State Capitalism

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State vs. Market Capitalism

The good news is that the argument has changed from which form of political economy works best, to which form of capitalism works best. At least most of the world now admits and accepts that capitalism is the only viable economic system, whichever form it may take. Trade and markets can not be stopped, no matter what a state may try to do to prevent it.

In 1970's Soviet Union, American goods were smuggled in by tourists, sailors, and diplomats. In particular, Soviet citizens were enamored with Levi's blue jeans and country music. What other goods can be considered more American? Their drab state-provided work trousers couldn't come close to matching the durability, comfort, and style of Levi's. Soviets would pay a month's salary for an authentic pair of 501's, often straight off a tourist's ass.

This obviously posed a problem for the leadership who had to constantly convince the rabble of the superiority of the Soviet system. Of course, they often did this by showing the worst of American TV on their one station. Instead of being disgusted with capitalism, which was the goal, Soviet citizens started asking questions like, “How is it that even the poorest homeless people in America can afford to wear authentic Levi's jeans?”

In an effort to combat the growing consumerism brought on by familiarity with American products, the planners finally decided to relent and try to produce the blue jeans their citizens wanted. For the first time in the Soviet Union, a official production decision was made based on consumer demand rather than the needs of the state. Although they were unsuccessful at producing jeans their people wanted to buy and eventually had to contract Levi's for help, this seemingly minor market event made the crack that would bring down the iron curtain within a decade. Sure there were political and military pressures, but once the average Boris realized he was being lied to about the capitalist West, the communist government could no longer maintain its support among the governed.

Power truly does reside with the people. This isn't just a political ideal, it's a political reality. A government without support of the governed can only maintain power with force, which also happens to cause them to lose support among those they employ to administer force, accelerating their own demise. Most soldiers and cops will only follow orders to kill and oppress their own people for so long before they get to someone they care about and end up turning their rifles on whomever is giving the orders. The recent Arab Spring is a pretty good example without getting into too much detail. The Romans found out the hard way that hiring an outside mercenary army to keep order isn't really an option either. The only way for leaders to stay in power is either to consistently keep their people fed and happy, or direct anger about economic mismanagement to an outside enemy. Capitalism is the only method so far that works for the former. The internet and global trade are making the latter much less viable, as our government is finding out with its efforts to find a new boogeyman on which to focus our attention.

What is state capitalism? It's simply the modern version of what's known in the West as mercantilism. The emergence of liberal capitalism came out of opposition to British mercantilism. Liberal capitalism has evolved past the ability of the state to control it. Not only is state control of liberal capitalism unnecessary, it's often destructive, and not in the creative way. Likewise, trying to impose liberal capitalism on statecaps that aren't ready for it would be equally, if not more destructive. There is obviously an extremely important role for government in the economy. However, that role declines as markets (individuals acting on their own accord) take over.

NASA is a great example. One would be hard-pressed to find someone who does not believe that space exploration is very important to the economy and human race overall. In the 60's it was not economically viable for private companies to make the big initial investment in rocket science. If nobody knows what's on the moon, it's difficult to convince investors that it's worth the cost to go mine it. Currently, NASA is a shadow of its former self. Other more important agencies such the ATF and DEA needed the funding more, so NASA has basically been reduced to a consulting firm. It wasn't by choice, a lot of people fought hard to maintain the NASA budget. Since then, private industry has taken over and the space program is now on the horizon of becoming a profitable business, using and improving technology that was discovered by their public predecessors. When I returned to Florida in late 2011, Cape Canaveral was a literal ghost town. Since SpaceX and some of the other private space companies have moved in, the area is once again buzzing with activity. They are making space travel efficient and commercialized so that soon (within decades) average folks will be able to take moon and mars vacations. Businesses will have greater access to resources extracted from celestial bodies that will enable them to do even greater productive feats like terraforming places outside our world to make them habitable, or perhaps building a Death Star. It probably would have happened anyway, but it will much sooner now because of the huge public investment that kicked it off. Not all government programs are successful, most aren't and this one happened because of unintended budget cuts. It should be a lesson that while government can kickstart a project, it needs to openly share the technology discovered and back away after that big initial investment. If it's a valuable project, the private market will take over by commercializing and thereby democratizing it.

