Ludwig von Mises vs. President Xi on the Benefits of Central Planning
The visible success of China's economy since 1979 has led to an inaccurate conclusion: central planning is more efficient than individual planning in a private property social order.
President Xi is convinced that central planning is more efficient than Western capitalism. But the central planning that he presides over is not the central planning that prevailed under Mao. It is a very different form of central planning. It is Keynesianism.
China has its cheerleaders in the West. That is because they are also committed to Keynesianism. One of them is Pepe Escobar.
He used to write for these leftist periodicals: Salon, Huffington Post, and The Nation. These days he writes mainly for Asia Times. Here are some of his articles for Salon in 2015.
The 21st century belongs to China: Why the new Silk Road threatens to end America's economic dominance.Go West, young Han: How China and the new Silk Road threaten American imperialism
I have analyzed the Belt and Road project. It is a huge, resource-wasting, money-losing public relations boondoggle. It is Keynesian mercantilism gone wild. Read my articles here:
https://www.garynorth.com/public/21477.cfm
Here is Escobar's latest exercise in economically blind cheerleading.
Based on frenetic social media activity, public opinion confidence in the Beijing leadership remains solid, considering a series of factors. China won the “health war” against Covid-19 in record time; economic growth is back; absolute poverty has been eradicated, according to the original timetable; the civilization-state is firmly established as a “moderately prosperous society” 100 years after the founding of the Communist Party.Since the start of the millennium, China’s GDP grew no less than 11-fold. Over the past 10 years, GDP more than doubled, from $6 trillion to $15 trillion. No less than 99 million rural people, 832 counties and 128,000 rural villages were the last ones to be extricated from absolute poverty.
This complex hybrid economy is now even engaged in setting up an elaborate, “sweet” trap for Western firms. Sanctions? Don’t be fools; come here and enjoy doing business in a market of at least 700 million consumers.
As I’ve noted last year, the systemic process in play is like a sophisticated mix of internationalist Marxism with Confucianism (privileging harmony, abhorring conflict): the framework for “community with a shared future for mankind”. One country – actually a civilization-state, focused on its renewed historical mission as re-emerging superpower. Two sessions. And so many targets – and all of them achievable.
He argues that this irreversible program of economic growth is based on central planning.
The review of the draft outline of China’s 14th Five-Year Plan will proceed all the way to March 15. But in the current juncture, this is not only about 2025 (remember Made in China 2025, which remains in effect). The planning goes long-range towards targets in the Vision 2035 project (achieving “basic socialist modernization”) and even beyond to 2049, the 100th anniversary of the People’s Republic of China.Premier Li Keqiang, delivering the government work report for 2021, stressed that the target for GDP growth is “above 6%” (the IMF had previously projected 8.1%). That includes the creation of at least 11 million new urban jobs.
You can read his article here: https://www.lewrockwell.com/2021/03/no_author/the-shape-of-things-to-come-in-china
Missing is any discussion of Ludwig von Mises' definitive refutation of central planning.
MISES VS. CENTRAL PLANNING
In 1920, Mises' long article appeared, Economic Calculation in the Socialist Commonwealth." Two years later, he expanded this argument in a book, Socialism: An Economic and Sociological Analysis.
Here is his argument in a nutshell. For any kind of economic allocation to take place on a rational basis, there must be prices. These prices must be set by the competitive system known as the free market social order. Buyers and sellers work out mutually beneficial exchanges based on competitive bidding. Sellers compete against sellers. Consumers compete against consumers. Out of this gigantic auction system come money prices. These prices reflect supply and demand.
If there are no money prices that are based on accurate assessments of supply and demand, the central planners cannot know what should be produced, in what quantities, in what qualities, and in what geographical locations. The entire system of production and distribution is an integrated process that is based on the private ownership of the means of production, including labor. For rational planning to take place, there has to be a market in which producers and consumers can enter into voluntary exchanges.
In a pure socialist commonwealth, none of this exists. The central planners do not have access to prices inside the socialist commonwealth. The prices are set by the planners, but these prices do not reflect the existing conditions of supply and demand, including above all the supply and demand of forecasts regarding future conditions of supply and demand. What is missing is entrepreneurship. There is no group of investors and producers who forecast future conditions of supply and demand, and who then allocate scarce economic resources to meet these expected conditions. There is no entrepreneurship in a pure socialist commonwealth. There is no private property. Entrepreneurs are not allowed to benefit from their accurate forecasts of supply and demand. There is no profit-and-loss system.
This means that the socialist planners are flying blind. They cannot gain access to the knowledge that is required for them to allocate millions and even billions of resources in terms of what consumers are willing to pay. Socialist theory denies the legitimacy of any such system of private ownership.
Mises wrote in 1920:
For each separate calculation of the particular branches of one and the same enterprise depends exclusively on the fact that is precisely in market dealings that market prices to be taken as the bases of calculation are formed for all kinds of goods and labor employed. Where there is no free market, there is no pricing mechanism; without a pricing mechanism, there is no economic calculation.
A socialist economy has no way to make managers responsible to consumers. This is because there is no private property.
