With the nineties now two decades behind us, and with the benefit of hindsight, some of the fashionable ideas of that era now seem quaint at best, and ludicrous at worst. One of beliefs of that era was that liberal democracy would be the wave of the future, and events during the same period certainly gave it credence: the collapse of the USSR, the democratization and marketizations of Eastern European and Asian countries, the economic success of the West which suggested that only its model could deliver the goods that most people wanted, such as comfortable living standards, economic opportunity, and good public services. These ideas, supported by much of the intelligentsia, seemed to be the conventional wisdom until 2007, when the sub-prime mortgage crisis that started in the US spread across the West and led to major recessions and huge job losses. This not only created a lot of misery, it also exposed the West's promotion of free markets as hollow, as governments of both centre-and centre-right, as well as other organs of the state used the levers of state power to combat the effects of the crisis. Whether it was George W. Bush sending checks of public money to all Americans, or Barack Obama's major stimulus, or Ben Bernanke injecting trillions of government backed currency into the financial system, Western policymakers showed a marked, and unsurprising, tendency to use the state to promote economic growth regardless of their ideological inclinations.
Whether these policies were effective will not be addressed here; reasonable people can disagree on the extent to which, or whether, the expansive monetary and fiscal policies worked, or whether they have only addressed the symptoms and created the conditions that will only delay the day of reckoning. The crisis that rocked the Western world matters for another reason: it undermined the West's triumphalist proselytizing of the virtues of liberal democracy and enhanced the appeal of an emerging alternative. State-capitalism is a political-economic model that has several features that clash with the Western liberal state, in particular, it relies on the wisdom of meritocratically chosen central planners rather than democratically elected leaders to direct both the market and society. Democracy is shunned or contemptuously seen as short-termist and irrational, which supposedly contrasts with the long-term and enlightened decisions of non-elected central planners. At the same time, it is not socialist, since governments in state-capitalist countries aim to promote business and markets and embrace globalization. Their firms, although often state-owned, are run by professional managers with MBA's from leading universities in the English-speaking world.
John Micklethwait and Adrian Wooldridge tackle the question of state-capitalism head-on in their book The Fourth Revolution. They are very pessimistic about the West's liberal democratic model. The economic crisis is only the tip of the iceberg; there are, according to them, more fundamental problems that make the Western state unsustainable in the long-term. At the economic level, the aging of populations and extended life-spans mean that states will be liable for the health and pension costs of people who retire in their sixties and are likely to live into their nineties. This amounts to up to three decades of being dependent on the welfare state, a length of time that was not envisaged by the creators of publicly funded social services who assumed that retirement would be much shorter. This is exacerbated by the shortage of workers who will pay the taxes to fund these programs. When the welfare state expanded in the fifties and sixties, there were eight tax-paying workers for every senior. That ratio is now approaching two to one. Immigration is helping to plug this hole, but even that is not enough balance the implicit liabilities of many states. There are also, according to the authors, political pressures that are creating the need to restructure the state. Polling data indicates that most Westerners want the state to take on more and more responsibilities even while they simultaneously are unhappy with most elected officials. Favourable views towards politicians have never been so low, and yet these same voters want politicians to take care of them from cradle to grave; this creates a tension that is potentially destabilizing. Lastly, and perhaps most convincingly, are the pressures emanating from the international system. Globalization has unleashed a ruthless competition for investment and trade and economic growth. Large and growing economies are among the main elements of national power, and these things increasingly depend on the capacity of countries to attract capital and to produce goods cheaper than others. It is this that has been largely responsible for the decline in manufacturing in the West, where firms have production costs that are much higher than those in developing countries. These three pressures--economic, political, and international--mean, according to Micklethwait and Wooldridge, that the Western state must either reform or slide into bankruptcy, and if the latter happens, it will represent the triumph of the state-capitalist model.
The authors do not lay the blame on any one political faction; in fact their ire is directed towards both the centre-left and centre-right, since both have increased the powers of the state. The right has increased expenditure on the military and security apparatus, while the left has allocated more resources to social services. Both camps have been unable or unwilling to confront various lobbies and interest groups that increase the states' liabilities. For example, medical doctors who prevent nurses from doing the same tasks at a much lower cost, or the housing/constructing industry which favours tax exemptions on mortgage payments (and hence reduces the cost of housing), or the myriad other interests that successfully lobby the state for some tax reduction or increase in spending or monopoly privilege that usually favours the well-off. Although The Fourth Revolution is unsparing in its criticisms of the Left and Right, the writers are unmistakably more critical of the Left and endorse a solution that is more consistent with the Right: a smaller state. However, they qualify this position with the argument that smaller does not mean less progressive. In fact they argue that the current state, which consumes almost half of GDP, is hardly progressive since taxes and spending tend to favour the rich (the deduction on mortgage interests is a good example of that). They believe that the state does have a role in protecting society's weakest, such as the very poor, old, and sick, but not the middle class. Here, they are endorsing a restructuring of the state along the lines of the state-capitalist model, which also avoids entitlements for the middle classes and tends to target spending only towards those who need it most. However, they reject the authoritarianism that seems to be a key feature of state capitalism. They want to preserve democracy even while recognizing that voters' contradictory wishes and the activities of interest groups are part of the problem.
