The allure of state capitalism

State capitalism and China. They're not all that many are cracking them up to be.

But . . . hold on a minute. What's state capitalism?

The January 2012 article The Visible Handin The Economist says: "The crisis of liberal [free market] capitalism has been rendered more serious by the rise of a potent alternative: state capitalism, which tries to meld the powers of the state with the powers of capitalism. It depends on government to pick winners and promote economic growth." (Parenthesis mine.)

So, what's China got to do with this?

As a way of trumpeting the new capitalism, The Economist continues: "State capitalism can claim the world’s most successful big economy for its camp. Over the past 30 years China’s GDP has grown at an average rate of 9.5 percent a year and its international trade by 18 percent in volume terms. Over the past ten years its GDP has more than trebled to $11 trillion. China has taken over from Japan as the world’s second-biggest economy, and from America as the world’s biggest market for many consumer goods."

Per the CIA World Factbook, The Economist numbers above are a little off. For 2010, the CIA puts the EU as the world's largest economy, with the United States next, then China, then Japan. So, it seems that if we’re considering national economies, and not including economic unions of nations, then China has been in second place for at least two years now. Old news.

But let's not split hairs. My point is that this argument of the superiority of China's economic formula is growing a little tiresome—because the argument is selective.

China's a winner, goes the mantra, so the world should follow their lead and convert to state capitalism. China's this that and the other, blah, blah, blah, ad nauseam.

Yes, China may currently have the world's second largest national economy and certainly that's nothing at which to sneeze. But there's a piece missing in this campaign to surrender capitalism to the inefficiencies and cronyism of government. Well, several pieces are missing actually, but I'm keeping this article simple and just focusing on one that will weaken favoritism toward state capitalism. Let's put China’s second place ranking in an economic context.

When measuring GDP, one needs to keep in mind that word product. Production is dependent on many factors, but one of the most important of those factors is labor. To consider its GDP as a measure of the success of a political economic structure, one must consider the size of China's huge labor pool. The standard and tiresome arguments in favor of the Chinese model of state capitalism do not do this. To arrive at a fair assessment, one needs to consider GDP from a per capita standpoint rather than from an absolute standpoint.

In a ranking of national GDP per capita, as of the date of this article the CIA Factbooklists China as number 117, with $8,400 per person. The Factbook ranks the United States as number 11 with $48,100 per person.

Based on per capita GDP, which economy is more productive? More efficient?

Although China's state capitalism economy may be growing quickly and in absolute terms is moving up in world rank, espousing the benefits of state capitalism while forgetting to mention the critical per capita statistics restricts the conversation and unfairly skews opinion on the benefits of state capitalism.

The differences in per capita GDP point to the benefits that a political economy accrues to the individual, as well as the differences in inefficiency between the currently highly-ballyhooed state capitalism and free market capitalism. This per capita view needs to be kept in mind when fairly considering the argument between state capitalism and free market capitalism.

If it is, it would appear that the fight for state capitalism won't be going very far very quickly.

About the Author

Richard Telofski

Richard Telofski is a competitive strategy and intelligence analyst. Formerly the president of one of the world’s first competitive intelligence consultancies, Richard currently practices at The Kahuna Institute where he studies the business effects of non-traditional competition. He blogs about “The War on Capitalism” at www.Telofski.com