The twenty-first century has evidenced a remarkable worldwide shift away from both the market economy model and the socialist economy model in favor of state capitalism. While the shift is undoubtedly beneficial for those who labored under socialism, it is unequivocally disastrous for those who thrived under market economy conditions.
In this column, I shall focus attention primarily on state capitalism in so-called emerging countries. China and Singapore are usually paraded as examples of high-performing state capitalist economies. China, indeed, is now the leading practitioner of this pervasive phenomenon. Its relative success, however, is an unreliable indicator for the rest of the emerging nations.
First, for state capitalism to have any chance of success is must be directed by a competent state. China has a strong Mandarin culture which was not entirely destroyed by the evil dictatorship of Mao Zedong. India, Brazil, South Africa Argentina, Venezuela and many other emulators do not have such a strong administrative culture.
Second, well-directed state capitalism performs best when copying the innovations of others. This is so because governments are prepared to ignore the property rights of others and are eager to steal technology. They tend, because of lengthy experience, to be efficient thieves. Notably, however, they are not effective innovators. So as soon as they have to produce new ideas of their own, puff there goes the market miracle! Japan is the outstanding example of this blow-out phenomenon.
Third, state capitalism always favors well-connected insiders over more innovative outsiders. In China, for example, unproductive princelings have seized almost all the state capitalist spoils. In Russia, a clique of oligarchs dominates both the Kremlin and business, such as that is. Thus, the state capitalist model induces cronyism, inequality and, eventually (one hopes) revolution.
Fourth, state capitalism always supports its losers through bail-outs and other subsidies. Americans should be fully aware of this given the hand-outs so recently provided to financial institutions, automobile producers, so-called energy-savers, rapid-transit rail systems and other political boondoggles favored by the President and compliant members of Congress because of campaign donations received from unscrupulous state capitalist beneficiaries such as Warren Buffet and George Soros.