The End of the Free Market: Who Wins the War Between States and Corporations? [Hardcover]

Despite the fact that the Cold War is 20 years over, we still tend to think in an unfortunate paradigm that sees 'communism' and 'capitalism' as the two major political categories. This book is written to let us know about the existence and growing presence of a third category: state capitalism. A quote from Chinese Premier Wen Jiabao (taken from a CNN interview and used in the book) well illustrates what state capitalism is: "The complete formulation of our economic policy is to give full play to the basic role of market forces in allocating resources under the macroeconomic guidance and regulation of the government. More bluntly, state capitalism is a market that is in large degree controlled by the government. Companies exist, but often serve political ends.

The book was motivated, it seems, by the 2009-2009 economic bust and explaining why this both strengthens nations that are already practice state capitalism and encourages more folks to defend state capitalism as an alternative to the free markets that many (rightly or wrongly, as the author puts it) blame for the bust.

Make no mistake: the author of this book is not writing in support of state capitalism, but simply wants us to be more aware of what it is, what its strengths and weaknesses are, and why it affects us. The author himself, though, writes as a supporter of semi-free markets with minimal, but necessary, regulation.

The first half of "The End of Free Markets" is devoted to explaining state capitalism. It developed primarily as an outgrowth of the Cold War. China and Russia both experienced broken communist regimes and the impossibility of replacing those regimes with largely unregulated markets. As a result of these failed attempts, state capitalism became a way to harness the creative and competitive powers of the market while keeping government strong as a force. (Of course, China used market processes to escape the inflexibility of communism, while Russia brought government back INTO their markets after seeing that the transition to markets didn't work out). Today, a good many countries practice more or less restrictive versions of state capitalism: Saudi Arabia, United Arab Emirates, China, Russia, Ukraine, Algeria, India - the list goes on. State capitalism is, indeed, on the rise.

The second half of the book discusses what, from the standpoint of a market supporter, the primary difficulties are with state capitalism and why it affects market economies. The author notes that state capitalism, while it does harness some of the power of the market, the ends of state capitalism is always political: governments own or favor companies in order to bolster their own power. Thus, companies do not exist to provide goods and services so much as to strengthen the power of those in office. Instead of making decisions based on what the consumers or shareholders want, decisions are either made politically or have to be approved by those with political ends. (I am very surprised that the author doesn't also mention the fact that the same thing which brought communism down - the inability of an entire economy to be controlled centrally - will likely be the downfall of state capitlaism, which is central planning that is only a tad decentralized).

And why is this bad for those nations who operate with market principles? In an age of globalization, one downside is inevitably that other nations problems and dysfunctions become our own. Particularly with state capitalism, where decisions are always made on a political basis, any dependence we have on state capitalist countries means that we are at the mercy (to some degree) of their political forces. Should they want to, say, institute protectionistic measures (as they often do because it makes citizens more likely to support you) then we bear the consequences. Should they want to rhetorically grandstand against the US (think Venezuela's Hugo Chavez), then their companies have to follow suit. In other words, it is risky enough depending on international companies, but when those companies are owned by or in cahoots with foreign governments, there is a bleeding of economic and foreign policy that becomes...well...even more complicated.

Overall, I was surprised at how engaging and readable this book was. Yes, I like books on politics and economics, but this author's writing style was clear and very readable. He does a good job explaining the ins and outs of how state capitalism works in different nations. Also, the author is neither a gloomy pessimist or unbridled optimist (either would make me much less willing to take him seriously). He is optimistic that state capitalism has a limited shelf-life but pessimistic that the economic downturn of '08-'09 have ensured that it will be around longer than it may have been.

Overall, this is an indispensable book to read in understanding the current climate of world politics. While our own nation increases its government intervention into the economy, it is important to read about other nation's descent into such territory.

This is an excellent briefing book. It doesn't drive a single idea, offer a polemic position or try to be controversial. It is thus a hype-free reliable guide to a complex subject. The sequence of logic is centrist and carefully couched. It shows how state capitalism, rather than socialism, is the growing counter to liberal capitalism, in Russia, China, Saudi Arabia and many smaller economies. This is not driven by ideology and Bremmer convincingly argues against any coming Armageddon or WWF wrestling contest of King Kong Commies take on Freedom Fighting Finance Whizzes. He shows that the drivers of state capitalism are very much centered on political control of resources and power and of job creation. It adopts a very domestic focus and is as short-term in its focus as the earnings-driven Wall Street community. He points not so much to the distortions of markets and the misallocation of national resource this leads to as the absence of countervailing forces that are intrinsic to liberal democracies. He emphasizes the commonality of axiomatic belief in market forces that underlies countries like Norway, France and Germany that are too often classified as anti-markets. Under all the rhetoric is an often tense balancing of economics and business versus the intersection of politics and social priorities. Bremmer is pretty convincing in showing that state capitalism does not overall provide the better blueprint for growth but also that it will continue to grow because of its political rather than economic focus.

My test in rating the book was to consider three questions:

1. Would I recommend it to someone largely unfamiliar with the issues to get a sound grounding. A definite 'yes' here. I know the fields fairly well and I felt that the coverage was simple without being simplistic, lucid, fair in judgment and broad enough to provide a sound briefing. It's very much is the style of Atlantic magazine pieces, the Economist and Foreign Affairs journal. It's well-presented, though not exciting or jazzy. It emphasizes judgment over flashiness.

2. Would I recommend it to an expert? Here, the answer is more or a 'probably' than 'yes.' There's little that's new or striking in analysis or the sensible centrist recommendations for policy at the end of the book. The "probably" is because it brings material together in a shrewd exegesis, so that I found conformation of what I already know, and extra insights too. His analysis of the dominance of state capitalism in the oil sector was a grabber, for instance. I hadn't realized that ExxonMobil is just 15th in revenues, behind state-owned firms and that the eight top multinationals account for just 10% of global revenues and 3% of reserves. It's not overheavy on such statistics but usefully selective in the ones it does present.

