Adam Smith, the 19th century economist, wrote that self-interest is the invisible hand that controls the market. The role of government, according to Smith, was to intercede only in those rare instances where there was a natural monopoly or to regulate excessive abuse. This is the basis of the free market capitalist system—no central planning, limited regulatory intervention in business, and self-regulating industry sectors motivated and controlled by self-interest. It is a model that has worked exceptionally well in the 20th century. The failed attempts of communism and extreme socialism to replace the invisible hand of the market with the firm autocratic visible hand of government did not succeed. Those state-run economies are in dismay and discredited.
It would appear that China is now attempting to define a new middle ground between a market-driven economy and central state planning. Over two-thirds of the former Chinese government state-owned enterprises (SOE) have been successfully transitioned to market-driven enterprises. The results have been dramatic. For the last 15 years, the Chinese economy has grown by double digits annually. China is now the second-largest economy in the world, with ambitions to overcome the United States within the next 25 years. China, however, does not have a government hands-off approach to the market, especially in global commerce.
The Chinese government takes an active role in maintaining a competitive advantage for Chinese export industries by keeping their currency low. Additionally, the Chinese government takes a direct and active oversight role in deciding which industries receive government subsidies and tax concessions—and more importantly, financing. In recent months, we've seen examples of the Chinese government's macroeconomic decisions: rare-Earth shipments have been contained, investments in foreign sources of raw materials have been coordinated by government agencies, political policies control the flow of available labor, and the government controls the access to commercial intellectual property and technologies.
A prime example of the government's influence in the marketplace is evident in recent decisions to prohibit the construction of new cement-making capacity within China, despite the fact that China consumes 40 percent of the world's cement capacity. In a free-market situation, this high demand for cement would reflect these results:
- In the short term, shortages and price increases.
- In the medium term, construction of new capacity.
- In the long term, this new capacity would become excess capacity and result in lower prices, which is not the optimum economic use of resources.
But in a truly market-driven economy, this is how the invisible hand works.
Has China discovered a new "ism" that is a midpoint between capitalism's totally market-driven economy and communism's state-controlled central planning economy? In the short term, does this give China a competitive advantage by cross-subsidization of industry, uneven global commerce, and government prohibitions against fair trade? It would appear so—and it seems to be working.
How then does the world compete where most governments constrain industry and the Chinese government partners with industry? Today, China is the world's workshop: the largest manufacturer in the world of everything except automotive and avionics. Tomorrow, China, with almost 1.5 billion buyers, will be the world's largest consumer. Will your products and services have the fair trade advantage in accessing the Chinese economy? I seriously doubt it.
How will you compete against this new "ism" of government-supported commerce by the largest producer and soon to be the largest consumer?