Monday, January 23, 2012

Capitalism vs dirigisme, and the winner is...

The Economist has a special report on the emergence and apparent success of State Capitalism in China, Russia, and Brazil, and to a lesser extent, the US (think the auto bailout).

Is state capitalism the wave of the future, or is it simply one in a long line of state-sponsored failures? Some commentators have seized on the riots in Russia in December as evidence that it is already on its way out. Others point to the continuing problems with global capitalism, arguing that the state variety is winning the war of ideas. Andy Stern, a former boss of the powerful Service Employees International Union, argues that China’s economic model is superior to America’s and quotes Andy Grove, the founder of Intel: “Our fundamental economic belief …is that the free market is the best of all economic systems—the freer the better. Our generation has seen the decisive victory of free-market principles over planned economies. So we stick with this belief largely oblivious to emerging evidence that while free markets beat planned economies, there may be room for a modification that is even better.”

For its apparent success--and I say apparent because it depends on what you think the alternative would look like--state capitalism has flaws that anyone who has read Chapter 21 would recognize:

Management theorists have long agonised about the “principal-agent problem”—the tendency of managers to run companies to suit their own interests rather than the interests of their owners or customers. Under state capitalism this problem is as acute as anywhere. Politicians are too distracted by other things to exercise proper oversight. Boards are weak and disorganised. And the company’s mission tends to be a confusion of the commercial and the social.

The result is an erosion of 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. Robert Lowe, one of the great Victorian architects of the modern business corporation, described businesses as “little republics” that operate as checks and balances on the power of the big republic of government. When the little republics and the big republic are one and the same, liberty is fatally weakened

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