themselves (they blindly believe they can “know” and should decide what the market should want, plan for that to occur and then exercise various means of enforcement/coercion/compulsion/initiations of force etc. in an attempt to make their dreams and beliefs become real). The greater the interference of the central planners in the market, the less effectively the market is able to fulfil the needs and aspirations of those within it.
The operators of a private company have not the power to enforce their beliefs, wishes and dreams upon an economy. They must obey it or their business operation fails. The only other option available to them is to lobby (& bribe) government (that is, get in good with those central planners who exert force over it) to obtain special privilege.
2/. China is not a free market economy. It remains under the auspices of central planners. To the extent that said critters interfere with the economy, they prevent the price and profit mechanisms from operating as those should and normally would.
Central planners do not respond to price signals and the profit mechanism as would regular market participants. Central planners are involved in the activity of hijacking control over the market and attempting to control prices and the allocation of profit (which are ultimaltely the means by which resources are allocated within the market). In the end they don’t “know” what to do, as their beliefs are arbitrary and random. Always remember, they operate in an absence of obedience to market price/profit mechanisms because they recieve their sustenance by means of expropriation of other people’s wealth by force.
3/. Similar deal as #2. You suggest audits. OK. Consider, what are the cental planning audits supposed to search for? Who controls them? What are the terms of reference for the auditors to operate by? Do they measure “compliance”? Or what, exactly? How? Who defines that? By what right? How?
“What is to be done” with the auditors’ reports? “Night of the long knives” at central planning HQ?
4/. Again, you haven’t started to answer this question. Mumbling some assertion about China being a “market economy” does not explain how it is that the central planners are supposed to “know” what to plan.
5/. Again, not answered.
6/. Again, not answered.
Note that when a private company fails to produce what the market demands it makes a loss. Either it changes its activities (assuming sufficient remaining resource to continue to exist) or it goes out of business and the resources it once controlled are reallocated to other market participants. This does not occur for the central planners. When they fail, they remain in operation exactly as beofre. The costs of their failures are borne by other people.
In conclusion, the author’s questions are reasonable (and I would add that if they are properly considered, lead to identification of a fatal weakness in the present Chinese system- it will need to be altered).
Sione
“I do think that being a command economy and not a democracy is an advantage for China at the moment, because if it finds that it’s moving in the wrong direction, as it recently did, it can just suddenly say to the banks “right now I want you to do these different things and cool it,” and it instantly starts to happen…but It’s a very efficient form of government at the moment to keep their show on the road”
We actually tried this here in 1980 during the Carter Administration. Paul Volker decided to try to control inflation by directly controlling the money supply at the bank level. Result – lending dried up and short term interest rates rose to over 20%.
The Quotable Mises
Ludwig von Mises: “No investment is safe forever. He who does not use his property in serving the consumers in the most efficient way is doomed to failure.” – Human Action
“…the fantasy world that Griffiths lives, in which central planners snap their fingers and the results they want arrive.”
A basic concept that I find useful when doing “policy analysis” (economic, education, etc.) is looking at the gap between Policy Intentions & Policy Implementation, i.e. Ideas in the Abstract / Theory vs. Reality. There will always be a gap; and, generally speaking, the grander/larger the plan, the larger the gap. The quote above points to this by making a joke of the belief that there can be a 1-to-1 correlation between the “results [central planners] want” and the actual, fully faithful-to-the-plan “arriv[al]” of those results in reality. ["Field of Dreams" joke/reference redacted.
]
AIWAI,
“Your responses show that you may not be exposed to the “Austrian basics” including “Economic Calculation in a Socialist Commonwealth” by Mises. For example you suggest an “audit” to know whether decisions are being made correctly or if they are being carried out correctly by the managers, and you compare the central planning of a private firm with the central planning of a national economy.”
I’m no Austrian scholar, but I have read quite a few books, and I think the Chinese problem isn’t essentially one of “central planning”.
“But how does one “audit” if these apartments are being built in a manner desirable to potential tenants? And how does a central planner know that consumers wouldn’t rather have new agricultural tools than move into a urban/suburban apartment with similar production costs?”
Not a problem of “central planning”. I suppose from your reply that you accept that private firms operate under a “central planning”, I.e, a management. Well, private firms produce tons of products that find no buyers. They go bankrupt, they merge, etc. Governments, such as the Chinese, also produce tons of stuff that people don’t actually want. The difference is that the government can print money, can impose taxes, can use threats of violence, etc. The problem isn’t central planning, the problem is whether you have a market, that is, voluntary exchanges, or coercion.
