Every time Republicans smugly say “COMMUNIST China,” they win brownie points from their voters, but the Chinese laugh at this demagoguery. Why? Because, China’s economic model is actually based on the 19th century classical Western economics. Unless America understands this, it will keep losing to China.
Doubt it? Compare the GDP growths of China and U.S.A. from 1992 to 2020. China beat America every single year, often by astonishing margins.
It’s time to unlearn everything you know about free-market capitalism. If a football team wins the Super Bowl thirty years in a row, would other teams study the champion’s strategy?
China disavowed the communist model forty years ago. China’s contemporary economy is modeled after Germany’s 19th century system, which can be described as state capitalism or industrial socialism. This hybrid economy led to immense prosperity and made Germany the biggest European economy within a few decades.
Why German Industrialists Sought Partnership with Government
Necessity is the mother of invention. Because of its non-colonialist past, Germany in the beginning of the 19th century was forced to devise a new economic paradigm. Empires of Spain, Portugal, Netherlands, and Britain became very wealthy, very fast by looting gold and silver – global currencies those days – from the Americas.
Germany was 400 years behind its European neighbors and was vulnerable to invasion. Worse, young Germans were starting to emigrate to the USA to seek better lives. Germany was in a precarious situation.
German industrialists were confident that they could catch up on technology and grow the economy, but labor and raw materials were too expensive. While Britain could use slavery or slave-like labor in India, Africa, China etc., German corporations obviously couldn’t do that to their fellow citizens. German elites realized that they needed a whole-of-a-society approach. Industrialists, banks, and the government got together and devised a new strategy.
Germany’s State Capitalism or Industrial Socialism
Germany’s solution was industrial socialism or state capitalism. You can also call it industrial capitalism. Doesn’t matter. In this hybrid system, the government took on some of the capitalists’ burden, which allowed German industries to focus on core competence, produce competitive goods, and increase exports.
First, the government subsidized or took ownership of basic industrial necessities such as infrastructure, mining, transportation, electricity, water etc. Without worrying about profit, the government provided these services in a cost-effective manner. Second, these public services also lowered the overall cost of living. Other services such as free public education helped not only the average family, but also corporations which benefited from a vast, educated labor force.
These “socialist” programs were so successful that Germany became the first country in the world to offer universal health coverage in 1883! Corporations also loved it, since it freed them from providing healthcare and enabled them to focus on innovation, productivity, profitability, and market share. While the taxes went up, the net profits grew much more – paying 50% tax on $100 is better than paying 10% tax on $20.
German banks also adopted symbiotic partnerships with industries. In Britain, banks were concerned about short-term profits and large dividends for shareholders. The German banks, on the other hand, became shareholders of companies and said, “Don’t worry about short-term profits. Focus on making the best products. And rather than giving out large dividends, reinvest your profits in building more factories, employing more people, and producing more goods.”
German corporations also formed alliances – or “cartels” as they would now be called disparagingly – that helped optimize their collective efforts.
This combination of state socialism and industrial capitalism enjoyed unprecedented success. By 1900, Germany surpassed Great Britain as the largest economy in Europe.
It was win-win-win for corporations, workers, and the government.
Germany’s success led to its own economic philosophy called the “Historical School of Economics,” which was contextual, pragmatic, and less ideological.
Communist China Follows Classical Western Economics
What an irony that China is now demonized for following the suggestions of great western minds! China provides free school, free college, free basic healthcare, affordable (and world-class) transportation, inexpensive utilities, cheap raw materials etc., which enable Chinese corporations to become prolific manufacturers and exporters. People-oriented development is the cornerstone of industrial socialist policy. (Click here to see a collage of Chinese infrastructure – airport, library, bookstore, theater, skyscraper, bridge, subway train and more).
Consider these two exemplary cases: The state-owned enterprises (SOE) in China build cutting-edge internet infrastructure and make it inexpensive, which allows smartphone companies and e-commerce firms to flourish. Obviously, the common people also benefit from low-priced internet and mobile phone services – the latter costs about $6 a month. The result? China accounts for 70% of world’s 5G base-stations and staggering 80% of world’s 5G mobile phone users. China’s e-commerce retail market is larger than those of the U.S. and Europe combined. Similarly, the Chinese government plays an active role in building EV charging stations, which in turn has helped Chinese electric car companies to grow rapidly and capture 40% of the global market share. In my new book, China, China, Chyyna – Greatest Disruption to American Century, I provide myriad statistics on China’s global leadership in technology, infrastructure, scientific publications, patents and more.
