Recently The Economist January 21st – 27th 2012 ran a special report on The Rise of State Capitalism – The Emerging World’s New Model. Not unexpectedly, given the nature of the publication, the report reached the finding that state capitalism has its “fatal flaws” and could never be seriously considered as an alternative to competitive capitalism. In conclusion, it asserts that “...state capitalism’s biggest failure is to do with liberty. By turning companies into organs of the government, state capitalism simultaneously concentrates power and corrupts it. It introduces commercial criteria into political decisions and political decisions into commercial ones. And it removes an essential layer of scrutiny from central government”.
Confusion reigns when we do not define our terms. I define capitalism, called “competitive capitalism” in the report, as voluntary exchange between individuals free of third party intervention. What is called “state capitalism” in the report is the opposite of capitalism correctly defined. It is, in fact, extensive government intervention and participation in the economy, usually called socialism.
Those who oppose capitalism seldom baulk at enjoying the benefits of free enterprise and individual liberties and take them for granted. For example, they object to other consenting adults entering into mutually beneficial employment contracts which they would define as ‘exploitative’. They dislike other entrepreneurs being able to establish businesses and begin trading without restriction. Especially businesses to provide electricity, food, water, healthcare and other essential commodities which they view as ‘public goods’ and believe these should be provided and controlled by a government agency. Their attempt to take the moral high ground by purportedly acting on behalf of the poor and down-trodden is, in fact, simple paternalism and most harmful to the very people they claim to be defending.
To believe that we should live in a society where government owns the means of production and is responsible for the decisions to be made is merely a romantic notion that fails in practice. Even the architects of communism had to rely on capitalism to disseminate their ideas. Karl Marx was sponsored by his friend Friederich Engels who jointly owned a factory in Manchester called Ermen & Engels, which specialised in manufacturing sewing thread. Whilst capitalism made Engels wonderfully wealthy, he despised it and plotted its downfall. He embezzled substantial sums of money from the factory to support his friend and collaborator, while Marx employed servants, sent his daughters to private schools and constantly boasted about his wife’s aristocratic heritage. In short, both Marx and Engels lived like the very people they supposedly despised – the bourgeois.
Free market capitalism generally is a system in which individuals are free to voluntarily enter into mutually beneficial trade agreements with whoever they choose and where the means of production are privately owned. This economic system, even when hampered by the state, has lifted more people out of poverty than any other in the history of mankind. Capitalism spawned the industrial revolution which saved millions of people across the globe from the constant tedium of back-breaking work. Capitalism allowed people to enter into mutually beneficial contracts to buy or sell their labour and condemned slavery, serfdom, and feudalism to their rightful place in the history books.
The harm caused by the Great Recession has made people question ‘competitive capitalism’. Many, in a knee-jerk reaction, are researching alternative economic systems. The chief contender appears to be state capitalism, where an increasing amount of power is afforded to the state. Proponents of this system hold up China as an example of what type of economic growth rates can be achieved when the state involves itself in business.
In China, the state owned virtually everything until the late 1970s when it opened farming to the private sector and since then steadily increased the share of output produced by the private sector. It is as a result of this increased economic freedom and the productivity of the private sector that China has had astonishing economic growth over the past 30 years. There can be no doubt that the country achieved these impressive growth rates in spite of state-owned enterprises, not because of them. In fact, if more private individuals had access to the available capital that the Chinese state owned enterprises currently consume, the growth rates achieved could be even more spectacular. What needs to be recognised is that it is the capitalist portion of “state capitalism” that actually works.
It is impossible for governments to have sufficient information to centrally plan an entire economy; attempts to do so are predictable and the results tragic. A market economy does not operate unplanned. An extraordinary amount of planning is conducted incessantly by millions of individuals seeking to maximise their own interests to get what they want by producing and delivering the goods and services that other people demand. Prices make it all work. Nobody and no group of individuals are needed to oversee and steer anything in the ‘right’ direction. As prices adjust, resources and knowledge transfer from one sphere of the economy to another, from unproductive sectors to productive ones, from the old to the new.
Competitive capitalism is still the dominant economic system and will continue to be so for many years to come. It has lifted millions of people worldwide out of poverty and provided them with an opportunity to succeed in life. In our modern capitalist society, even the very poorest is better off today than all but the very wealthiest members of society a century ago. Capitalism also has other beneficial consequences such as the emancipation of women and children from the uninterrupted toil of farming and other tedious and dangerous activities associated with subsistence living and allows children the chance to get an education. Capitalism promotes cross-border trade, which reduces the incidence of war.
Many people in South Africa think the state’s involvement in certain sectors is essential. This is not so. As The Economist report concludes, state capitalism is “fatally flawed”. Governments around the world can do more for their people by doing less. Give private enterprise a chance. Let people decide, for themselves, how they want to conduct their business and everyday activities without government meddling in their actions and controlling every aspect of their lives. For South Africans, who love their freedom, capitalism (in its true sense) is the best option to move from poverty to prosperity.
AUTHOR Jasson Urbach is an economist with the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation.
FMF Feature Article / 5 June 2012