There is a new wave of political attacks underway against the free-market economic system. It is not centered on capitalism—a concept that national conservatives rightly have debated with vigor and aplomb. This time, the ideologically charged superstructure of the Western economy is not part of the debate; focus is instead on the free-market economy and its alleged inability to compete with government-managed economies.
Among the propagators of these attacks are representatives of the United States government.
From the perspective of political economy, I am particularly interested in questions related to economic systems. Back when the Soviet Union existed, the public discourse in the West was brimming with debates over the Marxist-based system of central planning that the Soviets used. Its backers and detractors made considerable efforts to win the argument: was the free-market economy—the basis of the Western system—better than its Marxist competitor?
As mentioned, the discourse emerging now is not directly related to capitalism, nor does it envelop Marxist thought. However, that does not mean it is insignificant—on the contrary, it has the potential of rising to the same prominence as the debates over economic systems during the Soviet era.
There are two reasons why this new debate is emerging: Russia and China.
To start with the former, the renewed interest in the analysis of economic systems has arisen from a rude awakening among many Western analysts. This awakening, in turn, originates in a growing realization that for the last couple of years, economists and others in the West have been largely wrong about the Russian economy. Predictions of a Russian economic collapse under the pressure of Western sanctions have turned out to be wildly inaccurate. While the sanctions have undoubtedly affected Russia, the country has not only overcome those challenges, but proven to have a high level of economic resiliency.
Specifically with reference to the war in Ukraine, the Russian economy has demonstrated strong ability to support a large-scale military operation. It is dawning on Western leaders that their economies currently do not have the same ability. As a result, the West is engulfed in feelings of economic inadequacy, feelings that have been exacerbated by the perception that China is running rings around the West with its unending ability to flood the world with all kinds of export products.
With direct reference to introspective laments about Western economic inferiority, the current U.S. government has begun expressing ‘concerns’ about our free-market-based economy. In a comment related to the EU-U.S. Trade and Technology Council’s meeting in Leuven, Belgium, on April 4th, American trade representative Katherine Tai
said that Beijing’s “non-market” policies will inflict severe economic and political damage on the two blocs, unless they are tackled through appropriate “countermeasures”.
She expressed concerns whether “our firms” would “be able to survive” when competing “with a very effective economic system.” According to Euractiv, Tai also explained that the Chinese economic system is
fundamentally nurtured differently, against which a market-based system like ours is going to have trouble competing against and surviving.
To exemplify her concerns, Tai apparently pointed to “Chinese overproduction” in several industries, including steel and aluminum, as well as solar panels and electric vehicles.
Tai’s comments provide a brief concentrate of the Biden administration’s overall assessment of the Western economic system, which was articulated a year ago by the president’s National Security Advisor Jake Sullivan:
The vision of public investment that had energized the American project in the postwar years—and indeed for much of our history—had faded. It had given way to a set of ideas that championed tax cutting and deregulation, privatization over public action, and trade liberalization as an end in itself.
Sullivan went on to specifically target the free-market economy:
There was one assumption at the heart of this policy: that markets always allocate capital productively and efficiently—no matter what our competitors did, no matter how big our challenges grew, and no matter how many guardrails we took down.
Along the same lines, The Economist explained in a print magazine Leaders piece on March 30th that Europe
needs strong growth in order to help fund more defence spending, especially since American support for Ukraine has dried up
Furthermore, The Economist suggests, a strongly growing economy will help Europe fight an economic war (my term, not theirs) with China, whose president Xi Jinping “is using subsidies to supercharge Chinese manufacturing.” In arguing why China is such a threat to the West, The Economist makes a few analytical mistakes (more on them in Part II), but overall, their argument aligns with the points that Jake Sullivan proposed a year earlier.
For those who are interested in the actual performance of the Chinese economy, there are many indicators that it is nowhere near the powerhouse it is being portrayed as. The fact that Jake Sullivan, Katherine Tai, and The Economist all fail to mention this, suggests that they either do not know what the Chinese economy really looks like, or that they are using the emerging debate over economic systems to push a specific political agenda.
With three independent voices propagating largely the same story, and with all three omitting the same important information about China’s economic woes, it is hard to chalk it all up to incompetence. The only rational conclusion is that these three—for reasons we shall not inquire about here—are pushing one and the same political-economic narrative:
- Western economies are based on free markets;
- The free-market economic system is inadequate in competition with a system like the Chinese, which is based on government interventionism;
- Therefore, more government interventionism is desirable in the Western economies;
- The interventionism should focus primarily on the allocation of productive capital.
If this narrative is related to an awakening regarding the West’s inadequate military-industrial capacity, it serves a rational purpose. However, it seems overly bombastic to dismiss the entire economic system of the West solely on the basis of promoting the idea of closer government cooperation with the defense industry.
With that said, regardless of the motive behind this new narrative, its consequence is morally unacceptable as well as empirically false: the free-market system is not inferior to an economy based on government interventionism. The reason why Europe is not doing better is much more simple and—for many—intellectually brutal: the Western economic system is not based on the free market.
It is based on government interventionism.
Part II will explain in detail what this means, and how the West can reform its economies in order to more successfully compete with China.
