When corporations — and people — misallocate capital, they tend to suffer. Of course, whether capital is misallocated is sometimes only fully understood after the fullness of time.

The People’s Republic of China is rapidly modernizing its military, expanding its fleet, and building up its nuclear arsenal. China has also embarked on a costly effort to ensure its energy resilience by reducing its reliance on imported oil while cloaking the initiative as somehow being green — a mere talking point to assuage Western elites.

It wasn’t always such in China, where for decades, first under Deng Xiaoping and then Jiang Zemin, Chinese applied capitalist-mercantilist economic reforms culminating in China’s accession to the World Trade Organization in 2001. China appeared to be following the path charted by post-war Japan through the late 1980s.

But under paramount leader Xi Jinping, the emphasis on growth aided by capitalistic principles gave way to central planning and a massive military buildup. China is boosting its open defense budget by 7.2 percent this year. Total defense spending increases are likely far higher. Whether this effort ends up producing a massive inventory of expensive and hard-to-maintain equipment or weapons soon to be used in war will determine whether future analysts view the spending as a misallocation of resources.

America has flirted off and on with industrial planning of varying levels of specific control. From the republic’s very beginning, there were arguments between those who favored internal improvements and industry (Alexander Hamilton) versus those who thought the government should stay out of the way (Thomas Jefferson).

In the 1970s and ’80s, some pointed to Japan as the model to be followed, with highly trained bureaucracy seemingly adept at picking winners and losers. But Japan Inc.’s bubble burst in the late ’80s, followed by decades of sluggish growth, suggesting that Japan’s considerable capital reserves were misallocated.

Today, the argument regarding picking winners and losers is more likely to boil down to just how specific you want to get and who decides — politicians, bureaucrats, or business executives?

Of course, the risk of misallocating capital grows when those putting the capital at risk use other people’s money — and........

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