The Central Importance of Statistics

One of the enduring mysteries of the Chinese economy is, well, all the enduring mysteries about the Chinese economy.  Which is to say, good statistics are very hard to come by.  The other day, I spoke to an economist who said that after a long period when wages lagged economic growth, they were finally moving in the other direction, growing 30% a year.

For wages to be growing that much faster than the economy, something else must be growing slower, and I endeavored to find out what that something was.  Were profits growing more slowly?  No, they were growing faster than ever. 

What about the government's share?  No, also rising.

Could this be reflection of the inflation rate?  Assuredly not, he said.  These were real figures, not nominal.

Which leaves us with something of a mystery.  As he admitted when I, convinced I was not understanding something, pressed him:  "The figures," he said, "don't always agree."

The lack of good economic statistics often makes it hard to know what's going on here.  It's tempting to measure progress by the breakneck pace of construction, which you can see, rather than the pace of economic activity, for which you have no good measurement.

This would be a problem anywhere.  But it's a particular problem in China, because the government directs so much economic activity here.  It is not exactly central planning any more, to be sure, but nonetheless, government here seems to be much more actively and enthusiastically behind everything from new construction to how much lending activity goes on.

There's a certain temptation in China to become fascinated with the technocratic wizardry of it all.  Development proceeds on an epic scale:  massive office parks, shiny new airport expansions, boulevards of heroic proportions built to accommodate traffic that will not materialize for ten years.  America could never do anything like this, we are told; we're too short-sighted, too driven by profit.

It's hard to argue with 10% annual growth, but I don't know how they are managing.   In an economy with minimal government control, there isn't so much need for good statistics; the people on the ground react to the information immediately available around them, and as Hayek says, this system works elegantly without comprehensive information:

Fundamentally, in a system in which the knowledge of the relevant facts is dispersed among many people, prices can act to co-ordinate the separate actions of different people in the same way as subjective values help the.individual to co-ordinate the parts of his plan. It is worth contemplating for a moment a very simple and commonplace instance of the action of the price system to see what precisely it accomplishes. Assume that somewhere in the world a new opportunity for the use of some raw material, say, tin, has arisen, or that one of the sources of supply of tin has been eliminated. It does not matter for our purpose--and it is significant that it does not matter--which of these two causes has made tin more scarce. All that the users of tin need to know is that some of the tin they used to consume is now more profitably employed elsewhere and that, in consequence, they must economize tin. There is no need for the great majority of them even to know where the more urgent need has arisen, or in favor of what other needs they ought to husband the supply. If only some of them know directly of the new demand, and switch resources over to it, and if the people who are aware of the new gap thus created in turn fill it from still other sources, the effect will rapidly spread throughout the whole economic system and influence not only all the uses of tin but also those of its substitutes and the substitutes of these substitutes, the supply of all the things made of tin, and their substitutes, and so on; and all his without the great majority of those instrumental in bringing about these substitutions knowing anything at all about the original cause of these changes. The whole acts as one market, not because any of its members survey the whole field, but because their limited individual fields of vision sufficiently overlap so that through many intermediaries the relevant information is communicated to all. The mere fact that there is one price for any commodity--or rather that local prices are connected in a manner determined by the cost of transport, etc.--brings about the solution which (it is just conceptually possible) might have been arrived at by one single mind possessing all the information which is in fact dispersed among all the people involved in the process.

But central planners badly need good, comprehensive data.  Once you limit the autonomy of local nodes to make decisions, you need some sort of massive data set to overcome information loss as decisions move up the hierarchy.

Libertarians often use this to argue against any sort of central planning, but that's not the point of this post.  All modern economies engage in some level of planning, whether it is monetary policy or infrastructure construction.  It was in response to the problems of managing production during World War I that economists first conspired to create US economic statistics.

The Chinese government is extremely enthusiastic about managing their economy, and they put a lot of thought into it.  But the lack of good statistics on economic performance makes an already near-impossible challenge even more daunting.