Lex Fridman: belief

Transcript context

…Another big misunderstanding, and a fundamental one, is that people somehow think that the state suppresses the private sector. It’s not at all as simple as that. For the most part, if we look at the local government’s incentive system, they want to help the best, private companies, which are the most promising, because it makes them look good. It adds to their GDP. It adds to the jobs, investment. They are so helpful to these private companies. Actually, I know many of these local government officials working tirelessly, day and night, especially in bad times, to coordinate between debtors and creditors, and to smooth out and define relationships with banks. They want to help these private companies, because again, their incentives are aligned. Deepseek is a private company, by the way, so it has done the country proud, and why would the state want to go and suppress these private companies, which ultimately is kind of a beacon, represents a beacon success for China. Now, on how much freedom they have, it’s really ranged from too much freedom. That’s part of the problem, where you have defense companies buying art auction houses, real estate companies, like Evergrande, buying soccer clubs, doing EVs, companies investing in real estate that has nothing to do with their core business. That’s how much latitude were given to private companies, and there were consequences. They were not reined in, and then you go to the other extremes, where they’re scolded, they’re reprimanded, they’re reined in, and they’re kind of folded into submission so that is the whole spectrum. You have the whole range, but I guess what we’re really getting at is it is a country that is moving from a no-rule of law or very little rule of law, very immature markets, to something that is being gradually established: bankruptcy laws, corruption laws, rules and regulations on what’s possible. One interesting point is that, in China, you ask the companies to innovate first, and then you regulate after, right? So, that has led to things like P2P platforms. It’s led to lots of kind of financial innovations, some of which has actually been very helpful and good, some of which had been disastrous, but the intention to regulate after the fact is to really not slow down or hinder the innovation. This is a very different approach from Europe. You regulate first, and then companies have to work around that. So, this is why the Chinese economy is so complex. You cannot reduce it to simply a statement saying, “The state is unhelpful for the private,” or something like that. There are certain sectors where these SOEs dominate, when it comes to national security in terms of energy, but let’s not focus on these few sectors. By and large, most of the economy, if you actually admit to the fact that China’s highly innovative and highly entrepreneurial, means that it must be the private sector that is driving the show. Innovate first, regulate after, really interesting. I also, in my mind, am contrasting it with the way the Soviet Union and Russia, since operated. That doesn’t sound at all like this model, and it’s interesting that countries that, at least on the surface, had a similar cultural communist problems, the bureaucracies that form inside the communist state. It just seems that China broke away from that somehow. I don’t understand exactly what happened. In the West, they group these economies together, as if they’re the same thing. No, it’s not the same at all. There’s so many differences, so much more flexibility. You can have dynamic entrepreneurialism, at the same time have socialist characteristics, and I think this is what China has been able to shape and mold, a unique model that balances between government industry, between state coordination and market mechanisms, and between individualism and communalism. It’s not necessarily black and white. You can have all these things at the same time.…

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