Everybody knows now that for an economy to get past the subsistence stage, it must have basic infrastructure and public utilities. The insurmountable obstacle we had in Iraq to fostering economic growth was the lack of clean water and a consistent supply of electricity. Our planners sent plenty of stuff, and built lots of roads and bridges to help the Iraqis get on their feet, but without water and electricity most of it was useless, not to mention a huge waste of US taxpayer wealth. Without fixing those problems, Iraq will never get on its feet. Water and power come before everything else.

State capitalist countries are at the big initial investment stage of their economic evolution. The West has already gone through much of the inefficient trial and error evolution process, and now the statecaps can skip all that to get up to speed by using what is known to work. An authoritarian government is best equipped to do that most efficiently, rather than duplicating the market T&E process.

As the economies in these countries get up to speed (they're still developing), the growing wealth of their citizens causes them to move up the hierarchy of needs. Once basic needs are met, they will begin to worry about the next level of needs such as safety and security. Some of my [modern] liberal friends like to cite abuses by evil capitalists in developing countries. Not long ago a textile factory in Bangladesh collapsed killing 1000 workers. While it was certainly a tragic event, it was a necessary step in the evolution of their economy. Because those 1000 workers died, inexperienced capitalists there now know that ensuring the safety of their employees is of the utmost importance. Before that, Bangladeshis were worried more about eating than the safety of their workplaces. Outsiders can tell them it's important, but hard lessons often have to be experienced before they're learned, whether it's an individual or entire society. The statecaps can't skip that part.

China's growing middle class is catching the economic liberalism bug and beginning to demand more attention be paid to higher level needs. In time, China's economy and political system will be forced to continue liberalization. If current leadership wishes to maintain power they will have to go along and find their place in the evolving system. It will eventually liberalize past their ability to control it with heavy-handed government.

How can we compete with statecap juggernauts? Really, we don't have to. To get to our level of capitalism, they will be forced to liberalize and lose the advantages of state capitalism in the process. Their SOE's (like ours) will become so inefficient, from growth coupled with increasing complexity, as to eventually become a drag on the entire economy. Every business gets old and dies at some point. Indeed, one of the biggest problems in our economy is knowing when to pull the plug on a dying company or industry. Ian Bremmer said in the Economist, “As state-owned companies develop constituencies within government, some of them will long outlive their usefulness.” Knowing when to pull the plug in those countries will be an even bigger problem.

Every place I've been, American goods are still perceived as the highest quality and best value in the world. Iraqis wanted Michael Jackson cassettes and headphones that are far better and safer than the Chinese crap sold in their markets (I didn't tell them most of our electronics are made in Japan). The first car dealer I worked at was across the street from the Florida Mall in Orlando. All day everyday European tourists would come from the mall to check out our minivans. It was exactly the same minivan as they were able to buy in their countries, but they perceived the ones sold here as higher quality. Some would pay several thousand dollars to ship one back to Europe. Why? Because it was invented here and became popular here. It's hard for me to fathom that they would consider a Plymouth Voyager superior to BMW's and Mercedes'. But they do, whether or not it's true. Even foreigners that hate us still love our products. Our reputation for making the best stuff the world has to offer is a considerable comparative advantage.

To stay ahead and keep our place in the global economy, we need to specialize in what we do best – innovation. Our economy has been successful in part due to the mix of entrepreneurial capitalism and big-firm capitalism. Entrepreneurs innovate big ideas, big companies bring them to market with commercialization. Big firms do innovate, however they tend to focus on efficiency innovations, and do it much more slowly and incrementally, so as not bring about their own creative destruction. Fostering innovation means refocusing domestic economic development on entrepreneurial capitalism, let the the statecaps take the big-firm role of mass production and commercialization. Work with them, not against them. We're beyond that now. It also means making our economy and political system as free as possible. We need to stop lecturing the rest of the world about freedom, and instead show them how it's done and prove why it's better. By the time they catch up, we'll be moving on to whatever comes next.


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