The New China Playbook: Beyond Socialism and Capitalism
“Jin has made a compelling case against the idea that capitalism is the only path to prosperity.”
There is a saying that “Generals always fight the last war.” This means generals assume that future battles will be the same as the last battle they fought, so they use the same strategies. Although this is not her intent, Keyu Jin‘s must-read book is a warning to Americans not to make this mistake in the economic rivalry that will play out over the coming decades between China and America.
For example, she warns America not to assume that China will flood “European and American shores with cheap clothes, toys, and furniture” as it did in the past. Instead, she asserts that China will make “sophisticated products that directly compete with those made in Japan, Germany, and the US, from chemicals and electronics to batteries.” Moreover, China will be a leader in a “new kind of manufacturing that deploys next-generation technology, such as artificial intelligence, robotics, and big data.” China is now a formidable economic rival and direct competitor that America should never underestimate.
Jin is in a unique position to issue this warning. She works with one foot in the West and the other foot in China: she is an associate professor of economics at the London School of Economics and Political Science, serves on corporate boards, was born in China, and lives in both London and Beijing. Moreover, she is ‘fluent’ in the full range of topics that define the rivalry—from the business models for modern technologies to the fundamentals of international monetary policy.
Her most compelling challenge to democratic capitalists comes early on in her book: if China does not have the cornerstones that capitalists say are essential to prosperity—“the rule of law, sound corporate governance, and intellectual property protection,”—how is it that China has achieved one of the largest economic transformations of all times? Jin later writes that: “For those who cling to the belief that Western-style democracy with its full embrace of capitalism is the only system that can generate widespread prosperity, China’s global rise poses a perplexing paradox.”
The challenge becomes even more compelling because she asserts (correctly) that: “The biggest difference between socialism and capitalism is dynamic innovation—capitalism’s most fundamental virtue, delivered by mechanisms such as property rights protection and competition, which are notably weak in socialist systems . . . But in China, innovation and entrepreneurship have been defining features of the economy despite socialist characteristics of in-state coordination and resource allocation.”
What allowed China’s state capitalism to innovate to prosperity without the cornerstones of democratic capitalism? Jin’s answer is surprising: it is, in large part, local government that filled the shoes of innovators and entrepreneurs. She writes that “This phenomenon is known as the mayor economy. In recent decades, pioneering local government officials have rushed at a frenetic pace to expand their local economies, transforming former fishing villages and farmland to technology hubs and industrial centers. These officials vie with each other for primacy in everything from economic growth to foreign investment . . . Local governments busily commission landmark bridges, skyscrapers, opera houses, and gymnasiums with the latest avant-garde architecture . . . In China, the mayor economy rivals the market economy in importance.”
Jin points to some of the achievements that make China a leader in technology: China “built the world’s fastest supercomputer and the world’s first solar-powered expressway, and conducted the world’s first 5G-enabled remote surgery.” Jin worries that “Despite all the highly visible signs of technological prowess, experts are still divided as to how ready China is to assume the mantle of global innovator in chief.”
To address the issue, Jin suggests drawing the distinction “between two different types of innovation: fundamental breakthroughs and creative adaptations.” The first “takes us ‘from zero to one.’ This technology is revolutionary, giving rise to general-purpose technologies like computers and artificial intelligence.” The second takes us “from one to N”; these are “evolutionary” not revolutionary innovations. The “zero to one” innovations occur in America, among other countries. Jin opines that China is “achieving remarkable mastery of ‘one to N’ technologies,” but it would take “’profound” change to enable China to “consistently make ‘zero to one’ trailblazing innovations.”
Who in China could lead such a change? Jin’s hopeful answer is that “Many founders and CEOs of China’s unicorn tech companies are millennials. . . . They are China’s hope of becoming a sustainable zero to one innovator with a global reach.” She also has an optimistic view of the technology rivalry between China and America and believes that “The technological race between the US and China should be more like a race to win more Olympic gold medals—with proper rules and constraints—than like a downward spiral toward confrontation.”
Jin assesses one final aspect of the economic rivalry: Which country will be the global financial leader? Jin admits that China would have to increase its role in global finance to catch up to and challenge the US today. Jin finds that China’s currency lags behind the US in all three “roles of an international currency”—“store of value,” “medium of exchange,” and “unit of account.” For example, she reports that the “renminbi accounted for just 2.66 percent of total foreign reserves in 2021, compared with 59 percent for the dollar.” Jin concludes that “it will be some time before China’s currency will serve as a counterweight to the US dollar.”
Jin has made a compelling case against the idea that capitalism is the only path to prosperity—she simply points to the prosperity won with China’s state capitalism so far as evidence. We should not be surprised that ideology alone is never enough. Nevertheless, there is a unique causal link from capitalism to zero-to-one innovation—we can simply point to the prosperity won so far with America’s democratic capitalism as evidence.