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A Contribution to the Debate on the Class Character of China

2018-09-16

Introduction

Virtually all of the radical left circles I have moved through have taken it for granted that the People’s Republic of China was a thoroughly capitalist state, economy, and society. Many of the comrades (past and present) with which I have discussed the class character of China have pointed to its possession of a stock exchange, its apparent deep embeddedness in the linkages of capitalist production and commodity chains, and the supposed “imperialist” character of the Chinese state. When demonstrating the imperialist character of China, some of my comrades will point to what they say is the congruence of Lenin’s theory of imperialism and the empirical fact of the increasing flow of Chinese capital into certain oppressed nations.

In this contribution, I wish to argue that the popular “orthodox” judgement that China in a thoroughly capitalist state and economy is mistaken. I will do this by adopting a large portion of the arguments made by the economist Michael Roberts. He explains that while the law of value does operate to some degree in China, it is by no means dominant. In fact, the political state of the People’s Republic of China still retains enormous and overwhelming dominance over the economy of China. As Roberts explains, capital flows in and out of China are strictly controlled, and the vast majority of the GDP growth of the PRC is due to the production of State Owned Enterprises.

This article will say nothing about the class character of the superstructure of the PRC. It is concerned only to deal with the material base. It is Roberts’s position that the political character of the Chinese state is an autocracy, and not a worker’s democracy. I broadly agree with this assessment. Despite this, Roberts points out that the PRC is at a crossroads, and that the future development of China is a forked road. The future of the class character of China is open and contested within Chinese society. There are not insignificant political forces in China which wish to see it develop into a proper socialist society, instead of as it is now, what I call a “distorted” one. Indeed, the pro-capitalist political players within China have been partially discredited by the way the West has suffered so badly from their reliance on naked market forces.

The roadmap for this essay is as follows:

  1. First, I will look at the current hard data on the Chinese economy
  2. Second, I will “sort through the endoxa” on the economy of the PRC: I will look at the two most highly regarded theories on China’s economic development since 1978.
  3. I will perform a critical assessment of these two orthodox theories, following Michael Roberts.

Current Data on the Chinese Economy

First, let’s recount the famous data on China’s GDP growth. It is the envy of the whole world. Not even India can approach the heights of the expansion of the Chinese economy:

Chinese GDP Growth, Actual vs Target

Even though China’s GDP growth is enormous compares to the West, which struggles to reach even 2% growth per year, Roberts says China needs to maintain its GDP growth at at least 8% per year in order to stop unemployment from increasing. The proletarianisation of the rural Chinese population continues apace–millions of people are leaving the countryside and flocking into the cities, and high unemployment would cause social unrest.

Just take a look at the data on the increase of China’s industrial output since 2007. It is enormous. Indeed all other countries seemingly have “deindustrialised”:

Chinese Industrial Output Since 2007

Let’s next look at the GDP per capita of China:

China's GDP per capita in real terms (PPP)

Taken at face value, the data above shows that China’s enormous economic expansion has increased the wealth of its population significantly. Indeed, Roberts reports that approximately 600 million people have been lifted out of poverty, according to the standard international definition.

But this graph hides the massive growth of inequality within China because of the expansion of market forces within the country. Just take a look at the historial change of China’s Gini coefficient:

Absolute Change of Gini Coefficient of China

Roberts writes in Workshop On China: Challenging the Misconceptions (7 June 2018):

But at the same time, the law of value and capitalism operates within the country. Indeed, the capitalist sector in the economy is growing; there are many more Chinese billionaires and inequality of income and wealth has risen; while Chinese labour struggles against exploitation in the workplaces.

So the economic growth of China has come at the expense of massive increases in wealth inequality. A very interesting question to answer would be–who has benefited the most out of China’s enormous industrialisation?

The Current ‘Orthodox’ Position on the Class Character of China

Most people on the left have taken this data to indicate that China has fully completed its transformation into a capitalist economic system. The data that most comrades take as authoritative on China’s capitalist nature is the massive increase in inequality. People take this to mean that China’s society has well and truly stratified into a capitalist ruling class and propertyless workers.

I will now assess this claim–that China is now fully capitalist. By itself, the Gini coefficient is insufficient to decide on this question. Indeed, the data on Gini presented above is quite ambiguous.

