Wednesday, July 14, 2010

My Letter to National Review re: State Capitalism

Subject: State Capitalism
Date: Wed, 14 Jul 2010 11:10:40 -0400

Re: Perils of State Capitalism

Dear Sirs:
In Mr. Gordon G. Chang's excellent review of The End of the Free Market: Who Wins the War Between States and Corporations? by Ian Bremmer, Mr. Chang points out that state capitalism weakens markets.

"They (the despots and dictators) can, for instance, buy off elites by granting them monopolies and placate populations with the prosperity this system can generate. By bending markets, however, rulers ultimately make them less efficient. Over time, state-capitalist systems erode."

A better explanation is that by "bending markets" the authoritarian governments consumer capital or, at a minimum, prevent its accumulation even to the small extent needed to maintain the current capital base. For awhile an economy can display the appearance of prosperity as capital is spent on bailing out unprofitable businesses and sustaining those industries, like housing, that are already over-built. This is the destructive Keynesian prescription adopted by all the world's leading governments right now in their misguided attempt to "stimulate" the economy out of recession. But economies cannot be stimulated out of recession; they must liquidate the previous malinvestment and replenish the capital base upon which to build a new, true recovery. This requires savings--so spending must be reduced, not increased. Reduced spending will result in lower prices, the dreaded "deflation" that governments under the spell of Keynes vow to fight. But deflation is part of the cure--the inflationary bubble has burst and good riddance to it. The world's economies will not recover until governments cease their fruitless interventions.

Patrick Barron


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