“We thought Grease was going to be a disaster.” That’s how Barry Diller bluntly puts it in his memoirs (Who Knew) about one of the many blockbuster films that Paramount Pictures released during his tenure as CEO. When it comes to audience tastes, it’s frequently true that no one knows.
All of this is worth remembering as the Wall Street Journal’s editorial page continues to promote the notion that the Chinese, seemingly for being Chinese, are not restrained by historical absolutes involving the marketplace. To read editorials and op-eds on the page is to increasingly be told that the Chinese, Xi Jinping most of all, can simply decree commercial achievement (impossible) to the rest of the world’s detriment (similarly impossible).
The same Wall Street Journal editorial page that formerly mocked the conceit of Japan’s “industrial policy” planners in the 1980s gives the impression that this time is different. As a recent opinion piece by Ram Charan at the Journal explained it, “China’s power—which Xi Jinping can exercise at will—consists of 90% excess production capacity. That means it can identify a key industry, build the capacity to produce 90% of global demand, and then flood markets with subsidized exports, priced at marginal cost, backed by a 20% undervalued currency. That quickly wipes out competition.” Everything Charan asserts about China is what the Journal’s editorial page has historically rejected.
Charan indicates that Xi can dictate China’s commercial policies, but as the Journal’s editorialists and contributors have taught readers for decades, decentralized markets work while government planning always fails precisely because commerce is too complicated to be planned by one, or even thousands of experts. Prosperity is not an effect of decrees from the Commanding Heights as much as it’s constant discovery frequently driven by outsiders who miraculously divine consumer needs that weren’t previously evident. And sometimes market actors happen on discoveries by accident. See Grease.
What’s almost never true, if ever, is that prosperity follows government planning. Yes, central planning failed in impoverishing, murderous fashion in the 20th century. The Journal’s editorial page chronicled the previous truth better than anyone.
Charan would have us believe Xi can “identify a key industry,” except that he can’t. No one can. Most of the ideas of Jeff Bezos, Bill Gates, and Elon Musk failed.
Which means assuming China’s leaders demand excess capacity after identifying a key industry (again, an impossibility), it wouldn’t mean much as is. Just the same, if China wants to subsidize us with cheap goods, let it. It’s similarly impossible that low-cost goods could reach the U.S. to our detriment, which is nothing more than a popular argument among protectionists. That’s because work divided is not only the greatest driver of productivity the world has ever known (see Adam Smith’s pin factory), it’s also the greatest foreign policy advance ever conceived. Countries producing for each other are less likely to bomb one another.
Charan claims China’s industrial policies are able to wipe out the competition since the producers are “backed by a 20% undervalued currency.” No, not really. As the Journal’s editorial board has explained to devaluationists for decades, there’s no devaluing one’s way to prosperity for countless reasons, including that more costly imported inputs necessary to create any product will wipe out any alleged gains from a cheaper currency.
The main thing is that China is not unique despite what Charan believes. Contra Charan, China’s economy grows despite Xi, not because of him. Longtime readers of the Wall Street Journal’s editorial page know why this is true.
Originally published on Real Clear Markets.
