Does Capitalism Need Democracy to Survive?

Brad DeLong finds Robert Reich thinking more about China:

What Is China?: Bob Reich tries to think about what China is:

China: Capitalism Doesn't Require Democracy : by Robert B. Reich: You may remember when the world was divided between communism and capitalism, and when the Chinese were communists. The Chinese still call themselves communists, but now they’re also capitalists. In fact, visit China today and you find the most dynamic capitalist nation in the world. In 2005, it had the distinction of being the world’s fastest-growing major economy.

China is the manufacturing hub of the globe. It’s is also moving quickly into the highest of high technologies. It already graduates more computer engineers every year than the United States. Its cities are booming. There are more building cranes in use today in China than in all of the United States. China’s super-highways are filled with modern cars. Its deep-water ports and airports are world class. Its research and development centers are state of the art. At the rate its growing, in three decades China will be the largest economy in the world.

Communist, as in communal? Are you kidding? The gap between China’s rich and poor is turning into a chasm. China’s innovators, investors, and captains of industry are richly rewarded. They live in luxury housing developments whose streets are lined with McMansions. The feed in fancy restaurants, and relax in five-star hotels and resorts. China’s poor live in a different world. Mao Tse Tung would turn in his grave. So where are the Chinese communists? They’re in government. The communist party is the only party there is. China doesn’t have freedom of speech or freedom of the press. It doesn’t tolerate dissent. Authorities can arrest and imprison people who threaten stability, as the party defines it. Any group that dares to protest is treated brutally. There are no civil liberties, no labor unions, no centers of political power outside the communist party.

China shows that when it comes to economics, the dividing line among the world’s nations is no longer between communism and capitalism. Capitalism has won hands down. The real dividing line is no longer economic. It’s political. And that divide is between democracy and authoritarianism. China is a capitalist economy with an authoritarian government.

For years, we’ve assumed that capitalism and democracy fit hand in glove. We took it as an article of faith that you can’t have one without the other. That’s why a key element of American policy toward China has been to encourage free trade, direct investment, and open markets. As China becomes more prosperous and integrated into the global market -- so American policy makers have thought -- China will also become more democratic. Well, maybe we’ve been a bit naive. It’s true that democracy needs capitalism. Try to come up with the name of a single democracy in the world that doesn’t have a capitalist economy. For democracy to function there must be centers of power outside of government. Capitalism decentralizes economic power, and thereby provides the private ground in which democracy can take root. But China shows that the reverse may not be true -- capitalism doesn’t need democracy. Capitalism’s wide diffusion of economic power offers enough incentive for investors to take risks with their money. But, as China shows, capitalism doesn’t necessarily provide enough protection for individuals to take risks with their opinions.

I am not sure that he is right. I need to think harder about the relationship between China's upper economic class and its upper political class.

Yes, the long-run stability of the Chinese system is at issue - it is not yet clear to me that the current authoritarian/patronage model is sustainable. See Politics, Economic Reform, and Social Unrest in China, The Mountains Are High and the Emperor is Far Away, Stiglitz: China's Roadmap, and The Dark Side of China's Economic Boom for recent related posts.

Comments

[dryfly]

I just got an 'invite' to watch a China Logistics Web Seminar later this week... some snipets from their PR release:

In his keynote address, Stalk will discuss how organizations can survive the “riptide” that is sweeping companies into a headlong rush to source from China. Based on his extensive work in this area Stalk will set forth a different approach—a way to turn the riptide threat into an opportunity—by reducing time and variability in the China supply chain.

[...]

With forecasts of superlative economic expansion, aggressive infrastructure development, increased foreign investment, and continued advantageous operating and labor costs, there’s little doubt that China will continue to be an intriguing trading partner for U.S. companies for years to come. But there is much U.S. shippers need to understand about the current logistics landscape before they can continue to successfully expand their supply chain operations to tap into the rich manufacturing possibilities the region has to offer.

[...]

When so much about China’s economy is changing so fast, it’s understandable if logistics managers are struggling with how to plan optimal routes in and out of the country. That’s especially true when it comes to considering which ports to use. With the steady increase in container traffic, investments in port infrastructure continue to pour in, increasingly from private funds—but China’s government is well aware of the important role it must play in this area. In this session, logistics managers will receive the definitive overview of where each of China’s major ports stands in terms of investment, improvement, and future growth.

Yup, Mao would turn in his grave.

