Economics: Democratic Capitalism vs State Capitalism

The larger conflict began with the end of the cold war. That ideological dispute settled the argument over whether capitalism was the best economic system. But it did not settle the argument over whether democratic capitalism was the best political-social-economic system. Instead, it left the world divided into two general camps.

On the one side are those who believe in democratic capitalism — ranging from the United States to Denmark to Japan. People in this camp generally believe that businesses are there to create wealth and raise living standards while governments are there to regulate when necessary and enforce a level playing field. Both government officials like President Obama and the private sector workers like the BP executives fall neatly into this camp.

On the other side are those that reject democratic capitalism, believing it leads to chaos, bubbles, exploitations and crashes. Instead, they embrace state capitalism. People in this camp run Russia, China, Saudi Arabia, Iran, Venezuela and many other countries.

We in the democratic world tend to assume state capitalism can’t prosper forever. Innovative companies can’t thrive unless there’s also a free exchange of ideas. A high-tech economy requires more creative destruction than an authoritarian government can tolerate. Cronyism will inevitably undermine efficiency.

That’s all true. But state capitalism may be the only viable system in low-trust societies, in places where decentralized power devolves into gangsterism. Moreover, democratic regimes have shown their vulnerabilities of late: a tendency to make unaffordable promises to the elderly and other politically powerful groups; a tendency toward polarization, which immobilizes governments even in the face of devastating problems.

For more, see The Larger Struggle by David Brooks, June 14, 2010, at nytimes.com.