How did we get here? Didn’t the end of the Cold War signal the final victory of free-market capitalism? On December 25, 1991, a dazed Mikhail Gorbachev looked deeply into the lens of a single television camera and told his people that they were living in a new world. Proud that he had helped guide the Soviet people “toward the market economy,” he resigned as Soviet president, shuffled the papers before him, and waited for aides to signal that he was off the air. Six days later, the Soviet Union went out of business. Within three weeks, Chinese leader Deng Xiaoping had embarked on his famous “southern tour,” which created new momentum behind free-market reform in China. Within a year, even Fidel Castro had accepted the need for a little capitalist experimentation. Former Warsaw Pact states began the march toward membership in NATO and the European Union. Free-market capitalism looked to have permanently carried the day.
But as Russians discovered the hard way over the course of the 1990s, it’s a long step from a command economy to free-market capitalism. The successor to a state that had once determined which products would be produced in what quantities and how much buyers would pay for them found itself managing the largest estate sale in history. Clever (and sometimes ruthless) business moguls acquired enough overnight wealth to cast doubt on the question of who really ruled Russia. Ordinary citizens, scrambling to adapt and survive, saw a level of corruption, confusion, and chaos they had never imagined. This was not the sort of “mixed capitalism” found today in the United States or in Europe. This was a brand of laissez-faire, anything-goes capitalism in which markets were regulated by those with the most to gain from exploiting them. Little wonder, then, that as Boris Yeltsin prepared for retirement in 1999, public demand grew sharply across Russia for a return to “law and order.” Military and security officials led by a former KGB lieutenant colonel named Vladimir Putin stood ready to answer the call.
This is not simply Russia’s story. The fall of communism did not mark the triumph of free-market capitalism because it did not put an end to authoritarian government. Chinese state officials watched the Soviet collapse and Russia’s upheaval as if their survival depended on it, and they learned some important lessons. First, they recognized that if the Chinese Communist Party failed to generate prosperity for China’s people, its days were numbered. Second, they accepted that the state can’t simply mandate lasting economic growth. Only by releasing the entrepreneurial energies and innovation within its vast population could China thrive and the party survive. In short, China needed to embrace markets. Third, they saw that once this growth potential was unleashed, the party could only protect its monopoly hold on political power by ensuring that the state controlled as large a share as possible of the wealth that markets generate.
Nor is this simply China’s story. Authoritarian governments everywhere have learned to compete internationally by embracing market-driven capitalism. But if they leave it entirely to market forces to decide winners and losers from economic growth, they risk enabling those who might use that wealth to challenge their political power. Certain that command economies are doomed to fail but fearful that truly free markets will spin beyond their control, authoritarians have invented something new: state capitalism. In this system, governments use various kinds of state-owned companies to manage the exploitation of resources that they consider the state’s crown jewels and to create and maintain large numbers of jobs. They use select privately owned companies to dominate certain economic sectors. They use so-called sovereign wealth funds to invest their extra cash in ways that maximize the state’s profits. In all three cases, the state is using markets to create wealth that can be directed as political officials see fit. And in all three cases, the ultimate motive is not economic (maximizing growth) but political (maximizing the state’s power and the leadership’s chances of survival). This is a form of capitalism but one in which the state acts as the dominant economic player and uses markets primarily for political gain.