[Vergil]

It's not capitalism that suffers in a totalitarian state, it's the people. Capitalism doesn't need democracy because capitalism has no morality to it. It can flourish under any system, really. However, society - i.e. people - will do much better under a democratic system than a communist one. We the people need democracy. Capitalism is just a blunt weapon for serving the people, and can be held and used by anybody. So while capitalism and communism seem to cohabitating in Beijing, I don't expect it to last. The revolution will come, rest assured.

[Richard]

Try to come up with the name of a single democracy in the world that doesn’t have a capitalist economy

Yup, especially if your model of development is limited to the OECD nations.

But substitute "communitarian" for democracy, and use the Geni index and health statistics as your rating criteria (as opposed to per capita income) and a few other nations might show up on the screen.

Suppose a country is not democratic but does have low Geni figures and has widespread legitimacy througout the nation. It may not be democratic, but it isn't a tyranny or despotism in the usual sense of the word, either.

[NinjaPlease]

I'd look at South America as an example of where the USA is headed in terms of government & economics, specifically Brazil and Argentina.

Fun Fun Fun till vivendi takes the water rights away.

[dryfly]

I'll believe the China capitalism-sans-democracy model is 'stable' when they manage their way through their first major recession. If they do that without a capitalist version of the cultural revolution then they are for real. Until then its all conjecture.

[piglet]

What do you guys think about the book "Empire of Debt: The Rise of an Epic Financial Crisis"? Anybody who read it?

[Miguel]

"But China shows that the reverse may not be true -- capitalism doesn’t need democracy"

China does not show that, because Pinochet, Salazar, Franco, Baptista, Duvalier, Ferdinand Marcos, Somoza, Hitler, Mussolini, Napoleon, Bismark, Chang Kai-Shek (well, these is also China...), etc.,etc.,etc., already showed that many years ago.

Saying that "Capitalism doesn't require democracy" is like saying "the Sun brights at day" - what are the news?

[realpc]

We don't know what will happen as increasing numbers of Chinese become educated. They might start longing for free access to diverse sources of information, and for legal rights.

Maybe the old Communist party leaders just have to die off. I don't think we can easily predict what will happen.

[johnchx]

The problem I see with the Reich article is his failure to define "capitalism." I think that the hard-core defenders of the nexus between democracy and capitalism would argue that China's economic system hardly qualifies.

If "capitalism" means nothing more than the existence of (a) rich people and (b) tangible capital (all those cranes and the buildings they're constructing), then sure, China is "capitalist." I suppose the distinguishing feature, vis-a-vis the industrialization of the USSR under Stalin, for example, would be the rich people. There weren't many Soviet millionaires on magazine covers in Stalin's day. But are flashy, well-publicized millionaires really the defining feature of capitalism?

I'd expect a "nexus supporter" like Friedman to argue that "capitalism" implies a system in which private capital markets control access to capital on the basis of estimated risks and returns. If government plays a major role in allocating capital, call it what you like, but it isn't "capitalism" in their book.

In this view, "crony capitalism" is a misnomer. It should be called "crony socialism."

Personally, I think it's very difficult to say -- from the outside -- how much "capitalism" exists in China today. My understanding is that the state banking system is still very much in the business of pouring capital into languishing state enterprises. In addition, we know that lots of "stuff" is being built, but we don't know how much of it will turn out to be good investment, yielding enough income to repay the capital consumed.

At the moment, the government's priority seems to be to keep as many people as possible as busy as possible, whether their efforts produce any net value or not. I have to say that it's a policy that makes me nervous.

[James Killus]

"For years, we’ve assumed that capitalism and democracy fit hand in glove."

Given the supremely ambiguous nature of typical usage of "capitalism" and "democracy," isn't that rather like having a hand (an invisible one, no doubt) that can expand and contract into an elastic glove?

I suspect that the Soviet Union dissolved more from the boredom of the ruling class (who had some knowledge of the outside world and knew it was more interesting than what they lived in). It's an interesting question as to whether or not this dynamic will eventually apply to China.

[spencer]

What capitalism requires is "effective" government.

Developed countries all show some combination of
private capitalist markets and good government.
Moreover, it is not just the size of government or government just providing a minimal rule of law. It is government providing good public capital to complement the private capital.

But we have numerous examples of where capitalism has not worked because of bad government and we have many examples of government without capitalism -- but they almost all seem to be bad governments.

