17.10.2008

Helsinki Times 16.10.2008

What do China, Russia, the European Union and the United States have in common? They all run capitalist economies under state control. The recent bail-outs of banks and insurance companies on both sides of the Atlantic are changing the face of capitalism. It is good-bye to free-market capitalism. Welcome state capitalism!

The world of today has very little to do with the free-market principles of Adam Smith. It has much more to do with the mixed economies of the past century. Indeed, the discussion about the virtues of state capitalism goes back to the 1920s to the time after when Soviet Union was young and recovery from the First World War had just begun. The question back then was whether one could run a capitalist system with a state control of industrial enterprises. Those on the right rejected the notion. Those on the left, especially Leon Trotsky, saw it as a natural step away from capitalism. According to him, state capitalism represented a partial negation of capitalism.

Do sovereign wealth-funds, massive bail-outs and state-owned energy companies represent a ?partial negation? of capitalism? You bet! How about the cap-and-trade emission trading schemes pioneered by the European Union? Are they in harmony with the principles of free-market-capitalism? No way! Despite good intentions, present emission trading schemes have more to do with the five-year-plans of the Soviet Union than they do with the invisible hand of laissez-faire capitalism.

The world is witnessing a sea change from free-market capitalism to state capitalism. But it is not a change toward a uniform system of state capitalism. It is a change toward different types of state capitalism. It is like the old saying about happy families: they are all similar while unhappy families are miserable in their own unique ways.

The Chinese control much of industrial production as well as banks. The Norwegians have a huge sovereign wealth fund and a state-owned energy cluster. The French have national champions. In Sweden and Finland municipalities own energy and service companies and thereby crowd out private entrepreneurs from the market. Gazprom is a state within a state in Russia. And then there is the financial sector. Karl Marx famously predicted that capitalist financial system would lead to a crisis that would pave way for communism. He was wrong. The capitalist financial system led to a crisis that paves way for state capitalism.

Is state capitalism here to stay? There are many signs that it is not going to disappear any time soon. First, there is climate change. Faced with the massive challenge of combating climate change, politicians, experts and citizens are turning away from free-market capitalism. Instead of putting their fate in the invisible hand, governments and companies are speaking in favour of global rules and more regulation. This is an open invitation for states to take a more prominent role in the management of globalisation.

Second, there is the financial melt-down. The depression of the 1930s led to Franklin D. Roosevelt and the New Deal. The current turmoil is likely to lead to Barack Obama and an Audacious Deal ? after all, his best-selling book was called the Audacity of Hope. People around the world are investing their hopes in the new American president. It is very unlikely that he would choose to profile himself as the new defender of capitalism and the ?creative destruction? it entails.

Third, there are the siren calls for a more orderly world. People are tired of constant change. They would happily exchange some of their freedom for greater stability. Nowadays, politicians across the world sound more like Charles de Gaulle than Ronald Reagan.

Is this good news? I am afraid it is not. Free-market principles combined with clear rules and a vibrant democracy still sound like a better proposition that state capitalism combined with protectionism and authoritarian politicians. But hey, what are you going to do about it?