JoeQuant’s an ex NY finance guy who moved to Hong Kong. This tweet makes an important point:
So about this “Faustian bargain” nonsense. What would have happened if VW took the 54 billion euro they made and put it back into robots and EV technology. https://t.co/U9BOW9kAZW
— Joequant (@joequant) September 4, 2026
He then goes on as follows:
One reason China is “winning” is that if you are a Western auto company, and you make extra money, you will put it into exec bonuses and shareholder buybacks. If you are a Chinese company, you realize that if you don’t put money back into the company, then the competition will eat you alive. At that point as a shareholder or exec you wonder how much is enough. What if I cut my salary to 2 million USD rather than 10 million USD and put the rest into R&D or worker salaries.
Yes.
The reason VW and other German firms made so much money in China for so long is that they had, brace for it, better cars. More technologically advanced. Better handling.
But, as Joe points out, they didn’t try and keep that lead. They let the Chinese beat them by refusing to properly re-invest their profits.
This is a constant problem in the West: our elites don’t want to compete on price. They don’t want to compete on quality. They want “moats” — they want monopoly profits just for existing.
The problem is that in most industries China doesn’t allow moats. It forces competition. It wants competitive markets. Chinese capitalism is actually what Americans think American capitalism is: red of tooth and claw. In America the Red Queen’s race is “make more money so you can buy more companies and make sure you can’t be bought”, in China it’s “keep ahead of real competition which is trying to have better quality cheaper products.”
I wrote a fairly long article on Germany’s tax and industrial policy earlier this year. The short of it is that they changed the incentives to make it easier for German firms to pay more divdends and do my buybacks, and so that investing outside the country made more sense than investing inside the country.
Then they got exactly what they deserved. Now, since they’re not competitive, they’re starting to switch their automotive industry over to military production.
And no, that won’t end well.
I continue to note that it appears that only communists and socialists seem to understand how to use markets to actually produce widespread prosperity. Capitalists should never be allowed to run markets, because capitalists always want to destroy the markets. The government must always view capitalists as greedy stupid children who must be supervised with heavy application of the rod, because the minute capitalists get rich, they want to end competitive markets. This is logical, in competitive markets no firm is every secure, no fortune is ever impregnable.
Only oligarchy is safe for oligarchs. Unfortunately oligarchy destroys nations. Why is the US getting its ass kicked? Because it got rid of its industry. It’s that simple. It can’t even produce enough weapons any more, and essentially every industry in effectively an oligopoly–set up to raise prices faster than wages and entirely opposed to actual price and quality competition.
The CPC, not being capitalists, understand that capitalists are stupid, venal scum who must have fist of the state around their throat at all times.
The West used to understand that capitalists needed regulating, especially during the New Deal era. But they never truly understood that capitalists are like powerful nobles. If you don’t keep the boot on their neck, they will destroy you. And so they did and so they have, we’re just playing out the end results of oligarchs taking over the West: all the sound and fury and deaths are just part of an inevitable end-game. The actual damage was done in the 70s thru 90s (people can quibble about the dates) and the rest is just consequences.
If you want free markets, you need people who don’t trust capitalists in charge, and you need to be sure capitalists never capture the government. The second they do, your country is cooked. Depending on how prosperous it was before the oligarchs took over, it may take a few generations, but the end result is not in doubt.
What I write here is for the benefit of everyone, but alas, I live in capitalism and I, and the site, take money to keep running. If you value the writing here and can, please subscribe or donate.
Adam Eran
This is the consequence of classical economics’ “Law of declining profits.” All the capitalist firm managers know it, and try to create monopolies or oligopolies or do unproductive things that are nevertheless profitable. Anything to make an “unfree” market that protects their profitability.
Perhaps the most typical of the unproductive things done is cost plus military contracts. The bigger the cost, the bigger the profit. So US weapons are very costly, finicky and unreliable, but very profitable. The F-35 is a costly fighter jet that spends 40% of its time in maintenance. The M-16 is a rifle that requires constant cleaning. An AK-47 does better in wartime conditions. This is one reason the Russians are cleaning up in Ukraine (a war that will go on indefinitely, though, because it’s so profitable).