Guest Blog: Adam Dixon

Capitalism and the State: Nothing New and Always There

Adam Dixon

I’d like to use this opportunity to reflect on the crisis of legitimacy faced by SWFs over the past few years. This crisis led to the Santiago Principles and various new regulations in western countries, and, in my view, was a drastic over-reaction and a misinterpretation of what capitalism really is.

The oft made claim made by some skeptics of SWFs or any accumulation of financial power by some public entity (e.g. a public pension fund), is that such entities that are intrinsically linked to the state (or some center of political power) are incompatible with free market capitalism. Such skeptics fear that state-linked entities (even if there is a high degree of political separation from the decision-makers of these funds) will ultimately contravene ‘free’ market processes of exchange to the benefit of the political will, and such interference in a space that ‘should’ be limited to only private actors is ultimately inefficient. In other words, it goes against the ‘spirit of capitalism’, and as such, SWFs are dangerous.

Unfortunately, such skeptics seem to forget or ignore that markets are inherently political: in the history of capitalism over the last 150 years the state has had a key role — whether explicitly or implicitly — in ensuring capitalist processes. The state sets many of the rules of the game and is usually there to support those areas of the economy that can’t go it alone but are necessary for the rest of the capitalist system to operate. No successful developed market economy is without a relatively strong state. The recent financial crisis has reminded us that even in the most so-called free markets of global capitalism, the state is always waiting in the shadows to rescue capitalism from its excesses and failures — and the state is likely to continue to do so even to the chagrin of free-market purists, because it always has done and, politically, no one is willing to sit back and see what happens if it doesn’t.

Following the collapse of Lehman Brothers in September 2008, it wasn’t uncommon to hear fearful pronouncements that capitalism could soon be replaced, that the emerging markets that had embraced capitalism as a means to organize their economies over the last several decades would revert to their old ways. The specter of socialism was knocking on the door… Or was it? Like most economic crises, many forget to remind themselves that capitalism oscillates between booms and busts (to varying degrees), as it always has done. Moreover, it wasn’t so much a fear of socialism, but a fear of a return of the state (there is a difference). The state is already an inherent part of the capitalist process (even in the most free markets), so a more visible state is not necessarily counter to a properly functioning free market, or the continuing existence of one. The state may have to periodically show its face, but it is still firmly on the side of capitalism.

That the majority of SWFs are in emerging markets is not just a product of global imbalances and high commodity prices of the last decade, they are an expression of these political economies’ embrace of market capitalism and globalization. As has been suggested by some commentators, such as Ashby Monk, this crisis may engender the development of new SWFs and the extension of others (just have a look at all of the “varieties of capitalism” that have decided to join the SWF bandwagon). Given SWFs are by nature capitalist entities in pursuit of the profits of global capitalism, such a reaction would be another confirmation that the embrace of capitalism remains strong, with states (not surprisingly) leading the embrace.

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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