Is State Capitalism Winning?

by James E. Miller 

If we are to keep the term “capitalism” at all, then, we must distinguish between “free-market capitalism” on the one hand, and “state capitalism” on the other. The two are as different as day and night in their nature and consequences. Freemarket capitalism is a network of free and voluntary exchanges in which producers work, produce, and exchange their products for the products of others through prices voluntarily arrived at. State capitalism consists of one or more groups making use of the coercive apparatus of the government — the State — to accumulate capital for themselves by expropriating the production of others by force and violence.

Murray Rothbard

“State capitalism.”
Has there ever been a more contradictory word?
With the Davos World Economic Forum now come and gone, the political class and armchair intellectuals of the world predictably failed to reach their goal of developing a conclusive method to restructure capitalism for the 21^st century.  Of course attributing the kind of economic systems which exist in today’s developed countries to capitalism is not only a wrongful understanding on what free enterprise encompasses but gives a false directive for policymakers to try and fix what they believe is broken.  The reality is that capitalism isn’t broken as true free market principles haven’t been pursued through worldwide movements of decentralization in almost a century.


In a recent study in The Economist titled “The Visible Hand,” author Adrian Wooldridge falls under the same disillusioned spell much of the world has fallen prey to since the onset of the financial crisis in 2008.  Prolonged unemployment tends to force those affected to begin questioning what they see as unfair treatment in the context of a system not working in their favor.  Hence the rising of protest movements such as Occupy Wall Street in the United States.  Wooldridge notes this trend:

The era of free-market triumphalism has come to a juddering halt, and the crisis that destroyed Lehman Brothers in 2008 is now engulfing much of the rich world. The weakest countries, such as Greece, have already been plunged into chaos. Even the mighty United States has seen the income of the average worker contract every year for the past three years.

This mindset, according to Wooldridge, has given rise to the appeal of a mixed kind of economic system otherwise known as a command economy or “state capitalism.”  In lieu of stable growth and job opportunities, populist anger is often directed toward the wealthy.  Witnessing opulence in the wake of struggling to pay a mortgage or put food on the table stirs emotions of unfairness and envy.  Karl Marx, despite being an economic ignoramus, was right to conclude that perceived impoverishment as a result of capitalism would pave the way for government intervention.
But as adherents as the Austrian school understand, the current downturn is not a market failure but in actuality a much needed corrective process.  The housing bubble that wreaked havoc on the U.S. was a consequence of the easy credit policies of the Federal Reserve; never free market phenomena.  Wall Street’s excesses were a direct result of fractional reserve banking and Fed Chairman Alan Greenspan’s desperate attempt to nullify the dot-com bust by engineering another boom.  As economist Joseph Salerno documents:

From the beginning of 2001 to the end of 2005, the Fed’s MZM monetary aggregate increased by about $1billon per week and the M2 aggregate by about $750 million per week. During the same period the monetary base, which is completely controlled by the Fed, increased by about $200 billion, a cumulative increase of 33.3 percent.
The Fed Funds rate was driven down below 2 percent and held there for almost three years, pegged at 1 percent for a year. Rates on 30-year conventional mortgages fell sharply from over 7 percent in 2002 to a low of 5.25% in 2003 and, aside from brief upticks in 2003 and again in 2004, fluctuated between 5.5 percent and 6.0 percent until late 2005. Perhaps, more significantly, 1-year ARM rates plummeted from a high of 7.17 percent in 2000 to a low of 3.74 percent in 2003, rising to 4.1 percent in 2004 and to slightly over 5 percent in 2005.

