by Paolo Falconio * —
This analysis examines the crisis of Western financial capitalism and the emergence of state capitalism as a systemic alternative in global competition. The growing centrality of debt, financialization, and deindustrialization has progressively eroded the social and political foundations of the Western model, while systems characterized by strong state direction have demonstrated a significant capacity for strategic planning and long-term investment. The crucial point is understanding that the presence of state capitalism—typical of autarkic systems or systems with reinforced economic sovereignty—capable of generating wealth, innovation, and industrial power, confronts the Western model for the first time with a credible and competitive alternative. In different and more nuanced forms than in the twentieth century, a competition between systems is thus re-emerging, reminiscent of the one between free-market economies and centrally planned economies. The true stakes concern not merely economic growth, but the capacity of different models to generate stability, consensus, and geopolitical power in the twenty-first century.
The following analysis adopts an openly dichotomous interpretative framework—Western financial capitalism versus state capitalism—which should be understood for what it is: a heuristic tool, not an exhaustive description of reality. Existing economic models are far more hybrid and permeable than this contrast suggests, and simplification is the conscious price paid for a structural reading.
Some specific caveats deserve to be made explicit before proceeding. The emphasis on debt as the exclusive engine of the Western system risks obscuring the historical role it has also played as an instrument of development, innovation, and macroeconomic stabilization: debt has not merely been a source of fragility, and an honest interpretation cannot ignore this. Likewise, the presumed superiority of long-term planning in dirigiste systems must be relativized: alongside strategic successes coexist waste, overcapacity, and allocative distortions that are not accidental features but structural elements of any centralized architecture. Finally, interpreting state digital currencies as a crossroads between total surveillance and preservation of the status quo does not exhaust the range of technical and institutional solutions that may emerge in a field still largely open.
These limitations do not invalidate the central thesis. Rather, they invite it to be read as a robust and falsifiable interpretative hypothesis—not as a verdict.
For three decades, Western economic thought functioned as a theology without heresies: the self-regulating market was the endpoint of history, finance its universal language, and deindustrialization a virtuous transition toward a more “advanced” economy. Today, that theology reveals structural cracks. These fractures emerge simultaneously from within—from the right-wing populist revolt that has occupied the core of the Republican Party and from the social-democratic turn of the progressive wing of the Democrats—and from outside, where an alternative form of state capitalism advances with its industrial logic and a substantially public financial system.
I. The Dogma and Its Crisis.
The model that dominated the West beginning in the 1980s rested on a threefold conviction: that financial markets, if left free to operate, would allocate capital optimally; that manufacturing production could be delegated elsewhere without strategic consequences, provided financial flows and high value-added services remained in American and European hands; and that the institutional architecture of the state should progressively withdraw from the economic sphere, redefining itself as a mere guarantor of the rules of the game.
This vision was not without internal coherence. Financialization generated extraordinary rents, inflated stock markets, fueled consumption through retail credit, and allowed governments to conceal the decline of real wages through the illusion of wealth accumulation. The system functioned as long as domestic demand—artificially sustained through debt—held up; as long as exporting countries accepted recycling their surpluses into U.S. Treasury securities; and as long as the dollar remained the sole nervous system of global trade.
Deindustrialization was neither a law of nature nor the mechanical consequence of comparative advantage. It was a political choice, ideologically ratified as inevitable.
What presented itself as the natural evolution toward a post-industrial economy was, in reality, a redistribution of risk downward and of rents upward, accompanied by a progressive erosion of the industrial middle classes that had constituted the social foundation of postwar liberal democracy. The contradiction was not theoretical but sociological: financial capitalism was generating its own internal political opposition.
II. Internal Fractures: Vance and the Socialist Left.
It is significant that the crisis of consensus surrounding the financial model is now emerging across both sides of the American political spectrum, albeit with profoundly different languages and objectives. JD Vance represents the most theoretically articulated component of the new right-wing economic populism: criticism of the “managerialism” of financial elites, the demand for reindustrialization as a national project, and distrust toward globalization as a mechanism that enriched the coasts while hollowing out the country’s productive heartland. It is not Marxism, but it is a genuine critique of the structure through which the costs and benefits of financial capitalism have been distributed.
