Where the Free Market Fails: Understanding State Capitalism

When I was in high school, I spent a lot of my free time studying what Thomas Sowell would call “basic economics”. Through reading Adam Smith and participating in Learn Liberty’s online courses, I learned about the power of free market competition to maximize human happiness and freedom.

Business does much less harm than big government. Competition keeps business in check much better than government regulators do.

The point of view I developed is perhaps best summarized by the above quote from media personality John Stossel. Government is a centralized process dictated by elites who think they know what’s best for us. It fails because it cannot possibly take into account all of the needs, desires, and complexities inherent in human behavior. Markets are a decentralized process that allow human beings to make decisions about their own lives while competition between businesses forces people to work towards their maximum potential in the most efficient way possible.

While most people probably don’t think about markets in this exact way, the basic phrasing is incredibly influential. I believe this line of thinking is prominent enough to define what makes popular economic thinking in the United States different from other countries like Finland or Singapore.

This is related deeply to our experience of the cold war, which was framed as a good versus evil struggle of Capitalist freedom and Communist oppression. I could spend a long time discussing how ridiculous this framing is, but for the sake of clarity I want to simply observe that most Americans tend to understand the economy in terms of a sliding scale from private to government control, with private control meaning more freedom and government control risking more oppression. In this sense, capitalism and democracy are almost the same thing.

This framing is has been implicitly rejected by leaders like Lee Kuan Yew of Singapore and Deng Xiaoping of China. Their administrations achieved unprecedented economic success pursuing profits with heavy-handed government control and government-owned enterprises collaborating with private businesses. Not only have they decoupled capitalism from democracy, they’ve combined it with government ownership and central planning. This marriage between big government and capitalism is known as state capitalism.

You don’t have to go to Asia to find state capitalism. As Noam Chomsky loves to point out, government programs like NASA and DARPA have been behind many of the greatest innovations of the 21st century, including the internet. Those familiar with labor history might also point to events like the Ludlow Massacre in Colorado where government troops and police assisted in the violent suppression of labor unions. The most significant period of state capitalism in the United States may be World War 2, when government spending nearly doubled industrial productivity and corporate profits.

Where did John Stossel go wrong? It has to do with the nature of capitalism. I wrote an article that goes into this in detail, but in short you can think of capitalism as a sort of artificial intelligence. Specifically, it’s a maximizer. Because it’s possible to represent so many human needs through money, most everyone is incentivized to obtain as much of it as possible regardless of what their individual goals are. The most powerful people are those who are the best at accumulating this wealth. When they advance their own interests they also advance the interests of capital, since it’s the basis of their power.

There are three basic problems with this. The first problem is that the interests of capital do not necessarily represent human interests. For example, lightbulb companies conspire to build inferior light bulbs that need to be replaced constantly so they can keep selling bulbs and maximize profits. This is a common practice known as planned obsolescence. Tobacco companies lie about the connection between their products and lung cancer despite having known about it since the 50s. If I start talking about climate change, we’ll be here all day.

The second problem is much more conceptual. Basically, if capitalism is a maximizer, free markets are a stepwise hill climbing algorithm. That probably sounds like it’s really complicated, but it’s not. Imagine you’re walking around a hilly countryside, and you want to reach the tallest point. An easy way to do this is to make a rule so that every time you take a step, you have to reach a higher point. This will very quickly take you to the top of the nearest hill. Unfortunately, if you see a taller hill off in the distance, you can’t climb it because you would have to climb down from the hill you’re currently on, which would break your rule.

Evolution is the classic example of this. Small mutations that give an organism an advantage make it more likely that organism will survive and reproduce. Over time, these mutations build up to major changes. Evolution can produce something incredibly complex like the human eye because every step produces an advantage. A light detecting cell helps detect predators, more cells mean you can determine position, and so on. This sometimes leads to inefficiencies: a giraffe’s laryngeal nerve goes from its brain all the way down to its heart and then back up again to the voice box. This design made sense in fish, but over time as the neck gradually developed it was never possible or strictly necessary to fix the route. So, instead of 2 inches, it has to travel 15 feet to its destination. Evolution is also limited in what it can design: it will never produce a wheel because a spoke or axle by itself is completely useless. We needed our highly centralized brains to figure that one out.

Free market capitalism is obviously a bit more complicated since it involved human activity, but as I discussed in another article, it comes with its own limitations. A company that fails to maintain a certain level of profit will be abandoned by its investors and eventually outcompeted by its rivals. At an even more basic level, a business that doesn’t make profit cannot maintain itself even if it benefits society. So, businesses are forced to make decisions that maximize their profits regardless of how their directors feel. A lightbulb that lasts millions of hours may be good for humanity, but it’s an unsustainable business model, so they don’t get made. Roads are essential to modern life, but setting up a way to profit from them is incredibly prohibitive, so they’re almost always built and maintained by governments.

The third problem is that competition isn’t always viable. Modern mega-corporations like Walmart and Amazon have incredibly complex logistical systems that allow them to keep their prices low and efficiency high. It is not remotely possible for any business to compete with them. The costs to build up a competitive infrastructure are enormous and even if a parallel system were possible, it would halve the overall efficiency since you would need twice the infrastructure to do the same job. Even if you find a blind spot in their infrastructure, it will end up being more efficient for them to buy your company than let you remain as a competitor. At this point, their power is incredible and the lines between business and government blur.

The point of this article is not to extoll the benefits of government involvement in the economy. These benefits are elementary and obvious to anyone who isn’t an extreme ideologue. The point is that capitalism does not need a free society to operate, and we cannot depend on the so-called “free market” to protect our liberties.

In fact, capitalism involves central planning by corporate officers and a board of directors in an entirely dictatorial way. It is actively anti-democratic, which is probably why the United States helped overthrow so many democratically elected governments on behalf of corporate interests during the Cold War. Economics is a system of power just like politics, and authoritarianism in our economic sphere will always be a threat to democracy in the political sphere.

Democracy can be subverted only if large multitudes stand by and look away while it is corroded and demolished. Our deepest values are in most danger when people feel defenceless and despairing, mere spectators watching a nightmare slowly unfold as if there was nothing they could do to stop it, ready to abrogate their responsibility… Salvation can’t be outsourced to some sort of heroic figure who will ride to the rescue. The only real saviours are the people themselves.

I pulled the above quote from a wonderful article I found while looking up sources for the many, many, coups supported by the United States. The article is a comparison between the environment leading up to the 1973 coup in Chile and the political environment of the United States in 2018. As someone who fled the Chilean dictatorship in 1980, the author reminds us that democracy is fragile and everyone believes “it could never happen here” until it does.

The primary danger democracy faces today is not some leftist boogeyman. It’s complacency. Even the right is beginning to understand on an intuitive level that corporations act as a parallel institution with the power to undermine democracy. We can only hope to combat these anti-democratic trends with our own efforts to preserve and expand democracy. This can involve the practice of labor unions, workplace democracy, dual power structures, and popular movements. Ultimately, it’s in the hands of the people, as it always has been.

Journalism is printing what someone else does not want printed: everything else is public relations.

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