China's Anxiety About Successful Companies ... China is turning independent coal-mines into state-run operations, showing its impatience with private companies that get too big. China's high-profile battle with foreign companies makes it seem as though those businesses keep the nation's economic planners awake at night. It has arrested a Rio Tinto executive on trumped-up charges, blocked Facebook and YouTube, and restricted (in practice if not in name) foreign firms from key industries such as oil, media, and metals. ... While the government has claimed it's putting forth better companies at the expense of weaker ones, the root cause remains that an ever-insecure China wants to rein in independent sources of influence (and wealth) that it feels have become too independent to control. This trend, known in Chinese as "the country advances and the private retreats," allows the government to increase its control over the economy by funneling resources and growth potential into more pliable state companies. – Newsweek

Dominant Social Theme: The Chinese model advances ...

Free-Market Analysis: We have written numerous articles about the Chinese miracle with the intent of trying to explain that while China may have created a Western competitive face, the reality is otherwise. We have provided these articles because the current Western approach to China seems to us to have presented a dominant or sub-dominant social theme of sorts – that the "Chinese have found a way to marry state efficiencies to the power of the free-market to create formidable, world class results."

How does such a theme benefit the power elite, which is has been intent for the last century on advancing global governance? By making the argument that China has beat the West at its own "free-market" game with a more authoritarian brand of market-commerce, the elite can justify further public/private approaches to industrial competition. Justifications for the elite's favored form of business activity – mercantilism – is advanced and even celebrated within this context. It casts an unfortunately favorable light on the manipulation of public power for private gain.

We recently analyzed a book by author Ian Bremmer called "The End of the Free Market" which partook of these arguments, presenting the notion that state capitalism shall be the new model for the global economy, and that China is the forward-looking face of this sort of paradigm. We analyzed the Bremmer book from the point of view of a dominant social theme, presenting the argument that Bremmer, a brilliant young man with an extraordinary array of elite credentials, was trying to frame a new kind of cold war. Our conclusion was that by focusing on state capitalism as a significant danger to the West, Bremmer was able to reconfigure Western industry as free-market oriented – when increasingly it is not. It was a rhetorical trick, but an effective one.

In fact, large Western industry is increasingly intertwined with the state and the model may be rightly termed corporatism. But by contrasting Western corporatism with the authoritarian model offered by such massive, developing countries as China, Bremmer has fashioned a right-left paradigm that could present even the biggest and most inefficient Western companies as "free-market" oriented when compared to their Chinese counterparts. It is in our view an attempt to change the context of the debate at a time when arguments in the West over free-markets are becoming more focused and productive thanks to the Internet. You can read the article here: Power Elite Versus State Capitalism.

In analyzing Bremmer's presentation as an emergent dominant social theme – and he has received plenty of publicity of late – we neglected to explore one aspect of the argument, which is that state-run entities themselves are notoriously inefficient and eventually become hopelessly incompetent. This argument was made by none-other than the famous free-market economist Ludwig von Mises, who argued in books such as "Socialism" that countries with mixed economies inevitably end up with more and more involvement by the state, thus dampening and finally removing price information from the economy – at which the point the economy collapses.

Critics have pointed out that Mises' argument, while true, did not fully anticipate the timeline necessary to destroy a large, existent, Western economy. The American economy for instance, has become progressively more socialized; yet because of existing vitality and a legacy of market-oriented approaches, the economy may continue forward for years or decades before finally succumbing to mortal wounds.

Socialism, in fact, unpredictably injurious. It took the European Union some 50 years before significant rot presented itself. The Soviet Union took about 70 years to die. Cuba's arc has been similar. There is no reason to believe that China's "miracle" will last much longer than a similar period, even though the country now looks so very formidable. But we would argue, and we have, that looks can be deceiving and that in China's case, they are.

From our point of view, China has created a two-tier system in which competition exists between street vendors and small, struggling entrepreneurial companies but not at the upper levels of Chinese commerce where the power is. China's bigger banks, financial companies and industrial entities are all in some sense controlled by the state, as this article in Newsweek suggests.

There is actually nothing especially surprising about China's approach to free-market enterprise. In a sense it mimics the South American model, which is also authoritarian. In South America, small groups of privileged families traditionally control the social power centers – finance and industry – while the masses hawk cell phones to each other at ever-diminishing margins on the streets below. This is in fact, increasingly the Western model as well.

Newsweek's story about China is not laudatory by any means. But significantly, the problems that Newsweek defines as inherent in the Chinese model have to do with increasing "corruption." In "nationalizing these mines, the Chinese government won't be able to grow the economy and reduce corruption, disobedience, and scandal," Newsweek writes. The magazine thus grants that nationalization will allow Chinese leaders to "grow the economy," though corruption will rise as a result. This is a trade-off the Chinese will have to live, the magazine implies.

Conclusion: In fact, as we will see sooner or later, the trade-off that China has made is one between a vibrant, growing economy and one that is collapsing in on itself. Austrian economics shows us quite clearly that wealth is created by individuals via human action, not state action. The fundamental argument for state competence is flawed – and investors especially would do well to take care. Statist methodologies do not create dreams but nightmares.

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