The continual myth of unfettered capitalism as the sole cause of the financial crisis holds no weight.  Propagandists of this false reasoning tend to also be proponents of further government regulation in the affairs of private individuals.  Their ends direct how they present information and come to seemingly irrefutable claims.
Hence the Wooldridge’s analysis of “state capitalism” and its supposed rise to superiority.  In looking at the success of emerging the markets, the author notes the obvious fact that those enterprises granted the financial backing of the state have a distinct advantage on the market.  At the same time, Wooldridge is thankfully critical of the cronyism that must dominate the close working relationship between CEOs and politicians.
Seeing the Unseen
“State capitalism” shouldn’t be looked at as successful due to the ownership of many corporations being in the hands of bureaucrats.  Command economies end up being successful despite being under the whim of the political class.  Bastiat’s all important lesson of accounting for the unseen in all things economic has ironically been forgotten by an author writing in the premier magazine on economics.  Mentioning the fact that the German government has a stake in the telecom company Deutsche Telekom or France owns a large portion of the energy company EDF neglects the consideration of what other firms could possibly exist in lieu of the state not backing preferred enterprises.  The same goes for Wooldridge’s fallacious assertion that Russia needed state capitalism in order to emerge successfully from the collapse of communism.  Just because Vladimir Putin opted for a grotesque mix of supporting favored industries while yielding the iron fist of state control over others doesn’t mean those policies were responsible for the country’s success.  Any economic system, whether it be true capitalism or the blurred combination of state and private control over production, has the capability of generating better living standards than violently imposed communism.
So what does Wooldridge end up citing as the prime example of “state capitalism”?  The now-imploding case of fiat boom and bust otherwise known as China of course!
Like communist Russia before it, the miracle growth China has experienced over the past few decades will not come without serious, impending pain.  The now-imploding property bubble is going to make history books and will likely have devastating consequences for the world economy.  As The Telegraph’s Ambrose Evans-Pritchard points out, economic indicators in China are slowing as the country’s imports are down, the Baltic Dry Index measuring the transportation of capital goods has fallen, and electricity usage growth has plummeted and flat lined.  The country is plagued by infamous “ghost cities” which were built up as a boon for local governments.  Meanwhile home prices fell for the fifth straight month as of February 2012 as consumer inflation still rises despite evidence that the rate is underscored through government statistics.  Such is a destructive consequence of China’s mercantilist and easy money policies which benefit exporters over consumers.
Combined with China’s notorious suppression of civil liberties, the declaration of the once-communist country being a victory for state capitalism makes no economic sense.  Ridding itself of authoritarian communism and privatizing key portions of the economy has undoubtedly done wonders for China.  Maintaining state interference will have damaging implications for years to come however.
The State Capitalism Mindset
Within the introductory paragraph of the report is a slight anecdote on the muddled intellectual development of Beatrice Webb who famously coined the term “collective bargaining.”  Webb, who was taught the enriching effects of laissez-faire capitalism by classical liberal theorist Herbert Spencer, fell under the spell of acquainting the state with an apparatus outside the bounds of physical scarcity.  This is key in understanding the typical mindset of state capitalism proponents.  Webb questioned, “why should the state not intervene in the market to order children out of chimneys and into schools, or to provide sustenance for the hungry and unemployed or to rescue failing industries?”
Such inquiry misunderstands the role of the state and its makeup within the context of society.  Bureaucrats and state enforcers sanctioned with a syndicate to utilize coercion don’t “provide sustenance” or “rescue failing industries.”  They merely transfer squandered resources from one individual to another.  In China for example, government leaders sought to maintain loyalty to the regime by shuffling the bosses of leading airline and telecom industries.  The politician who writes a law doesn’t summon food from the heavens to give unto others but merely orders such a transfer under the threat of monetary penalty or imprisonment.  If such thievery was productive, the former U.S.S.R. would have been a wondrous success instead of miring in economic depravity for decades before a final collapse.
Webb was unfortunately not alone in her confused reasoning.  Infusing a system of peaceful cooperation with one based solely on violence retards the positive benefits of the former.
Conclusion
There ultimately is no such thing as “state capitalism.”  It is merely a deceitful term used to rationalize what are policies taking the world further down the road to socialism.  The invocation of state capitalism has been used for almost a century as a guise for further economic intervention.  Mises recognized this chicanery long ago in an address given to the University Club of New York in April of 1950:

This third system is known as the system of interventionism. In the terminology of American politics it is often referred to as the middle-of-the-road policy. What makes this third system popular with many people is the particular way they choose to look upon the problems involved. As they see it, two classes, the capitalists and entrepreneurs on the one hand and the wage earners on the other hand, are arguing about the distribution of the yield of capital and entrepreneurial activities.
Interventionism cannot be considered as an economic system destined to stay. It is a method for the transformation of capitalism into socialism by a series of successive steps. It is as such different from the endeavors of the communists to bring about socialism at one stroke. The difference does not refer to the ultimate end of the political movement; it refers mainly to the tactics to be resorted to for the attainment of an end that both groups are aiming at.

The assertion of rising “state capitalism” must be seen for what it unequivocally is: a ploy to insert a degree of comfortability with creeping statism.  It is a means for the political class to yield domination over key aspects of the private life of its citizens.  Like the broken window fallacy, the unseen results of dynamic competition will never reach fruition in an environment of political favoritism.  Populist anger directed toward capitalism itself is misguided for it was not capitalism that lead to the financial crisis but mere government intervention and central banking.
When true capitalism is prevented from existing, the rising of the standard of living for the whole is ultimately anchored down.  While Wooldridge recognizes the dangerous trend of state capitalism, he gives far too much credit to its supposed benefits.