TL;DR: The article argues that China is gaining an edge in the AI-driven economic race not by rejecting capitalism, but by effectively blending state power with big business to control data and shape markets—unlike the West, where the myth of free markets masks a reality of state-corporate collusion that stifles true competition.
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đź“ş Title: China is winning the AI war – Yanis Varoufakis & Wolfgang Munchau | The Econoclasts
⏱️ Duration: 1538
👤 Channel: UnHerd
🎯 Topic: China Winning War
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In a groundbreaking discussion from the Econ podcast by Unheard, economists Jiannis and VFK dismantle long-held myths about capitalism, free markets, and the true nature of economic power in the 21st century. Far from being locked in a battle, big business and the state are deeply intertwined—collaborating to suppress competition, engineer monopolies, and plan economies from behind closed doors. And in this high-stakes game, China is emerging as the unexpected winner—not by rejecting capitalism, but by mastering its real mechanics better than the West ever did.
This comprehensive guide extracts every insight, example, and argument from the full transcript to reveal why the West lives in a de facto planned economy, how privatization often masks elite enrichment, and why AI and data control—not free markets—will determine who dominates the next economic era. Most critically, it explains why China may benefit more from AI than the U.S., despite American origins of the technology.
The Myth of the War Between State and Big Business
A dominant narrative in Western political discourse claims that a fierce war rages between bureaucratic governments and freedom-loving private enterprises. According to this view, big business seeks nothing more than to be “unshackled from the state” to unleash market competition and innovation.
The podcast hosts firmly reject this as a fairy tale. In reality, there is no war happening between states and big business. Instead, they operate in close coordination. The last thing major corporations want is genuine market competition—because, as Peter Thiel famously stated, “competition is for losers.”
Thiel’s aphorism isn’t cynical hyperbole—it’s strategic doctrine. The goal isn’t to compete; it’s to achieve and maintain monopoly or oligopoly power. This is not accidental but systemic, embedded in how modern capitalism functions.
The Revolving Door: The Technostructure in Action
John Kenneth Galbraith, in his 1967 book The New Industrial State, identified a powerful force he called the “technostructure”—a cross-sector professional class comprising:
- Engineers
- Politicians
- Economists
- Marketeers
- Advertisers
- Corporate executives
This elite class moves fluidly through a revolving door between government agencies and corporate boardrooms. As they shift roles, they blur the line between public and private sectors—not to serve the public good, but to consolidate power for their own class.
This isn’t conspiracy; it’s institutional design. From Thomas Edison’s vertically integrated enterprises to today’s tech giants, capitalism has always thrived on state-corporate collusion to suppress market forces and engineer favorable conditions.
Privatization Was Never About Free Markets
Another sacred cow of neoliberal economics is that privatization liberates markets, bringing efficiency, accountability, and consumer choice. The transcript dismantles this claim with concrete examples.
Failed Privatizations in the UK
The UK’s privatization programs under Margaret Thatcher are often cited as success stories—but the evidence tells a different tale:
| Sector | Privatization Outcome | Impact on Consumers |
|---|---|---|
| Water Utilities | Private monopolies with no competition | Higher bills, underinvestment, profit extraction |
| Railways | Fragmented, underfunded, still state-subsidized | Poor service (e.g., British Airways described as “one of the worst airlines”) |
| Council Housing (Right to Buy) | Homes sold below market value | Short-term political win, long-term housing crisis; half of young Britons now locked out of homeownership |
These weren’t market experiments—they were transfers of public assets to private hands without introducing real competition. The result? Financialization replaced industrial productivity, turning homes into speculative assets and deepening inequality.
When Privatization *Did* Work: Telecoms and Limited Rail Competition
VFK offers a counterpoint: privatization can succeed only when paired with genuine competition. Examples include:
- UK Telecoms: Once privatized, the sector exploded with dynamic, differentiated service providers—proving markets can work when entry barriers are low.
- Oxford Rail Corridor: Two competing train operators serve London, giving passengers real choice when one fails.
- German Rail (Partial)**: Brief experiments with competitive bidding on specific lines showed promise—though full privatization never occurred.
The key insight: Privatization ≠Free Markets. Without enforced competition, privatization merely creates private monopolies accountable to shareholders, not citizens.
The West Lives in a Planned Economy—Just Not the Soviet Kind
Contrary to popular belief, the West does not operate under free-market capitalism. Instead, we inhabit a stealth planned economy, where critical decisions are made outside market mechanisms:
“Here in the West, we actually live in a planned economy where decisions about how we work, how we live, what we buy have already been made by someone else outside the markets, outside any market mechanism.”
