The rise of State capitalism: new masters of the universe or an ominous portent?

The Visible Hand of the government

‘The Visible Hand’ was the title which the famed London-based economics weekly, The Economist, used when it published a special report in its issue on 21 January 2012 on the rise of state capitalism in the modern era.

The title has a pun: The governments do not care to hide what they do when they interfere in an economy, because they think that they are all powerful and can do anything openly.

The markets which are more powerful than governments do their work subtly without being seen by anyone, as conceptualised by Adam Smith, father of modern economics, with the publication of his masterpiece ‘The Wealth of Nations’ some 236 years ago.Hence, the choice of the title by The Economist implies that it is now a battle between the visible hand of the government and the invisible hand of the free market system to rescue the world from the current economic malaise and thereby deliver prosperity, sustainability and super-living to people.

 China’s success story resurrects state capitalism

Taking the readers through the most successful story of state capitalism today, China’s admirable growth record in the last three decades, The Economist has drawn attention to the rise of state capitalism in other parts of the world which it calls the state capitalism’s global reach making it ‘the new masters of the universe’.

There has been a temporary receding of state capitalism in 1990s after the collapse of the Soviet Union and its satellite states that had inspired many developing and emerging nations as the role model of state action.

However, with China’s success and the re-emergence of Russia as a nation of worth, state capitalism too has made a sudden and hasty come-back with a difference. According to The Economist, there are three reasons for its unexpected triumph over the free market system.

“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.”

Thus, according to The Economist, “The invisible hand of the market is giving way to the visible, and often authoritarian, hand of state capitalism.” In other words, state capitalism has been viewed as the all-time saviour of the global economy thereby relegating the once powerful and admired free market economy system to an unimportant place in economic history.

Old adherents to  state   capitalism

State capitalism places its trust on the governments’ ability and its right to intervene in an economy in the name of providing benefits to people. The intervention takes place in the form of governments’ running commercial enterprises sometimes as state monopolies and sometimes in competition with private businesses and grabbing the wealth belonging to the people by using coercive powers.

History is not without adherents to this type of governmental intervention in economic activities simply to strengthen the powers of rulers, while providing welfare services to members of society as well.

The economic system which Kautilya, the 4th century BCE Indian economist and philosopher, advocated in his treatise on economics, The Arthashastra, was a typical state capitalism because he advised the king to run commercial enterprises, license private individuals to run certain enterprises under the king’s orders and grab private wealth if there is a severe shortage of resources in king’s treasury.

The king’s ability to grab the private wealth by coercion was a problem at that time too, because, the Buddha, 200 years before Kautilya, advised the householder Vyaggapajja, as canonised in the Anguttara Nikaya under a discourse titled Vyaggapajja Sutra, that householders should protect their hard earned wealth from kings who have an inclination to grab such wealth by using their coercive powers in the same way they protect their wealth from thieves, enemies, natural hazards and undesirable relatives.

The kings in ancient Lanka too practised state capitalism to the letter: All resources in the country belonged to the king and private individuals used them commercially subject to king’s permission and payment of due taxes to the king.

But the state capitalism practised today by governments is different from what was practised in the ancient past or even in the not-so-distant past by communist countries.

State capitalism checked by good governance in the past

In the ancient past, in this part of the world, though the kings had absolute authority, they were always guided by good principles of governance known as ‘Dasa Raaja Dharma’; Kautilya advised the king that “just as one plucks fruits from a garden as they ripen, the king should collect revenue as it becomes due because if revenue is collected before it is due, it will make people angry and spoil the very sources of revenue.

The Buddha praised the Lichchavi rulers because they had taxed people like a bee which sucked nectar from flowers without trampling them. Hence, governments could have powers, but those powers should be used to protect their subjects and not to put them to misery. Kautilya was very particular about this role of the king: He said that a king who observed the duty of protecting his people justly and according to law would go to heaven and those who failed would end up in hell.

