Monday, February 13, 2012

"State capitalism" (1 of 8): a meaningful concept or a shaky ideological construct?

The conservative-leaning British magazine The Economist recently featured on its 01/2102102 cover Vladimir Ilyich Ulyanov, better known to history as Lenin:


As I've noted before, I'm skeptical when business publications do this kind of publicity for an article, or in this case numerous articles on the topic of "state capitalism". It's almost a sure sign that the readers are being offered some heavily propaganda-laden content.

And that's the case here, as well. The visible hand article frames the special report series of piece on state capitalism with this opening paragraph to serve as a warning that once you start questioning the gods of the Free Market, you'll be a Commie in no time!

Beatrice Webb grew up as a fervent believer in free markets and limited government. Her father was a self-made railway tycoon and her mother an ardent free-trader. One of her family's closest friends was Herbert Spencer, the leading philosopher of Victorian liberalism. Spencer took a shine to young Beatrice and treated her to lectures on the magic of the market, the survival of the fittest and the evils of the state. But as Beatrice grew up she began to have doubts. 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? In due course Beatrice became one of the leading architects of the welfare state—and a leading apologist for Soviet communism.
Well, let's give The Economist credit for being marginally more subtle than Newt Gingrich or Ron "Papa Doc" Paul.


The source of the distress is something that is happening in the real world but isn't compatible with neoliberalism, the True Faith of what we call "globalization" and with what became known in the 1980s as the Washington Consensus for deregulation, maximum freedom for financial speculators, and sell-offs of state-owned enterprises, often under financial coercion from the International Monetary Fund (IMF) and the World Bank:

State companies make up 80% of the value of the stockmarket [sic] in China, 62% in Russia and 38% in Brazil (see chart). They accounted for one-third of the emerging world’s foreign direct investment between 2003 and 2010 and an even higher proportion of its most spectacular acquisitions, as well as a growing proportion of the very largest firms: three Chinese state-owned companies rank among the world's ten biggest companies by revenue, against only two European ones (see chart). Add the exploits of sovereign-wealth funds to the ledger, and it begins to look as if liberal capitalism is in wholesale retreat: New York’s Chrysler Building (or 90% of it anyway) has fallen to Abu Dhabi and Manchester City football club to Qatar. The Chinese have a phrase for it: "The state advances while the private sector retreats." This is now happening on a global scale.
The charts to which that paragraph refers are at the link.

Here, I won't try to sketch out the checkered history of the concept of "state capitalism". The Economist isn't going for academic rigor in its definitions. It's pointing out that state enterprises are actually serious players in the world economic systems and are out-competing some of the supposedly superior private enterprises.

The Economist warns the champions of the Free Market that there are still dragons to be slain:

This special report will cast a sceptical eye on state capitalism. It will raise doubts about the system’s ability to capitalise on its successes when it wants to innovate rather than just catch up, and to correct itself if it takes a wrong turn. Managing the system’s contradictions when the economy is growing rapidly is one thing; doing so when it hits a rough patch quite another. And state capitalism is plagued by cronyism and corruption.
Croneyism and corruption? Oh, Miss Mellie, bring me mah smelling salts, ah thank ah'm gonna faint dead away! Why, ah never heard of such things in our nice American Free Market!!

It's actually a little surprising that The Economist's editors would be writing something like that as thought it's still the middle of the tech boom in 1999 or something.

But the report will also argue that state capitalism is the most formidable foe that liberal capitalism has faced so far. State capitalists are wrong to claim that they combine the best of both worlds, but they have learned how to avoid some of the pitfalls of earlier state-sponsored growth. And they are flourishing in the dynamic markets of the emerging world, which have been growing at an average of 5.5% a year against the rich world’s 1.6% over the past few years and are likely to account for half the world's GDP by 2020.

State capitalism increasingly looks like the coming trend. The Brazilian government has forced the departure of the boss of Vale, a mining giant, for being too independent-minded. The French government has set up a sovereign-wealth fund. The South African government is talking openly about nationalising companies and creating national champions. And young economists in the World Bank and other multilateral institutions have begun to discuss embracing a new industrial policy. [my emphasis]
In other words, not only is the neoliberal model of the ideal world not theoretically the only alternative. There are also real existing alternatives, for better or worse. The editors of The Economist clearly think it's for the worse.

That introductory article also casts "state capitalism" as involving "authoritarian" government:

Today’s state capitalism also represents a significant advance on its predecessors in several respects. First, it is developing on a much wider scale: China alone accounts for a fifth of the world’s population. Second, it is coming together much more quickly: China and Russia have developed their formula for state capitalism only in the past decade. And third, it has far more sophisticated tools at its disposal. The modern state is more powerful than anything that has gone before: for example, the Chinese Communist Party holds files on vast numbers of its citizens. It is also far better at using capitalist tools to achieve its desired ends. Instead of handing industries to bureaucrats or cronies, it turns them into companies run by professional managers.
This is an interesting ideological convolution. They are clearly working from something like a Cold War template. But because in the neoliberal thought world, China is a kind of honorary capitalist country, despite its Communist government, they obviously put some effort into wordsmithing around any embarrassing suggestion that anything about China's Communist ideology might have something to do with their economic performance, e.g., their use of capital controls.

In my mind, a public company (one who's ownership is based in stock) that is majority owned by a government is still a company organized on a capitalist basis. Even if a government owns all or most of the stock, it can still be sold on the stock market and the ownership could change hands. A "pure" public company, one owned by the state but not capitalized by stocks that could be sold on the market, is more straightforwardly a public enterprise. But it can also be organized with various degrees of independence like the Federal Reserve or self-financing like the US Postal Service.

But The Economist seems to be using the term "state capitalism" in a much more polemical and vaguely-defined sense.

In the next posts in this series, I'll look at other articles in the special report on "state capitalism".

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