Going out on a limb here, but maybe you’re both wrong – or I’m about to be.

Jo Schumpeter, right after the fun bit about creative destruction, describes how capitalism destroys itself, as monopolistic competition automatises innovation into giant corporate bureaucracies. We can see that playing out now with the likes of Apple and Amazon, who are simply extracting value from the properties they previously created. Their innovation is now focused on preventing competition, with proprietary standards and ecosystems that lock people in. They are protecting their patch.

The soviet system was similar but different. There may well have been plenty of capacity for innovation in the local collectives, but that was not the incentive that drove the central planners. If some upstart local manufacturer innovated in a way that made the central planners look slow or stupid, they would more likely be shut down than allowed to grow and accumulate their own power. The central planners are more concerned with protecting their patch. In both socialism and capitalism, it is the excessive concentration of power that changes the structure of incentives, so that innovation is redirected at retaining that power – at the expense of everyone else.

The concentration of capital is the concentration of power (from Nitzan & Bichler), which may be why China periodically lurches from promoting investment to cracking down on capital. This keeps the state-owned enterprises awake, and prevents accumulated capital from forming another centre of power (see Branko Milanovic). I wouldn’t suggest that Xi is not focused on retaining power, but even if he is not as smart as Deng, dispersing economic power would have the beneficial side effect of encouraging innovation. China is certainly innovating, to the extent that the western car industry might be about to face its own moment of Schumpeterian creative destruction.

Am I wrong? Does China itself eventually become too powerful and fall into the same value extraction trap as the west? Is the fact that capital accumulation is based on value extraction, not value creation, the real cause of this problem, as well as environmental destruction and social breakdown?

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Jan 19·edited Jan 19Liked by Steve Keen