On the opposite side, the progressive wing of the Democratic Party — from Bernie Sanders to the new generation of congressmen and women close to social movements — has shifted the center of debate toward categories that until only a few years ago would have appeared alien to the American mainstream: public control of strategic utilities, pharmaceutical price regulation, taxation of mega-fortunes, and a redefinition of the relationship between state and market. With all necessary caveats, this represents a partial social-democratization of the Democratic Party, reflecting the pressure of a younger and increasingly impoverished electorate.
These two phenomena, apparently opposite, share a common denominator: the rejection of the post-Reagan consensus according to which prosperity is achieved through the freedom of financial markets and specialization in the tertiary sector. The question that emerges is whether this internal crisis within the American model is deep enough to produce a structural reallocation, or whether it is merely a political disturbance that the system can absorb without substantial transformation.
III. State Capitalism as a Systemic Alternative.
Yet the challenge to the financial model does not arise only from within. At the very moment when dissent is crossing Western democratic institutions, an alternative model has consolidated internationally, one that challenges the fundamental assumptions of the Washington Consensus. State capitalism — in its most complete form in the Chinese experience, but with significant variants in Russia, the United Arab Emirates, Saudi Arabia, Iran, and other contexts — represents a coherent economic paradigm rather than a simple transitional phase toward market capitalism.
The distinctive feature of this model is not the absence of markets, but their subordination to state logic. Industrial policy becomes a sovereign prerogative: the state determines which sectors should be strategic, directs investments through public banks, protects national champions from external competition and international financial speculation. The financial system is not an autonomous power capable of conditioning public choices, but an instrument that finances them.
This is perhaps the most radically alternative aspect of the model: in China, the four major commercial banks are state-owned and function as transmission belts for government economic policy. Stock markets exist, but strategic firms are not exposed to the predatory logic of hedge funds nor to the pressures of short-term shareholder value. The renminbi is managed in a way designed to serve national development objectives rather than maximize the free mobility of capital.
There is, however, an additional structural element that distinguishes this model and is often neglected in comparisons with the West: state capitalism is not built upon debt as the pillar of its own reproduction. This does not mean it is immune to debt — debt exists, and in some components, such as Chinese local government debt or construction-related credit, it has reached concerning dimensions. It means something more precise: debt is not the generative mechanism through which the system sustains aggregate demand, finances public expenditure, and guarantees the continuity of accumulation. In the financial West, debt — public, private, and corporate — is the belt that keeps the entire apparatus moving. Without credit expansion, the system does not grow; without growth, servicing previous debt becomes unsustainable. It is a structure intrinsically dependent upon its own fragility.
In state capitalism, and particularly in the Chinese model, the primary lever is different: monetary issuance remains fully under the control of the sovereign issuer. The state does not borrow from an external market to finance its objectives; it directs monetary creation toward them. The distinction is not merely technical. It fundamentally changes the architecture of debt, which remains internal. Debt contracted with private creditors — domestic or international — creates dependencies, imposes conditionalities, exposes the state to the discipline of financial markets and, in extreme circumstances, to speculation against sovereign bonds. Monetary issuance managed by the issuing state does not create this chain of external dependence: risk remains internalized within the system, and its management becomes a political choice rather than an externally imposed necessity.
Western debt is a form of servitude contracted with the market. Sovereign monetary issuance is a prerogative that financial capitalism has progressively ceded to the private banking system, while state capitalism has never formally relinquished it.
Naturally, this does not mean exemption from the parameters of the global economy. International commodity prices, exchange rates, and trade flows remain unavoidable realities: no national system, however sovereign in monetary management, can ignore them. China itself has had to confront deflationary pressures, capital flight, and constraints imposed by integration into global value chains. Nevertheless, the nature of the constraint is qualitatively different: these are external pressures to be addressed with internal instruments, not contractual obligations toward private creditors capable of conditioning budgetary and economic policy choices from within.
This asymmetry acquires strategic relevance in an era in which Western public debt has reached historically unprecedented levels during peacetime, and in which debt servicing increasingly competes with states’ ability to finance productive investments, energy transition, and defense. State capitalism is not devoid of its own financial vulnerabilities — credit bubbles resulting from directed lending, mismanagement of public enterprises, and opaque local government balance sheets are evidence of this. But its vulnerabilities are not those of a system that built its prosperity upon a debt pyramid requiring constant expansion merely to avoid collapsing under its own weight.
This is not a system without pathologies. Concentrating credit in the hands of the state generates systemic allocative imbalances and creates opportunities for politically driven corruption. State capitalism is no less “ferocious” than Western financial capitalism: it produces inequality, labor exploitation, and social exclusion. The difference is one of form, not humanitarian substance.
