Central Planning Always Fails!
China has been in lockdown again. The ports in Shanghai are closed, and ships are waiting in the South China Sea. The implications for supply chains are incomprehensible. So is the Chinese lockdown policy, so it seems.
Lockdown policies have proven to be a complete failure at reducing the spread of Covid. The recent adoption of this policy by the Chinese has many people scratching their heads and asking, “Why now?”
China represents the pinnacle in central planning. Xi Jinping is the General Secretary of the Chinese Communist Party (CCP) and the leader for life.
To rise to the position of leader for life, there is no doubt that many promises were made. The patronage system that feeds the CCP is vast.
The only way to thrive and build wealth in China is to be a member of the CCP. A CCP member puts their membership number front and centre on their CV when applying for a job. The CCP membership number signifies that you fully support the party and its leaders.
The Orwellian nature of the CCP is such that members operate out of fear. It is common knowledge that passing bad news up the hierarchical leadership structure can result in severe consequences. The implications for a central planning economy are dire if essential information does not make it back to the centre.
A significant benefit of the free-market structure is the feedback loop from the dynamics of supply and demand and the impact on setting prices. For this feedback loop to work efficiently, there needs to be information transparency of the supply capacity and demand requirements. The system doesn’t work perfectly all the time. However, most of the time, it functions satisfactorily.
Another characteristic of the free-market system is that businesses that cannot meet the market’s requirements are allowed to fail, and capital is directed elsewhere. Capital is often poorly allocated in a central planning structure because businesses are not subject to free-market forces.
This week on the Rebal Capitalist Podcast, hosted by George Gammon, a hypothesis was presented by his guest, Jason Burack. Burack suggested that the lockdown in China has nothing to do with Covid. The reason for the lockdown is that China is suffering from food shortages. Areas of China have suffered from significant crop failures, and their food imports have been largely cut off due to the Russia / Ukraine war.
The lockdowns are a tactic to reduce demand!
This is an example of what happens when governments have too much power and try to control all levers of the economy. The system is way too complicated to be controlled from the centre. Small failures are an essential feedback mechanism. The alternative is a colossal failure.