Today state capitalism breeds bribery and corruption

In communist countries, state capitalism was exercised by resorting to all inclusive central planning and by using all governmental machineries for the production and distribution of the goods needed by people. The Soviet Union was one good example: there, from a little pin to a space rocket, everything was produced according to a centrally prepared plan which was implemented by governmental production units.

In India, during the times of Jawaharlal Nehru and his daughter Srimathi Indira Gandhi, all economic activities were directed by the government according to five year rolling plans and even the private sector businesses had to produce goods according to the production quotas set by the government through a wide spread permit system.

As Gurcharan Das, the author of India Unbound, says, exceeding those production quotas was a punishable offence and many an entrepreneur was sent to jail for committing that economic crime. In both countries and others that adopted this economic model, a very powerful bureaucracy was established which took individual liberty and freedom away from the people.

Worst was that in India, according to the Columbia University based economist of Indian origin, Jagdish Bhagwati, it led to an immutable system of those in power trying to earn extra benefits for themselves, which economists call ‘rent seeking’ and ordinary laymen ‘bribery and corruption’. When people observe that those in power could practise bribery and corruption with total impunity, they too try to join the powerful gang of people in politics and bureaucracy thereby giving birth to a bribery and corruption driven society.

Wider state capitalism: an attempt to control every aspect of human behaviour

This system could not continue to serve people for long as promised. Almost simultaneously in early 1990s, Soviet central planning collapsed and India had to start dismantling its ‘Permit Raj’. But today, against the worldwide economic calamities, state capitalism has raised its head once again in a new form: the expansion of government activities into commercial enterprises by using the fundamentals of free market system as practised by China and other countries that have embraced this new economic model.

Sri Lanka is one such country where state expansion has taken place rapidly in the last five years into almost all activities of human life from good personal behaviour to private consumption. This has taken place according to a set pattern of state capitalism as prophesied by American economist Murray Rothbard, a follower of Austrian economist Ludwig von Mises who wrote extensively on economics of human liberty along with other Austrian economists.

Murray Rothbard’s prophesy of state capitalism

According to Rothbard, state capitalism is directly in conflict with democracy, liberty and human freedom. In a book he published in 1962 under the title ‘Man, Economy and State’, he presented three types of state intervention under state capitalism by way of interfering in exchanges which people make for normal healthy life.

The first he called ‘artistic intervention’ under which a government intervenes in private non-exchange activities, that is, activities which have no market transaction completed by payment of a price, such as how people should behave, what they should consume and what they should not, what type of artistic activities they should engage themselves in, to what extent and how they should practice their religions, what type of information they should have access to and so on. In this manner, governments try to regulate even the thinking patterns of people.

The second intervention is the ‘binary intervention’. This refers to forced exchange between individuals and governments and in this intervention, private individuals have no choice but to patronise state monopolies, receive knowledge under state sponsored or run educational systems, accept moneys issued by governments though its value may be falling in the market, etc. Thus the government becomes the all-powerful authority of deciding how and what people should do in the market.

The third is the ‘triangular intervention’ under which private individuals have to have exchanges among themselves as mandated by the government. For instance, a government may decide that a private television station should not carry foreign produced TV commercials and under that restriction, private companies, TV stations and TV viewers have to be happy with only permitted TV commercials.

Rothbard: state capitalism is threat to liberty, freedom and democracy

It is obvious that Rothbard’s definition of state capitalism is much wider than the narrow definition of state capitalism used by The Economist. In terms of Rothbard’s definition, many countries today are in fact practitioners of state capitalism to varying degrees. Along with the rise of economic, cultural and spiritual nationalism, governments have tried to regulate practically every type of behaviour of their citizens. To Rothbard, this is a serious threat to human liberty and freedom.

Sixty years ago, the British writer George Orwell prophesied in a novel titled ‘1984’ the emergence of a world in which the governments would become extremely powerful by the year 1984 basing his creative work on the developments taking place in societies like those in the Soviet Union at the time of writing his novel. The year 1984 has now passed and the government could not play that powerful role as prophesied by Orwell in his novel; instead, the Soviet Union collapsed within six years from 1984.

