Monday, July 23, 2012

The New (Bogus) Economic Narrative

Capitalism. It has--across the past several centuries--remade the world, mostly making the Occident the dominate economic--and therefore political--force on the globe, leaving the Orient behind to collapse. The giants of economic theory--many of them operating on the basis of flawed assumptions, it's true--were responsible for the dominant narrative that explained the "why" behind this reality.

And despite the flaws in their thinking, the narrative was and is largely correct: open, free markets allowed capitalism to occur and led to wealth creation, as opposed to wealth accumulation (which had been the standard for thousands of years, by and large), on a massive scale. Politically, the development of the nation-state in the West turned out to be a catalyst for this process, as it eventually allowed governments to make market-wide changes, to establish uniform rules for economic activity, to extend those rules far and wide via treaty with other states, to coin and regulate money, and to--when necessary--force open markets that had been closed.

But within this narrative, it was quickly realized that capitalism flourished when state interference--beyond enforcement of contracts and the like--was minimized.

Attempts to establish contradictory models failed miserably, with the Soviet Empire being the penultimate example.

And as the West flourished, the East--and Africa--struggled to keep pace, mostly because the political still controlled the economic. That's the world of the late twentieth century. Free marketeers--like Milton Friedman--pushed for the rest of the world to follow suit, to abandon state-run economies and markets. And  in some cases, states in the East acquiesced, though never fully embracing the concept, as those in power were not willing to simply surrender authority wholesale.


In the past several decades, however, a new economic narrative is taking shape, one wherein what was an oxymoron--state capitalism--is being held up as a viable alternative to free market capitalism. Witness this piece at Bloomberg by Pankaj Mishra (an Indian-born political and economic writer). It's essentially a rah-rah piece, trumpeting the "successful" state capitalism of states like Japan and China. Mishra writes:
Since its origins in mid-19th century Britain, the Economist has been the main propaganda organ for the neoclassical ideology of the free market (minimal government, invisible hand, etc.). It is the job of all ideologues to make their own preferred political and economic system seem natural and perfect. Still, someone in that 1992 editorial meeting ought to have said, “Not so fast”... 
Liberal capitalism in the U.K. and the U.S. isn’t just convulsed with internal crises caused by unregulated financiers. It now faced “a potent alternative”: state capitalism, which has on its side one of the world’s biggest economies -- China -- and some of its most powerful companies --Russia’s Gazprom OAO, China Mobile Ltd. (CHL), DP World Ltd., and Emirates Airline.
Mishra is not alone on this view of state capitalism as a "potent alternative" to what he calls liberal capitalism (and what I call free market capitalism). Such arguments are now commonplace in academia. Ian Bremmer, a political scientist and former fellow of the Hoover institute defines state capitalism in the following way in his book The End of the Free Market: Who Wins the War Between States and Corporations?:
In this system, governments use various kinds of state-owned companies to manage the exploitation of resources that they consider the state's crown jewels and to create and maintain large numbers of jobs. They use select privately owned companies to dominate certain economic sectors. They use so-called sovereign wealth funds to invest their extra cash in ways that maximize the state's profits. In all three cases, the state is using markets to create wealth that can be directed as political officials see fit. And in all three cases, the ultimate motive is not economic (maximizing growth) but political (maximizing the state's power and the leadership's chances of survival). This is a form of capitalism but one in which the state acts as the dominant economic player and uses markets primarily for political gain.
The assumption that such a system can simply be a workable alternative to free-market capitalism is the basis  for the arguments of people like Mishra, who see nations that have adopted it as--for lack of a better word--winning. But Bremmer, himself, knows that state capitalism cannot work indefinitely, that it will hit a wall (that wall being the point at which the cheap labor in such nations ceases to be cheap). Mishra and company are missing this, apparently believing cheap labor is an unlimited resource.

But beyond that, I would argue that all of them--Bremmer included--are missing something else: such state capitalism is only successful when there is free market capitalism on the outside. To put it another way, state capitalism is not a stand alone system, it is a dependent one. Really, it is parasitic in nature: it cannot exist without free market capitalism, while free market capitalism can exist easily without state capitalism.

The simple test: stop all international trade and investment. China would implode almost overnight, while Western nations would not. Why? Because of two reasons:
1. The West is the principal market for all goods and service provided by the state capitalism of the East. 
2. And the West is the principal locus of investment for excess profits and capital reserves for state capitalism, as well.

Proponents of state capitalism are quick to forget this in their rush to champion a counter to the economic narrative of the western thinkers. Moreover, they also fail to note the consequences of this reality: there is no actual state capitalism taking place. Capitalism--as a process--is still happening where it has always happened, by and large. Some authoritarian states--like China--are just taking advantage of this, thanks to the West's willingness to open their markets, while allowing China--and other "state capitalism" nations--to keep their own largely closed.

In short, this new narrative--the triumph of state capitalism--is simply nonsense. But for some reason, it appeals to academics. Maybe in the same way the Soviet economy appealed to academics in the 1950's and 1960's...before they realized it was all smoke and mirrors.

Cheers, all.



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