Monday, December 19, 2011

Entrepreneurial Versus State-Run Capitalism

by Richard Crews
There is a great social experiment afoot in the world today. On the one hand, entrepreneurial capitalism--throwing the bait in the middle of the pool, and letting the sharks fight for it--appears, by clear historical evidence, to be the greatest societal wealth-generation system the world has ever known. It clearly beats out, on the one hand, both feudalism and its various derivatives and, on the other hand, centralized, politically manipulated government control of industrial-age wealth generation (the fall of the U.S.S.R. punctuated the end of that sentence).

But entrepreneurial capitalism cannot function unfettered: adult supervision appears to be essential. From Teddy Roosevelt's anti-monopoly oversight of the Robber Barons (in the first decade of the 20th century), through the excessive exuberance over public ownership that led to the Great Depression (in the 1930s), to the secretive and inventive greed of financial institutions leading up to the Great Recession (in the first decade of the 21st century), it seems clear that a strictly "boys will be boys" approach to swimming in shark-infested financial waters leads to severe distortions and disruptions of the engines of societal wealth generation.

But a different experiment is now afoot, one that is based on the question, if entrepreneurs and boards of directors (with some adult, government supervision to assure equitable, social-democratic wealth distribution) is so good at generating post-industrial wealth--particularly as the corporate units get bigger and bigger--why not have one vast state-run "corporation"? This seems reasonable. And China is trying this out. Business strategies in China--from price gouging to various methods of undercutting competitors--are evaluated and implemented on a national level. For example, the Chinese government, through the use of hundreds of billions of dollars of government subsidies, successfully cornered the world mining and production of rare-earth minerals; China simply put the rest of the world out of business by undercutting prices. For another example, displacing 1.3 million people and destroying irreplaceable ecological and archaeological treasures to build the Three Gorges Dam required only board-room type decisions; it did not require dealing with legally and politically sensitive eminent-domain issues or with complex regulatory and licensure constraints. For a third example, development of safe, efficient, Thorium-molten-salt nuclear power reactors is proceeding apace in China (and in Russia and India) but not in the U.S. or in any Western country because of political pandering to irrational public worries in the West.

So far the Chinese experiment seems to be going well. For example, government intervention to protect the Chinese economy from the burst of the worldwide housing and credit bubble in 2008 was quick and massive--and, unlike in the U.S. and Europe, effective. For another example, China has enormously expanded a consumerism-dedicated middle class. Thirdly, last year China passed Japan to become the second largest national economy in the world--behind only the U.S. And many economists and political savants predict that within the next couple of decades China will pass the U.S. to become the largest national economy in the world. Meanwhile, China has amassed trillions of dollars in board-room war-chest funds. (It could bail out the Euro-zone sovereign debt crisis if it chose, but the international political implications are horrendous.)

What seems to attract little comment is one profound historical observation: boards of directors make mistakes. The Chinese model has inadequate internal (or external) correctives. Sooner or later the "board of directors" that is China's centralized political governing authority will make a colossal boo-boo--they will produce an Edsel, introduce alcohol prohibition , bankrupt Lehman Brothers, or otherwise have a Alan-Greenspan moment on an unimaginably vast scale. (Perhaps they already have--there may already be such a boo-boo percolating up through the system.) And the world will go back to muddling along as best it can with the evolving fits and starts--the successes-failures-corrections process--of Western, social-democratic-regulated entrepreneurial capitalism.