I will perform a rehearsal of the discussion that Roberts makes in his 2015 seminar paper China: Three Models of Development, and then perform a critical assessment of the conclusions he makes.

Neoliberal

The mainstream discourse on the economic development of China, and its corresponding class character, is the neoliberal economic discourse. This discourse centres around how China has oriented to exporting commodities in the global capitalist system. World Bank economist Lin argues that under Deng Xiaoping, China oriented from a comparitive advantage defying strategy (CAD) to a comparitive advantage following strategy (CFD).

Roberts writes that this means

By this [Lin] means that China‘s leaders realised that the bias in state intervention towards developing heavy industry at the expense of agriculture, or increasing capital inputs instead of using the plentiful supplies of cheap labour eventually created distortions in the prices of products, weakened agricultural prices and rural incomes relative to industry, ke pt consumption too low and generated over accumulation with low capital productivity (pp 1-2)

The old strategy of CAD lead to a range of industries that were “unviable”–meaning “uncompetitive on the global capitalist market”. Under Deng, Lin argues that China took advantage of its comparitive advantage, its cheap labour factor of production.

Roberts says that Lin argues

[that] under Deng, China then embarked on a “dual-track system”, introducing reforms in some areas while maintaining the status-quo in others - aimed at controlling the shock delivered at one time. Farmers were one of the first beneficiaries - they were allowed to own their land again (collective farms were broken up) and could set prices for selling their production that exceeded quota obligations sold to the state at fixed prices. Meanwhile, entry of private enterprises, joint ventures, and foreign investment in to labour - intensive sectors was allowed (p 2).

Lin argues that it is possible to detect a trend in China’s development that shows that the most successful industries in China turned towards exploiting cheap labour, instead of using more capital-intensive economic production. He claims that this special “index” that you can construct demonstrates why some regions of China have performed better economically than others.

Roberts gives three counter arguments which cast a great deal of doubt on Lin’s theory that China’s development is due to the expansion of reforms that better integrated it into the global capitalist system.

First, Lin’s explanation seems to suggest that China’s economic fortunes under Mao were terrible. But this isn’t the case. From 1952 to 1978, the GDP of the PRC increased 6.1% per year on average. Given that the official predictions for GDP growth in China are around 8% per year, Lin’s explanation that China’s shift towards a CFD strategy doesn’t seem to have produced a different kind of growth in China.

Second, Roberts writes that

As Tyler Cowen recently put it, a leading neoclassical economist of the 1950s and 1960s, Paul Samuelson considered comparative advantage as an example of an economic theorem which was both true and trivial. It had little explanatory value. As a static model, it takes no account of the dynamic perspective. The law assumes perfect mobility of labour, and “sits uneasily with the observation that long-term unemployment is indeed possible” (p 3).

Finally, the original comparitive advantages that a country has are endogenous to specialisation decisions and other economic factors. Endogeneity is the quality of being internally connected to some process or object in a complex way. So the endogeneity of specialisation decisions and certain economic factors means the competitive advantage of some country is not easy to just look up in a book or encyclopedia and write down in a spreadsheet. Because the world market is not made up of a single economic input, the only way to assess some comparitive advantage is with market prices. But this is where the problem of endogeneity comes to bear–just because something is cheap, doesn’t actually make it a competitive advantage, because of the enormous complexity of the world economic system.

Lin treats comparitive advantage as something simple to observe and decide upon – as if it was an epiphenomenon – something that is external to the system China was embedded in. This is not true at all.

Many comrades adopt Lin’s approach, whether they’d like to admit it or not. Almost everyone in Australian society claims China’s cheap labour was the reason that they ended up industrialising so spectacularly, becoming a capitalist society. Lin’s theory is the most rigorous form of this pub explanation. It turns out to be completely unfounded in science.

Keynesian

Let’s turn to a slightly more nuanced perspective – the paradigmatic Keynesian one currently offered up. One such paradigmatic Keynesian explanation for China’s economic development since Deng Xiaoping is one given by an scholar named John Ross.