“National central planners only have their own subjective values of “success” or “failure” that rely not on using resources effectively or meeting the demands of other people, but solely of being able to construct things that meet their own egotistical notions of “how things should be”.”
I suppose I’d be happy and done if instead of talking about “central planned” we spoke of “markets” and “command economies”.
“And they do not see this failure as a failure of their design or plan, but one of “the people” not knowing what is good for them. They do not leave the situation asking “what else could I have done to satisfy others”, but instead “why do others not appreciate what I have done for them.””
I think in the operation of actual markets, entrepreneurs aren’t so nice as you seem to portray them. They don’t simple say, “oh, this project failed, too bad, let’s try something else”. Very often, they will try to impose those products on someone – through the government. I don’t recall seeing any CEO of american banks throwing their arms up and saying “my bad. No, they went to the government.
“Finally you insist that China is a “market economy”. … China does not rely on firms experimenting and succeeding or failing in using natural resources to their most desired ends, as would a market economy, but instead relies on the State taking their natural resources…”
I think you’re quite wrong about how China works in practice. There are literally millions of entrepreneurs in China, who work pretty much entirely outside of the scope of any government plan. There’s no central plan in China to determine how many children toys of each kind must be produced in a year, although the Chinese government will try to stimulate a company that can produce and sell children toys to foreign markets…
“would you rather have failures affect only the individuals who voluntarily invested in them, or would you rather have those failures socialized across an entire nation of people that have no control over how the plans were made?”
I would prefer that failures affect only the individuals, but again, you’re wrong to assume that every single failure in China is “socialized”.
Ok, so let me try to summarize my argument:
1) I don’t think the problem is one of “central planning” – I don’t think that is even the essence of Austrian economics. I think the problem is whether there is or not a market, that is if there is private property and if exchanges are voluntary. Now, if you have the whole country running out of a single central plan, sure, there will be a problem, because there is no market and no voluntary exchange, as the soviet case very clearly illustrates;
2) But China is a market economy. One heavily distorted by government intervention, but a market economy nevertheless. I’ll venture to guess that state intervention in China isn’t much greater than what occurred in the US or England during WWII – and those countries were still market economies.
SIONE,
“The problem that the author was directing your attention towards was discussed by Von Mises when he addressed the impossibility of socialist calculation. It is fatal for socialism (fatal for any centrally planned economy). Even the leading socialist economists and apologists, such as Lange, were unable to solve this problem- it is insolvable.”
If I recall it correctly, von Mises pointed to the impossibility of socialist calculation not due to the nature of planning, but due to the absence of private property and voluntary exchange. In other words: you can have all the plans you want, but are the plans executed voluntarily, or by force?
“The operators of a private company have not the power to enforce their beliefs, wishes and dreams upon an economy. They must obey it or their business operation fails. The only other option available to them is to lobby (& bribe) government (that is, get in good with those central planners who exert force over it) to obtain special privilege.”
Again, I’ll contend that the problem is not one of planning. It’s one of execution.
“China is not a free market economy. It remains under the auspices of central planners. To the extent that said critters interfere with the economy, they prevent the price and profit mechanisms from operating as those should and normally would.”
If you’re arguing then that there isn’t a single free market economy in the world, they I guess I’ll agree with you.
“Similar deal as #2. You suggest audits. OK. Consider, what are the cental planning audits supposed to search for? Who controls them? What are the terms of reference for the auditors to operate by? Do they measure “compliance”? Or what, exactly? How? Who defines that? By what right? How?”
I think we get the terms confused here. It is not at all impossible for a country to produce based on a central plan. It is essentially what every single company does. Now, whether what is produced is something anyone will want to acquire, is a different matter.
4/. Again, you haven’t started to answer this question. Mumbling some assertion about China being a “market economy” does not explain how it is that the central planners are supposed to “know” what to plan.
As I argued above in my answer to aiwai, I think you overestimate the reach of China’s “central plan”.
“Note that when a private company fails to produce what the market demands it makes a loss. Either it changes its activities (assuming sufficient remaining resource to continue to exist) or it goes out of business and the resources it once controlled are reallocated to other market participants. This does not occur for the central planners. When they fail, they remain in operation exactly as beofre. The costs of their failures are borne by other people.”
