A prevailing narrative in the Western business press asserts that China’s subsidized industries destroy value because they lack profitability. This narrative spans across various sectors, from residential property and high-speed rail to electric vehicles (EVs) and solar panels. Recently, The Economist highlighted this perspective, particularly criticizing China’s photovoltaic industry. However, this viewpoint fundamentally misunderstands the broader economic impact of subsidies, value creation, and the principles laid out by Adam Smith in “The Wealth of Nations.”

If The Economist is simply continuing its tradition of critiquing China, one might overlook it as typical rhetoric. However, if this opinion is genuinely held, it signifies a profound misinterpretation of economic principles. Adam Smith’s work, published 248 years ago, emphasized the importance of the invisible hand guiding self-interest to benefit society as a whole. This principle has been misinterpreted in modern times, leading to a skewed understanding of value creation.

To compare Tesla’s market cap of $788 billion with BYD’s $93 billion and celebrate Tesla’s profitability while overlooking the broader context is a misjudgment. Both Tesla and BYD benefit from government incentives. Tesla’s higher profitability despite lower EV market penetration in the U.S. compared to China signals a policy failure rather than a testament to Elon Musk’s genius. Tesla has capitalized on incentives, whereas BYD and its competitors have focused on delivering tangible outcomes.

Similarly, First Solar’s superior valuation in a tariff-protected market, while Chinese photovoltaic companies face fierce competition and low margins, should not be lauded. The reality that China’s companies are lowering global solar panel prices demonstrates successful policy implementation and significant value creation.

The crux of Adam Smith’s argument was not the pursuit of profits but the secondary and tertiary effects of self-interest that improve societal outcomes. The ultimate goal is the provision of goods and services, not the accumulation of wealth by producers. China’s focus on affordable EVs and solar panels rather than creating mega-cap companies aligns with this philosophy.

Smith’s famous quote, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest,” underscores the importance of the end product over the wealth of the producer. High market valuations, like those of U.S. tech giants, often indicate economic distortion rather than genuine value creation.

Value Creation Misconception

The business press often equates stock market performance with value creation, a misunderstanding that neoliberal thinking exacerbates. The multi-trillion dollar valuations of American tech giants—Microsoft, Apple, Nvidia, Alphabet, Amazon, and Meta—are not purely the result of innovation but also of regulatory capture and anti-trust failures. China’s approach, which includes reigning in tech monopolies, demonstrates that similar or superior products can be delivered at lower prices without the need for massive valuations.

For instance, non-shareholders of Microsoft should question the high costs and frequent issues with products like Windows and Excel. With a $3 trillion market cap, it’s evident that consumers are not the primary beneficiaries.

China’s strategy of flattening the supply curve through subsidies fosters innovation, increases output, and reduces prices, ultimately benefiting consumers. The focus should not be on the financial returns of subsidized companies but on the overall consumer surplus and the externalities produced.

For example, a recent CSIS report estimated that China spent $231 billion on EV subsidies. Even if this figure is inflated, the benefits far outweigh the costs. With over 250 EV models available, intense competition and innovation have drastically reduced car prices, benefiting Chinese consumers significantly. The estimated $500 billion in consumer savings in 2024 alone illustrates this point.

Broader Impact of Subsidies

The value created by subsidies extends beyond immediate financial returns. For instance, the switch to EVs reduces oil dependence, lowers emissions, and provides employment opportunities, contributing to broader societal benefits. The collapse of solar panel prices could enable previously unfeasible engineering projects, significantly lowering energy costs globally and transforming economies.

The city of Hefei exemplifies the successful application of this model. By investing in high-tech industries, Hefei has achieved remarkable growth. This approach, where local governments operate venture capital funds, can be more efficient than traditional Silicon Valley models. Returns are not limited to company profits but also include taxes, employment, and consumer benefits.

China’s model considers all aspects of value creation—from consumers to producers to externalities—rather than focusing solely on profits. This holistic approach fosters sustainable economic growth and societal well-being. As demonstrated by Hefei and other Chinese cities, this model is adaptable and scalable across various technological frontiers.

In conclusion, China’s subsidized industries do not destroy value; they create it in ways that are often overlooked by traditional economic metrics. The Western business press and policymakers need to reevaluate their understanding of value creation, considering both consumer benefits and broader societal impacts. The ultimate goal should be to deliver affordable and innovative products and services, not to inflate stock market valuations.

Tesla vs. BYD: A Tale of Two Policies

A comparison between Tesla and BYD illustrates the point. Tesla’s market capitalization stands at an impressive $788 billion, while BYD’s is $93 billion. Both companies benefit from significant government incentives. However, Tesla’s higher profitability in the context of lower EV market penetration in the U.S. indicates a policy failure rather than a triumph of entrepreneurial brilliance. Tesla has capitalized on incentives without delivering commensurate market outcomes, while BYD and its competitors have driven substantial market penetration and innovation in China.

First Solar’s recent rise as the most valuable photovoltaic company, aided by tariff protections, should not be celebrated as a victory. Instead, it highlights a market distortion where value is artificially inflated. In contrast, Chinese photovoltaic companies, despite cutthroat competition and narrow margins, have succeeded in flooding the global market with affordable solar panels. This outcome is a testament to policy success and value creation, contrary to the concerns of publications like The Economist.

The business press often equates market capitalization with value creation, a perspective that is both lazy and misleading. Market cap reflects investor sentiment and stock market dynamics, not the actual economic value provided to consumers. For non-shareholders, the value of a company like Microsoft is derived from the price and performance of its products, not its stock price. If regulators did their job, products might be cheaper and better, enhancing consumer welfare.

China’s strategy of subsidizing industries to stimulate competition and innovation is a prime example of creating consumer value. By subsidizing producers, China increases output, drives innovation, and reduces prices, benefiting consumers immensely. This approach contrasts with the Western focus on profits, which often leads to monopolistic practices and higher consumer prices.

The concept of consumer surplus – the difference between what consumers are willing to pay and what they actually pay – is often overlooked in traditional economic analysis. China’s subsidies significantly increase consumer surplus by lowering prices and enhancing product quality. For instance, the subsidies for the electric vehicle (EV) industry have led to a proliferation of models and intense price competition, resulting in substantial consumer savings.

Case of EV Subsidies

A recent report by the Center for Strategic and International Studies (CSIS) estimated that China spent $231 billion on EV subsidies. Even if this figure is an overestimation, the impact on the market has been profound. The subsidies have catalyzed the emergence of over 250 EV models, driving innovation and lowering prices across the board. The consumer savings from these developments far exceed the initial subsidy outlay, creating immense value for Chinese consumers.

The benefits of China’s subsidy policies extend beyond immediate consumer savings. The shift to EVs reduces dependence on oil imports, lowers emissions, and creates jobs in high-tech sectors. Similarly, the dramatic reduction in solar panel prices opens up new possibilities for renewable energy projects, with significant geopolitical and environmental implications.

The city of Hefei in Anhui province exemplifies how local governments can drive economic growth through strategic investments in high-tech industries. Hefei’s approach, which includes government-operated venture capital funds, offers a more flexible and potentially more effective model than traditional venture capital. This model considers a broader range of returns, including employment, workforce upgrades, and consumer surplus, rather than focusing solely on company profits.

China’s approach to industrial subsidies, which emphasizes competition, innovation, and consumer value, stands in stark contrast to the Western focus on profits and market capitalization. By understanding and appreciating the full spectrum of value creation – from consumer benefits to positive externalities – policymakers can develop more effective economic strategies. China’s success in sectors like EVs and solar panels demonstrates that subsidies, when properly implemented, can create immense value and drive broader economic progress.