Returns to Capacity

American capitalism makes money. Chinese capitalism makes things.

American capitalism makes money. Chinese capitalism makes things.

Go read my new essay, Capacity Returns (gift link), in The BREAK—DOWN. Below are some related thoughts, extensions, and oddities on and around the themes of the essay.

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In 1989 the late Russian leader Boris Yeltsin famously visited an American supermarket and was astounded by the abundance of it all.

Yeltsin amazed by the frozen Kool-aid products, among others

Life under communism meant persistent shortages, but the incentives of American capitalism triumphantly provided. Yet in 2026, shortages pervade the American economy. While the Abundance discourse has focused on NIMBYism and regulations as the source of shortages, especially in housing, this perspective ignores critical industrial shortages arising from a very different source. Americans are increasingly under the thumb of powerful corporations and financiers sabotaging society by choosing profits over production.

Returns to capital lay at the cornerstone of the American economy. Money flows to projects, companies, and ideas where it can be most profitable and generate the greatest financial return to the investors and lenders who funded those initial flows. On the other hand, areas lacking strong expected returns will struggle to raise money and remain unbuilt. In China, capital is not so beholden to profit expectations. Capital is comparatively undisciplined and flows absent high expectations on returns.

Lack of capital discipline is traditionally seen as a problem for perhaps obvious reasons: without discipline, capital will be allocated inefficiently. Money travels towards purposes that produce smaller returns than it theoretically could if the capital were allocated more efficiently. The Chinese state-owned enterprise (SOE) is the classic example of this phenomenon. For decades these firms have received preferential treatment from state-controlled banks and capital markets despite producing mediocre returns. This phrasing is the polite language of World Bank reports and UN analyses. The bare truth is that often these firms just lit money on fire with huge workforces making products that the market did not demand.

In today’s debates about the Chinese economy, both inside and outside the country, arguments have shifted. The problem is still the capital going to places where it fails to produce returns for investors and lenders. However, rather than emphasizing differences between an inefficient state-owned sector and an efficient private sector, we instead focus on individual sectors which are characterized as being plagued by “overcapacity” or involution (内卷), destructive hypercompetition. Real estate, steel, EVs, polysilicon, solar panels, and more all operate in worlds where profits have evaporated because of intense competition amidst massive supply capacity. Where are the returns to capital if firms have no profits?

At the same time as concerns are raised about their profitability, some of the firms in these sectors have grown to world-changing proportions. While these investments may generate minimal returns to capital, they do produce substantial benefits even if those benefits don’t all accrue to their debt or equity holders. Workers get jobs, consumers get cheap products, and competition helps push technologies forward. Cheap solar, batteries, and EVs might even help save the world. Having excess capacity smells like resilience, which might be particularly valuable in a world with a Nero-like would-be-king atop the hegemon determined to burn the global order to the ground and an increasingly chaotic climate system fueled by carbon emissions pushing similarly towards entropy.

Critiques of American financialization are common as are those of Chinese overcapacity. But rarely are these two pathologies examined together. American capitalism struggles to build while Chinese capitalism can’t stop itself from building too much. A possible synthesis requires more than meeting in the middle but questioning the purposes that underlie them.

It is time that we expand our perspective on returns. Investment necessarily involves expenses today for production, and returns, tomorrow. But whose returns should we consider? Beyond returns to capital, there are also what we could call returns to capacity. What are the implications -- economically and politically -- if we take this expanded view of returns more seriously?

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Again, go read the full essay. (If the gift link isn’t working now, you could subscribe and / or wait until they drop the paywall soon.)

There was enough going on in the essay that I left out a ton of things, which is what substack posts are for. Here’s a short list with some riffing: Gulf War 3, varieties of capitalism, capital controls, and bankers as planners.

Gulf War 3 makes even more plain that demand for various goods is not fixed, and shocks to demand — such as the boost in demand for electrotech as fossil fuel supplies are pinched off and prices skyrocket — are real. Decisions that looked financially dicey three months ago may turn out to pay out after all. Resilience can read as fat, with leaner firms winning, until things shift. At the individual and firm level, insurance is taken for granted that we don’t think about it. But the market dynamics of insurance itself are shaped by the state because left to pure market forces, they will collapse. The healthy avoid paying into insurance until they are older, which leads premiums to rise on those needing care, which leads even more to opt out given a calculus of guaranteed high costs compared with probabilistic economic disaster. States intervene, requiring coverage in ways that can be annoying and generate pushback but really just leave everyone off in a more resilient place. Yet at the sectoral level, we have very little. The US government does not mandate firms have at least a few days, weeks, or months of inventory in case of disaster or market dislocation. It hasn’t even mandated ramping up of production in sectors where shortages pervade the market.

