China and Authoritarian Capitalism

Sydney, Australia. Today I gave a lunchtime speech on the paper I wrote for an essay contest. If you'd like to get an idea of my argument on China and authoritarian capitalism, you can read my brief remarks that follow:

Good Afternoon. The question for this year’s essay competition was “Is authoritarian capitalism a viable alternative to its Western liberal vision to promote long term growth and development.” To answer this question, I focused primarily on China, a country that denies its citizens political liberties but has had incredible success in promoting economic growth. I concluded that authoritarian capitalism is not a viable alternative to the Western liberal model, and will outline a couple key points I made in my paper.  

I argue first that political and economic freedoms rely on each other. It is unclear how “free” China’s economic system really is. Regulatory hurdles to register companies and small businesses are opaque, for example, and negotiation rather than competition governs business practice. Business owners within China say that “capitalism” doesn’t describe the system well at all since competition, private property, and independent wealth creation are not highly valued. As Milton Friedman points out in Capitalism and Freedom, where effective freedom of exchange is not maintained, the central feature of market organization is void. Where there are no political freedoms, there can be no real long term economic growth because a free economy gives people what they want instead of what a particular group thinks they ought to want. 

The main argument I make in my paper, however, is that a decentralized state structure is a necessary condition for the maintenance of technological leadership through innovation, and that without the framework in place for such innovation, a nation-state will decline in the long term. Historically, a great power has gained hegemonic status via a near-monopoly in leading sectors. 

To be specific, innovation has been described as one of three types of activities. It could be the introduction of a new product or a new quality of an established good. It could be the introduction of a more efficient production process, or it could be the introduction of a new organizational type for production and/or distribution. 

For countries on the technological frontier, a centralized state structure will lead to policies that retard innovation since a central actor is responsible for public investments into innovation. This leads to decisions biased towards status quo interest groups. In addition, centralized states tend to stick with bad policies even as their utility declines while decentralized states reward innovation and welcome experimentation. 

If China wishes to remain competitive under it’s current model, it will have to devise a way to promote innovation without ceding their hold on political liberties. It will have to create basic frameworks and foundations that promote free-thinking, and invest in basic public goods that are related to innovative activity.  

A market economy must be comprised of free actors who work to maximize profits in a variety of ways. The authoritarian capitalist model allows this to an extent, but its increasingly interventionist undertakings will diminish its productivity in the long run. Finally, if China and other authoritarian capitalist states believe that creativity and free thought is a menace to power, they will likely suffer the consequences of their insecurity in the long term. 

As someone said earlier this morning during the sessions, in order for people to flourish, freedom needs to be more than a vehicle for economic consumption.

If you're interested in reading the entire paper, send me a message and I'll be happy to pass it along.