state capitalism

state capitalism, economic system in which the state takes an active role in economic production, controlling the means of production and generating profits (or surplus value, in Marxist economics), which it then uses for further production. The state functions in a manner akin to a business enterprise, with its economic interventions and decisions driven by its political goals. The political affiliation of the state is independent of its participation in the capitalist process, and state capitalism can thus take multiple forms, depending on the nature of the state’s ownership of commercial enterprises.

The term state capitalism was first used in the 1880s, and the concept was described in detail in 1896 by Wilhelm Liebknecht, a close associate of Karl Marx, to differentiate state takeover of private enterprises from the socialist state. Liebknecht described socialism as the removal of capitalism, leading to total state control, which he considered different from state capitalism. State takeovers increased during and in the immediate aftermath of World War I in Europe as private firms failed or were taken over to prevent layoffs. France nationalized its railways, airlines, and several other industries. Italy used a state-owned holding company to control a multitude of nationalized companies. In the United States, state and local governments have owned most major airports since the 1920s, and the country’s postal service is part of the federal government. The interwar period also saw the rise of several totalitarian states, with Nazi Germany exercising high control over investment and production.

Nationalization in capitalist countries continued after World War II and into the 1970s, especially in industries such as coal, gas, electricity, aviation, steel, and, later, telecom. States increased their involvement in their economies to bring strategic industries under government control and ensure employment security. Several newly independent countries, such as Zambia and Bangladesh, chose to nationalize industries that had previously been operating privately in order to move to a state-planned economy, though at the same time they allowed private enterprise to continue.

The efficiency of state control came under particular scrutiny after communist countries, the Soviet Union and China foremost among them, faced economic challenges in the 1960s and ’70s that were compounded by multiple oil crises and stagflation. State control of and involvement in the economy were perceived as inefficient, and governments opted to privatize industries to reduce their debt burdens. India, for example, liberalized its economy in 1991 to move away from its earlier planned-economy model. During the Great Recession of 2007–09, though, states intervened in their economies through publicly funded bailouts to save private companies deemed “too big to fail,” particularly in the United States. Governments have often used nationalization as well as privatization to change the extent to which they play an active role in a capitalist economy.

State capitalism broadly takes on two forms, depending on the nature of influence the state exerts. In the first form, statism, the state does not participate in the capitalist process directly but influences private corporations through taxation, regulation, economic planning, and policy. In state capitalism’s second form, the state directly intervenes in multiple forms. Examples of these interventions can include:

State capitalism can also be defined in terms of how much a state disrupts the smooth functioning of private enterprise, the extent of state ownership across all enterprises, and the extent of statism. Countries such as India and Argentina have a low level of state ownership but a high risk of state-caused disruption because of government inefficiencies and bureaucracy. China has a high level of state ownership as well as bureaucracy, and the state ends up crowding out the private sector. Market-oriented states such as the United Kingdom and the United States traditionally exhibit a more laissez-faire approach, with low statism as well as limited ownership by the state. Countries typically classed as welfare states, such as Norway and Denmark, use central banks and state-owned companies extensively while exercising low controls over (and posing little threat to) private initiatives. This system, known as the Nordic model, thus merges high taxation with free-market capitalism to run social welfare systems for citizens.

Features and examples of state capitalism can be found today in countries around the world, particularly where governments control key industries. For example, many large oil companies, such as Saudi Aramco, Gazprom, China National Petroleum Corporation, and Petronas, are controlled by governments. State-owned organizations and initiatives now compete, in many cases, with multinational corporations. The latter, with lower bureaucratic controls and stronger research departments, have traditionally proved more successful, but state-owned enterprises are becoming more nimble and can leverage some of the unique advantages that come from state control. However, state-owned enterprises are often more susceptible to economic downturns affecting a country, and they can be affected by economic sanctions imposed by other countries that seek to influence or punish a country for actions considered objectionable, though this is tempered by a state’s ability to provide a fiscal stimulus when deemed necessary.