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Economy

A Tale of Three Capitalisms

Sep 09 , 2020

As the COVID-19 pandemic continues to impact global economic prospects, calls for nationally self-sufficient economies are growing louder. These calls make sense for certain crucial products, including some medical supplies. However, the more extreme arguments for decoupling key global economies, especially those of China and the United States, make little economic or political sense.

While economic decoupling has captured popular imagination and gained traction in Washington’s policy circles, it is not feasible given the deeply interconnected nature of global economies. The United States would find it extremely difficult and economically detrimental to totally disentangle itself from China. Their economies are profoundly interlinked, not only via supply chains upon which companies such as Walmart and Amazon rely, but also due to large flows of energy, food, and finance.

The arguments for economic decoupling can be traced back to the rise of populist forces in the West, especially the arrival of the Trump administration in 2016. Their rationale for decoupling is simple: China is considered an economic competitor that is utilizing a “deviant” and hostile form of capitalism. Often termed “state capitalism,” such forms of capitalism are seen as engaging in the widespread theft of intellectual property while using “unfair” industrial policy tools to further their economic upgrading.

The emergence of new state capitalisms is not just confined to China, but widespread in the developing world. The label of state capitalism is used by populist political forces in the West to paint a picture of zero-sum economic competition that necessitates counter-policies, such as techno-nationalist measures. Ironically, these resemble exactly the “deviant” measures perceived to be employed by state capitalist economies.

There are three major problems with Western perceptions of state capitalism and the destructive geo-economic competition that follows. First, state capitalist systems are not deviant. They are one of three major forms of capitalism the globe has witnessed over the past 250 years, and can be traced back to the very beginnings of capitalism under mercantilism. Second, state interventionist tools such as industrial policies are widespread in all types of capitalism, regardless of their philosophical, political, or institutional underpinnings.

Finally, capitalisms, regardless of their institutional and political nature, are bound to integrate economically. The relentless drive to accumulate capital leads individuals and corporations to search for new avenues to make profit. Crass barriers to this search, such as policies that pursue economic decoupling, will crimp the dynamism of capitalism, and ultimately undermine the economies of those implementing them. The trick therefore is to seek ways to successfully coexist and mutually strengthen economies, rather than destroying ties. 

The literature on Varieties of Capitalism and Comparative Capitalisms traditionally laid out the case for two major organizing principles in the capitalist universe. One form of capitalism is perceived to be dominated by liberal market forces with minimalist state intervention. Often found in Anglo-Saxon countries it constitutes a form of liberal market capitalism.

The other, most commonly found in continental Europe, is perceived to be coordinated by the state, large corporations, and peak labor unions. Such socially coordinated capitalism is often associated with social democratic norms and principles, including higher taxation, better welfare supports, stronger labor unions, and less social dislocation. Rather than unfettered markets, these forms of capitalism espouse Keynesian norms – capitalism has to be actively managed to be successful.

More recently, the literature has pointed to the existence of additional types of capitalism, first and foremost emerging forms of state capitalism in the developing world. Despite its socialist pedigree, China is seen as the most important new member of the state capitalist club. Its economy is primarily based on market competitive pressures and the relentless accumulation of capital by both private and public entities, but state institutions play a crucial role in financing, steering, and coordinating economic forces.

State developmentalist capitalism has a long history. Its origins can be traced back to the mercantilism of the 15th to 18th centuries. However, modern state developmentalism must be seen primarily as a response to the emergence of industrial capitalism in the United Kingdom.

Poignantly, it was the United States that pioneered state developmentalism by following the advice of Alexander Hamilton to protect and foster domestic manufacturing. The American experience was then described by German-American economist Friederich List, who emphasized national systems of production to engender capitalist development. Bismarck’s Germany in particular, but also other late developers such as France and Japan adopted and refined developmentalist policy tools, including the use of state coordinated finance to create big developmental pushes in industrialization and infrastructure.

After World War II Japan continued to follow an essentially state developmentalist path, while South Korea and Taiwan further advanced this approach to political economic organization. China is therefore merely the latest in a string of state developmentalist economies that have engendered successful industrialization.

The Trump administration is now trying to reinvigorate the American tradition of state developmentalism. However, for it to work, effective industrial policy would have to stand front and center. While there have been pockets of success, such as under the Defense Advanced Research Projects Administration (DARPA), for the most part American industrial policy has been flagrantly incompetent.

Market liberals argue that industrial policy fails, yet there are many successful cases where state elites spurred the creation of new industries through incentives and policy changes. Policies ensured that newly created industries generated intellectual property that would pay back state investments over time.

The American political system is designed to offer public access to political decision makers, with Congress playing an outsized role in economic policy making compared to other legislatures. The resulting lobbying creates conditions where many attempts at industrial policy in the United States become handouts to industries in decline.

Other countries have faced similar problems, including China. But Chinese industrial policy has benefitted from years of experimentation, both at the local and central level. Political insulation of elite decision-makers helps as well, but, most importantly, Chinese industrial policy increasingly focuses on incentivizing the creation of new industries and firms, such as via state backed venture capital funds.

As the economically dominant power, the United States got used to a world where it was simply the best in a broad range of industries and technologies. Few other countries could compete on its scale. However, today plenty of countries can compete in manufacturing and some have pushed their entire infrastructure, education systems, and government economic policy to prioritize technological upgrading. It is against this backdrop that Trump’s “America First” response must be seen.

While the reaction is understandable, the policies adopted are one-sided, emphasizing a retreat from global competition rather than effective means to compete. State capitalist systems are not deviant, but they have their weaknesses, especially as economies become more sophisticated and complex. Trump’s techno-nationalism is thus moving in the wrong direction. Statist interventionist policies only work in a certain industrial eco-system. Very few steps to establish such an eco-system have been taken in America.

Ultimately, the global capitalist system and individual capitalisms within it can only thrive when the relentless drive to accumulate capital faces few barriers. This is a policy arena in which the philosophical underpinnings of the liberal market, socially coordinated, and state developmental varieties of capitalism agree: exposure to international market competition, even with various caveats, is a must to keep an economy vibrant.

Washington’s economic decoupling strategies emphasize the wrong features of the state developmentalist model. Rather than smart industrial policy to retain and build America’s competitive edge, they impose various barriers to trade and investment. And these policies are superimposed on a liberal market capitalism not suited to such measures.

Recognizing that different forms of capitalism with different strengths and weaknesses populate the global system could enable policy makers to step away from seeing the wrong problem and thus employing flawed remedies. For Washington to paint China as “deviant” and “hostile” is, in effect, negating America’s own political economic heritage.

For sure, China’s economic rise constitutes a novel challenge, in large part due to China’s massive scale and size. However, reactionary trade and investment barriers are not the solution. Rather, in a global capitalist system, competitive adaptability must be constantly honed, fostering dynamics that allow competing economies to coexist and mutually strengthen each other.

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