The book has much that will satiate the thirst of the intellectually inclined reader. One is that it divides the history of the modern state into four broad and recognizable eras that give a clear sense of how the state evolved. The first era is signified by the work of Hobbes, who was the first to theorize political power as a social contract rather than deriving from the divine right of royalty. The second was defined by the Victorian liberalism of Mill, who aimed to promote liberty in the sense of being free from external control, and equality in the legal sense of no one having legal privileges deriving from lineage. Another reform promoted by the Victorians was the priority of meritocracy rather pedigree in the selection of bureaucrats. The third major change in the states' evolution emerged from from the work of Sidney Webb, who successfully changed the meaning of freedom from the classical sense to freedom from want. The definition of equality was also changed; it now meant equality of opportunity, and since not all people were born with the same opportunities, it was the states' role to create the conditions for humans to flourish regardless of whether they were the offspring of professionals or chimney workers. This provided the intellectual foundation for the welfare state that persists to this day. The era of the seventies and beyond, which many would call neo-liberal, does not, according to Micklethwait and Wooldridge, constitute a major epoch in the evolution of the state because, although views among political elites changed--as represented by the resounding victories of Thatcher, Reagan, and other right-wingers--the state itself did not change much, since it continues to tax and redistribute around the same amount now as it did then.
The book also has some statistics that give pause, such as the following: when one takes account of tax deductions and other hidden forms of spending, the US spends around 27% of GDP in social services, more than Italy and Denmark. Denmark! This challenges the stereotypes of the US as some neo-liberal paragon which supposedly contrasts with Europe's more social democratic model. Or this one: Singapore has better health and education outcomes than Western countries even though it spends under half of what the West spends on the same services. Singapore plays an important role in the book because it is such a successful model of state-capitalism: in the span of fifty years, it went from a being an economic backwater to one of the world's most developed countries. Not coincidentally, China has adopted Singapore's mix of authoritarianism, market-friendliness, and professionalization of political elites, and the success of China, coupled with its increasing influence, have made state-capitalism more attractive to many countries. It is now being adopted across Africa, the Middle East, and elsewhere where China is increasingly supplanting the US as the main trading partner and provider of aid and security.
Micklethwait and Woolridge say, as mentioned above, that the Western state must shrink if it is going to meet the challenge in this global struggle for supremacy. The authors recognize that this rather formulaic approach will have different applications in different countries. For some, privatizations will be more pressing, while increasing state power might be more relevant elsewhere. For example, they applaud Europe's single payer health-care system as preferable to the US's jumble of private insurance companies: it provides better health outcomes at a lower cost, implying that, at least in this area, the US needs more, not less, state power. Scandinavian countries get very favourable treatment in the book, and rightly so, since on many indices of well-being--competitiveness, social mobility and inclusion, public services, etc--they are at the top of the world rankings. What is more, the Nordics are successful even though their states are still large, consuming almost half of GDP.
The success of the Nordics points to a deep flaw in The Fourth Revolution. If the Scandinavian countries are a success, why not endorse their model rather than the classical liberal one? This raises a deeper question that there are no easy answers to: why are the Nordics more successful than others despite having a large state? My answer is that the quality of the state matters just as much, if not more, than the size of the state, in producing favourable outcomes. This is certainly one of the secrets of the success of Singapore, which recruits only the best into the public service, and it does this with salaries of up to two million dollars for leading bureaucrats. One also cannot ignore culture: a strong civic sense that Northern European countries are known for must play some role in the quality of the state in Scandinavian countries. This then leads to another conclusion. If the cultural and societal conditions for a competent state are absent, its size will not really matter; large or small, it will continue to produce dysfunction. Thus the notion that reducing the state will automatically produce sustainable growth is simplistic boilerplate. What matters more, it seems, are the societal and cultural conditions that produce both competent states and favourable economic outcomes. Unfortunately for policymakers, there are no easy solutions because these things cannot be exported: societies and their cultures are radically unique, reflecting distinct historical trajectories and contingent elements such as their geopolitical neighborhoods or former colonial masters. This makes it difficult to create formulaic political programs, such as the kinds proposed in The Fourth Revolution, that can be adopted anywhere and be expected to produce sustainable growth. Rather, each country, owing mainly to its uniqueness, must find its own path through trial and error. Those who find the right path will ultimately prevail in the struggle for economic supremacy that characterizes international politics.
