The State Capitalism

By: Om Prakash Dani, Member Executive Committee, Sri Aurobindo Society, Puducherry & Vice Chairman, Sri Aurobindo Foundation for Integral Management, Past President, The Institute of Company Secretaries of India and M. S. Srinivasan, Research Associate, Sri Aurobindo Society, Puducherry 

A new Avatar of capitalism has emerged in the horizon.  Recently, the well-known British magazine, Economist, brought out a special issue on State Capitalism and a columnist in the magazine described it as the New Masters of the Universe.  The new economics emerging in Russia, China, India and Singapore are regarded as examples of state capitalism.

What is precisely the nature of this new form of capitalism and how it is different from the traditional or liberal capitalism?  In traditional capitalism, Government plays a minimal role in regulating or investing in the economy and allows private enterprise to create wealth for the society through competition and the dynamics of the market-forces.  In state capitalism, private enterprise, competition and market-forces, the three major forces of capitalism, are allowed.  But unlike traditional capitalism, in state capitalism government play a dominant role in regulating, investing and building the economy.  The main plus point of liberal capitalism is that it promotes entrepreneurship and innovation much better than a state-controlled economy.

The flip side of capitalism is that it encourages individual and corporate greed and tends towards the domination of corporate power over the society.  One of the past presidents of US, very much dismayed by the overwhelming domination of corporate power in America, said that American democracy is of the corporation, for the corporation and by the corporation.  The other drawback of liberal capitalism is that it engenders concentration of wealth in a few or in otherwords economic inequality.  Can state capitalism provide a better alternative to traditional capitalism and also the communist-type state controlled economy?  It depends on the nature and quality of government intervention.  State capitalism can perhaps do better than the traditional capitalism, if the government intervention is not in the form of a tight-control of the economy but in the following direction:

  • Building high-quality infrastructure like roads, transportation, communication, power.
  • Promoting entrepreneurship and innovation in all the levels and sectors of the economy and society—-in the big, medium and the small scale sectors, low income and weaker sections of the society, students and the educated unemployed—through appropriate financial and educational inputs.
  • Encouraging corporate social responsibility, more by incentives rather than by legal enforcement.
  • Keeping a watchful eye and firm check on corporate power in order to prevent it from exploiting the weaker sections of the society or gaining a too heavy upper hand over other sections of the society.
  • Filling the gaps in the economy by building industries in those domains which are essential for the economy but where private sector is unwilling to enter because of high-risk or low-profit.
  • Maintaining high standards of efficiency, competence, quality, integrity in governance and public administration. 

This brings us to the larger issue of the true role of the state in economic and social development.  The first and the most important function of the state is to ensure equity or distributive justice.  The traditional capitalism has failed miserably in this task.  The trickle-down of wealth from the richer to the poorer section of the society, hoped for by capitalist theorists, never happened in practices.  Joseph L. Bower and others, writing on the crisis in capitalism in an article in Harvard Business Review, state that increasing income and wealth disparities in capitalist economies makes a mockery of the idea that economic growth benefits all.  If state capitalism succeeds in consciously steering this trickle-down of wealth, without curbing free enterprise or eliminating private property, it has scored many points over traditional capitalism.

The other major function of the state is to maintain balance between the various organs of the society.  According to Indian thought human society is made of four social organs: Culture, Economy, Polity and Labour or the masses.  One of the main aims of government is to ensure a balanced development of all the four organs of the society which includes maintaining the balance of power between these organs.  But in the societies which follow traditional capitalism, there is no such balance, because business and economy dominate other sections of the society.  Here again if state capitalism can bring this balance to society, then it provides a better alternative to traditional capitalism.

However, as we have indicated earlier, the success of state capitalism depend mainly on the quality of the government which means on its efficiency, competence and integrity.  Without this crucial factor, all government interventions, however good they may be in concept and intention, becomes ultimately ineffective.  In the Indian perspective the state has a moral responsibility to uphold and enforce Dharma in society.  And the Indian concept of Dharma is much more than mere honesty or integrity.  Upholding Dharma means fostering the mental, moral and spiritual development of the individual and the community in every section of the society; enforcing Dharma means to deal firmly with all that prevents or opposed to this dharmic flowering in society.


Authored by: 

O. P. Dani M. S. Srinivasan
Vice Chairman Research Associate
Sri Aurobindo Foundation for Integral Management and Sri Aurobindo Society
Past President, The Institute of Company Secretaries of India Beach Office, Research Section
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