Gulf War 3 might provide a temporary boost to firms in China’s overbuilt electrotech sectors in ways that help push off a day of reckoning into the future. Whether that will help or hurt the Chinese government’s plans for anti-involution or merely delay them remains to be seen.

Varieties of capitalism exist. The Hall and Soskice volume with that title remains worth reading but isn’t precisely where I land. Capitalism is a worthy subject of study, and it has multitudes. Chinese capitalism is not American capitalism. Obviously the essay tries to make more sophisticated points about the nature and evolution of those differences, and exceptions to them, but if people only take away the most basic point, I’d still consider that a win.

In a very nice episode of the Rhodes Center podcast, Mark Blyth interviews Erik Peinert about his new book, Monopoly Politics. It covers deep shifts in how capitalism operated in France and the United States in the 20th Century. From the OUP description:

Using original archival evidence from the United States and France, and borrowing insights from microeconomics, bureaucratic politics, sociology, psychology, and law, Peinert demonstrates how government policy towards competition and monopoly changes at key moments in the 20th century. Centrally, policy changes as a result of the interaction between staff turnover in policy circles and the diminishing returns to policy regimes.

As policy regimes across different arenas such as antitrust, intellectual property, trade, and industrial policy push consistently either in favor of competition or monopoly, they generate diminishing returns. Unsustainably pushing for competition suppresses profits and destabilizes markets, whereas pushing to defend market power will raise prices, stifle innovation, and concentrate profits in stagnant monopolies. However, with policy regimes locked in by committed policymakers who have invested time, reputation, or the careers into implementing one approach to policy, government policy only changes through their replacement with non-committed officials willing to reconsider policy.

Competition policy is an existing legal framework that countries have used to try to manage the profitability of firms to promote social ends. We have tool boxes, and they are powerful. That being said, most of the usual tools in those boxes do not map easily onto the Chinese and American problems I wrote about. It’s not really competition policy’s place to generate startups to challenge lazy incumbents sitting on their laurels. Nor does it tend to propose mergers and acquisitions to turn the fire down on competition that is far beyond the boiling point. Both of those problems are assumed to be solved by market actions. In the former, ambitious entrepreneurs should sense that the incumbents have created an opportunity for a new entrant to disrupt the existing market and grab profits. In the latter, loss-making firms are assumed to be killed by financial pressures rather than remain stumbling around as zombies kept “alive” by local governments scared to see them disappear completely.

Capital controls. One could ask the question, why is Chinese capitalism not American capitalism? Not at the level of policy inside each of these states, but why do the dynamics of capitalism as a global set of ideas and practices not lead to homogenization? If capital tends to produce greater returns in the United States than in China, why does the capital not flow to the United States? Capital controls are load bearing for China’s development model today as they were in the pre-2020 real-estate centered economy. The desire for control and the fear of capital flight also has explanatory power over why Xi and his cronies so strongly prefer an industrial upgrading and innovation growth model to a consumer-led one. Consumers — citizens — are many; firms are few. And controlling what those firms do with their funds is difficult but still much easier than dealing with the myriad ways in which citizens might try to exfiltrate their money out of the country, even if they were doing so not as prelude to emigration (rùn 润 as meme) but as individual-level hedging. The potential of capital flight and the seriousness of what it could do to the Chinese economy (and its politics) are why I remain skeptical of RMB internationalization stories, for all of the possibility of an electroyuan.

Bankers as planners. I’m excited to read Against Money by J. W. Mason and Arjun Jayadev. They had a great conversation in an episode of the Climate Pod. Mason has published a ton of fascinating pieces recently, including one that I can’t find at the moment sitting in a hotel room in Beijing that discussed bankers as planners, so I’ll just link to his piece about NYC Housing after the freeze. My recollection of the bankers as planners piece (which might have been a bluesky post) is just the realization that bankers when they fund a new idea are not operating in a typical market environment but instead placing a bet on an idea and a view of how that idea, its potential costs of production and estimates of the demand curve, will operate in the world before that idea is material. Which isn’t that far off from what we imagine an economic planner might be doing.¹

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To be completely clear, I am not arguing that China is doing things correctly and the US needs to adopt Chinese policies. What I am suggesting is that there is much to be learned about how we do and can govern ourselves by closely examining the dynamics of the status quo in diverse places. More, much much more, to come.

1. I can’t really quibble with an argument that I’m recalling but iirc my concern was that there might be something slightly more market-like in the costs of funds being offered, where the banker is in competition with other potential sources of funding that can look market-like, but now we’re through the looking glass.