“Authoritarian Capitalism v. Liberal Capitalism”
1. Introduction
The rise in prominence of China, and the ongoing economic strength of the cities of Singapore and Hong Kong, has caused a new question to be asked: does the kind of capitalism practiced by such countries constitute a real challenge to traditional capitalism? These countries are characterized by increasing economic freedom, but within a system that is largely politically and civilly not free. While the nature of the truncation of freedom varies, the question is rather deep: to what extent does political and civil freedom matter for economic development? My intention is to show logically the importance of full freedom and to illustrate that so-called authoritarian capitalism is not a viable alternative to the traditional Western liberal capitalism.
I begin by elaborating on some definitions of Western liberal capitalism and authoritarian capitalism. The former is defined as a system in which the individual is completely free to deploy his or her resources in whatever manner desired. The latter is a system in which individuals are free to deploy their resources in a limited way. For example, one may work at whatever job is desired, but the work available is limited by the overarching plan designed by the government. Generally, under authoritarian capitalism, any endeavor that does not fit into the grand plan of the state would be proscribed. Our definitions will focus on the ‘pure’ form of each type of capitalism, and it should be recognized that, in reality, no pure form of Western liberal capitalism currently exists.
After defining the two forms of capitalism, I will discuss the factors necessary for economic growth and development. Among these, I argue that the critical difference between the two types of capitalism is the human capital factor. The skill of entrepreneurship is required to arrange, and rearrange, economic resources into their most productive structure. My argument is that entrepreneurship will first be underdeveloped, and second may take a different form, in an authoritarian system than in a liberal capitalist system. This will result in a gap between the actual entrepreneurial ability in an authoritarian system than in a liberal system, and this gap will cause economic growth to lag in an authoritarian system.
I conclude with some empirical data on growth rates in the two types of countries discussed here. My findings indicate that GDP growth is highest in liberal capitalist countries, but second highest in authoritarian capitalist countries. Nevertheless, the gap in development has increased over time. Also, authoritarian capitalist countries tend to become less authoritarian and more politically free over time. Thus, the staying power of an authoritarian capitalist system is in doubt.
The authoritarian capitalist system is a poor version of the liberal form of capitalism. Because the former fails to fully use the human capital, and thus causes human capital to atrophy in some areas, the authoritarian system’s growth will always lag the growth of a free capitalist system. Thus, authoritarian capitalism is not a viable alternative to Western liberal capitalism.
2. Defining capitalism – the Western liberal version.
Capitalism, as defined by George Reisman in his economics text “Capitalism,” (Reisman 1998) is a system of societal organization that is based on property rights, especially the private ownership of “the means of production.” In a capitalistic society, people are free to pursue their own ends and to manage their own resources as they see fit. There is no coercion by any central authority. All trade is voluntary, and so mutually beneficial. Thus, the foundation of Western liberal capitalism is private property. The core of private property is the self, so that any labor that is deployed is an extension of one’s self.
Insofar as one is the owner of one’s labor, and trade must be voluntary, in a pure capitalistic system the only method of building up productive assets is through voluntary combinations of the labor and existing physical capital that exist and are owned by people. The essential problem faced by people engaged in production is the organization of labor and capital in such a way is to produce goods and services that are demanded by other people. This problem of organization can be solved by appeal to a system of prices that is sensitive to the relative demands of people. Thus prices reveal peoples’ relative subjective valuations of various goods and services, and production is adjusted accordingly. As long as a good or service is traded, it carries a price.
The system of free market capitalism demands the growth of a particular skill – entrepreneurship. For reasons that will become clear later, this type of entrepreneurship will be labeled economic entrepreneurship. Those individuals who are skilled in economic entrepreneurship will have the ability to arrange labor and capital in particular ways so as to produce those goods and services desired by people in the most efficient way possible, which will yield the largest profit. So profit is the entrepreneur’s guide, including expected future profit. Changes in profit will lead the skilled economic entrepreneur to continuously rearrange labor and capital to maximize profit. Failure to arrange the means of production effectively will lead the entrepreneur to try again until success or exhaustion, and so we have the process of continuous improvement.
While some will suggest no government is consistent with a pure capitalistic society and so advocate for anarcho-capitalism, others believe representative democracy is consistent with capitalism, as long as the role of government is limited. The view of government’s rightful role is diverse, even within the Austrian school of economics. (Callahan 2004)
3. Authoritarian capitalism
An authoritarian government is a government that exercises a great deal of control over the citizens of a particular nation, while some room for private choice may exist. One might call such a government “the state.” According to Ludwig von Mises (von Mises 1980), in an authoritarian system, all people must obey the plan of the state. The primary characteristic is obedience; subservience of the people and the primacy of the state. Prime examples of authoritarian governments are the former USSR and Nazi Germany. In an authoritarian government, people operate under the rule of man, whereas in a pure capitalistic society, people operate under the rule of law.
Initially, the idea of ‘authoritarian capitalism’ seems oxymoronic, since how can there be entrepreneurship in an authoritarian environment? However, if the term is understood as a hybrid model, then one can see this as an environment that has a strong government that often directs its people in certain ways, but that allows the people a certain measure of freedom in the deployment of their resources. In other words, an authoritarian capitalist environment would have economic control shared between government and the people, with the lion’s share of control held by government.