Roberts explains that

Ross argues that the key factor in China‘s development was not a switch to a policy of comparative advantage but the continued effort raise investment. For Ross, growth depends fundamentally on an increased division of labour, following Adam Smith’s insight. Increased division of labour implies a sustained rise in investment in mechanisation and technology over labour inputs, thus boosting productivity . Thus it was not a switch to using cheap labour and allowing a rise in agricultural prices that allowed China to “take off” but more investment in technology i.e. great er capital inputs as well as labour (p 4).

This explanation is the obverse of Lin’s. Lin follows the neoclassical dictum that investment does not drive economic growth. Lin claims it is consumption which drives growth–the old “the consumer is king” slogan, that it was consumer preferences which drove market forces and production. But, as Ross shows, there is empirical evidence that investment does drive growth – the trend in economic development all throughout history is that the proportion of the economic devoted to investment rises.

The “revolution” in the PRC after Mao, Ross claims, was that Deng Xiaoping followed a Keynesian economic development model. Deng dismantled the old Maoist administrative control of the economy, and “replace[d] it with a Keynesian - style macroeconomic model that would boost investment further” (p 5).

Ross argues:

In China, … relatively limited budget deficits have been combined with low interest rates, a state owned banking system and a huge state investment programme. While the West‘s economic recovery programme has been timid, China has pursued full blooded policies of the type recognisable from Keynes General Theory as well as its own “socialism with Chinese characteristics”.

So it is apparently the case that Deng was completely ideologically uncommitted. He was prepared to permit the growth of a private market and the development of large state investment in the economy.

The Explanation of the Sources of Growth in the Chinese Economy

Indeed there seems to be evidence to support Ross’s premises:

So whereas in the US, for example, fixed investment fell by over 25% during the financial crisis in China, urban fixed investment rose by over 30%. Consequently, there is no mystery why China‘s economy grew by 41.4% in the four years since the peak of the last US business cycle at end 2007, while the US economy has grown by only 0.7 %! (Roberts, p 6).

Michael Roberts: A Nuanced Marxist Perspective

While Ross’s explanation and description of China’s economic development since Deng Xiaoping seems to have some evidence, he starts from some false premises. The correct way to start analysing the economic development of some society under capitalism is not to start with its comparitive advantage, or the rate of savings and investments in an economy, but to start with the law of value.

As Roberts explains, understanding the operation of the law of value in China will provide us with the precise explanation of the class character of the PRC:

China’s econom ic development is better gauged from the ability of an economy to avoid the unstable impact of the law of value while al so recognising its inexorable power.

The Law of Value in China

Roberts explains that the Marxist understanding of economic development, the law of value, is about the dialectical contradiction between “productivity” and “the falling rate of profit”. Productivity, as Marxists understand it, is the rate of exploitation–the rate of surplus value extraction from a worker in the workplace. The higher the rate of exploitation, the more productive a worker, workplace, or economy is. However, this special indicator of economic fortunes needs to be weighed against the result that it has on the global economic system, and this is determined by the “rate of profit” of an industry or a workplace.

Broadly speaking, the more surplus value a sector of an economy produces, the more investment it will receive. Resources will be directed at more productive sectors, and even pulled out of sectors with a lower rate of exploitation. But this has a counter-acting effect on the economy. This causes the “rate of profit”, the overall return on capital investment, to sink in that sector with a higher rate of exploitation as well as the rest of the economy, because they are now producing with less investment.

The only way that economies can return to higher rates of profit is by increasing their use of technology in order to increase the rate of surplus value again, in order to drive more investment in targeted sectors of their economy.

Comparison of Percentage of Research Spending Against GDP

Roberts provides evidence for this crucial piece of Marxist economic science:

I found that, within overall productivity growth, average productivity achieved from innovation has risen in importance compared with labour and capital inputs as a source of world growth over the last 20 years, except in the G7 economies, which have also experienced much slower growth. Average productivity achieved from innovation has risen from a 12% contribution to world GDP growth in the early 1990s to 37% in 2008. But the G7 average productivity achieved from innovation contribution has fallen from 18% to 15%. The average productivity achieved from innovation contribution in the major EMs has risen from just 11% in the 1990s to 47% in 2008. So innovation and technology transfer was increasingly important to EMs over capital and labour inputs.