Not a problem of how the plan is made, but one of how the plan is implemented.
“In conclusion, the author’s questions are reasonable (and I would add that if they are properly considered, lead to identification of a fatal weakness in the present Chinese system- it will need to be altered).”
I’ll not disagree from the conclusion that the Chinese system needs to be altered, but well, I’d say that is the case for every single country out there…
There really is not a single free-market economy in the world augusto.
well, that I can accept, although I would find it a bit unfair to put, say, the US or New Zealand (and China?) in the same bag as Cuba or North Korea…
Iawai and Sione,
You two nevertheless make some great points and helped me clarify a few issues, so, thanks!
The problem is the firm attempts to maximize revenue. If it is taken for granted the Chinese government’s goal is to maximize revenue then they are indeed capable of economic calculation. The problem is that’s not the goal here: Their goal is to “increase social utility.” Unless income is tied to results it’s impossible to know whether what you’re doing is valuable or not.
Here is another fun example of China’s “ingenuity”:
http://inhabitat.com/china-developing-traffic-straddling-bus-that-drives-over-cars/
Let that monstrosity sink in.
I am a big dis-believer in the whole China-as-next-great-power mania, but why is this story so sinister?
Two things:
1. You have to question the competence of an engineer that draws up mock shots of a solid metal tube smoothly bending around corners like it was made of rubber.
2. There’s a companion story where this company is trying to convince major city governments in the US to install this system.
1. you can clearly see on picture 6 that the “stradling bus” is basically a train – with four or five cars/wagons connected. I don’t see why it would be unable to bend around corners.
I would question the competence of the artist who drew those images, not so much that of the engineer 
2. Yes, they are trying to push that system to city governments in my country as well. Now, while transportation is something government perhaps shouldn’t be involved in (I’ll leave this open to debate since some of us think government could/should handle urban traffic), I would choose the lesser of two evils: this system is much cheaper than building subways (regular trams are even cheaper to build, but they have the “inconvenience” of getting in the way of car/bus traffic).
It’s a safety issue. Just imagine how bad a single ill-timed lane change will be. Additionally, to properly work, one side needs to be connected to what’s essentially a 3 foot tall rail. An interesting fact is that no one has bothered to explain how traffic gets off the road when there’s a three foot tall rail in the way. This super-bus would end up having to slow down considerably, check for traffic leaving the roadway, and then slowly aligning up with the next set of rails.
Additionally, the rail is not connected to a separate mechanism like a train car. The wheels connecting to the track have the capability to rotate independently of the car, this is how they handle curves. Our rail-bus here has what appears to be a 20+ foot long leg that’s made of solid metal, there isn’t a mechanism in the mock-ups that would indicate how this thing is able to get around turns without bending the leg out of place. What this tells me is not a single one of these buses has been constructed yet and it’s all being put into place on a wild fantasy, just like the large list of empty Chinese mega cities.
1) The classic problem of two technologies being deployed at the same time. Sometimes it works, sometimes it doesn’t. The company (and I am willing to bet, so to speak, that a private company that developed this, and not some “central planning bureau”) will have to find someone to try this first, before others follow suit. Most likely, in some city looking for ways to “develop its image as a first-class international city where cutting edge technology shares space with the ancient welcoming spirit of its people”. Probably Dubai or one of those places.
As for the specific safety issues you mention, if you have ever been to Lisbon or any other city where tram lines share the road with buses, cars, bikes and pedestrians, you’ll know that they aren’t that great.
2) You’re reading too much into those drawings, methinks. But you could be right, in which case, the company will go bankrupt, or come up with a better product.
The only unfortunate thing in this whole project is that it will most likely be paid by people who have no interest in it (taxes, etc.).
You know, you have a good point. I usually look at China and private company as a mutually exclusive concept considering that the top 8 “private” companies in China are state owned. Then again, there have been plenty of bad ideas to linger around for years because of state funding. DC power stations that stuck around until the 1960s in the USA come to mind. I guess the ultimate answer is to see what happens to the system when China puts it into play next year.
I’m skeptical of the Chinese “miracle” too — see my post Don’t Bet on China and Don’t Bet on China: Redux. http://www.libertarianstandard.com/2010/05/12/dont-bet-on-china/ and http://www.libertarianstandard.com/2010/11/04/dont-bet-on-china-redux/
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