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Will Free Markets Give Way to State Capitalism?

Will Free Markets Give Way to State Capitalism?

By Gregory Scoblete - May 28, 2010

The End of the Free Market: Who Wins the War Between States and Corporations - Ian Bremmer, Portfolio, 2010.

It's quite likely that the financial crisis that began in 2007 and is, just now, threatening to unravel the European Union represents the final period in a two decade era of the West's "end of history" hubris. While the wars in Iraq and Afghanistan have sullied the aura of Western military power, the financial crisis has surely cracked the other pillar of Western dominance, free market capitalism.

There is, in no other words, no better time for a challenger to rear its head and take on the "Washington consensus" that free markets and free politics are the true engines of growth, power and prosperity. And such a challenger has arisen in the form of what Ian Bremmer, in his engaging new book The End of the Free Market, dubs "state capitalism."

State capitalism, Bremmer writes, "is a system in which the state dominates markets primarily for political gain." From state-owned corporations operating in strategic industries like natural resources or defense, to enormous sovereign wealth funds in the hands of autocrats with opaque operating principles, state capitalism has enabled the world's autocratic states to reap the benefits of capitalist enterprise while maintaining a vice-grip on political freedom.

In Bremmer's telling, the world's autocratic states learned a valuable lesson from the implosion of the Soviet Union: command economies do not work and when they fail, they can bring down the over-arching political system with them. They also watched the post Soviet experiment in crash liberalization with horror. To protect their hides and preserve their privilege, autocratic rulers in China, Russia, Saudi Arabia and elsewhere have created a "hybrid" system that leverages many of the tools of capitalism to generate wealth while the heavy hand of the state ensures that wealth is put to the service of the elites and rulers of each country.

Most of Bremmer's slim, accessible volume (just 200 pages, excluding end notes) is devoted to a tour of the world's dominant and emerging state capitalist systems in places such as Malaysia, Brazil, and the United Arab Emirates. Bremmer's picture of global state capitalism is nuanced - he acknowledges that even free market democracies interfere in markets for political purposes, as is the case with Europe and America's generous farm subsidies and tariffs. The signature difference is the degree and scope of state interference and the lack of democratic transparency in the countries that practice state capitalism.

According to Bremmer, this hybrid model has serious repercussions for the U.S. and other capitalist democracies. Since economic competition is global, companies with state ownership or state influence can distort markets and harm consumers. They can, for example, pay above market prices for natural resource contracts to lock up long term supplies. They can trade freely with the world's pariah states, offsetting the impact of sanctions. More than that, as China emerges from the world's worst recession with 10 percent GDP growth, these state capitalist systems can lure "fence sitting" states like Brazil and India to their brand of government, further tilting the global economic playing field. Goodbye Washington consensus, hello Beijing consensus.

Only not quite.

Despite the dramatic (indeed, misleading) title of the book, there's no indication that we've reached the end of the free market. In fact, Bremmer says so explicitly in his conclusion. Unlike competitors of yore, state capitalism is less an ideology than a methodology. What unites the state capitalist systems of the world is how parochial they are: the leaders are too focused on defending their own skins to worry about world domination or exporting a revolution. What's more, as Bremmer writes, none of the practioners of state capitalism believe in mercantilism - the notion that there is a finite allotment of wealth and that the only way to grow share is to take share from others. So while their state champions and sovereign wealth funds can distort global markets, the world can escape the beggar-thy-neighbor cycle of economic destruction that marked the Great Depression.

Indeed, it's clear from the book and from Bremmer's confidence in free market capitalism, that state capitalist systems contain the seeds of their own destruction. As Bremmer demonstrates, the primary goal of capitalist activity under a state capitalist system is to defend the political interests of the state. But those interests often align quite closely with the material prosperity of the state's own citizens. China wants to maintain its torrid growth rates not so its president can lounge around in opulence, but to provide the millions of jobs it needs to stave off social unrest. The implicit social contract of state capitalism - you can earn a good living if you don't care about political freedom - acknowledges the urgent need to provide improved standards of living to its citizens.

That's a difficult straddle. China has managed it for thirty years and may be able to for thirty more, but the inherent inefficiencies and corruption of state capitalism don't augur well for its future.

That's not to argue for complacency. While he mercifully avoids the doom-mongering that often attends discussion of the rise of China or the re-emergence of Russia, Bremmer does make some brief and modest suggestions for U.S. policy in the face of state capitalist competition. Stay verbally committed to free market capitalism, expand free trade agreements, particularly with countries that practice state capitalism, sustain a military lead over potential competitors like Russia and China, and selectively assert American rights and interests with unfair competitors like China. In short: stay calm, and stay true to the principles that made the "Washington consensus" so attractive in the first place.

Sage advice.

Gregory Scoblete is an editor at RealClearWorld.

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