We failed to invest cleverly - can we learn?

Our failure to understand why China is so good at manufacturing is the failure that will stymie the Burnham Government and which is at the heart of Scotland’s weak government. Where you invest your money matters too much to be left to chance.

You cannot use bad thinking to try to understand why your thinking is bad, yet on the economy that is what we do. It really frustrates me – if I have to explain to one more person that no, China isn't hammering us at manufacturing because of 'low wages', I'll scream.

We forget how deeply embedded the cult of neoliberalism is in our everyday language about the economy. Why is China so much better than us? Under neoliberal doctrine it can only because global capital has allocated resources to the part of the world where wages are lower because if neoliberal doctrine admitted the truth, it would cause a crisis of faith.

So, let me try and explain the real reason China is kicking our ass, why it means that Andy Burnham has zero chance of 'moving on from neoliberalism' as he claims he wants to and how that ought to alter the course of economic policy in Britain and Scotland – but won't.

Let's start with batteries. I visited a battery test laboratory a couple of years ago and it was fascinating. I won't go into any details but here is one really important thing you have to understand – batteries are designed with tolerances of a few microns. That is one thousandth of a millimetre.

So if you've been imaging large sweatshops full of overworked Chinese women sowing batteries together with old sewing machines, you are at least reflecting the neoliberal argument quite accurately. It is of course utter nonsense.

Battery manufacture is almost all automated. Human labour costs are an infinitesimally small – perhaps amounting to little more than three or four percent of the cost of making a battery. Cut the wages of the battery-makers and you'd barely notice it in the retail price at all.

So why is China so far ahead of us at making batteries? That it is somehow something 'inferior' about the people (the subtle implication of the low wage argument) is a comforting fairytale for neoliberalism, but it is absolute garbage.

There are two big reasons why China is so far ahead, and they're both related. One is that it has vertically integrated the supply chains for batter manufacture. It can get all the raw materials and all the manufactured component parts quickly, easily and cheaply – because of central planning.

The other is simply that China ploughed money into fixed capital assets (factories and so on) at exactly the time that the Western world stopped doing that and instead was directing all its national investment into a housing and dot com bubble.

Once you have built a factory you immediately start learning how to build a better factory. You cannot learn that standing outside someone else's factory looking in, and you can't even learn it by taking apart the thing they make to see how they did it. Process learning is crucial, and you can only gain that learning through the process itself.

That is the reality of why China is so far ahead. On batteries, solar panels, electric vehicles, injection moulding, metal tooling, LED manufacture and much more, China invested in productive capacity while we were speculating on financial assets. Our financial assets made our elites rich but brought little value to the rest of the economy.

China's productive capacity enabled a 30-year learning curve during which time they became very, very good at manufacturing things quickly, efficiently, cheaply and to a high standard.

(China will make what you want. If you want crap they will make you crap. Temu sells you cheap crap because apparently you want to buy cheap crap. Apple sells you first rate technology because you want good quality. China makes all of it to order. I hear people say 'China only makes crap', but that's just the West projecting our low standards onto others.)

So why is this about planning and why does that mean Burnham will fail? Because of the varying theories of how capital should be allocated in an economy. In the West we believe that capital should be allocated by the market. This is the theory that only self interest will 'correctly' assign investment to purpose.

And it is nonsense. It is only 'correct' if you define the task as being 'find the investment that costs me least of my own money but makes me the most profit in the shortest time possible' (i.e. debt-fuelled leveraged Western finance). In the longer term, all you end up with is online gambling and Ultra Processed Foods. The operation has been a roaring success but the patient is bleeding out.

The Chinese approach of centrally-directed investment has this entirely different purpose. It is not about making the people who have money more money in the shortest possible timeframe but to develop the overall economy to be strong and useful. China makes incredibly efficient batteries only because it decided to make incredibly efficient batteries.