State capitalism is not a more humane capitalism in re ipsa. It is a capitalism in which the power to allocate surplus has remained in the hands of politics rather than migrating toward finance — and in which debt is not the engine, but merely a potential instrument.
Yet from the perspective of international systemic competition, the model demonstrates a resilience that financial capitalism struggles to counter in one specific domain: the ability to sustain long-term investments in strategic sectors regardless of their immediate profitability. Semiconductors, rare earths, renewable energy, and global port infrastructure are fields in which the logic of quarterly returns proves structurally inadequate, and in which medium- and long-term state planning has demonstrated an ability to create positions of dominance that are difficult to challenge.
IV. The Unresolved Question of Legitimacy.
The comparison between these two models cannot be reduced solely to economic efficiency. The crucial issue concerns political legitimacy. Financial capitalism, for all its distributive distortions, historically became embedded within a framework of liberal democracy that granted it a foundation of consensus — however fragile and increasingly eroded. State capitalism, in its Chinese and analogous variants, rests upon an implicit authoritarian bargain: economic development and social order in exchange for political subordination.
This bargain shows signs of wear as growth slows and the expectations of an educated urban middle class become increasingly complex. Yet the democratic-liberal bargain of financial capitalism is also under stress: the rise of populism, electoral disengagement, and the crisis of representation within intermediary institutions all reflect an exhaustion of legitimacy. The question is which of these systems possesses greater internal resources for reinvention.
The answer has not yet been written. What appears increasingly clear is that the era of convergence — the belief that all economic systems would progressively adopt the self-regulating financial market model — has come to an end. We have entered an era of competition among capitalisms, each with its own logic of power, distribution structure, and geopolitical projection. Within this scenario, the specific weakness of Western financial capitalism lies in its structural difficulty in mobilizing resources for long-term collective objectives without passing through the filter of private return.
V. Toward a Hybrid Capitalism? Western Options.
Faced with this challenge, the responses emerging throughout the Western world take different forms but converge on one point: the partial return of the state as a direct economic actor. The Inflation Reduction Act in the United States, the European Green Deal Industrial Plan, and the de facto renationalization of energy sectors across several European countries after 2022 are all signs of an ongoing hybridization — a form of financial capitalism that is beginning to reintegrate elements of industrial policy it had once proudly abandoned.
The question is whether this hybridization is sufficient and sufficiently coherent. The risk is ending up in an intermediate position: not planned enough to compete with the Chinese model in strategic industries, yet not liberal enough to preserve the innovative agility that historically constituted the comparative advantage of Western capitalism. Reindustrialization without reform of the financial system risks remaining a rhetorical exercise; reform of the financial system without a redefinition of ownership structures risks being captured by the very actors that financial capitalism has consolidated.
Reindustrialization without reform of the financial system is rhetoric. Reform of the financial system without redefining ownership structures is a promise the system can easily absorb and neutralize.
Financial capitalism is not at its end, but it is certainly approaching the end of its phase of uncontested hegemony. The question history poses to the West is not whether it should return to an impossible industrial past, but whether it is capable of constructing a model that rearticulates the relationship among state, market, and finance in a new way — without surrendering either to nostalgia or to the illusion that twentieth-century categories remain adequate for understanding the twenty-first century.
VI. State Digital Currencies as the Next Frontier in Competition Between Capitalisms.
Competition between Western financial capitalism and state capitalism does not end on the industrial or commercial plane. Its most advanced — and in some respects most decisive — battleground today is monetary. Central Bank Digital Currencies (CBDCs) are not a technical innovation in the ordinary sense of the term: they are the digital projection of a sovereign choice, the point at which the logic of the two models confronts each other in its purest form.
Money as an Architecture of Power.
To understand what is at stake, one must begin with a premise often avoided in the technical debate surrounding CBDCs: the monetary system is not neutral. Every monetary architecture incorporates a distribution of power among the state, private banks, and citizens. The current system in Western countries functions according to a logic of delegation: the central bank issues base money, but actual monetary creation — through credit — remains in the hands of the private banking system. Commercial banks do not merely intermediate pre-existing deposits; they create money at the very moment they issue credit. This creative capacity constitutes one of the silent pillars of financial capitalism: whoever controls credit controls capital allocation and therefore, ultimately, the productive structure of the economy.
