Is State Capitalism Superior to Market Capitalism? The Case of China.

An article in The Wall Street Journal this week raises questions about the long-standing consensus that market competition is better than central planning.  Using an example from China’s success in the emerging solar energy industry,  the question arises: Is State Capitalism superior to Market Capitalism?  If not, how can China’s successes be explained?  Let’s talk about it more now …

As The Wall Street Journal article explains, in 2007, there was a shortage in polycrystalline silicon, a raw material used to create solar panels.  In 2008, the price of polycrystalline silicon skyrocketed to $450 per kilogram.  In turn, these high prices were passed along to Chinese companies.  The Chinese government decided to take action and make the raw material a priority.  With the support of the Chinese government, money flowed in and fast regulatory approvals were obtained.  The results included the development by Zhu Gongshan of one of the world’s biggest polycrystalline silicon companies, GCL-Poly Energy Holding Ltd.  Also, China now produces about 25% of the world’s polycrystalline silicon supply and controls more than 50% of the market for finished solar power equipment.

So, does this mean State Capitalism is superior to Market Captialism?  No!  Not at all.  The reason is that in this example, we are not comparing State Capitalism to Market Capitalism.

In reality, China is practicing State Socialism with some elements of capitalism permitted.  In contrast, America is practicing Hampered Capitalism with increasing elements of Welfare State Socialism permitted.  If America’s energy industry were not so highly regulated, I think American innovation and competition would have prevailed over the Chinese model in finished solar energy products.  Economic freedom always leads to increasing innovation, higher standards of living, and greater prosperity.

One other note to consider.  When a country practices State Socialism, it might reap some successes.  But, what economic opportunity costs does it incur for those successes?  Without a truly Free Market, there is no guarantee that scarce resources are used most efficiently and effectively.  No matter how hard a country tries, global economic optimization is not possible under a centrally planned economy.  Central planning is not a good substitute for people acting freely within a Free Market.

Choosing the Good Life Blog by Gerard Francis Lameiro, Ph.D.

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