'The End Of The Free Market': Why America Must Defend The Free Market Economy (VIDEO)

Breaking News: This is not free market capitalism's finest hour.
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Breaking News: This is not free market capitalism's finest hour.

Greece has provided the eurozone with its largest ever stress test. The EU and IMF have ridden to the rescue, but that's hardly a ringing endorsement for the world's largest ever experiment in capitalism without borders. Things aren't going well in Japan either as a beleaguered prime minister and a deeply indebted, dysfunctional government lose public and market confidence. In America, unemployment hovers near 10 percent, and voters appear poised to punish incumbents of both parties in November. Bankers, particularly those from Goldman Sachs, fit the bill as bad guys. Deficit reduction and trade deals have been shelved for another day.

Meanwhile, things are looking up for the largest state-driven economies. China looks set to resume the double-digit growth of the past 30 years. The recovery in oil prices has buoyed Russia, Saudi Arabia, and the United Arab Emirates. As Europe, Japan, and America struggle to their feet, the developing world's free-market skeptics are again off to the races.

Communism is dead, but we can't say the same for authoritarian government. The Soviet collapse made clear that governments can't simply mandate lasting economic growth. So to fuel the growth and create the jobs on which their political survival depends, governments of non-democracies must embrace market capitalism. But if they leave it entirely to market forces to determine who wins and who loses, they enrich those who might use the new wealth to challenge their political power.

To maximize control over how (and for whom) wealth is generated, authoritarians have embraced state capitalism. In China, Russia, Saudi Arabia and other non-democracies, state-owned companies and privately owned national champions help political leaders dominate sectors as diverse as energy, aviation, shipping, power generation, arms production, telecommunications, metals, minerals, and petrochemicals. They've built global market power: National oil companies now own more than three quarters of the world's oil reserves. Governments finance state capitalism with help from increasingly large sovereign wealth funds.

In short, these states are using markets to create wealth that can be directed as political officials see fit. The ultimate motive is not economic (maximizing growth) but political (maximizing the state's power and the leadership's chances of survival).

There's nothing new about state-owned companies or governments active in their domestic economies. But we're no longer talking about a few Western-friendly developing countries run by military dictators or a communist world buried safely beneath a wall. Today's state capitalism is driven by the world's fastest growing emerging market powerhouse and many of the world's largest energy exporters. The global economy needs these countries to succeed.

To illustrate the differences between various economic systems, imagine a football game. Soviet-style command economics is a game in which the state tries to predetermine the final score by ensuring that all players, referees, and spectators faithfully perform their pre-assigned roles. It's more a pageant than a sport. The more interesting competition goes on in the shadows beneath the stands, and there are a lot more people down there than you think.

Free-market capitalism is a game with referees who exist only to ensure proper enforcement of recognized rules and with players engaged in genuine competition. Government's only role is to ensure that the rules are written effectively and fairly. It's an ideal, one to which most U.S. and European policymakers continue to aspire, despite the state-led financial crisis damage control of the past two years. In America, unfortunately, the referee has spent the past several years sleeping on the job as players invented their own rules. That's a problem that can be fixed.

State capitalism is a match in which government controls most of the referees and enough of the players to improve its chances of determining the game's outcome. Spectators profit from some limited level of genuine competition, but the state rigs the game to ensure that favored players (including family and friends) have what they need to score the vast majority of points on the state's behalf. Outsiders are welcome to join the league, especially when their experience and skills can help lift the overall quality of play. But referees are under no obligation to inform the new players of all the rules--or of any changes in how they might be applied.

This new system, made more attractive for would-be imitators by China's economic surge and its new international swagger, undermines free markets in several ways. Many state-owned companies and investment funds are as secretive and inefficient as their governments. Add the problem that political motives trump economic goals in their decision-making and you've sharply lowered the trajectory of global economic growth at a moment when everyone could use a dose of global economic dynamism.

In addition, Western companies and investors operating inside China, Russia and other state capitalist countries are discovering that once domestic companies develop the technical, management, and marketing expertise they need to compete with outsiders, their governments can use a variety of legal and administrative tools to favor the locals. Assumptions about long-term openness to foreign investment in these countries are dangerous.

Finally, multinationals operating in Africa, Latin America and throughout the developing world now find themselves competing on an unprecedented scale with Chinese and other state-owned companies armed with substantial material and political support from their governments.

Looking for scapegoats for the turmoil of the past two years is especially dangerous with some many obstacles in the road ahead.

WATCH Ian Bremmer on Thursday's 'Daily Show with Jon Stewart':

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