Is State Capitalism the most viable alternative to Free Market Capitalism?

To even the strongest supporters of capitalism, there is little argument that the global economic crisis that began in 2008 has exposed some of the fundamental weaknesses of the system, and in particular the ‘free market’ element that has existed in many Western democracies since the end of the Second World War. This exposure has coincided with the rise of ‘state capitalism’ in the developing nations of Brazil, Russia, India and China (known as the BRICs). The emergence of these nations as global economic powerhouses is in part thanks to the policies pursued by each respective nation which have a common theme. Research conducted by Goldman Sachs in 2003, and further expanded upon by S.C. Jain in his comprehensive book Emerging Economies and the Transformation of International Business, argued that if the BRIC countries “maintained policies and developed institutions that are supportive of growth”, then this would lead to their combined economies becoming larger than the G6 (in terms of US dollars) within the next thirty to forty years.

According to Adrian Wooldridge of The Economist magazine, the on-going change in the global balance of power is the most dramatic since the end of the Second World War. This has therefore consequentially raised the question of whether the world is witnessing a shift from an age of liberal, free market capitalism, to an age of sate capitalism . Theoretical alternatives to free market concepts that have previously been dismissed now are seen a potentially viable alternatives, thanks mainly to the rise of the BRIC countries. From a historical perspective, since the 1500s there have been four main ‘ages’ of economy; mercantilism, liberalism, the return of mercantilism, and the return of international liberal economy.

Mercantilism is intimately connected with the establishment of the modern, sovereign states that emerged during the sixteenth and seventeenth centuries, in which economic activity was subordinate to the primary goal of building a strong nation state, thus entailing that the international economy/system was/is an area of conflict . Therefore within such a system some states will have more power than others, which enables hegemonies and balances of power to be created. However, since the end of the Second World War, mercantilism has seen a decline, which signalled the return of international liberal economics. With such a decline, it is extremely difficult to imagine any modern day state employing a full mercantilist system, although as will be seen later in relation to the BRIC countries, governments are employing protectionist policies.

Often seen as the enemy of western capitalism, Marxists argue that capitalism is the driving force in the world economy, and that global economic relations are best viewed as a class struggle between the bourgeoisie, who own the means of production, and the proletariat, who do not enjoy the fruits of the labour. Modern neo-Marxists offer a strong and persuasive argument that underdevelopment in the developing countries is not simply a phase of a ‘traditional society’ that has been experienced previously by many other countries, but that both development and underdevelopment are the result of a single process of global capitalist development . Although Marxism correctly places the production and distribution of material wealth at, or near, the centre of political life, there has not been a true implementation of it in society and its viability as an alternative is therefore severely questioned.

The current most persuasive and modern alternative economic system is found in the ‘State Capitalism’ of the emerging economies of the BRIC countries. State capitalism is the “widespread influence of the government in the economy, either by owning majority or minority equity positions in companies or through the provision of subsidised credit and/or other privileges to private companies” . It therefore undertakes profit-seeking economic activity, even if said state is nominally socialist. Aldo Musacchio has argued that there are two broad, general forms of state capitalism; firstly through majority control – known as state-controlled state control enterprises – or through a more hybrid fashion through minority investment by development banks, pension funds, sovereign wealth funds and the government itself .

As with any alternative system of economics, there are debates surrounding the long-term viability of state capitalism, as seen in the BRICs, and its feasibility as an alternative system to that of free market economics. There are two broad schools of thought surrounding state capitalism; firstly those, such as Aldo Musacchio, who argue that state capitalism is indeed a viable alternative to free market capitalism, and secondly, those such as Ian Bremmer who argue that it is not.

Both Bremmer and Musacchio’s arguments stem primarily from their definition of state capitalism and thei respective relationship with government. However, the forms of state capitalism that are found in the BRIC countries incorporate a variety of political systems, which therefore means that each individual country’s government-industry relationship and the extent of its influence will be different. It relation to Britain, although no society is obviously perfect, it can be strongly argued that the quality of British democracy and the representation of the people is vastly greater than that of any of the BRIC countries

Ian Bremmer is the principle author who argues against state capitalism as a viable alternative to free market liberalism. Bremmer defines state capitalism as a system in which “political elites control economic activity for political gain” . He therefore argues that state capitalism is not an economic system, but rather a political invention, whose main purpose is not to produce wealth, but to ensure that wealth creation does not threaten the ruling elite’s political power, therefore ensuring market activity serves the interests of the states and those who run it . Furthermore, Bremmer argues that state capitalism will generate fraction in international politics and distortions in global economic performance . It is for these reasons that Bremmer argues state capitalism is not a viable alternative to free market capitalism, as although it produces a short term advantage, such prosperity will run out when the resources are fully depleted.

