Why Communists Make The Best Capitalists

It is often assumed that the United States is the best exemplar of capitalism and the difference in stock market performance between the US and China in the last two decades has certainly played a role in reinforcing this view. That said, China’s economic model has prioritized broad-based economic benefits for its citizens above corporate profits, better reflecting the classical economic theory of perfect competition.

While the S&P 500 has more than tripled since 2009, Shanghai’s indices languish behind. This performance differential has often been attributed to investor reluctance in the face of Chinese state interference. However, this divergence in stock market returns may be the result of lower profit margins due to higher levels of competition in China.

The concept of perfect competition, originating with Adam Smith’s ‘invisible hand’ before being formalized a century later by economist Alfred Marshall, posits that profits tend towards zero as competitors enter the marketplace, driving prices to marginal cost.

China has embraced this foundational capitalist economic model, using state subsidies for start-ups and enforcing anti-trust laws to promote competitiveness between manufacturers.  Western markets, on the other hand, tend to favour established players. US corporate profits hit record highs during recent economic crises, even though median wages have stagnated.

This divergence between China and the US underscores how a highly concentrated market directs wealth to shareholders who have come to favour buybacks over innovation. Boeing’s recent struggles epitomize this ideology, while Pfizer’s COVID vaccine pricing (which was fivefold higher in the US than in Africa) illustrates the struggles facing Western consumers.  

In this respect, China may be more capitalistic than the West, redistributing value away from firms and toward consumers, which is precisely what classical economics predicted would occur under conditions of perfect competition.

American capitalism, in contrast, appears a lot more monopolistic, dominated by a handful of big tech companies and nationwide retailers whose margins benefit from economies of scale, rent-seeking, regulatory capture, brand loyalty, and tax optimization.

It’s not just the businesses either. Chinese consumers, shaped by decades of rapid market evolution, exhibit particularly low brand loyalty compared with other countries. A McKinsey study found 40% of Chinese consumers switch brands for better value versus 25% in the US. This consumer fluidity forces companies to compete on both price and quality.

US firms have learned to think of profits as permanent and brands as unassailable. China thinks differently. A consumer in Shenzhen switches brands because the camera quality is marginally better, while a California consumer sticks with Apple because they’re locked into the ecosystem. One is an efficient market. The other is an example of Stockholm syndrome.

Xiaomi’s rise against Huawei in smartphones exemplifies this trend. In contrast, brand loyalty in the West insulates firms like Apple, whose ecosystem locks in users despite premium pricing.

The competitive intensity of the Chinese domestic market is often overlooked. No major platform has been able to dominate its segment for long. Alibaba was forced to adapt or perish when Pinduoduo redefined e-commerce with bargain-led group buying. Didi disrupted taxis but was soon under pressure from Meituan and others.

High levels of competition and constant innovation keeps resetting the pricing environment, lowering margins, and raising consumer expectations. The average operating margin for Chinese tech companies is less than 10%. In the US, the equivalent figure is at least double and often much higher. Although this has meant investments in dominant US companies have often offered higher returns for investors, these higher margins indicate a lack of genuine competition.  

Another reason Chinese firms can’t slack off is because of a regulatory system that, while often criticized as heavy-handed, enforces competition far more rigorously than in the West. When Alibaba was caught squeezing vendors with exclusive contracts, regulators didn’t hold back. They fined the company $2.8 billion. Tencent’s exclusive music licensing was unwound by force and Ant Group’s IPO was blocked because its lending business had grown too large.

These moves were widely framed as evidence of China’s hostility towards business. But perhaps they simply reflect China’s hostility towards monopolies. Meanwhile, in the United States, policymakers have allowed tech giants to grow and self-regulate with fewer constraints.

Google and Meta now control more than 80% of the global digital ad market while Nvidia is worth more than most countries. This isn’t just bad for business. It is a threat to democracy. As news rooms shut down and newspapers go out of print, the independent media our freedoms depend on struggle to survive, while whole nations must compete with big tech for capital.

For ordinary Americans, the situation is just as bad. Overpriced weapons systems drain taxpayer resources, while drug companies charge much higher prices in the US compared with foreign markets. This means the cost is not just paid by Western consumers but by their cash-strapped governments whose procurement budgets are bloated by anti-competitive pricing.

This stagflationary trend in America’s real economy could eventually have consequences for the entire US financial system as the Treasury market comes under strain due to growing budget deficits and higher debt servicing costs resulting from higher levels of inflation.  

Meanwhile, American leaders regularly accuse China of operating a closed economy, but that’s not really true. Tesla operates its largest factory in Shanghai. Apple sells more iPhones in China than in any other market outside the US. Starbucks, KFC, and McDonald’s are all well supported. In fact, there are almost three times more KFC stores in China than in the United States.

While the US excludes Chinese tech companies like Huawei and BYD from its market, China still makes iPhones for Apple and buys their products. This openness also created conditions where domestic firms must be competitive not only against each other but also against foreign incumbents. The US, on the other hand, uses tariffs, sanctions, and legislative exclusions to protect its companies from competition, leading to negative outcomes for consumers.

The Trump administration has even argued that China and Europe are only more competitive than the US because of labour exploitation, ignoring differences in profit margins. But employees have benefited from Chinese capitalism too. Huawei is a 99% employee-owned private enterprise with its founder, Ren Zhengfei, retaining just 1% of the shareholding.

While a surprisingly large number of US firms are also employee owned, Chinese workers tend to accept lower wages (another symbol of heightened competition), while R&D personnel consume roughly one-quarter of revenue and comprise more than half of Huawei’s workforce.

The irony is that ‘communist’ China is succeeding by doing capitalism better than the West. Profits are lower and prices trend toward marginal cost. Although state intervention remains a factor, the US has also become increasingly reliant on state intervention. This may be hypocritical but perhaps it is a good thing. After all, capitalism is supposed to be an economic theory not a political system.