Whether these policies were effective will not be addressed here; reasonable people can disagree on the extent to which, or whether, the expansive monetary and fiscal policies worked, or whether they have only addressed the symptoms and created the conditions that will only delay the day of reckoning. The crisis that rocked the Western world matters for another reason: it undermined the West's triumphalist proselytizing of the virtues of liberal democracy and enhanced the appeal of an emerging alternative. State-capitalism is a political-economic model that has several features that clash with the Western liberal state, in particular, it relies on the wisdom of meritocratically chosen central planners rather than democratically elected leaders to direct both the market and society. Democracy is shunned or contemptuously seen as short-termist and irrational, which supposedly contrasts with the long-term and enlightened decisions of non-elected central planners. At the same time, it is not socialist, since governments in state-capitalist countries aim to promote business and markets and embrace globalization. Their firms, although often state-owned, are run by professional managers with MBA's from leading universities in the English-speaking world.
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| Mao might be turning in his grave if he saw what China has become |
John Micklethwait and Adrian Wooldridge tackle the question of state-capitalism head-on in their book The Fourth Revolution. They are very pessimistic about the West's liberal democratic model. The economic crisis is only the tip of the iceberg; there are, according to them, more fundamental problems that make the Western state unsustainable in the long-term. At the economic level, the aging of populations and extended life-spans mean that states will be liable for the health and pension costs of people who retire in their sixties and are likely to live into their nineties. This amounts to up to three decades of being dependent on the welfare state, a length of time that was not envisaged by the creators of publicly funded social services who assumed that retirement would be much shorter. This is exacerbated by the shortage of workers who will pay the taxes to fund these programs. When the welfare state expanded in the fifties and sixties, there were eight tax-paying workers for every senior. That ratio is now approaching two to one. Immigration is helping to plug this hole, but even that is not enough balance the implicit liabilities of many states. There are also, according to the authors, political pressures that are creating the need to restructure the state. Polling data indicates that most Westerners want the state to take on more and more responsibilities even while they simultaneously are unhappy with most elected officials. Favourable views towards politicians have never been so low, and yet these same voters want politicians to take care of them from cradle to grave; this creates a tension that is potentially destabilizing. Lastly, and perhaps most convincingly, are the pressures emanating from the international system. Globalization has unleashed a ruthless competition for investment and trade and economic growth. Large and growing economies are among the main elements of national power, and these things increasingly depend on the capacity of countries to attract capital and to produce goods cheaper than others. It is this that has been largely responsible for the decline in manufacturing in the West, where firms have production costs that are much higher than those in developing countries. These three pressures--economic, political, and international--mean, according to Micklethwait and Wooldridge, that the Western state must either reform or slide into bankruptcy, and if the latter happens, it will represent the triumph of the state-capitalist model.
The authors do not lay the blame on any one political faction; in fact their ire is directed towards both the centre-left and centre-right, since both have increased the powers of the state. The right has increased expenditure on the military and security apparatus, while the left has allocated more resources to social services. Both camps have been unable or unwilling to confront various lobbies and interest groups that increase the states' liabilities. For example, medical doctors who prevent nurses from doing the same tasks at a much lower cost, or the housing/constructing industry which favours tax exemptions on mortgage payments (and hence reduces the cost of housing), or the myriad other interests that successfully lobby the state for some tax reduction or increase in spending or monopoly privilege that usually favours the well-off. Although The Fourth Revolution is unsparing in its criticisms of the Left and Right, the writers are unmistakably more critical of the Left and endorse a solution that is more consistent with the Right: a smaller state. However, they qualify this position with the argument that smaller does not mean less progressive. In fact they argue that the current state, which consumes almost half of GDP, is hardly progressive since taxes and spending tend to favour the rich (the deduction on mortgage interests is a good example of that). They believe that the state does have a role in protecting society's weakest, such as the very poor, old, and sick, but not the middle class. Here, they are endorsing a restructuring of the state along the lines of the state-capitalist model, which also avoids entitlements for the middle classes and tends to target spending only towards those who need it most. However, they reject the authoritarianism that seems to be a key feature of state capitalism. They want to preserve democracy even while recognizing that voters' contradictory wishes and the activities of interest groups are part of the problem.