On the opposing side of the debate and arguing in favour of state capitalism, Aldo Musacchio states that twenty first century state capitalism is a hybrid form of capitalism that is propelling state owned companies, such as the Sinopec Group to the top of the Fortune 500. Furthermore, he argues that state capitalism is not just a “command economy ran by authoritarian elites”, and highlights the democracies and autocracies of Brazil and China respectively as prime examples of this. Finally, Musacchio argues that not one single political system exists within state capitalism and no single model of influence on the economy, as highlighted by the examples above. Therefore, although often confused with authoritarianism, state capitalism can be successful, if its requirements of an efficient system of operational control and discipline over state actors are fulfilled .

The arguments in favour of state capitalism are centred around they fact that four of the world’s most promising economies employ state capitalism to differing degrees, highlighting its strength as a viable alternative to free market concepts. This is in stark contrast to the theoretical alternatives – mercantilism and Marxism – discussed earlier in this essay. Like any economic system there are flaws to it, and these flaws need analysing. The benefits of state capitalism are rather obvious, and each one is highlighted by the examples stated above. State capitalism can provide stability as well growth for countries, as the new state capitalist model bears little resemblance to the versions of nationalism seen in the UK or the systems used in the former Soviet Union. Furthermore, the rise of countries who have suffered from high levels of poverty, such as Brazil and India, who are now prospering and have the resources to fight poverty, as the relative gap between rich and poor is extremely large. China is perhaps the biggest success story in terms of economic growth and through proper management has boomed in not just terms of its global economic presence, but also in its infrastructure at a national level, such as its hydroelectric power, three gorges dam, high speed rail and mobile phone network.

However there are numerous disadvantages that can be levied against state capitalism. When states favour one set of companies, then others suffer. An example of such suffering is found in China and with the Chinese National Petroleum Company, who posted profits of $33 billion, which was more than China’s five hundred most profitable private companies combined, therefore highlighting how state giants soak up a country’s capital and talent. The second and third main disadvantages are that the quality of democracy in current state capitalist states such as Russia and China is highly doubtful, and that for the sake of world trade, it is advisable that state capitalist countries begin to “unwind their holdings and handing them over to private investors” so as to prevent friction in trade. The final, and potentially the most important point, is that state capitalist systems only work when implemented and directed by a competent state, as can be seen (once again) by the former Soviet Union.

To conclude, the rise of the BRIC countries and their potential for growth in the next forty years, combined with the current economic crisis occurring in the most prominent free market economies, offers a relatively persuasive argument as to the viability of state capitalism as an alternative to free market liberalism. However without the current crisis that is facing the free market states, the flaws that are apparent in state capitalism would be greater highlighted. Therefore out of the theoretical alternatives to free market concepts, state capitalism is without doubt the most persuasive alternative, although its long term viability is extremely disputed.

Author: Dominic Rowan

 

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Categories: International politics

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7 Comments on “Is State Capitalism the most viable alternative to Free Market Capitalism?”

  1. dammyolaniyi
    August 29, 2013 at 1:16 pm #

    Germany is a case in point. There is a working balance between free market capitalism and social equality exhibited in the fact that German workers are some of the most paid and most looked after workers in the world. The German model of social capitalism recognises that economic growth has to happen in tandem with good labour relations. Laissez faire capitalism’s false dichotomy between social equality and economic progress is unsustainable. There has to be good labour relations, a social safety net in the form of welfare provisions, if capitalism is to be sustainable.

  2. August 31, 2013 at 3:25 am #

    😐

    There is no moral system of economics other than a free market. The reason it’s a free market is that any other market is slavery.

    The end.

    Kthxbai.

    • Alexander Clackson
      September 1, 2013 at 8:10 pm #

      One could argue though that free market leads to the situation where major corporations control big chunks of the market and become so powerful, that their strength exceeds even the governments and authorities. An example would be all the corporations who refuse to pay tax and yet nobody can do anything about it, while small and medium sized businesses continue to struggle to compete with corporations.

      • September 1, 2013 at 8:27 pm #

        I thought “the end” was clear enough. Apparently some people have trouble reading.

        Again, free markets are free. There is no such thing as a tax in a free market. Your pathetic point is invalid.

        Let’s try this again:

        Liberty or slavery. The end.

      • Alexander Clackson
        September 1, 2013 at 8:45 pm #

        The whole point of a debate is to allow other people to respond and have a substantial argument. Simpy saying “the end” is not only quite childish, but is also a block to intelligent thinking.

        But there is definitely taxes in free markets, everybody pays taxes, except some corporations refuse to pay it…thanks to the free market.

        But if you want to talk about liberty/slavery, it is quite ironic that “free” market has ended in citizens and governments becoming slaves to corporations.

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  1. Confused Blogger claims free markets include taxes | Tiffany's Non-Blog - September 1, 2013

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