Moreover, just like the 19th century German banks, the Chinese banks are focused on industrial growth and investment. They also provide financing for long-term infrastructure projects. No wonder that China can build 38,000 km of high-speed rail in a decade and execute colossal projects for the Belt and Road Initiative in 130 countries. In the U.S., most bank loans are for mortgages, which only make housing unaffordable and blow-up speculative bubbles.
China’s “Made in 2025” is a good example of industrial policy. While the U.S. vilified it as unfair government subsidies that violate WTO rules, the Biden administration announced a new $2 trillion infrastructure plan. Talk about hypocrisy! There is however a big difference: In China, the government establishes tangible goals for corporations that get subsidies – for example, “40% of new cars should be electric by 2030”; while Biden’s plan does not seem to demand such accountability.
No economic system is perfect. The pressure on Chinese leaders to meet GDP goals encourages white elephant projects. Kickbacks and bribes for government officials are also common. However, China has been cracking down on corruption and emphasizing high-quality growth.
America’s Predatory Capitalism
For the last forty years, America has been taken over by financial capitalism that is predicated on privatization and financialization. The U.S. economy is run by Wall Street and bean counters, who care nothing about investment, production, wage growth, or social welfare. America’s FIRE economy – Finance, Insurance, and Real Estate – and casino capitalism generate inefficiency, extreme inequality, and boom-bust economic cycles. In China, billionaires and financial gurus are kept on a tight leash, which is why China hasn’t had a single recession or a financial crisis in forty years.
Financial capitalism distorts every industry – healthcare, education, prison system etc. – by turning them into predatory profit machines. Privatization of military is also why we have endless wars and perpetual enemies. It’s shameful that we spend 18% of the GDP on “health” care and create debt serfs out of college graduates. In China, virtually nobody graduates with student debt. And the Chinese government has managed to provide free basic healthcare to all of its 1.4 billion people. When Big Pharma drooled over the Chinese market, the CPC (not “CCP”) negotiated a 90% discount on essential, life-saving drugs.
The S&P 500 companies in the United States spent whopping $5.3 trillion on stock buybacks between 2010 and 2019, pushing the stock market up 300%, which benefits only the ultra-rich. All these trillions could have been used to increase R&D spending, innovate new technologies, hire/train millions of Americans, and raise wages substantially.
Hedge funds and private equity firms simply buy, loot, and kill many American corporations. This parasitic behavior is glorified as laissez-fair economics. There are virtual monopolies and oligopolies in most American sectors because they are more profitable for the financial overlords and shareholders. However, when U.S. corporations lose out to China, the libertarians run to daddy, the U.S. government, and plead for sanctions on Chinese firms.
On the other hand, the Chinese model cultivates more entrepreneurship, resilience, and competition. For example, while the U.S. has one smartphone company (Apple), China has Xiaomi, Oppo, Huawei, Vivo, OnePlus, Tecno etc. While the U.S. has one dominant electric car company (Tesla), China has BYD, NIO, XPeng, Wuling and dozens more.
When Marco Polo visited China in the 13th century, he was astonished by paper currency and struggled to describe it to Italians back home. Chinese had invented many remarkable things such as compass, gunpowder, paper, printing press, silk, porcelain etc. and had mastered impressive infrastructure projects. Chinese ships were ten times bigger than the one Columbus had sailed in. Soon, Chinese emperors became arrogant, assumed they had nothing to learn from others, and missed the transformative industrial revolution.
America now exhibits similar hubris, entitlement, and parochial attitude. This is a dangerous inflection point in American history. America must acknowledge its systemic problems and implement structural reforms that curtail financial capitalism and embrace smart industrial policies. There should be concrete objectives and unwavering dedication to expand the middle class, raise wages for all, eradicate poverty, foster a low-cost society, and invest in critical areas such as infrastructure, education, and research. If not, the U.S. will inevitably follow the Qing Dynasty’s path into oblivion.