China has emerged as the world’s second largest economy and has regularly enjoyed economic growth in excess of 5 percent in recent years. With China’s middle class emerging as one of the world’s largest and more affluent and the Chinese military repeatedly flexing its muscle in Asia, many now believe that the Middle Kingdom will soon as emerge as the world’s foremost super power.

China Chinese Pettis
China’s Flag

This may indeed be the case, and if China does emerge as the world’s leading superpower, it may be Chinese state-owned firms that lead the way. While China appears to have embraced modern capitalism, the country’s economic model more closely resembles the old mercantile states of the 17th century than a modern free market economy.

Mercantile States and the Rise of the West

So what is a mercantile state? The mercantile system refers to states that closely managed the national economy in the 18th and early 19th century. Following the decline of traditional feudal societies and the emergence of modern industries many national governments, then still under the control of strong-armed monarchs, closely directed their economies.

Among other things, governments supported national industries with funding, land, and other assets. When the East India Company went East, the British navy supported them with their full military power. Numerous governments levied huge levies on imports, while some governments even subsidized labor costs with charity.

At the time, governments still competed fiercely with one another. While the last few decades have focused more on companies competing with each other, companies then took back stage to the competition between countries. Indeed, governments saw it as their duty to drive economic development so they could then raise revenues to fight wars.

With the rise of Adam Smith and free market economics, however, the West gradually turned away from Mercantilism. In many countries State slowly withdrew from direct activities and direction of the market. Even when governments did stay involved, they usually focused more on welfare and social development, rather than economic development.

China as a Neo-Mercantile Power

It’s important to remember that China is controlled by a “Communist” Party that once tasked itself with directing the entire economy. While China has embraced dramatic market reforms, the government itself has not left the market behind. Many of China’s biggest giants are in fact state owned firms and the government remains heavily involved in labor markets.

Indeed, most of the upper management of China’s state-owned companies are in fact members of the Communist Party and are appointed to run the company by high level government officials. There is a revolving door that sees upper level managers in State-owned companies and high level bureaucrats frequently moving between the private and public sector.

Many of these leaders are also trained at high level Chinese training centers, many of them closely affiliated with the Communist Party. This revolving door also allows for the private sector to wield massive influence over public policy, arguably more so than even the lobbyist system in the United States.

Economics Equals Power

The Chinese government understands that a vibrant economy will lead to more national power. Instead of focusing massive amounts of resources on building a world class military, Chinese officials appear more concerned with first building a truly world-class economy. The government has also taken developing a more innovative and educated people seriously.

While the West rests on its laurels and assumes that the economy will run, or at least correct, itself, China has taken the view that direct management of the economy will lead to better results. Whether or not this turns out to be true remains to be seen but it’s obvious now that China is neither a free market nor a communist state. Instead it is a neo-merchantile power with the government looking to directly increase the country’s economic clout.