1 · The Price Thermometer And The Dead Cells

In a market economy, prices are a thermometer. When a good becomes scarce, its price rises - telling producers "make more, there's profit here". When it's in glut, the price falls - telling them "stop, move your capital elsewhere". Millions of daily decisions allocating capital, labor, and raw materials all read off that thermometer, with no one giving orders.

Hayek called this the real miracle of markets: a single number compressing all of society's dispersed knowledge - the drought in an exporting country, the invention that halved a cost, the shifting tastes of a hundred million consumers - things no planning committee could ever collect. And every price does three jobs at once:

• Transmit information: a rising price = this thing is scarcer than everyone thought; a falling price = there's a glut.
• Create incentives: a high price rewards whoever produces more and punishes whoever wastes; a low price does the reverse.
• Ration scarcity: when there isn't enough for everyone, price decides who gets the goods - whoever is most willing to pay - instead of queues, ration coupons, or connections.

A subsidy - in any form - is a wedge driven between the true cost and the price people see. A car that costs 40,000 dollars to build but, thanks to subsidies, sells for 30,000 makes all three functions of price broadcast false signals at once: the buyer reads "cheap, buy more"; the producer reads "still profitable, keep going"; the investor reads "this industry is winning, pour money in". The 10,000-dollar gap doesn't vanish - it just gets shifted onto an invisible payer: the budget, the savers, or the next generation. And because the payer is invisible, none of them feel the true cost - which is precisely the point.

It isn't only firms that misread the signal. Students pick majors based on the salaries of an industry being pumped; banks pick borrowers based on collateral being inflated; households pile savings into the thing that "never goes down" - because the state doesn't allow it to go down. A false price that lives long enough reorganizes the whole society around itself.

The state has four main knives for killing a price - and each knife broadcasts its own kind of false signal:

The last column of the table is the real point: no knife erases the cost - they only shift it onto a payer who is harder to see, and the price of that shift is far steeper: the whole system goes information-blind. This is why this post calls subsidies an oxygen tank: it doesn't cure the lung disease, it just makes the patient stop feeling the suffocation - while the disease keeps worsening in silence.

Killing prices is only half the story. The other half: for the thermometer to work, the system must accept dead cells - weak firms going bankrupt, obsolete industries shrinking, a natural rate of unemployment that always exists as workers move between jobs. Schumpeter called it creative destruction: every bankruptcy frees capital, premises, and labor from an inefficient use and returns them to whoever can use them better. This is why the Fed never targets 0% unemployment: the "full employment" the Fed pursues sits around 4% - below that, the economy starts running an inflationary fever and price signals turn to noise.

But history keeps producing states that look at dead cells and see... a defect to be eliminated. Bankruptcy? Not allowed. Unemployment? Must be zero. A strategic industry losing money? Pump money in and keep it alive. All four knives in the table above get drawn at once - and the immediate result always looks beautiful: nobody loses their job, output soars, the achievement reports glow. That is the "good time". It isn't fake - it just hasn't been paid for yet.

Because the cost is always shifted onto an invisible payer, the question that decides the fate of every oxygen-tank system is just one: where does the money feeding it come from, and when does it run out. The two biggest case studies of the 20th and 21st centuries fed their oxygen tanks from two different money sources - and followed the same script when that source broke.

2 · The Soviet Union - When Gosplan Smashed The Thermometer

The Soviet Union didn't distort price signals - it abolished them entirely. In the centrally planned economy, the State Planning Committee (Gosplan) and the State Committee on Prices administratively set the prices of hundreds of thousands of goods: what a ton of steel cost, what a loaf of bread cost, which factory produced how much, delivered to whom. Price was no longer information - price was an accounting number decided by officials in a meeting room.

The Hungarian economist János Kornai - who observed the system from the inside - named its foundational disease: the soft budget constraint. A private firm has a hard budget constraint: spend more than you earn for long enough and you die. A Soviet state enterprise had a soft one: whatever it lost, the state covered, because output targets and employment mattered more than profit and loss. Once death is removed from the equation, every incentive to cut costs, innovate, or serve users' real needs vanishes with it.