But can anyone cite a single example of capitalism moving a country with bad government into the advanced world.

[donna]

Obviously the ideal capitalist government is fascist....

[Miguel]

«I'd expect a "nexus supporter" like Friedman to argue that "capitalism" implies a system in which private capital markets control access to capital on the basis of estimated risks and returns. If government plays a major role in allocating capital, call it what you like, but it isn't "capitalism" in their book.»

But, if we adopt a "strict" definition of "capitalism" like these, we can easily find "non-capitalist" democracies (some candidates: India under Nehru and Indira; Portugal 1976-1989), and the nexus "capitalism democracy" is again refuted.

[johnchx]

Miguel wrote: "But, if we adopt a 'strict' definition of 'capitalism' like these, we can easily find 'non-capitalist' democracies (some candidates: India under Nehru and Indira; Portugal 1976-1989), and the nexus 'capitalism democracy' is again refuted."

Good point. I think that a "nexus" advocate would question the quality and durability of democracy in such countries. And that raises the question of whether "democratic socialism" is a contradiction in terms. Countries like India (in the period you reference) raise a fundamental "conflict of visions" between libertarians and democratic socialists.

Consider a country that has a plebiscitary democracy, but whose government plays a major, direct role in the operation of the economy. The democratic socialist sees a government controlled by its people (via elections) through which the people gain a measure of control over the whole economy. The libertarian sees a government whose control over much of the economy gives it the power to subvert the electoral mechanism and effectively nullify popular control.

The "nexus" supporters, of course, tend very much to side with the libertarian vision of the power dynamics in this situation. For them, substantial direct government control over the economy constitutes -- at minimum -- a constant threat to the democracy itself. Limiting the government's role in running the economy -- i.e. instituting "real" capitalism -- thus becomes an important safeguard for democracy.

Of course, democratic socialists have a different perspective: they see the economic power in private hands as just as much (or more) of a threat to the electoral machinery as it would be in public hands.

Alas, my own view is that both sides are right...as long as the technology exists to turn money into votes, effective democracy is in some degree of jeopardy.

[Dave Schuler]

I've seen estimates of NPL's as high as the Chinese GDP.

It seems relevant to remind everyone that China's economy is very reminiscent of the Soviet Union's economy in the 1930's when it was the marvel of the world. Much of China's growth has been achieved by improving agricultural efficiency and then moving the available labor to industrial production. Unless Chinese agriculture continues to become more efficient that can't drive China's growth forever.

[a]

Miquel:
"Chang Kai-Shek (well, these is also China...), etc.,etc.,etc., already showed that many years ago."

Good example. One that many Chinese in Mainland are looking at. Taiwan politics and elections are intensvely covered in Mainland.

realpc:
"Maybe the old Communist party leaders just have to die off."
That can also be the "true" solution. Don't under-estimate the power of death --- it gives way to something new.

[yartrebo]

It's inequality that subverts democratic republics and democracies. As a general rule, countries with high income and asset inequality or with rampant racism (both often come together) are run by oligarchies, dictatorships, monarchies, and the likes.

Unfettered capitalism and crony capitalism lead to inequality as wealth and power become concentrated. The US is a prime example of this.

For a democracy or a democratic republic to be stable both the people and the government must be sovereign. The media, government, and the economy must be accountable to the people, not big business or private interests. This means businesses should not be given political power, and both individuals and businesses should be limited as to how much wealth they can accumulate, as this in and of itself can and often is used subvertively.

[Dave Iverson]

Robert Reich says, "For years, we’ve assumed that capitalism and democracy fit hand in glove. We took it as an article of faith that you can’t have one without the other." Reich's "we" does not include Robert Heilbroner (along with many others I assume).

Heilbroner explains (or, better-stated, builds a case for) the evolution of capitalism with or without democracy in his Behind the Veil of Economics (1988), particularly in a chapter titled "Capitalism as a Regime," Heilbroner lays out a necessary symbiosis between political regimes that evolved as capitalism emerged in Europe: ... A second theme in the historical evolution of capitalism emphasizes a related but distinct aspect of political change. Here the main emphasis lay not so much in the direct organization of production, as in the separation of a traditionally seamless web of rulership, extending over all activities within the historical formation, into two realms, each concerned with different functions within the whole. One of these realms involved the exercise of the traditional political tasks of rulership—mainly the formation and enforcement of law, and the declaration of war. These undertakings continued to be entrusted to the existing state apparatus which retained (or regained) the monopoly of legal violence and remained the center of authority and ceremony. The other realm was limited to the production and distribution of goods and services—that is, to the direction of the material affairs of society, form the marshalling of the work force to the amassing and use of the social surplus. In the fulfillment of this task, the second realm also extended its reach beyond the boundaries of the territorial state, insofar as commodities were sold to and procured from outlying regions and countries that became enmeshed in the circuit of capital.