Productivity Due to Innovation

Roberts explains the operation of this need to increase productivity through machinery and automation throughout history:

Even if China’s rapid growth was founded on a very high ratio of capital investment, as well as on cheap labour in the period up to the Great Recession, it may be a different story from hereon. Gross investment has averaged over 47% of GDP since 2009. But real GDP growth has been slowing. So China’s productivity return on new investment (or the productivity of capital input) is declining. Back in 2006, before the global crisis, it took 2.9 units of investment to increase real GDP by 1 unit. In 2014, it now takes 6.6 units. China needs to return to its long - term average productivity achieved from innovation rate of over 2.5% a year to sustain 7% real GDP growth (p 10).

So what does this mean for the class nature of the Chinese economy? The best answer is always the historical one. Roberts shows the three phases of profitability in China lead to the answer of exactly what the class character of China is.

The first cycle since 1978 was this: between 1978-1990 “there was an upswing as capitalist production expanded through the Deng reforms and the opening up of foreign trade”.

But, following 1990, in the second cycle, from 1990 to 1999, there was a decline in the rate of profit in China, as over-investment plagued the Chinese economy, and many other countries of similar development (Mexico, East Asia, and Latin America, all between 1994-2001), went into severe economic crisis after being forced to “join” the Washington “consensus”. This falling rate of profit caused a slowing in GDP growth.

Then, as Roberts explains

Then, from about 1999 onwards, there has been a rise in profitability, which also saw a significant rise in the rate of economic growth (as the world too expanded at a credit - fuelled pace) After 2007, the slump in world capitalism drove down Chinese profitability. Rising wages were not matched by increased sales abroad, so the rate of surplus value slumped (green line) while investment in fixed capital remained high (red line). So profitability fell.

China Rate of Profit Composition

As you can see, the data for the organic composition of capital shows it rose as surplus value sank, as Marx explained.

These changing fortunes of profitability show that it is true that the law of value is operating in China, and that the world market has some effect on the Chinese economy. But who exactly is driving the investment, and why has China’s rate of profit not been as affected by the global market as the rest of the world? The following data provides the final piece of the puzzle to explaining how the law of value operates in China:

Public Sector Value to Private

Historical Ratio of Public vs Private Stock Value to GDP

As you can see in the first graph, the ratio of the Chinese public GDP and stock to private is almost 3:1, in absolute terms.

The second graph provides the biggest piece of the puzzle to explaining the changing fortunes of proftibability in China – while public stock is still greater in absolute terms compared to GDP, the ratio of private stock to GDP is growing. So capitalism, defined as the law of value, is not dominant in China, but it is growing.

Critical Assessment of Roberts’s Argument

Roberts’s analysis of the class character of the Chinese state is incredibly illuminating. Indeed Roberts demonstrates that the class character of the Chinese state is still closer to the old “degenerated/distorted workers state” characterisation than to the now-popular characterisation as fully and thoroughly capitalist. From what I can discern, Roberts’s explanation that growth in China is triggered by investment which stems from state directed finance from public funds seems sound. This explanation is grounded on the Marxist science of the law of value. The PRC’s rate of profit is so incredibly high because it manages to avoid much of the pitfalls of the profitability of a capitalist economy. But to the extent that capitalism and the law of value do plague the PRC, you see deviations and slumps in the overall productivity of the Chinese economy.

The major drawback of Roberts’s account of the class nature of China is that is is incredibly general and broad-brush. Personally I cannot fault him for this defect in his work because his goal with respect to analysing the rate of profit in China is not to draw up a specific set of guidelines about how to relate to specific forces in China, he is more concerned with measuring the global rate of profit, and analysising the fortunes of global capitalism as a whole.

Roberts’s work also says nothing about the political structures of the PRC. It is entirely concerned with the economic base of China. A complete dialectical analysis of the PRC and its role in the cause of global communism demands that we also understand how the superstructure of the state of the PRC relates to its economic base.

As far as I am concerned, this is the very beginning of a long debate that we need to pay close attention to, because China is a major economic and political force in the world, and there may be forces within it that we can relate to in order to best carry out internationalist socialist struggle.

Conclusion

I believe Roberts’s work on the class nature of the Chinese economy needs to be radically expanded and continued. It is my understanding that in November there will be a conference at Newcastle University discussing the role that Marxism plays in politics and the economy of the PRC. It stands to reason that to find out more about the forces that exist in China and what they have to say would suggest that we have a presence at that conference.