This planning isn’t done by central committees—but by the technostructure moving between state and corporate power centers. Nationalization isn’t inherently virtuous either: Trump’s proposed 10% seizure of Intel or the RBS bailout served elite interests, not the public good.
Thus, the real divide isn’t between “state vs. market,” but between who controls the planning apparatus—and for whose benefit.
China’s Capitalist Strategy: State-Guided, Market-Driven
Western commentators often misread China’s reforms. Deng Xiaoping wasn’t a “pro-Western capitalist”; he was a committed Communist Party member who used capitalist tools to strengthen state power.
How China Built Its Industrial Power
Take the auto industry: China didn’t rely on laissez-faire markets. Instead, it deployed:
- Massive state capital injections into strategic sectors
- Brutal, Darwinian competition among state-backed firms
- No ideological purity—only results mattered
The result? A vibrant, competitive industrial ecosystem—more dynamic than much of the West—precisely because it blends state direction with market discipline.
China’s Edge in the AI Race
This strategic agility extends to AI. Despite U.S. origins of foundational models (Google, OpenAI), the hosts argue China will benefit most from AI for three reasons:
- Open Algorithms: Core AI models (like DeepSeek) are replicable; no trade secrets lock out competitors.
- Human Capital: China has vast engineering talent capable of rapid iteration.
- Data Collection Willingness: Unlike privacy-conscious Western societies, China aggressively harvests data to train models.
As VFK notes: “The fact that AI was developed in America… doesn’t mean they will be the ones that benefit the most. My hunch is that China will benefit the most from AI.”
Peter Thiel, Monopoly Power, and the Schumpeterian Fantasy
Thiel’s “competition is for losers” reflects a deeper economic philosophy rooted in Joseph Schumpeter’s theory of “creative destruction.” Schumpeter argued that temporary monopolies drive innovation—until a better startup dethrones them.
But the hosts reject this as a “simparian fantasy.” In reality:
- Google doesn’t just compete—it invests in 5,000+ U.S. startups on the condition they route services through Google Cloud.
- This isn’t rivalry; it’s ecosystem capture—locking innovation into its own infrastructure.
- True market competition is stifled, not enhanced.
Warren Buffett’s investment strategy confirms this: he seeks companies with durable monopolies because, in perfect competition, profits vanish.
AI: The Next Battleground for Monopoly vs. Market
AI’s open nature offers hope for renewed competition. DeepSeek’s free, high-quality model caused massive drops in OpenAI and Nvidia valuations—proof that commoditized AI services can disrupt incumbents.
However, Jiannis warns: the real value isn’t in selling AI subscriptions. It’s in weaponizing AI to monopolize attention and behavior.
Cloud Capital: The New Monopoly Machine
Big Tech’s true power lies in “cloud capital”—AI systems like Amazon’s Alexa that:
- Engage users in dialogue to collect behavioral data
- Train users to provide more data
- Build trust through “helpful” recommendations
- Steer choices toward high-margin products (earning Amazon 40% commissions)
This isn’t surveillance—it’s desire engineering. As Jiannis explains:
“It’s not simply… finding things out about you, but it’s also shaping your desires, your preferences, your consumer choices.”
When AI merges with existing monopoly platforms (Google Search, Amazon), it amplifies rent extraction—leading to economic stagnation, per David Ricardo’s theories.
The Data Fetishism Fallacy
While data is valuable, the hosts argue its importance is overblown. The real breakthrough is AI’s capacity for dialogue-based interaction—a first in machine history.
This interaction loop—AI trains users, users train AI—creates a self-reinforcing system of behavioral control. Data is merely fuel; the engine is the reinforcement learning architecture that shapes human action.
Thus, even if data becomes more widely available (as it likely will), the first-movers with established user bases (Google, Amazon) retain massive advantages.
Unsustainable Systems: Stablecoins, State Capitalism, and Crisis
The current model—“corrupt capitalism” with presidents issuing personal cryptocurrencies—is fundamentally unstable. As VFK states:
“This is unsustainable… politicians were just making so much money from their own policies.”
Stablecoins (like those promoted by Trump) exemplify this rot: financial instruments designed to hide debt and enrich insiders. But as history shows, such schemes always collapse—whether in the private sector or via state-backed ventures.
Yet, as Keynes warned: “In the long run, we’re all dead.” The unsustainable can persist for decades if societies fail to act.