It is a general complaint that the administration of public undertakings lacks initiative. It is believed that this might be remedied by changes in organization. This also is a grievous mistake. The management of a socialist concern cannot entirely be placed in the hands of a single individual, because there must always be the suspicion that he will permit errors inflicting heavy damages on the community. But if the important conclusions are made dependent on the votes of committees, or on the consent of the relevant government offices, then limitations are imposed on the individual's initiative. Committees are rarely inclined to introduce bold innovations. The lack of free initiative in public business rests not on an absence of organization, it is inherent in the nature of the business itself. One cannot transfer free disposal of the factors of production to an employee, however high his rank, and this becomes even less possible, the more strongly he is materially interested in the successful performance of his duties; for in practice the propertyless manager can only be held morally responsible for losses incurred. And so ethical losses are juxtaposed with opportunities for material gain. The property owner on the other hand himself bears responsibility, as he himself must primarily feel the loss arising from unwisely conducted business. It is precisely in this that there is a characteristic difference between liberal and socialist production.
DENG'S ANTI-COMMUNIST REVOLUTION
In December 1978, Premier Deng Xiaoping announced a new policy. Farmers would henceforth be allowed to sell surplus crops in a free market. The project began in 1979. From the moment it was implemented, China began to grow economically. Wikipedia summarizes:
The Communist Party authorities carried out the market reforms in two stages. The first stage, in the late 1970s and early 1980s, involved the de-collectivization of agriculture, the opening up of the country to foreign investment, and permission for entrepreneurs to start businesses. However, a large percentage of industries remained state-owned. The second stage of reform, in the late 1980s and 1990s, involved the privatization and contracting out of much state-owned industry. The 1985 lifting of price controls was a major reform, and protectionist policies and regulations soon followed, although state monopolies in sectors such as banking and petroleum remained. In 2001, China joined the World Trade Organization (WTO). The private sector grew remarkably, accounting for as much as 70 percent of China's gross domestic product by 2005. From 1978 until 2013, unprecedented growth occurred, with the economy increasing by 9.5% a year.
This was the sole source of the Chinese economic miracle, which was not a miracle. It was simply the implementation of policies that moved the Chinese economy in the direction that Mises recommended throughout his career: toward private ownership and voluntary exchange.
The Chinese economy moved from centralized planning by government bureaucrats to decentralized individual planning by owners of private property, especially their own labor. It moved the economy from state bureaucratic management to free-market profit management. The rival systems of management were described by Mises in 1944 in his book, Bureaucracy.
The five-year plans described by Escobar are remnants of the older Communism that was pioneered by Stalin in the 1930's. They are restraints on the extension of private property in the economic life of China.
The economy in mainland China is Keynesian. It is export-oriented, therefore it is mercantilist. It represents a throwback to the early 18th century. But, compared to the Chinese economy of the 18th century, and especially the Chinese economy of Mao, this is liberty. Escobar calls it Confucianism. That is a legitimate description. To the extent that the five-year plans still exist and are in various ways implemented, this is more mercantilism than it is socialism or Communism. Nobody gets shot in China for failing to meet a quota that was imposed by central planners. He may get fired, but he does not go to the equivalent of Lubyanka prison.
CONCLUSION
Escobar does not believe in the unhampered free market economy. That is clear from what he writes. He believes in central planning. He does not believe in the central planning along the lines of Stalin, but he believes strongly in central planning along the lines of Premier Xi.
China is a tyranny. It is simply less of a tyranny than it was prior to 1979. Tyranny is not productive. It can exist only because it is incapable of stamping out all entrepreneurship, all private ownership, and all voluntary transactions.
It is revealing that the much-heralded social credit system of control that supposedly is going to be implemented in China is based on computer records of people's purchases. It is a computerized system of monitoring individual behavior. But the behavior is explicitly market behavior. It is the behavior of buying and selling specific items. The negative sanctions to be imposed by this computerized system will interfere with the terms of future exchanges. These negative sanctions represent an odd form of central planning. The system is an attempt to use the free market as a means of control. This is not socialism. It is hard-core Keynesianism. It works to shape the market, not to destroy it.
Mises was correct. Central planning is economically irrational. It can exist only because the planners have access to market prices.
I end with Mises' assessment in 1920 of the economics of China's Belt and Road initiative.
Picture the building of a new railroad. Should it be built at all, and if so, which out of a number of conceivable roads should be built? In a competitive and monetary economy, this question would be answered by monetary calculation. The new road will render less expensive the transport of some goods, and it may be possible to calculate whether this reduction of expense transcends that involved in the building and upkeep of the next line. That can only be calculated in money. It is not possible to attain the desired end merely by counterbalancing the various physical expenses and physical savings. Where one cannot express hours of labor, iron, coal, all kinds of building material, machines and other things necessary for the construction and upkeep of the railroad in a common unit it is not possible to make calculations at all. The drawing up of bills on an economic basis is only possible where all the goods concerned can be referred back to money. Admittedly, monetary calculation has its inconveniences and serious defects, but we have certainly nothing better to put in its place, and for the practical purposes of life monetary calculation as it exists under a sound monetary system always suffices. Were we to dispense with it, any economic system of calculation would become absolutely impossible.
Central planning boondoggles do not make nations richer. They make nations poorer.