The "good times" of the 1950s-60s - and the underside of the numbers

For the first two postwar decades, the system looked like it was winning - and not just in Pravda. By the CIA's own estimates, the Soviet economy of the 1950s grew 6-10% a year - faster than the US, among the fastest in the world (Texas National Security Review). A country that had just lost 27 million people in the war became the second-largest economy on the planet: steel, electricity, and cement output closed in on America's; illiteracy was wiped out; education and healthcare were free for all; khrushchyovka apartment blocks rose en masse, moving tens of millions from cramped communal housing into private flats. And above all, the declared abolition of unemployment - something no capitalist economy ever achieved.

The peak of the good times was in the sky. Sputnik flew before any American satellite (1957), Gagarin became the first human in space (1961) - and the West fell into a genuine panic called the "Sputnik crisis": Washington rushed to create NASA and DARPA and passed a national defense education act to catch up with Soviet engineers (Wikipedia). The year Gagarin flew, Khrushchev was confident enough to write it straight into the party program: communism completed by 1980. Before that he had promised to "bury" the West economically - and the remarkable thing is that plenty of people in the West believed him.

That was the good time seen from outside. But beneath the numbers sat two truths rarely printed in the papers:

• Disguised unemployment: the 0% figure came from enterprises being forbidden to lay anyone off and being made to "invent work to stuff people into". A line that needed 10 engineers would carry 50 on the payroll; the other 40 still drew wages and still counted as "employed". The famous Soviet workers' joke summed up the whole system: "We pretend to work, they pretend to pay us."
• The shortage economy: because the plan prioritized heavy industry and defense - the things that were countable and impressive - the system had surplus steel, surplus cement, surplus tanks, but chronic shortages of consumer goods: meat, shoes, toilet paper. Queuing became a structural part of life. This is the picture of a crisis of overproduction and a crisis of shortage coexisting - something that only happens once the price thermometer has been smashed.

When bread was cheaper than wheat - what a dead price signal looks like

What does a dead price signal look like in practice? The Soviet loaf of bread is the classic example. The retail price of bread was fixed in the 1950s and barely changed for over 30 years - regardless of how much the costs of growing wheat, harvesting, milling, and baking rose. The budget covered the gap. At some point, finished bread in the shops became cheaper than the wheat and bran used as animal feed. Farmers around the cities did exactly what that price commanded: they bought baked bread... to feed their pigs. The state grew wheat, subsidized it into bread, and watched the bread come back around into the pigsty - a perfect budget-burning loop, operated by millions of people, every one of them acting rationally on exactly the price signal the state was broadcasting.

Why not fix such an absurd price? Because the Soviets tried, once. In 1962, Khrushchev's government raised the prices of meat and butter about 30% to bring them closer to true cost - workers in the city of Novocherkassk went on strike, protested, and were fired upon by the army; dozens died. The leadership drew exactly one lesson from the bloodshed: never touch food prices again. Prices of essentials were frozen for good, and the food-subsidy bill swelled into one of the largest lines of the federal budget - the wedge between cost and price never got pulled out, only hammered deeper every year. A subsidy, once it touches the people's stomach, can never be withdrawn - Cairo and Caracas will repeat this exact lesson further down.

The oxygen tank called oil

A system that inefficient should have run out of breath by the 1960s - and indeed its growth rate declined steadily with every five-year plan. What extended its life by two more decades was a geological stroke of luck: the giant oil fields of Western Siberia, brought into mass production from the late 1960s, just as the oil shocks of 1973 and 1979 multiplied the world oil price more than tenfold.

From 1975 to 1985, Soviet oil-export income quadrupled (Russia Matters). By 1985, fuel and energy accounted for roughly 60% of the union's hard-currency earnings (Wikipedia). And that dollar stream was spent on exactly one thing: sparing the system from having to reform.

• Importing food to feed the population: collectivized agriculture failed chronically, to the point that the Soviet Union - the country with the largest agricultural land area in the world - had to import grain at scale from its own adversaries (the US, Canada, Argentina), in some years tens of millions of tons.
• Covering losses in the productive sector: continuing to feed loss-making enterprises, maintaining "0% unemployment" and prices of essentials pinned below cost.
• Feeding the empire: the arms race with the US, the war in Afghanistan from 1979, and subsidies for the whole Comecon bloc - Soviet oil sold to Eastern Europe below market price as a kind of political glue (covered in more depth in the Marshall Plan, Comecon and BRI post).

By the 1980s, the Soviet model was in essence a giant oil company using its oil revenue to subsidize the rest of the economy - plus an expensive military superpower. The entire architecture stood on a single assumption: the oil price would stay high forever.

