As we keep insisting, it’s markets that matter

China seems to be having a problem in its economy:

China is urging its electric vehicle industry to stop cutting prices and rein in production amid fears that persistent deflation is imperilling economic growth.

In recent months Chinese officials have talked repeatedly of the need to combat “involution” in sectors suffering from overcapacity, such as EVs, referring to the phenomenon of investing more effort and money for diminishing returns.

Xi Jinping has spoken of the problem directly. In an unusually blunt speech this month, China’s president criticised provincial governments for blindly overinvesting in artificial intelligence, in computing power and in new energy vehicles, industries that Beijing has identified as strategic priorities but which are also at risk of overheating.

Hmm. So central government deciding what everyone should do has its problems then? Be still our beating hearts.

What is actually happening is that that planning is meeting the market and no business plan ever does survive first contact with the marketplace. Which is the point of having markets of course - to sort through competing business plans. See whose vision of that potential future actually matches what the mere people desire.

But it’s also worth noting the outcome of those markets. The people making out like bandits here are the consumers. Not the capitalists, nor the producers, the consumers:

In the hyper-competitive Chinese economy, consumers, unwilling to part with their cash, have come to expect rock-bottom prices. Companies across industries often cut prices to near or below cost levels in a play for market dominance.

This is how it always does work in a competitive market as well. As Bill Nordhaus pointed out with his paper Schumpeterian Profits in the American Economy. Yes, sure, capitalists invest and entrepreneurs entrepreneur and who are the beneficiares? Where there’s competition it’s the consumers - the entrepreneurs end up with 3% or so of the value generated, near all the rest accrues to the users of the products and services.

This is why, in one sense, we’re intensely relaxed about who owns. The British supermarket sector contains two cooperatives, Waitrose and the CoOp and that doesn’t bother us at all. That they compete, head on, with the variedly capitalist Aldi, Lidl, Asda, Morrisons, Tesco and Sainsbury’s is what does matter for it is that which leads to supermarket margins being in the 2 to 3% range and thus consumers are the beneficiaries.

In another sense we’re less relaxed. Now that government owns all the railways again they’re banning competition from open access operators on the grounds that competition might “steal state revenue”. Which is to wholly miss the point we think.

But in that more general sense yes, we’re really very relaxed about who owns and even who plans. As long as everyone has to face a competitive marketplace in the end it will be consumers who make out like those proverbial bandits. Which is as it should be of course, the whole point of an economy is to make us consumers out here richer. Richer by whatever definition of our being richer comes into our pretty little heads.

Throwing the entire Chinese economy at making cheaper electric vehicles might not have been all that good an idea. Maybe, even. But an actual market in the finished product - however much the planners rail against it - is what drives all the benefit, whatever that benefit might be, into the wallets of consumers.

Tim Worstall