3. Is it useful for a wide range of readers? The specialist economics and policy literature circles round and round all the topics Bremmer covers and provides far more depth. But World Bank type policy wonkery is for a narrow audience. I think this book is useful for business managers; it helps make sense of China and provides a sound overview of global trade. It is useful, too, for those interested in the political issues. It's distinctly centrist and won't anger or evangelize the extreme left or right. For any general reader, it sensibly counters all the guff about the death of capitalism as we know it.

All in all, this is a very professional and well-presented guidebook. Two aphorisms come to mind. One is "This leaves me none the wiser." "Yes, but infinitely better informed." The other is "You are entitled to your own opinions but not to your own facts." This book will help you be better informed and surer of your facts. What more could one ask in trying to be a little wiser?

My review reprinted from Huffington Post:

Political risk guru Ian Bremmer examines the growing momentum of "state capitalism" in his new book The End of the Free Market: Who Wins the War between States and Corporations? Bremmer argues that state capitalism differs from free-market capitalism in that politics rather than profit is the main driver of decision-making. For this reason, it threatens to curtail free markets and the global economy. It is the latest chapter in the "rise of the rest," or the expansion of non-Western states in the international system.

Capitalism takes many forms but all of them can be distinguished by their "use of wealth to create more wealth, a broad enough definition to capture both free-market and state capitalism," Bremmer notes. In the free-market form of capitalism, the job of the state is to "enable" wealth generation by enforcing contracts and limiting the influence of moral bads such as greed--the latter can lead to market failures, which have occurred periodically since the Dutch tulip craze of 1637. Free-market governments attempt to ensure that the economic game is played fairly.

In contrast to free-market capitalism, the economy in state-capitalist regimes is dominated by the state agenda. "Forced to choose between the protection of the rights of the individual, economic productivity, and the principle of consumer choice, on the one hand, and the achievement of political goals, on the other, state capitalists will choose the latter every time," Bremmer explains. Continuing the sports game analogy, state capitalists control the referees as well as the main players.

Bremmer admits that state capitalism isn't new. He traces the first reference to an 1896 speech by Wilhelm Liebknecht, a founder of the Social Democratic Party of Germany. But due to recent questions regarding the merits of free markets after the 2008-2009 financial crisis, the need for job growth and economic stability in less-than-democratic regimes, and the growth of the economies and influence of state-capitalist countries, this form of capitalism is catching on worldwide.

While there is "no single model of state capitalism," its leading practitioners, China and Russia, "share a well-developed sense of risk aversion," having recently abandoned communism as their guiding philosophies. Other notable users of this model include energy-rich states, such as Angola, Iran, Kuwait, Malaysia, Nigeria, Saudi Arabia, the United Arab Emirates, and Venezuela. Another cluster of countries in this group, some of which have benefited from rising commodity prices, include emerging markets that have only tentatively committed to free-market principles, such as Brazil, Egypt, India, Indonesia, Mexico, South Africa, and Turkey.

Another way to identify a state-capitalist country is by looking at the use of four specific policy tools. One policy tool favored by state capitalists is the national oil (and gas) corporation (NOC), such as Gazprom of Russia, China National Petroleum Corporation, and the National Iranian Oil Company. NOCs like these own 75 percent of the world's crude-oil reserves. A second tool is the state-owned enterprise, such as China's First Automobile Works.

A third tool is privately-owned companies--so-called national champions--that are supported by the state to develop a "commanding position" in an economy. The Brazilian mining concern Vale, according to Bremmer, is a prominent example of a company that was coerced by its government to advance the state objective of stimulating the economy.

A final tool is the sovereign wealth fund (SWF), the largest of which includes the UAE's Abu Dhabi Investment Authority valued at $300-650 billion and Saudi Arabia's Monetary Agency valued at $430-500 billion. Many types of governments have SWFs but they "tend to be as transparent--or as secretive--as their governments," Bremmer writes, noting that Norway's Government Pension Fund is exceedingly open and accountable. Norway is an example of a country that has some state-capitalist trappings but is not in the state-capitalist camp. Similarly, the U.S. bailout of financial institutions was designed to "save the free market, not bury it," Bremmer notes. "It's not the tools that count; it's how they're used. But countries that have all four of these institutions tend to be state capitalist," he writes.

How do these tools threaten the free market? While Bremmer is careful not to predict a new Cold War, he does worry about fissures in the international system and state-capitalist support for undemocratic regimes such as Guinea. As the head of Eurasia Group, a political risk company, it is Bremmer's job to ask what if. He poses at least ten hypothetical scenarios in the book, including given the mutually assured economic destruction (or interdependence) between the United States and China, what happens if China closes the door?

While the phrase "The End of the Free Market" may capture public anxiety in America today, Bremmer should have called his book "The End of State Capitalism"--he bets that free markets will win the "war" with statists. First, state capitalism just doesn't have the same appeal as an ideology that communism had, it is "more a set of governing principles than a coherent political ideology." Second, state capitalism is actually a sign of domestic political vulnerability. It is a response to the risks countries face as they open up, which Bremmer detailed in his earlier book The J Curve. Meanwhile, free markets hold several advantages over their statist cousins: Most importantly, these systems better facilitate innovation and long-term growth.

Bremmer lays out several recommendations to ensure that free markets do indeed prevail. Most of these recommendations are just good common sense for America: keep markets open, invest in hard power, pick the right fights, and welcome world-class foreign workers. Bremmer is saying subtly that for America to continue to lead it should be strong, smart, and principled. In other words, it should stay true to its values.