Key to understanding how the role of the state plays out in business is the level of interference by the state and its relationship to the size of the business. Based on discussions with entrepreneurs in China and other similar countries, one surmises that the freedom to conduct business on a small scale is complete, as is the freedom to advertise. Such freedoms are limited in the United States, for example, by the requirement for various vending licenses and limitations on advertising methods for certain products like alcohol and tobacco.
However, while interference by the state may be more or less equal in a country like the U.S., in a country like China interference really begins in earnest once a business becomes large enough to be ‘noticed’ by the state. Then, the interference becomes more direct and is not equally applied (McGregor 2010). Thus the key difference between authoritarian capitalism and liberal capitalism is the extent to which firms must align their behavior with the overall state plan for the economy.
At this point, it makes sense to point out that capitalism is a system of free markets. It assumes free men and women. A critical aspect of freedom is a person’s right to work at whatever he or she chooses (F. von Hayek 1978 Paperback Edition). In an authoritarian environment, these choices are likely strictly limited by the state. In a free society liberty does not mean the ability to whatever is desired. It does mean that your choices are not limited through threat of violence, and that is the case in an authoritarian environment. Thus, one cannot speak of “authoritarian capitalism” and assume capitalism to be meant literally. We are clearly dealing with a new concept in which people are not free in the classic (Hayekian) sense.
This is not to say that individual workers may not leave jobs in order to pursue other opportunities. In fact, it appears to be the case that workers are relatively free to work at whatever opportunity best suits them in these authoritarian capitalist countries. This makes it seem as though labor is free but this is a truncated freedom. The breadth of opportunities, and depth in a hierarchical sense, is limited by the state. Thus, while one may take any job available, the jobs available are a subset of what would be realized in a completely free capitalist system. The depth one may go, in a “climbing the corporate ladder” sense, is also limited due to political pressure. For example, in China, the leaders of the large firms are also typically high-ranking members of the Communist Party (McGregor 2010).
On seeing the above definition of authoritarian capitalism, one immediately thinks of China, the second largest country in the world by GDP. The first, of course, is the United States. While the US is far from a pure capitalistic environment, it is the symbol for free markets. China, of course, is an authoritarian regime that has slowly loosened the shackles on its people and has experienced enormous economic growth as a result. The Chinese experience, and other similar experiences, makes the concept of authoritarian capitalism intriguing. But is it a viable alternative to traditional Western capitalism?
4. On the Nature of Economic Growth
First, economic growth must be defined. Is it an increase in national output? What about employment? What about household economic opportunity? In a pure capitalistic system, one may define economic growth as an increase in total wealth of the people of a nation. In the spirit of this essay, that definition will be maintained throughout.
Thus, the question is: how is total wealth increased? Studies of economic growth abound. A search of Google Scholar yields upwards of 900,000 hits. A highly influential article by Robert Barro (Barro 1991) contains the following insights. Political stability is, of course, an absolute necessity for economic growth. Also relative poor countries can demonstrate higher growth rates than relatively well-developed countries. This is attributed to the fact that there is considerable opportunity for the development of physical capital, which will allow productivity to increase more rapidly than countries whose physical capital is already well developed.
Human capital is a strong predictor of future growth, especially if the current level of economic development is below the potential implied by the human capital. This would occur if some restrictions on the use of human capital were in place, as was the case in the former USSR. As restrictions on human capital are reduced, it can find more productive allocations and thus growth and development will increase.
As already alluded to, there must be some physical capital to which the human capital may be applied. Thus, investment is a very important factor for economic growth. However, the more government consumption spending there is in proportion to the output of the entire economy, the less growth one can expect in the future. Note that government investment does not appear to have much impact (Barro 1991).
Barro’s work also includes two measures of the political environment. He categorizes economies into socialist, mixed, or primarily free enterprise. This is done in a subjective manner, but results indicate socialist countries experience negative growth, mixed countries no growth, and free enterprise positive growth, controlling for all other factors.
One factor not modeled by Barro but that is obviously critical to growth is openness to trade. This allows countries to specialize in production, but also facilitates the transmission of human capital and knowledge.
A key to understanding the issue discussed in this essay is the type of human capital being developed. Human capital is clearly not homogeneous. As such, a particular type of human capital must be defined in this context: entrepreneurship. Entrepreneurship is the skill set used in organizing productive forces to create goods and services, and the skill to rearrange productive forces continuously so as to keep finding the most efficient methods of production.
Entrepreneurship so defined is economic entrepreneurship. Such is the type of skill that, in a pure capitalistic environment, will determine the pace of development and growth. The alternative type of entrepreneurship, the type which is necessary for arranging productive forces in an authoritarian environment, may be labeled political entrepreneurship. (Henninger 2010)
The political entrepreneur specializes in navigating political circles and negotiating with the state in order to arrange productive forces. These productive forces are arranged in a circumscribed manner, being that options are limited to those allowed by government. In an authoritarian government, these options are necessarily constrained. So the political entrepreneur does not have the skill to organize productive forces to first create products desired by consumers, and second to continuously rearrange productive forces to maximize efficiency and meet changing tastes of consumers.