In a January issue, the lead article of The Economist was “The Rise of State Capitalism”, featuring China as its leading example, of course, with comparisons with the recent problems in the world’s free-market systems suggesting that “the era of free-market triumphalism has come to a juddering halt”. But in all objectivity, after careful analysis, in the end the long essay arrives at the wise conclusion that state capitalism’s biggest failure has to do with liberty.
I would add that we are certainly seeing serious problems in China as a result of this void in liberty, both in human and economic terms, and the most significant deficiency in the state economic model is the absence of Joseph Schumpeter’s principle of “creative destruction”, the bane of all state capitalistic models, which deprives the system of the natural function of rewarding success and disposing of failure and replacing old technologies with new ones, thereby rationalizing the allocation of capital. In fact, The Economist admits this in an indirect way, when it says “By turning companies into organs of the government, state capitalism simultaneously concentrates power and corrupts it.” A related deficiency is that this concentration severely limits the free flow of ideas which drive innovation. So as long as China disallows creative destruction to work its will, the days of its economic miracle are numbered, and when the bust comes and its corrupt system of crony capitalism hits the wall, as it most assuredly will, the good news will be the further discrediting of the state capitalism model one more time.
And it will further signal the day when it will no longer be possible to segregate the dynamics of the liberty of markets and human liberty, which is the elephant in the room in our diplomatic relationship with China. The Chen affair is but the most recent manifestation of their moral dilemma and the trade off between human rights concerns and the need for open U. S. – China diplomatic dialogue. President Obama says that “human rights are on the table in every conversation” with China. Yes, but they are not pushed, and the elements of our relationship with China need not be mutually exclusive. Ronald Reagan advanced both elements of our relationship with the Soviet Union forcefully and vocally–“the evil empire”, “tear down this wall”, etc. It can and has been done successfully.
The leadership of the Chinese Communist regime has serious legitimacy problems, they know this, and they don’t know how to respond to the human rights issues as framed by a dissident like Chen without further undermining their legitimacy, but it’s only a matter of time until this facade crumbles.