Human technology

Welcome to the Age of the Authoritarian State

JHE RELATION between governments and businesses is constantly evolving. After 1945, many countries sought to rebuild society using state-owned and operated enterprises. In the 1980s, in the face of sclerosis in the West, the state retreated to become an arbiter overseeing the rules allowing private companies to compete in a global marketplace – a lesson learned, of sorts, by the communist bloc. Now, a turbulent new phase is underway, as citizens demand action on issues from social justice to climate. In response, governments order corporations to make society safer and fairer, but without controlling their actions or their boards of directors. Instead of being the owner or the arbiter, the state has become the backseat driver. This authoritarian commercial interventionism is well intentioned. But, ultimately, it is a mistake.

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Signs of this approach are everywhere, as our special report explains. President Joe Biden pursues an agenda of soft protectionism, industrial subsidies and just regulation, aimed at making the home of free markets safe for the middle classes. In China, Xi Jinping’s “common prosperity” crackdown is designed to curb the excesses of his freewheeling boom and create a more self-sufficient, docile and obedient business scene. The European Union is moving away from free markets to adopt an industrial policy and “strategic autonomy”. As the biggest economies pivot, so do the medium ones like Britain, India and Mexico. Fundamentally, in most democracies, the appeal of intervention is bipartisan. Few politicians fancy running an election on a platform of open borders and free markets.

Indeed, many citizens fear that the markets and their arbitrators are not up to the task. The financial crisis and slow recovery have amplified anger over inequality. Other concerns are more recent. The ten largest tech companies in the world are more than twice as big as they were five years ago and sometimes seem to behave as if they are above the law. The geopolitical context is a far cry from the 1990s, when expanding trade and democracy promised to go hand in hand, and the Cold War when the West and the Soviet Union had few commercial ties. Now the West and totalitarian China are rivals but economically linked. Erased supply chains are at the root of inflation, reinforcing the perception that globalization is too extensive. And climate change is an increasingly pressing threat.

Governments are rethinking global capitalism to address these fears. But few politicians or voters want to return to full-scale nationalization. Even Mr. Xi has no desire to rebuild an empire of steelworks run by chain-smoking commissioners, while Mr. Biden, despite his nostalgia for the 1960s, need only cross the congested ports of the American West Coast to remember that public ownership can be chaotic. . At the same time, the pandemic has seen governments experiment with new policies that were unimaginable in December 2019, ranging from perhaps $5 billion or more in subsidies and guarantees for businesses to indicative advice on optimal spacing. customers in the shopping aisles.

This openness of the interventionist spirit materializes around policies that do not take ownership into account. A set of measures claims to improve security, in the broad sense. The class of industries in which government direction is legitimate for security reasons has expanded beyond defense to include energy and technology. In these areas, governments act as de facto central planners, along with research and development (R&D) spending to foster local innovation and grants to redirect capital spending. In semiconductors, America has offered a $52 billion subsidy package, one reason Intel’s investment is expected to double from five years ago. China is seeking self-sufficiency in semiconductors and Europe in batteries.

The definition of what is considered strategic may well expand further to include vaccines, medical ingredients and minerals, for example. In the name of security, most major countries have tightened rules that filter incoming foreign investment. The US web of punitive sanctions and technology export controls encompasses thousands of individuals and foreign companies.

The other set of measures aims to strengthen entrepreneurship. Shareholders and consumers no longer have the undisputed primacy in the hierarchy of groups that corporations serve. Managers must weigh more heavily on the welfare of other stakeholders, including staff, suppliers and even competitors. The most visible part of this is voluntary, in the form of “ESG” investment codes that rate companies for, for example, the protection of biodiversity, local populations or their own workers. But these broader obligations can become harder for companies to avoid. In China, Alibaba pledged a $15 billion “donation” to the cause of common prosperity. In the West, participation can be imposed by bureaucracy. Central banks and public pension funds can avoid stocks of companies deemed antisocial. The US antitrust agency, which once only protected consumers, is considering other goals, such as helping small businesses.

The ambition to tackle economic and social problems is admirable. And so far, outside of China at least, an authoritarian government hasn’t hurt business confidence. The main US stock index is more than 40% higher than it was before the pandemic, while capital spending by the world’s roughly 500 largest listed companies rose 11%. However, in the longer term, three dangers loom.

High stakes

The first is that the State and companies, faced with contradictory objectives, will not be able to find the best compromises. A fossil fuel company forced to preserve good labor relations and jobs may be reluctant to contract, which hurts the climate. An antitrust policy that helps hundreds of thousands of small suppliers will hurt tens of millions of consumers who will end up paying higher prices. Boycotting China for its human rights violations could deprive the West of a cheap supply of solar technologies. Companies and regulators focused on a single sector are often ill-equipped to deal with these dilemmas and lack the democratic legitimacy to do so.

Diminishing efficiency and innovation is the second danger. Duplicating global supply chains is extremely costly: multinational companies have $41 billion in cross-border investments. More pernicious in the long term is a weakening of competition. Firms that gorge themselves on subsidies become flaccid, while those shielded from foreign competition are more likely to treat their customers meanly. If you want to rein in Facebook, the most credible challenger is TikTok from China. An economy in which politicians and big business manage the flow of subsidies according to orthodox thinking is not an economy in which entrepreneurs thrive.

The last problem is cronyism, which eventually contaminates business and politics. Corporations seek advantage by trying to manipulate government: already in America the line is blurred, with greater corporate interference in the electoral process. Meanwhile, politicians and officials end up favoring certain companies, having invested money and hopes in them. The desire to intervene to mitigate each shock is a habit. Over the past six weeks, Britain, Germany and India have spent $7 billion to prop up two energy companies and a telecom operator whose problems have nothing to do with the pandemic.

This newspaper believes that the state should intervene to improve the functioning of markets, for example through carbon taxes to move capital towards climate-friendly technologies; R&D fund science that corporations won’t fund; and a benefit system that protects workers and the poor. But the new style of authoritarian government goes much further. Its adherents hope for prosperity, fairness and security. They are more likely to end up with inefficiency, vested interests and insularity.

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This article appeared in the Leaders section of the print edition under the headline “Beware the authoritarian state”