What is "state capitalism"?

Twenty years ago when I was at the War College, it was fashionable to talk about state socialism, and that the USA was moving in that direction - economically, culturally, politically. Examining the history the political evolution of socialism, it occurred to me then, that we were not moving toward state socialism, but something different, which I called state capitalism. State Capitalism (SC), has the following hallmarks or rather principles that guide it -

1. The state does not own the means of production (like socialism, which does).
2. The state does incentivize innovation, via grants, tax breaks and, in some cases direct subsidies to innovative technologies, social services, health care services, etc. Friedman calls this "shaping the market". So total free-booting wide open markets are,, well, out.
3. The enterprises receiving these benefits do so to support political goals. Others are not discouraged, but not overtly encouraged by state incentives.

OK, this overly simplistic so far, and is only part one of a series. Also, none of this new: in fact it began, in this country, during and immediately after the Civil War. Here's how it happened - Sectional conflict over control of the area taken from Mexico was a key factor in starting the subsequent War for Southern Independence, the Civil War. This period, from 1861–65, led to a mammoth resurgence of Hamiltonian statism. First, by denying to states the right of secession, Lincoln utterly transformed the federal union, dealing a deathblow to real decentralization and abolishing the final check in the checks-and-balances system.

Second, Lincoln’s far-reaching executive “war power”—invented from whole cloth—paved the way for twentieth-century presidential Czarism. Likewise, his conscription set a precedent for wartime, and later peacetime, militarization of America. Civil liberties naturally suffered. With respect to the political economy, wartime centralization was equally harmful. With the free-trading South out of the union, Lincoln’s Republican administration secured passage of a “National Bank Act, an unprecedented income tax, and a variety of excise taxes ” verging on “a universal sales tax.”

Finally, subjugation of the Confederacy and its reintegration into the union on Northern terms made the South into a sort of permanent internal colony of the Northeastern Metropolis. Aside from protection of American manufacturers, perhaps the most flagrant wartime and post-war subsidy consisted of funds lent and land given to the railroads by the federal government to encourage railroad growth. Between 1862 and 1872, the railroads received from Congress some 100 million acres of land. Similarly, federal legislation saw to it that large quantities of “public” land in the South-which might have gone to freed slaves and poor whites—wound up mainly in the hands of Yankee timber and other interests. This was the beginning of state capitalism in the US. Without the Federal subsidies, the railroads probably would not have been built, at least in the form they took, and perhaps not at all.

Regulation of railroads, monetary reform, and the search for overseas markets (especially for agricultural surpluses) were among the major American political issues from 1865 to 1896. Southern and Western farmers sought regulation—and, ultimately, their radical wing sought nationalization—of the railroads to ensure their “equitable” operation. Another agrarian goal was large-scale coinage of silver to reverse its 1873–74 demonetization, and to provide “easier” money to foster trade with countries on the sterling standard.

Above all, many farmers sought new outlets for their crops. The deflation of 1873–79 gave them added reason to look abroad. According to William Appleman Williams, an “export bonanza” in 1877–81, occasioned by natural disasters affecting European agriculture, underscored the possibilities that overseas markets held for American prosperity. The bonanza’s end, when European farmers recovered, only reinforced the growing conviction that larger export markets for American farmers were both desirable and necessary. Failing at first to win government assistance to open up such markets, agrarian interests exerted substantial pressure for expansion.

With the Panic of 1893 and the subsequent economic crisis, many metropolitan industrial interests arrived at the view that foreign markets were essential to their prosperity. The turning point came when metropolitan Republicans, led by Ohio Governor William McKinley, presented a program attractive to industrial and agrarian interests alike. This set the stage for McKinley’s emergence as leader of an expansionist coalition. The stage was now set for the next stage of government / private sector economic integration... and in case you are wondering - the answer is yes. It's called fascism.

The developments summarized above were not natural or inevitable outgrowths of a market society. Rather, they fit the pattern of “export-dependent monopoly capitalism” as analyzed by Joseph Schumpeter, Ludwig von Mises, and E.M. Winslow.

Next week - Schrumpter and the second coming of Locke, Hume and Smith.