In his 1944 classic The Road to Serfdom, the Austrian economist and philosopher Friedrich August von Hayek warned that central planning and public ownership would inevitably lead to hardship, oppression, and even tyranny, while free markets would naturally maximize general welfare. The same year, in The Great Transformation, the American-Hungarian economic historian Karl Polanyi offered a very different picture, arguing that market forces and society are locked in a kind of struggle: capitalists exploit society through free markets, and society pushes back through regulation and politics.
Nearly 80 years later, debates over Polanyi and Hayek’s opposing views still echo through the halls of power in Beijing and Washington. While the West essentially adopted Hayek’s liberal order of free markets and democracy, China broadly followed Polanyi’s “great transformation,” becoming the world’s largest economy (based on purchasing power parity) and nearly eradicating absolute poverty.
Of course, China’s great transformation would have been impossible without economic opening and market-oriented reforms. For decades, the United States played a critical role in enabling and sustaining this process, not least by creating the conditions for globalization to flourish. American technology, military might, and diplomacy bolstered global security — few can deny the poverty-reducing potential of a peace dividend — while a stable U.S. dollar facilitated international exchange.
The U.S. also engaged with China directly. This brought far-reaching benefits, from helping to bring an end to the Cold War to contributing to progress on combating climate change. Meanwhile, China’s economic dynamism, together with its deep engagement in the world economy, helped to spur global growth and limit the fallout of shocks like the 2008 financial crisis.
The danger is that the weaponization of media, technology, finance, trade, and other former areas of cooperation sparks an inevitable escalation of tensions, leading eventually to war.
The issues Polanyi raised have been playing out not only in China. Large emerging economies like India, Indonesia, and Brazil struggle to deal with the consequences of market failures, such as income and wealth inequality, pollution, biodiversity loss, and global warming. While excessive government control raises its own problems — a point on which Hayek and Polanyi agreed — few would dispute the state’s ability to limit market abuses, redress negative externalities, and fulfill people’s expectations of security and prosperity.
In fact, as Polanyi warned, a state’s failure to address market failures and deliver political and economic stability typically leads to political backlash. This can cause the state to atrophy or even collapse, like the Soviet Union. It thus seems clear that state capacity is as important as market capacity.
A more contentious question is how to check market and state abuses. Different systems strike their own balance. China’s system of governance focuses on delivering substantive results to a majority of the population through an administrative-oriented accountability mechanism. From a Western perspective, this is fundamentally different from electoral democracy, which emphasizes legal and procedural rules and individual rights — and thus is unacceptable.
These differences go a long way toward explaining why China’s great transformation has triggered such a negative response from Western powers, which have in recent years eschewed close engagement and cooperation in favor of competition, confrontation, and containment. The danger is that the weaponization of media, technology, finance, trade, and other former areas of cooperation sparks an inevitable escalation of tensions, leading eventually to war.
Likewise, the more attention, resources, and capacity India and other rising powers direct toward national security and defense, the less they will be able to devote to domestic economic development and integration into the global economy. This will weaken the market-based relationships that have done so much to support peace over the last several decades. Given that China, India, and Indonesia may be among the world’s top five largest economies by 2050, and currently constitute 40 percent of the global population and nearly 175 percent of U.S. GDP (PPP), a new multipolar order must be negotiated to prevent major conflicts.
We can and must find common ground, pursue constructive engagement, and make compromises in the service of a global “great transformation” toward peace, prosperity, and planetary health.
The Cold War mindset is outdated. The view that rising powers must be contained fails to account for the lessons of two world wars, which were fought to keep two rising national powers (Germany and Japan) down. But today’s contest is between continent-size rising powers, with nuclear and increasingly destructive technology. Polanyi understood that systemic transformation involves a balance between limitless demand and limited resources. The solution is either war that accelerates planetary and human destruction, or peace and human survival through integrating all countries into a balanced global system.
Avoiding excessive instability within — and fragmentation of — countries is crucial to such a stable balance of power. This is why Western calls for self-determination in places like Xinjiang, Hong Kong, and Taiwan are so ill-advised. And it is not just China that is facing such pressures. The government of India was outraged last month after the U.S. state of Connecticut’s general assembly officially recognized the anniversary of the declaration of Sikh independence, thereby effectively showing support for an independent state within the country.
It is unrealistic to demand that all countries agree on their priorities, systems, and values, that they all heed the advice of Hayek, Polanyi, or some other intellectual. But that does not mean that we are doomed to live in a state of constant and escalating conflict. We can and must find common ground, pursue constructive engagement, and make compromises in the service of a global “great transformation” toward peace, prosperity, and planetary health.
Copyright: Project Syndicate, 2022
Andrew Sheng is Distinguished Fellow at the Asia Global Institute at the University of Hong Kong and a member of the UNEP Advisory Council on Sustainable Finance.
Xiao Geng, Chairman of the Hong Kong Institution for International Finance, is a professor and Director of the Institute of Policy and Practice at the Shenzhen Finance Institute at The Chinese University of Hong Kong, Shenzhen.