A central bank CBDC — in its most radical form, direct citizen accounts at the central bank — dissolves this delegation. The state regains the capacity to transmit monetary impulses without passing through private banking intermediation. This is not nationalization of banks in the classical sense, but something potentially more transformative: a monetary disintermediation that redefines the role of private banking from creator of money to provider of financial services.
China’s Structural Advantage.
China understood this logic with strategic foresight. The digital yuan — the Digital Currency Electronic Payment (DCEP) — was not conceived as an equivalent of Bitcoin nor merely as a modernization of retail payments. It is an instrument of monetary policy and capital-flow control possessing characteristics that the Western private banking system could hardly tolerate: programmable spending, complete traceability, and the possibility of applying expiration dates to deposits in order to accelerate circulation velocity. In a system where the central bank is already de facto the state, CBDCs become the natural digital extension of a capitalism in which money never ceased to be an instrument of planning.
The geopolitical dimension is equally relevant. Beijing has launched bilateral agreements for the use of the digital yuan in trade transactions with several countries across Central Asia, the Middle East, and Sub-Saharan Africa. The objective is not to replace the dollar in the short term — that would be a premature ambition — but rather to construct alternative circuits capable of reducing dependence upon SWIFT and the American financial infrastructure. Every transaction conducted in digital yuan that bypasses the dollar-centered corridor represents a micro-erosion of American monetary sovereignty, all the more significant when multiplied over time and at systemic scale.
The Western Dilemma.
The West finds itself facing a dilemma that once again reveals the structural tension between financial capitalism and the demands of systemic competition. A fully sovereign CBDC — one granting the state direct transmission capability, programmability, and traceability — is fundamentally incompatible with the logic of financial capitalism, which depends upon the autonomy of private banking as allocator of credit. American and European commercial banks oppose the introduction of direct central bank accounts through every available means: they fully understand that this would represent a structural erosion of their systemic role rather than a simple technological innovation.
The result is an intermediate position: CBDCs designed for interbank wholesale use, or for retail distribution through private intermediaries that preserve the existing power structure while gaining technical efficiency. This is the same halfway hybridization already identified at the industrial level: not sovereign enough to compete with the Chinese model in international monetary projection, and not liberal enough to represent a genuine innovation in financial architecture.
The digital euro, in the form currently under consideration by the European Central Bank, represents a paradigmatic example: distributed through commercial banks, with explicit limits on balances held directly at the ECB, designed specifically to avoid disturbing private financial intermediation. A technical response to what is fundamentally a political challenge.
Surveillance, Freedom, and the Price of Monetary Sovereignty.
There is a dimension the technical debate tends to underestimate, yet which constitutes the most delicate political issue of all. The sovereign CBDC — programmable, traceable, and directly managed by the state — is also the most powerful instrument of financial surveillance ever conceived. Every transaction becomes visible, every spending pattern analyzable, every form of economic dissent potentially detectable. In an authoritarian system, this capability naturally complements political control. Within a liberal democracy, however, it creates an irreconcilable contradiction with the principles of privacy and individual autonomy upon which such democracies formally rest.
This is the point at which competition among capitalisms touches something deeper than allocative efficiency or geopolitical projection. State capitalism with sovereign CBDCs offers systemic power at the cost of compulsory transparency toward the state. Financial capitalism with hybrid CBDCs offers reassurance regarding privacy at the cost of preserving dependence upon the private banking system. Neither option is free of costs; the difference lies in the type of vulnerability each incorporates.
The true battleground of twenty-first century monetary competition will therefore not be merely technical or geopolitical. It will be the answer to a question no model has yet resolved: whether it is possible to construct a form of digital monetary sovereignty that does not evolve into total digital surveillance. Whoever succeeds in answering this question convincingly — not merely at the technical level, but at the level of political legitimacy — will win the most important contest of the coming decade.
In any case, beyond ideological judgments, the confrontation among these different forms of capitalism will increasingly become the central terrain of geopolitical competition for control over the production of wealth and systemic power. In other words, the decisive question of the twenty-first century will be which model is capable of guaranteeing greater stability, strategic capacity, and political legitimacy. For this reason, it would be reductive to interpret the contemporary crisis as a merely economic one: before being an economic crisis, it is a crisis of historical paradigm.
* Member of the Consejo Rector de Honor and lecturer at the Sociedad de Estudios Internacionales (SEI).