September 13, 1985 - the day the oxygen valve was pulled

That assumption died in the autumn of 1985. Saudi Arabia, after years of cutting its own output to hold prices up for all of OPEC (with the Soviet Union free-riding), announced it was done carrying the load alone and turned to reclaiming market share. Within months, Saudi output rose from about 2 to 10 million barrels/day, and the world oil price collapsed from ~$32 to around $10/barrel (Russia Beyond) (Wikipedia - 1980s oil glut).

For the Soviet Union, the damage was estimated at over $20 billion in 1986 alone - on top of a budget already in deficit (Russia Beyond). The domino chain that followed ran in textbook order: dollars run out → not enough food and consumer-goods imports → empty shelves → borrow from the West → debt balloons → eventually nobody wants to lend anymore. Gorbachev's rushed reforms (perestroika) couldn't fix the rotten structure - they only exposed it. Yegor Gaidar - who later served as Russia's acting Prime Minister and dissected the collapse in Collapse of an Empire - summed it up:

The irony is that the system never lacked productive capacity. In 1991 the Soviet Union was still turning out more steel, cement, and tractors than most of the world. It collapsed because all that capacity had been allocated on false signals for decades, piling up into a mountain of output nobody needed while the things people did need went unmade - and when the foreign-currency stream papering over that mismatch vanished, nothing remained between the rotten structure and reality.

3 · China - The Second-Generation Oxygen Tank: More Sophisticated, And Bigger

China learned the Soviet lesson - half of it. From 1978, Beijing handed the price thermometer back to most of the economy: farmers could sell their produce, private firms could compete, and most prices were set by the market. The result was the most spectacular three decades of growth in modern economic history.

Good times, China edition - the greatest miracle ever recorded

If the Soviet good times lasted two decades, China's lasted more than three - and at a vastly larger human scale. From 1978, GDP grew on average over 9% a year, continuously, through every regional and global crisis; nearly 800 million people escaped extreme poverty - the largest poverty-reduction campaign in human history, with extreme poverty declared eliminated by 2020 (World Bank). After joining the WTO in 2001, China became in turn the world's largest exporter (2009) and the world's largest manufacturer (2010) - a position the US had held for over a century.

This good time had its own Sputnik moment too: the 2008 financial crisis. While the US and Europe sank into recession, Beijing unleashed a 4-trillion-yuan stimulus and single-handedly pulled global growth along; the high-speed rail network went from zero (2007) to larger than the rest of the world combined in just over a decade. Western academics began speaking of a "Beijing Consensus" as an alternative to the Washington one, and books about "when China rules the world" climbed the best-seller shelves. The zeitgeist felt exactly like 1961: that other system seems to have found a formula free markets don't have.

But the half that wasn't learned sits at the capital-allocation layer. Whenever a growth target must be hit, or an industry gets labeled "strategic", the state still intervenes on the old reflex: directed credit through state banks, discounted land from local governments, central and local subsidies stacked on top of each other, and an implicit promise that big players will not be allowed to go bankrupt. The budget constraint of firms in these industries - state-owned and private alike - softens in exactly Kornai's sense. The Chinese edition of the oxygen tank doesn't feed sluggish Soviet-style enterprises; it feeds some of the most aggressive, modern production machines in the world. That makes the problem harder to see - and bigger.

The overcapacity crisis: when the whole country wins the race to the bottom

The overcapacity machine runs like this: the center designates an industry as the future (solar panels, EVs, lithium batteries, chips...) → all 31 provinces race simultaneously to court it with land and capital, because local GDP performance is the yardstick of an official's career → hundreds of firms pile in together → total capacity outruns every demand scenario → prices crash → but nobody withdraws, because behind every firm stands a local government that cannot let its "champion" die. The result has its own name in Chinese: involution (nèijuǎn) - competition so brutal it becomes self-destructive; the harder everyone tries, the poorer everyone gets (China Leadership Monitor).