The formation of these two distinct realms was of epoch-making importance for the constitution of capitalism. …(pp.43-44)Heilbroner goes further to state that capitalism by its very nature is not necessarily sustainable, and indeed "exhibits tendencies for interruptions and failures to break the general momentum of capital accumulation." At each interruption or failure we renew the debates as to the efficacy of government intervention into markets and market mechanisms.

Often, as in the present case with fiscal problems associated with both entitlements and war-making, we see government's hand as at least a partial cause in the stage-setting for major interruption, which gives we economists much to cuss and discuss.

[Movie Guy]

Considering that fast capitalism economies burn up a considerable amount of natural resources (beyond common sense in many cases), will capitalism be the model for the future? Once we have physical shortages of key commodities?

Capitalism may burn itself out. Or it may get shot.

[Dave]

Star Trek fans will agree with Movie Guy, that capitalism is a passing fancy. I do too. Incidentally, Heilbroner said that "all the great economists have envisaged an eventual end to the capitalist period of history." Heilbroner includes among his list of "great economists," Smith, Ricardo, Mill, Marx, Keynes,and Schumpeter.

[anne]

Chinese cowboys (girls) :)

http://www.nytimes.com/2006/07/25/world/asia/25nomads.html?ex=1311480000&en=d36914c7e23708d9&ei=5090&partner=rssuserland&emc=rss

July 25, 2006

China's Nomads Trade Up for an Easier Ride on the Range
By JIM YARDLEY

MADOI, China — At the Doulong Store, the musty shelves are stocked with the necessities for Tibetan nomads. There are kettles for yak butter tea and bolts of colorful fabric for traditional Tibetan robes and clothing. A nomad affluent enough to use a light bulb in his tent can buy an electric generator.

But an unexpected necessity here in the immense grasslands of the Tibetan plateau are the six motorcycles on display, including the ASIAHERO 150-7 bought by a nomad named Trashi Dorjay. He had traveled almost 200 miles to the store from his tent because he wanted a bike to herd his sheep and yaks.

"I used to ride a horse," he explained. "A motorcycle is faster."

At altitudes of 14,000 feet or higher, the mountainous grasslands here in Qinghai Province, in western China, have become motorcycle country. With a motorcycle now sometimes cheaper than a horse, ethnic Tibetan nomads scattered across the region are buying them out of necessity, but also as status symbols. The dingy truck-stop towns along the highway are swarming with Tibetans on motorcycles.

"You're only a real nomad if you ride a horse," said one nomad, Tsendo, as he sat in a hillside tent situated a two-hour drive from the nearest town. Then, glancing at a motorcycle parked inside the tent, he laughed and added, "But this is our horse."

The trend began a few years ago and reflects the subtle changes under way in this isolated region of Qinghai, where most residents are ethnic Tibetans. Nomad families still live in tents and move their herds of yaks and sheep between winter and summer grazing pastures. Yak milk is still used to make tea, yogurt and butter, while yak hair is sometimes used to weave tents. Even yak dung is a commodity; it is flattened, dried in the sun and burned for heat.

But some nomads, unable to subsist any longer on the land, are beginning to move into relocation centers built by local governments. Pilot projects with solar energy have brought electricity to at least one remote grazing area and with it the beginnings of contact with the wider world. Even nomads who live in the most isolated high country mountains make occasional trips into small cities like Madoi to buy supplies.

This deepening interaction has made the motorcycle an essential possession. "We mostly use it for transportation to go to town," said one nomad, Tupten Jikmay, 29. He said that wealthier nomad families began buying motorcycles five years ago but that he and his two brothers had just managed to buy their first, a used model.

"It used to take two days on horseback to go to Madoi," he added. "Now it is much faster."

Many nomads credit China's economic changes for the arrival of the motorcycle....

[Colin Smith]

Economic freedom and social freedoms are intertwined, eventually one tends to bring about the other. We will see more social freedoms in china over the next few decades.