The idea in a nutshell

  • China has a ‘mixed’ (part Capitalist, part Communist) economy.
  • All countries have some sort of mixed economy.
  • However, China’s approach to this mixed economy is, in some ways, different to anything that has come before.
  • They are, in at least some cases, installing government representatives on the boards of big Chinese technology firms.
  • Imagine a government representative sitting on the board of Google, Apple and Facebook, directing activities. It’s a bit like that.
  • It seems to offer them the best of both worlds; They get the benefits of Communist coordination of a country to solve problems, and the efficiency of Capitalist economies.
  • This is a series of blog articles. Here, I’ll consider what the status of the Chinese economy is.
  • In the second article in this series, I’ll look at the mechanisms through which government guidance improves the economy.
  • Finally, I’ll consider some metrics and other information to determine whether what they’re doing differently is working.

How are economies set up around the world

There are 3 economic models: Socialism, communism, and capitalism. Each describes an archetype of the ways to allocate 4 factors of production: Land, Labor, Capital, and Enterprise.

It is only by combining these things that a country, or economy can produce things (i.e., products and services). I mean, actually, countries don’t produce things really; people do. But you get what I mean, I’m sure.

Ideologically these are the different forms of ‘perfect’ implementations of these approaches:

  • Socialism : The government owns everything and the people use it on their own behalf to produce goods and services.
  • Communism: The people own the factors of production and are directed by the government on how to allocate them to produce goods and services.
  • Capitalism: Private individuals own the factors of production. Entrepreneurs and the owners of Capital direct production activity.

This stuff is taught in the first few lessons of any economics course. In reality, no economy is perfectly communist, socialist, or capitalist. Even the USA has a government which conducts activity with an economic impact. Where there is a mix of public and private spending in the economy, you get a ‘mixed economy’. A good measure of the mix is the proportion of GDP spent by the government.

Generally, Capitalism is viewed as more effective at generating wealth for it’s population. In Communist Russia, for example, before they opened themselves up to market forces, there was a lot of overhead cost involved in figuring out how to get products to the right place. Often, in the real work, there were long queues for groceries.

In London, a Capitalist economy, there weren’t nearly as many and there was no centralized organization. As soon as there is an incentive caused by a queue, a rival entrepreneur sets up nearby and fills the gap. This isn’t opinion – countries with lower levels of government spending have higher GDPs.

Until now, the less government involvement a government has in its economy, the higher economic growth.

In reality, most economies are mixed – consisting of some private and some government spending. Lower levels of government spending are correlated with higher levels of GDP growth. Source.

So, generally, Capitalism has appeared to be (at least until now) more efficient in allocating resources where they’re worth the most.

What ‘coordinates things’ (the equivalent to Russia’s centralized planning) in Capitalist economies is the (free) ‘invisible hand’. The Invisible Hand is a combination of the concepts of financial self-interest and the price mechanism.

How is China’s mixed economy different from the rest of the world’s?

Twenty years ago, China invited foreign investment to the country. Then, some would say, they ripped off a lot of the Intellectual Property that visitors and investors brought. Later, China backtracked and implemented a new strategy, often displacing foreign investors with domestic products and services.

Looking back, it’s hard to deny that the Chinese government was effectively luring Western companies in with the promises of access to the 20% of the world’s population that China had, and then betraying them.

Now, the Chinese government has several venture capital funds that it uses to invest in domestic companies, and different teams which operate in the USA, investing in theirs. The new scheme is a coordinated ‘Made In China’ plan.

Alongside these state government investors, China’s government is quietly guiding their businesses by inserting CCP (Chinese Communist Party) members on to the boards of their companies.

How? This is the element of Chinese law most widely quoted : Article 7 of their Intelligence Law :

“Every Chinese company is legally obliged to host internal CCP cells”.

The CCP is looking to buy 1% of each of their own biggest tech companies, with a trial underway now. At least 35 Chinese companies have board members from the government to direct them in case they ‘stray from the path of socialism’.

Alongside these more formalized activities, they’ve called on Chinese entrepreneurs to pick patriotism over profits.

China generally allows these private companies to do what they want, but government staff members on their boards intervene when they think it’s appropriate.

From the outside, it’s difficult to tell exactly how much influence the Chinese government has when they insert themselves on the boards of these companies.

We’re all different and the same

China is combining the effectiveness of The Invisible Hand with the effectiveness of centralized control, and have invented a new type of economy.

When Capitalism put us in the winning seat for the fastest type of growth economy, we smiled and enjoyed that our system was better than the Russian’s. One useful question might be, does China’s new approach to mixed economies work better than our Invisible Hand? I have examined that question in the next blog post.