Look back at the "four knives" table at the top: China draws the whole set at once, each layer killing a different price. This is why it deserves the name second-generation oxygen tank: each layer on its own looks more like "industrial policy" than crude subsidy, but added together, a firm in a strategic industry barely sees any true cost at all:

The last layer is the most dangerous. In a normal market, a price war is a self-correcting mechanism: prices fall below cost → the weakest run out of cash and leave the game → supply contracts → prices recover. In China, the signal still gets broadcast - auto-industry margins fell from 7.8% to 4.3%, solar panel prices fell below production cost - but the receivers have been anesthetized: no firm withdraws, because behind each one stands a local government that treats its survival as a political achievement. Prices keep falling, output keeps rising, the whole industry loses money together year after year - a state of affairs a genuine market economy could tolerate for only a few quarters. That abnormal capacity to absorb losses says only one thing: the subsidy wedge has been driven very deep.

Sources: Seafarer Funds, Policy Circle, Dallas Fed, CNBC.

The first number is almost impossible to believe until you're used to China's scale: one country building enough EV capacity to supply the entire planet. In a market with a working price thermometer, this simply cannot happen - the 50th, the 100th investor would have watched margins collapse and stopped writing checks long ago. It can only happen when the price signal has been numbed into paralysis by subsidies and directed credit.

Producing for whom to consume?

Every mountain of goods needs buyers. China's structural problem is that the very model that builds the mountain also strangles the domestic buyer: resources get siphoned toward production and infrastructure investment through three channels: suppressed deposit rates (an invisible tax on savers), a thin safety net that forces households to self-insure by hoarding savings, and wages growing slower than productivity for decades. The result shows up plainly in one number:

When the domestic market can't absorb it, only one relief valve remains: exports. China's export prices have fallen for three straight years - cheap goods flooding the world are at once a lifeline for the factories and a wave of "exported deflation" pressing down on every other country's industry. And the world's reaction has been exactly as predicted: the US slapped triple-digit tariffs on many Chinese goods in the escalating trade war, the EU added duties on EVs, and a growing list of emerging economies - Brazil, India, Indonesia, Turkey - built barriers of their own (World Bank China Economic Update Dec 2025). The relief valve is being squeezed shut from every side.

That valve is also greased by the fourth knife from the opening table - the least visible one: the exchange rate. The yuan's real effective exchange rate (REER) is now at its weakest since 2012, down roughly 17% from late 2021 by the BIS measure - meaning that while Chinese goods flood the world, the currency of the largest trade-surplus nation in history keeps getting cheaper, the exact opposite of what a free market would do (Brookings). The undervaluation is no longer just a political accusation: Goldman Sachs estimates the yuan is about 25% undervalued on a trade basis (Bloomberg Dec 2025), the IMF puts it around 16%, and German Chancellor Friedrich Merz - with the EU running a record trade deficit with China of about €1 billion a day - publicly called it 30% and proposed an international round of currency talks in the style of the 1985 Plaza Accord (SCMP) (Euronews).

Merz's remark inadvertently sums up this post's thesis: overcapacity subsidies and a pinned exchange rate are one package, two blades of the same machine that transfers purchasing power from domestic households to exporters. For Chinese consumers, a cheap currency means imports, energy, and trips abroad cost more than the economy's real strength would allow - one more invisible payer for the list. History adds an ironic detail: the Plaza Accord Merz invoked is the very agreement that once forced Japan - the trade-surplus nation the whole world complained about in the 1980s - to revalue the yen. Four decades on, the old script has found a new lead actor, at twice the scale.

And the oxygen tank really is running out of money

The money feeding this model was never the central budget - it is land and local debt. Local governments sell land-use rights to developers to fund industrial subsidies and infrastructure; when they need more, they borrow through their captive financing vehicles (LGFVs) to keep the debt off the budget books. That flywheel spins smoothly as long as land prices keep rising. Since the property bubble burst (analyzed in the China real estate crisis post), both wheels have broken at once. Set beside the 1980-1986 oil-price chart in the Soviet section, the curve below is its twin - the same role in the story, just a different asset:

The chain of consequences:

• Local government debt is estimated to have reached ¥66 trillion (~$9.3 trillion) - roughly half of GDP (Atlantic Council); the IMF calls the LGFV debt pile a "serious risk to financial stability".
• Beijing had to launch a ¥10 trillion hidden-debt swap program, order the shutdown of over 70% of LGFVs, and set a mid-2027 deadline for eliminating "hidden debt" - an official admission that the old funding channel is dead (Yicai) (Caixin).
• Youth unemployment hit 21.3% in mid-2023 - so high the statistics bureau stopped publishing the series, then relaunched it under a new methodology (excluding students from the sample); even by the new measure, the figure has hovered around 15-17% through 2025-2026 (Trading Economics). The official message to the young has shifted from "the state will provide" to "go back to the countryside, start your own business, learn to eat bitterness" - the polite version of "you're on your own".
• And the "anti-involution" campaign since 2025: the government directly ordering the EV, solar, battery, and steel industries to cut capacity and stop selling below cost (Saur Energy). The paradox is packed in right here: the state pumped subsidies to create the overcapacity, and now uses administrative orders to cut the overcapacity - treating the consequences of planning with more planning, instead of handing the price thermometer back to the market (McGill Journal of Economics).

