State Capitalism vs. Market Capitalism – who’s your money on?

The question, never mind the answer, isn’t as clear as you might think, argues Niall Ferguson in this month’s Foreign Policy Magazine (hyperlink not working).

It’s generally assumed that since the de facto beginning of the end of Maoism/Chinese Communism – call it what you will – in 1979, China has been pioneering a new hybrid model of “State Capitalism”. In more recent years, Putin’s Russia is regularly cited as another state pursuing a similar course.

And this new-ish state capitalism model – according to the argument shared by CCP members, last-refuge western socialists, and international relations scholars – poses a formidable challenge to the Western variants of market capitalism practiced (with increasingly alarming incompetence) by the US and Europe.

Not according to Ferguson.

Reports can be cherry picked but consider the following data points Ferguson uses to challenge the tidy state vs. market capitalism dichotomy:

Where in the world is the role of the state greatest in economic life, and where is it smallest? The answer lies in data the IMF publishes on “general government total expenditure” as a percentage of GDP. At one extreme are countries like East Timor and Iraq, where government expenditure exceeds GDP; at the other end are countries like Bangladesh, Guatemala, and Myanmar, where it is an absurdly low share of total output.
Beyond these outliers we have China, whose spending represents 23 percent of GDP, down from around 28 percent three decades ago. By this measure, China ranks 147th out of 183 countries for which data are available. Germany ranks 24th, with government spending accounting for 48 percent of GDP. The United States, meanwhile, is 44th with 44 percent of GDP. By this measure, state capitalism is a European, not an Asian, phenomenon: Austria, Belgium, Denmark, Finland, France, Greece, Hungary, Italy, the Netherlands, Portugal, and Sweden all have higher government spending relative to GDP than Germany. The Danish figure is 58 percent, more than twice that of the Chinese.

How d’ya like them cherries?

Having punctured some of the casual assumptions about what State Capitalism is – and where it is – Ferguson’s argument then takes a jarringly wrong turn.

But the question today is not whether the state or the market should be in charge. The real question is which countries’ laws and institutions are best, not only at achieving rapid economic growth but also, equally importantly, at distributing the fruits of growth in a way that citizens deem to be just.

Two points:

1. This is nonsense. Regardless how fast Lenin and Stalin’s Russia or Castro’s Cuba ever grew and how inclusively they ever divided the spoils of that growth, their people still lived in an illiberal prison. (Granted, for people in the west still living in poverty, such an illiberal prison may seem preferable. Maybe.) But by Ferguson’s criteria, Russia’s rapid escape under Lenin and Stalin from a peasant society to a global superpower would retrospectively qualify it as a better performer than its Western market capitalist contemporaries of the same period. And there’s no way Ferguson, or anyone half wise, would accept a criteria that over-looks the ghastly political realities of that system – as he does here. A sloppy moment.

2. Fast growth well distributed is the argument continuously proffered by leftists keen to downplay the central importance of liberal democracy – and its lack thereof in today’s rapidly growing China. So it’s odd, to say the least, for right-winger Ferguson to employ this formula here. (The hopelessly porous phrase “…in a way that citizens deem to be just” has the air of a defense Soviet leaders might have branded; no ‘Get out of the Gulag Free’ card for that one.)

Ferguson makes a strong case for the weaknesses inherent in assuming that market and state capitalist systems are easily distinguishable in contemporary times. Fair enough. But he’s wrong to frame long-term durability forecasts for today’s states based on questions of economic growth and its distribution; he must consider the consequences of suppressing liberal political freedoms and rights.

The real contest of our time is not between a state-capitalist China and a market-capitalist America, with Europe somewhere in the middle. It is a contest that goes on within all three regions as we all struggle to strike the right balance between the economic institutions that generate wealth and the political institutions that regulate and redistribute it.
The character of this century — whether it is “post-American,” Chinese, or something none of us yet expects — will be determined by which political system gets that balance right.

No. Today Putin is tasting what choked so many Arab dictators last year. The Chinese CCP leadership are terrified of becoming its main course during their “transition” this year. No amount of material wealth and security can ever sufficiently bribe a people into indefinitely accepting life in an illiberal state. Sooner or later, people demand freedom – at least more freedom than is ever possible without democracy.

Tomorrow’s defining struggle will continue to be yesterday’s: The refusal of people to live under rulers they have no right to remove and replace. It’s why the Chinese CCP remain so nervous – and, whatever their GDP, so internally repressive.

  • pauluk

    Ruarai, here’s the link.

  • FuturePhysicist

    Ugh, I don’t want the state running the UK. As a science graduate I shudder to think of Dave “can’t change a light-bulb” Willets and the rest of the useless “Oxbridge Politics, Philosophy and Economics” graduates controlling the money supply to the private sector. Ken Clarke is the only one amongst this useless bunch who actually knows how to make money, the rest are old-school Austrian economicists who never lifted a finger, and that’s fair enough so long as you don’t actually happen to control everything.

    The British public need to get them out before they are in a much more serious Anschluss than the Republic is … or perhaps maybe that would be an improvement.