However, the modern trend is that as Rothbard has prophesied, governments throughout the world have tried to impose their will on citizens in a subtle manner which does not go to the extent of the open extremism of George Orwell’s prophesy. But it has affected the individual behaviour, their creativity and innovative spirits adversely.

But how have the governments become able to impose their will on citizens? As Bhagwati has said of India’s bureaucracy which is bent on earning extra benefits for itself or earning undue rents, it is the bureaucracy itself that has rallied round governments to exercise their new powers on people.

Rothbard: no shortage of supporters to state capitalism

Rothbard in his 1980 book on ‘Power and Market’ has argued that under state capitalism the role of the government economists is immensely enhanced while in a free market system, the role of economists in general is limited, because everything is done there by the invisible hand in the market. But, under state capitalism, the size and the function of the government expand continually bringing about a similar expansion of the power and the role of the state economists too.

Since governmental interventions create new problems, the state economists have to find solutions for those problems; then, those solutions create new problems and state economists have to now find solutions to those new problems as well. So, solutions and problems expand like the spread of wildfires and, as a result, state economists become all powerful people in the society.

Rothbard argues that this simple self-interest prejudices the views of many economists in the state sector and therefore they become the fierce champions of state capitalism which their political masters have to just use for building up their own political base and power.

Self-created problems generate more problems

The corollary of the self-created problems breeding further problems in this way is the general tendency of state economists to look at free market economists disparagingly. According to them, free market economists are just ideologists devoid of practical experience and could talk on theories but cannot offer solutions.

But the state economists, according to their own rating of themselves, know both the problems and the solutions. What is missing in this rating is that those problems are created by themselves by unnecessarily interfering in the free market activities and there is no need for solutions had they not intervened in the market in the first place.

Rothbard’s Law: loss of focus leads to do one’s worst

This has led to the famous Rothbard’s Law in economics. This law says that if one loses focus on what one should do, one ends up in specialising in what one is worst at. In laymen’s language, the governments lose their focus by engaging in unnecessary interventions in economies.

These interventions create problems and governments have to now find solutions. The solutions also create problems because one mistake leads to another mistake. Eventually, governments and therefore state economists too specialise in creating problems for which they have to go on seeking solutions eternally.

Enlightened self-interest is no ground for creativity

State capitalism’s greatest weakness is the loss of creativity and innovative spirits of people who have power to decide on governments’ intervention in an economy. Since their self-interest which can be termed ‘enlightened self- interest’ because it is exclusively for their own enlightenment, there is no incentive for them to use their energy for being creative and innovative for the benefits of others.

Steve Jobs of Apple fame, according to his biographer Walter Isaacson, found fault with President Barack Obama because he was all up to please everyone, a tactic to promote his enlightened self-interest. Jobs is reported to have said that as long as USA has this policy of satisfying one’s enlightened self-interest, it loses its creativity and innovative spirit, the saviour of that country in its current economic malaise.

The new Masters of the Universe or what?

Will state capitalism be the new Masters of the Universe as claimed by The Economist? Yes and no. Yes, in the short run by helping a country to use all its energy and resources to produce more and more through concerted governmental action. Money is poured into projects in large amounts and economic activities start booming. So, everyone rallies round the government and promotes state capitalism further.

But in the long run? No, because state capitalism fails to identify priorities and allocate resources accordingly, the projects are chosen arbitrarily on whims and fancies of rulers, resources are wasted on the projects that are so undertaken, further resources are wasted to correct errors and justify those projects when there are criticisms against them, bribery and corruption are bred at all levels giving birth to a corruption tolerating society and above all, creativity and innovative spirits are killed because people are not encouraged to think differently. So, in the long run, the masters may not be able to maintain their master-ship unabated.

(W.A. Wijewardena can be reached at [email protected].)