“You have to make capital be better than it wants to be if you do not want your society to be eaten away from the inside”

This is why it really matters how you allocate investment capital in an economy. It's back to 'choosing brown bread in a sweetie shop' – if you permit investors to cream off everyone else's money through non-productive speculative gambling, they will. It just means no-one will build a factory and no-one knows how to make a battery.

That is a rough encapsulation of the crisis in Western economics – we can't do useful things because we spent all our money playing poker while China can do useful things because the state stopped people playing poker and forced them to spend it on useful things.

Now I am not advocating for state planning or even state-directed capitalism. It has its problems. For example, while China's centralised decision-making means it has enormous industrial capacity, it also misread the economy and built far, far too much housing too quickly, leading to a long-standing major economic drain on the country. Central planning is effective but can be inefficient or plain wrong.

But what I am saying is that you can't make our free market madness achieve what state planning can achieve and there is no bridging that reality. Either capital is free and will be spent on robbing more people or it is directed towards a national purpose. You can't make a free market invest in a national purpose just because you want it to. You need to make it.

This is the Burnham point. I don't really know if he is sincere about moving on from neoliberalism given how neoliberal much of his policy agenda in Manchester was, but I do buy the fact that he knows we have a fundamental problem with our economy.

Why I think he will fail is that we already see every sign that he will try to huff and puff his way to a post-neoliberal world without addressing the allocation of capital in the economy – so it won't work. We have already seen this happening with his administration, talking about doing something differently then backing off immediately it gets lobbying kick back.

Burnham wants capital to be allocated to a national mission where Starmer wanted to make the interests of capital the national mission, so there is a difference. But capital won't do it unless Burnham makes them, and making them will cause pushback so he won't.

The reason this is so, so important in Scotland is that Scotland has the problem China did when China started more purposefully directing capital to create manufacturing infrastructure – we have very little productive capacity and we do not make anything like enough of what we need to survive.

We treat ourselves like a cookie jar from which the world can take what it wants – we call it inward investment and increasingly I think of it as an utter national betrayal, devised by lawyers and consultants who get rich by selling their country to foreigners on the cheap.

Instead we need to invest in productive capacity, and it will never come from industry itself. So it must be directed from somewhere, and only government can do that.

The options are not limited to British-stile extreme laissez faire or Chinese state control. There is a different approach to the same thing that bridges these alternatives, and we've been going on about it for ages. It is called an industrial strategy.

But it doesn't happen, because people do not understand that an economic strategy and an industrial strategy are totally different things. The former is generally take to be the British model of 'tweak levers to maximise the returns to capital' and is almost always value-free. Industrial strategy is nothing like that. It acts to direct capital like the Chinese did, but in a slightly different way.

Rather than compelling investment or making it all yourself as a government, you decide where you want capital investment made and you incentivise it, while disincentivising the alternative. Why it is not an 'economic strategy' is that it states a mission, not a target. A mission might be 'build the capacity to make wind turbines'. A target is 'erect 100 wind turbines'.

They sound superficially the same but very clearly they are not. That is why the West can't change itself. It doesn't understand this difference and vested interests spend a lot of money trying to prevent you from understanding this difference.

That is why our capitalists wants you to believe that the Chinese are successful because of low wages because it implies that you as a worker can't possibly want the same success. But you do, because of why capital doesn't want an industrial strategy – and that is because theft is easier than work, and there are so many ways to steal money from us now.

Hence we have Ticketmaster charging you a gazillion pounds to see a corporate pop act and China is about to break the $40 per kWh threshold for sodium batteries which would transform the world.

If you let capital do what it wants it will fleece you. Adam Smith understood this a long time ago. You have to make capital be better than it wants to be if you do not want your society to be eaten away from the inside.

Scotland needs to get its courage up and undertake a massive process of directing capital towards the development of productive domestic capacity. Neither Burnham or Swinney are going to achieve this and the latter doesn't even pretend he wants to. We wake up to this now or this is going to turn into China's century and we'll just be vassals to a new master.