Resistance Is Possible: Decentralization as Defense
Despite the grim outlook, the hosts highlight avenues of resistance:
- Avoid commercial search engines (use privacy-focused alternatives)
- Use VPNs legally—even in restrictive regimes like Russia—to bypass surveillance
- Leverage decentralized tech: The internet and crypto are inherently decentralized, making total control difficult
Unlike Orwell’s 1984, today’s “big brother” faces structural limits. The cryptoverse, in particular, offers tools to reclaim autonomy—if users adopt them.
Why China Is Winning the Economic War
China’s advantage isn’t ideological—it’s operational. While the West clings to the myth of free markets, China:
- Uses markets as tools, not dogmas
- Combines state direction with ruthless competition
- Mobilizes resources at scale without democratic friction
- Embraces data-driven governance without privacy constraints
This allows China to deploy AI and capital more effectively than Western societies paralyzed by rent-seeking monopolies and political gridlock.
The Financial Sector: The Hidden Puppet Master
VFK adds a crucial layer: the financial sector is now the dominant actor in state-corporate collusion—especially in the U.S. Banks, asset managers, and hedge funds don’t just fund monopolies; they shape policy to protect their investments.
This financialization turns economies into “rentier societies”, where wealth comes from ownership and leverage—not production or innovation.
The Housing Catastrophe: A Case Study in Financialization
The UK’s “Right to Buy” policy illustrates this perfectly:
- Homes sold at 50% discounts created instant paper wealth
- No real entrepreneurship emerged—just property speculation
- Public housing stock collapsed, locking out future generations
- Result: a “precariat” with no asset base, fueling political instability
This wasn’t capitalism—it was asset stripping disguised as empowerment.
Entrepreneurial Culture: West vs. Germany vs. China
The hosts contrast societal attitudes toward risk:
| Region | Entrepreneurial Climate | Key Traits |
|---|---|---|
| 1980s UK/US | High | “Social norms changed… certain things became cool that weren’t before” |
| Modern Germany | Low | Youth pursue degrees for status, rely on state support, avoid risk |
| China | State-directed | Entrepreneurship encouraged only in service of national goals |
The West’s decline in entrepreneurial spirit isn’t accidental—it’s the result of financialized economies that reward speculation over creation.
AI’s Achilles’ Heel: The Lack of Moats
Despite their dominance, Big Tech’s AI ventures may be fragile. A leaked Google memo admitted: “We have no moat.” Why?
- Algorithms are public and replicable
- Hardware dependence (e.g., Nvidia) is vulnerable to algorithmic breakthroughs
- Data advantages may erode as collection tools democratize
One efficient algorithm could slash computing costs—dethroning trillion-dollar firms overnight. This inherent instability could reset the playing field.
The Role of Crisis in Systemic Change
Stablecoin collapses, AI bubbles, or housing crashes may force reckoning. Financial crises expose the fiction of “ingenious instruments” that hide debt. As VFK notes:
“I borrow too much money and I think I have some ingenious instrument that can hide this… and nobody ever does.”
These crises, while painful, may be the only path to dismantling the technostructure’s grip.
Key Takeaways: What This Means for the Future
Core Insights:
- Capitalism ≠free markets—it thrives on state-corporate collusion.
- The West lives in a planned economy run by the technostructure.
- China’s state-guided capitalism is outperforming Western rentierism.
- AI’s open nature may disrupt monopolies—but only if weaponization is resisted.
- Privatization without competition is elite enrichment, not reform.
Actionable Steps for Individuals and Policymakers
For Individuals
- Use privacy tools (VPNs, alternative search engines)
- Support decentralized platforms (crypto, open-source AI)
- Question narratives about “free markets” vs. “big government”
For Policymakers
- Enforce real competition in privatized sectors
- Regulate data monopolies and AI behavior-shaping
- Rebuild public assets (housing, infrastructure) to counter financialization
Conclusion: Debunking Myths to Reclaim the Future
The transcript reveals a stark truth: the battle isn’t between state and market, but between democratic accountability and elite capture. China’s rise isn’t about ideology—it’s about execution. The West’s decline stems not from too much government or too much market, but from a system rigged by the technostructure for its own benefit.
Yet hope remains. AI’s openness, decentralized tech, and looming crises may force a reset. As the hosts remind us, the unsustainable can’t last forever—but it can last long enough to demand urgent action. The first step? Seeing the system clearly.
Final Thought: “This discussion about capitalism versus free markets will probably sound very different in maybe 5 years time.” — The system is breaking. What comes next depends on whether we recognize the real war—not between state and business, but between democracy and monopoly.
