State Capitalism -- Thoughts on mixing government and business

by Roger Bourke White Jr., copyright January 2012


This essay was inspired by a 21 Jan 12 Economist editorial, The Rise of State Capitalism: The Emerging World's New Model. The article describes how many of the world's largest business organizations of today are owned by governments and many of those are centered in the emerging world.

One of the chronic questions of Industrial and Information Age communities is how to mix government and commerce. This question has been answered many ways since the 1700's when the Industrial Age began in Western Europe. With the coming of steam engines, railroads and factories, the relations between workers, capital, and managers changed from the older agricultural models. Things got complicated... and very emotional. It seems there is no single good solution to how these relations should be set up.

On one extreme are those who believe that the government intervention should be pervasive. The iconic example of this was the Bolsheviks of Russia in the 1920's. They attempted to put the government directly in charge of all commerce. This goal is still being aspired to in contemporary North Korea, and Cuba has only in the last year been experimenting with alternatives to this aspiration. On the other extreme are liberal trading-oriented communities such as Hong Kong of the 1990's and the legendary Old West of America. These were places were commerce -- business -- was left mostly up to the people conducting business. Contemporary real world communities fall between these two extremes, and with wide, wide variation.

So the question of this essay is: when does open-entry, free-market competition work better as a business model, and when does a centrally planned, heavily regulated system work better?

When Centralized Control Works Well

Centralized control works better the more four things dominate an industry:

o The way to conduct business is predictable and stable

o There is little experimenting that can be done to determine the best way to do things

o The business is asset intensive -- there's a lot invested in "bricks and mortar"

o The business requires skilled management practitioners and those are in short supply in the community

The more these conditions are true the more it makes sense for government and businesses of the industry to team up and coordinate closely. In times and places when heavy industry dominate, such as in Europe in the first half of the 20th century, lots of government intervention smoothes the industry's growth.

When an industry is asset-intensive, such as railroading or steel-making, it's expensive to change operations. This another element which makes a stable relation with government attractive.

And finally, if the management talent of the community is in short supply, it makes sense for good managers to do "double duty" and be community governors as well as business runners.

When Decentralized Control Works Well

Decentralized control works better when the following dominate an industry:

o The way to conduct business is unpredictable or not yet well understood

o The capital requirements are low and there is a lot of experimenting going on in the industry

o The business is information-oriented, not asset-oriented

o Customer service is a major element of the business

Decentralized control -- the free market -- works better when there is a lot of uncertainty about how to do business. The free market environment is more conducive to constant experimenting and adapting.

The free market also works better when customer service is an important element. Learning how to best please people is something that requires constant experimenting.

Finally, when a community has a lot of management talent it makes sense for those managers to specialize -- some run businesses and some run governments.

Enfranchisement: Something both systems need

Regardless of which system is being employed, enfranchisement is necessary. Enfranchisement is the feeling that, "We are all in this together and we are all working for the common good."

In passionate arguments about which is the better system, each side will accuse the stereotypical member of the other side of taking "cheap shots" of various sorts -- government officials with abuse their powers, business people will abuse their powers. This happens when the community member is feeling disenfranchised.

The more cheap-shotting happens in real life the more the community loses, and it doesn't matter in which system is the cheap-shotting is happening.

The basic goal of rules and regulations is to discourage cheap shots -- abuse, death, fraud, theft and other sorts of exploitation. When they do this they are working well and they are agreeable to most community members. When other goals are added to the rules and regulations universe, such as social justice or morality goals, then they get more controversial, and they may cause disenfranchisement.

--The End--