China’s “market Leninism” graphically illustrates the tension between a static political system and a fast-changing, globally integrated market economy. Will China’s party-state adapt, or will it stagnate and get stuck in the middle-income trap? The auguries are not good.
A capitalist economy is, of course, a market economy: the exchange of goods and services at freely forming prices in a system that unites production and consumption. This was what Adam Smith meant by a market economy; he also emphasised property rights and “natural liberty”, or what we now call economic freedom—the individual’s freedom to produce and consume, and to use his property rights, as he sees fit. But capitalism suggests more than “market economy”. I use it in the Schumpeteriansense. For hovering above this essay is Joseph Schumpeter, one of the great twentieth-century economists; he was also perhaps the greatest historian of economic thought of all time, and surely one of social science’s most colourful and dazzling performing artists.
Karl Marx wrote about “capital”—the stock of wealth around which production and class relations are structured. Werner Sombart, from the last generation of Germany’s Historical School of economics, was the first to refer to “capitalism”. But Schumpeter had a different vision of capitalism. Vision was one of his favourite words. Today the word is debased, for everyone has a “vision”, just as everyone has a “philosophy”. But Schumpeter meant something precise: a vision is a personal conception of how a whole system works, before filling in its compartments and its nuts and bolts. He laid out his vision of capitalism first in The Theory of Economic Development, and later, encompassingly, in Capitalism, Socialism and Democracy.
Capitalism is the central nervous system of market society. It is responsible for the biggest increase in living standards the world has ever seen; it has lifted hundreds of millions, indeed billions, of people out of poverty and enormously improved the lives of ordinary people. Capitalism also transforms political systems and social relations. It is constantly changing, like cells in a biological organism. It also reminds me of Buddhist psychology: in the Buddha’s teaching, nothing is ever the same; everything changes all the time. Capitalism is never in equilibrium; it is always dynamic, never static. In that sense, neoclassical economic models of equilibrium-based perfect competition are irrelevant: they do not apply to real-world markets.