Antai Insight


Lu Ming: Market Economy Cannot Be Replaced by Planned Economy, With or Without Big Data

Alumni and Public Relations Office 2017-06-15

Recent remarks by Jack Ma, Chairman of Alibaba, have sparked a new round of debate between planned and market economy.

Will big data change the verdict on planned economy?

Professor Lu Ming from Antai College of Economics and Management things big data can provide information on the behaviour of some of the market players so as to enable better informed decision making. In this respect, it is possible to bring some changes to economic policies, but it will not be able to replace the market economy.

One of the biggest drawbacks of big data is that the market is constantly changing, but the statistics are largely devised on past events. And it cannot reflect people's simultaneous response to various policies.

In planned economy, there is no pricing system, in other words, price is decided not by the market, but by administrative forces. The same happens to resource allocation. These are the essential characteristics of a planned economy.

In the 1930s, there was a flurry of debates and reflections on this system and the two main conclusions were: first, pricing system contains all the information about human preference and behaviour, something which the planned economy lacks.

'Big data can only shed some light in this area. Even when armed with statistics, the problem of insufficient information in planned economy still persists,' says Professor Lu.

Second, individuals will adjust their behaviour according to market condition, once a policy based on existing information is out, the public will simply switch to new behaviour patterns and render it useless. With or without big data, a planned economy can never know what people are thinking.

Therefore, Professor Lu believes that the growth of big data will not redefine planned economy and market economy. Moreover, plan and market are only concepts used by academics, in the real world there is no absolute planned economies, nor absolute market ones, rather, all the economies are more or less in-between.

How will data affect planned and market economies?

Professor Lu argues that market-based policy making could be more effective and precise when supported by data evidence, offering better guidance to the economy and further enhancing social welfare. Alas it still cannot solve a series of restrictions such as information asymmetry.

'Big data can help raise policy efficiency, but that does not mean we can ignore market rules,' says Professor Lu.

For example, statistics about traffic flow could help the authorities to set more appropriate congestion charges - using the price to nudge people's behaviour, a market-based action. However it cannot use data to justify policies of who can drive at what time to what location.

Professor Lu also warns against blindly trusting technologies, as 'it might actually make things worth.'

Jack Ma's words that 'big data makes planning and prediction possible' cannot be interpreted as big data could lead to an almighty government. Data can help government improve management effects, but cannot make it all-powerful.

The market should always play a decisive role in resource allocation, and 'data can only add to the power of market'. Government cannot go against the market, otherwise it is bound to be punished. 'This is a time-tested rule in economic history, we cannot make the same mistake again.' 

This article (in Chinese) was originally published by Caixin on Jun 13, 2017.