Not 1991 yet - but the familiar symptoms are showing

To be fair, China's economy is not at a Soviet-style endpoint, and may never reach one - it has a real private sector, real technological capability, the world's largest FX reserves, and a macro-management apparatus many grades more sophisticated than Gosplan. But lay the two patients' charts side by side, and the number of overlapping symptoms is too large to call coincidence:

The third row is the heavyweight. China's goods surplus now exceeds 1% of world GDP - roughly double the highest peak Japan or Germany ever reached in their export golden ages (Fed Notes Mar 2026). An economy of 1.4 billion people whose number-one growth engine is buyers in other countries - because the buyers at home have had their purchasing power squeezed by the model itself - is replicating the Soviet Union's exact risk structure: betting the system's life on a foreign-currency stream it does not control. For the Soviets, the fateful variable was an oil price decided by the Saudis. For China, it is the openness of import markets decided in Washington, Brussels, and New Delhi - along with one familiar side symptom: when the numbers turn bad, stop publishing the numbers, a reflex Gosplan had mastered half a century earlier.

4 · The Same Script, Different Time Zones

The subsidy oxygen tank is no invention peculiar to planned economies - it grows anywhere short-term politics beats long-term economics, differing only in what gets subsidized and what money feeds it:

Sources: Dialogue Earth, NRGI, Bloomberg, Wikipedia.

Four stories, four continents, four different political systems - but a structure so identical it can be written as a formula:

5 · Conclusion - Health Is Measured By The Ability To Take Hits

Back to the opening image. The United States - the economy so often derided as "wild" - deliberately maintains a rate of dead cells: the Fed treats unemployment around 4% as healthy and will raise rates to keep it from falling too low; every year hundreds of thousands of American businesses go bankrupt and hundreds of thousands more are born to take their place. It looks cruel. But precisely by accepting a constant stream of small deaths, the system avoids one big death - it is antifragile in Taleb's sense: frequent small hits make it stronger (a theme covered in the antifragile post).

Oxygen-tank systems choose the opposite: no small hits at all, a growth curve smooth as silk - until it isn't. The Soviet Union had 0% unemployment until the day the entire union was unemployed. Venezuela had the world's cheapest gasoline until the day there was no gasoline. Sri Lanka had subsidized power and fuel until the day of 13-hour blackouts. China has "champions" that never go bankrupt - and now has 50 loss-making EV brands and a mountain of local debt worth half of GDP.

Three propositions to carry away, for anyone watching any economy:

• Don't judge a system during its good times. While the easy money still flows, an oxygen-tank system always looks better than a market system: higher growth, fuller employment, more "stable" prices. Real health is measured by one question only: when the shock arrives, does the system absorb it, or bank it for next time?
• Find what feeds the oxygen tank before believing in the miracle. Every prolonged "miracle" has a specific money stream behind it - oil, land, debt, or remittances. Identify that stream and you've identified the Achilles heel: the miracle will live and die with it.
• The shock is only the bill's messenger. What killed the Soviet Union was 60 years of misallocation - Saudi Arabia opening the taps merely delivered the invoice. What created China's overcapacity crisis is a model skewed from the root - Western tariffs are merely squeezing shut the last relief valve.

The Soviet Union and China genuinely had good times. Sputnik really flew, the highways and megacities really rose, hundreds of millions really escaped poverty. But good times built on bent price signals have one distinctive property: they haven't been paid for at the moment of consumption. The bill accrues - into the budget, into debt, into mountains of capacity nobody needs and generations of workers trained for industries that exist only by subsidy - and it falls due on precisely the day the easy money disappears.

Every subsidy oxygen tank eventually runs out of money. The only remaining question is when - and by then, whether the system spent its years of free oxygen healing itself, or merely forgetting how to breathe.