You will no doubt have heard about the battle of ideas – Keynes v Hayek. In the 1930’s this was probably the most famous debate in the history of economics – the battle of ideas -government v markets.

Now there is Chinese version of the debate:

Justin Lin (Keynes) versus Zhang Weiying (Hayek) – both are Professors at Peking University. Lin is on the right of the image below.

Their latest debate is about industrial policy and the concept that the government can set the example of how to run successful industries – in the 1980’s textiles and today renewable energy. Although China’s growth record would seem to justify this some have seen these state run industries produce little innovation. Lin believes that countries that have a comparative advantage should receive help from the government whether it be in the form of tax cuts or improved infrastructure. Furthermore, because resources are limited the government should help in identifying industries which have earning potential. This assistance includes subsidies, tax breaks and financial incentives — aimed at supporting specific industries considered crucial for the nation’s economic growth.

Zhang sees this industrial policy as a failure in that he believes government officials don’t know enough about new technologies. He uses the example in the 1990s, when the Chinese government spent significant money on the television industry only for the cathode ray tubes to become outdated. He is also concerned about industrial inertia with local officials following the central government’s direction which tends to lead to an overcapacity. Zhang, however, credited the free market — not politically motivated government subsidies — with game-changing innovations that benefit society eg. James Watt and the steam engine, George Stephenson’s intercity railway, and Jack Ma’s innovative online marketplaces under Alibaba.

China’s ongoing transition to a market-based economy has relied on labour, capital and resource-intensive industries. But the transition’s negative side effects have included structural imbalances and excess capacity in certain sectors. Moreover, some state-owned enterprises such as telecoms have been challenged by disruptive innovators, such as social networks.

Zhang said industrial policy can foster greed. For example, companies may collude with government officials to win special favours. And policymakers can make mistakes, given that even the most well-informed intellectual cannot always predict market trends. Other economists have contributed to the debate stating that a lot of the most successful companies have not had any government assistance in their early years.

However the debate is sure to continue – what works best ‘Markets or Governments’?

Sources:

The Economist – 5th November 2016

CaixinOnline