The book has much that will satiate the thirst of the intellectually inclined reader. One is that it divides the history of the modern state into four broad and recognizable eras that give a clear sense of how the state evolved. The first era is signified by the work of Hobbes, who was the first to theorize political power as a social contract rather than deriving from the divine right of royalty. The second was defined by the Victorian liberalism of Mill, who aimed to promote liberty in the sense of being free from external control, and equality in the legal sense of no one having legal privileges deriving from lineage. Another reform promoted by the Victorians was the priority of meritocracy rather pedigree in the selection of bureaucrats. The third major change in the states' evolution emerged from from the work of Sidney Webb, who successfully changed the meaning of freedom from the classical sense to freedom from want. The definition of equality was also changed; it now meant equality of opportunity, and since not all people were born with the same opportunities, it was the states' role to create the conditions for humans to flourish regardless of whether they were the offspring of professionals or chimney workers. This provided the intellectual foundation for the welfare state that persists to this day. The era of the seventies and beyond, which many would call neo-liberal, does not, according to Micklethwait and Wooldridge, constitute a major epoch in the evolution of the state because, although views among political elites changed--as represented by the resounding victories of Thatcher, Reagan, and other right-wingers--the state itself did not change much, since it continues to tax and redistribute around the same amount now as it did then.
The book also has some statistics that give pause, such as the following: when one takes account of tax deductions and other hidden forms of spending, the US spends around 27% of GDP in social services, more than Italy and Denmark. Denmark! This challenges the stereotypes of the US as some neo-liberal paragon which supposedly contrasts with Europe's more social democratic model. Or this one: Singapore has better health and education outcomes than Western countries even though it spends under half of what the West spends on the same services. Singapore plays an important role in the book because it is such a successful model of state-capitalism: in the span of fifty years, it went from a being an economic backwater to one of the world's most developed countries. Not coincidentally, China has adopted Singapore's mix of authoritarianism, market-friendliness, and professionalization of political elites, and the success of China, coupled with its increasing influence, have made state-capitalism more attractive to many countries. It is now being adopted across Africa, the Middle East, and elsewhere where China is increasingly supplanting the US as the main trading partner and provider of aid and security.
Micklethwait and Woolridge say, as mentioned above, that the Western state must shrink if it is going to meet the challenge in this global struggle for supremacy. The authors recognize that this rather formulaic approach will have different applications in different countries. For some, privatizations will be more pressing, while increasing state power might be more relevant elsewhere. For example, they applaud Europe's single payer health-care system as preferable to the US's jumble of private insurance companies: it provides better health outcomes at a lower cost, implying that, at least in this area, the US needs more, not less, state power. Scandinavian countries get very favourable treatment in the book, and rightly so, since on many indices of well-being--competitiveness, social mobility and inclusion, public services, etc--they are at the top of the world rankings. What is more, the Nordics are successful even though their states are still large, consuming almost half of GDP.
The success of the Nordics points to a deep flaw in The Fourth Revolution. If the Scandinavian countries are a success, why not endorse their model rather than the classical liberal one? This raises a deeper question that there are no easy answers to: why are the Nordics more successful than others despite having a large state? My answer is that the quality of the state matters just as much, if not more, than the size of the state, in producing favourable outcomes. This is certainly one of the secrets of the success of Singapore, which recruits only the best into the public service, and it does this with salaries of up to two million dollars for leading bureaucrats. One also cannot ignore culture: a strong civic sense that Northern European countries are known for must play some role in the quality of the state in Scandinavian countries. This then leads to another conclusion. If the cultural and societal conditions for a competent state are absent, its size will not really matter; large or small, it will continue to produce dysfunction. Thus the notion that reducing the state will automatically produce sustainable growth is simplistic boilerplate. What matters more, it seems, are the societal and cultural conditions that produce both competent states and favourable economic outcomes. Unfortunately for policymakers, there are no easy solutions because these things cannot be exported: societies and their cultures are radically unique, reflecting distinct historical trajectories and contingent elements such as their geopolitical neighborhoods or former colonial masters. This makes it difficult to create formulaic political programs, such as the kinds proposed in The Fourth Revolution, that can be adopted anywhere and be expected to produce sustainable growth. Rather, each country, owing mainly to its uniqueness, must find its own path through trial and error. Those who find the right path will ultimately prevail in the struggle for economic supremacy that characterizes international politics.
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