If you haven’t read our piece on the US Dollar and how President Nixon’s legacy changed it’s legacy, read it first. The following is a continuation. With that said, let’s go back to the future.
It’s 2018. There’s a US-China Trade War looming. On the streets and alleyways of the internet, the dramatic outperformance of US markets is used as evidence that China will soon cry mercy, and yield to US demands. Those demands include most importantly, but not limited to, the removal of unfair Chinese government subsidies on exports. Think of these subsidies as a way for Chinese exports to be more attractive to buyers; simply put, the Chinese government pays some of the cost for consumers, allowing Chinese exporters to charge less and undercut the competition. The others demands are also important. They are: government protection for US intellectual property, and protection against IP theft. For the sake of this conversation, I’ll focus on these “unfair” subsidies.
“In the party’s official narrative, Socialism with Chinese characteristics is Marxism–Leninism adapted to Chinese conditions and a product of scientific socialism. The theory stipulated that China was in the “primary stage of socialism” due to its relatively low level of material wealth, and needed to engage in economic growth before it pursued a more egalitarian form of socialism, which in turn would lead to a communist society described in Marxist orthodoxy.” (From Socialism with Chinese Characteristics Wikipedia page)
The most important characteristic of socialism is public versus private ownership of business and business capital. In socialism, there is theoretically no such thing as private business. China, therefore, is not a purely Marxist/Socialist/planned economy (we will explain “planned economy” later). The above excerpt from Wikipedia describes China in a different way; China has put socialism on-hold. China is working its way towards it’s socialist destiny by using capitalism as the engine toward that goal. The Chinese believe Capitalism is simply a “primary stage” of socialism. There are plenty of signs it is progressing towards its goal. There are signs that Chinese capitalism is maturing. Since Special Economic Zones (SEZs) were founded by Xi Jinping’s father in the early 1980’s, they have expanded to cover the entire eastern coast of China. The evidence of their success is in lavish cities that have emerged from them, including Shenzhen, Haining, Zhuhai, Shantou, Xiamen, Kashgar, and other coastal development areas.
Kashgar is a whole story on it’s own, as it borders Afghanistan and Pakistan. It is the most recently designated SEZ, having received the distincition in 2009. Ethnically and culturally, Kashgar is different from the rest of China. It’s people are known as ethnic Uyghurs, and they are religiously Muslim. The city is very strategically placed on the Silk Road, and surely will serve as a major trade hub for China’s Belt and Road Initiative. A couple great reads on Kashgar can be found here at Newsweek and here at New York Times.
Special Economic Zones effectively eliminated big brother from business in select provinces/areas of China, primarily in coastal areas(for access to shipping and receiving). The SEZ’s were a critical component of Chinese economic reform. China’s coastal areas are now it’s wealthiest, and both state-owned and private business mingle freely with foreign manufacturers, buyers, and investors. The in-flows of capital have been astounding.
“The CPC still considers private ownership to be non-socialist. However, according to party theorists, the existence and growth of private ownership does not necessarily undermine socialism and promote capitalism in China. It is argued that Karl Marx and Friedrich Engels—the founders of communism—never proposed the immediate abolishment of private ownership. According to Engel’s book Principles of Communism, the proletariat can only abolish private ownership when the necessary conditions have been met. In the phase before the abolishment of private ownership, Engels proposed progressive taxation, high inheritance taxes and compulsory bond purchases to restrict private property while using the competitive powers of state-owned enterprises to expand the public sector.”
The above is again very telling. The CPC views private ownership of enterprise as a complementary tool to socialism. It argues that privatization is simply a phase, which ultimately could be phased out. Easier said than done, but that seems to be the plan.
Systems of Economy
To understand Chinese capitalism, we need to understand different systems of economy that capitalism and socialism are built on. To do that, let’s understand what an economic system is meant to do. Any economic system must answer the following basic questions for its participants:
- What to produce,
- How much of it to produce,
- How to produce it, i.e. labor intensive or capital (machinery) intensive,
- For whom to produce it.
There are 3 forms of economies that answer those questions, each in their own way:
- Market Economy: A market economy operates through the free working of demand and supply. This means that supply and demand, and their associated actors, producers and consumers, are the main determinants of supply costs and product prices. In this sense, price works as the main driver for allocation of resources. This means that the cost to produce, and the price of consumption, drive how much of something is produced and consumed. The ultimate equilibrium between supply and demand is a price-quantity coordinate where it makes sense to make the product ( a profit can be made for suppliers) and consumers are willing to pay the price. Capitalist theory says that markets will always eventually become efficient; this means excesses are eventually worked out of the system. Efficiency drives producers to innovate, and find new ways to make a profit. It also drives consumers to look for a better and better product and price. The problem with market economies is that on the way to efficiency, markets can fluctuate wildly. Price discovery, on the demand side, and cost discovery, on the supply side, can be erratic, and price shocks can occur. Price shocks occur when prices move massively suddenly, in response to some geopolitical events, news, technological discoveries, etc… The equal opportunity dissemination of information is important in market economies, but information is not always equally distributed. Insider trading laws, for example, exist to protect against the use of information that is not freely available to all market participants.
- Planned Economies: A planned economy is one where a central authority exists to answer the basic questions of economics. That central authority is usually a government entity. The individual freedom to make economic choices is sacrificed, in exchange for the good of a larger entity. The custodian of that greater good is, again, the government. Planned economies are associated with socialist/communist/Marxist governments. When a central authority makes all decisions related to the economy, individuals have very little incentive to innovate, or work harder. Socialist economies are associated with very large government bureaucracies. Bureaucracies are government organizations that implement the will of the central authority; they take the place of non-governmental, or private, structures that would exist in a market economy.
- Mixed Economies: Mixed economies try to gather the best from market and planned theory to create hybrid system. The US economic system is a hybrid system. It contains very large government bureaucracies that were built in response to economic crises. It is still an economy where an overwhelming majority of business is held either in private hands, or in the hands of the public as private shareholders. State-owned industry in mixed economies are rare, and, in market economies, are non-existent. With that said, there are state-owned enterprises in the US; most familiar to Americans would be the United States Postal Service, Fannie Mae, Freddie Mac, and the FDIC.
China’s Hybrid Economy
“Marx and Engels proposed similar measures in the Communist Manifesto in regards to advanced countries, but since China was economically undeveloped, party theorists called for flexibility regarding the CPC’s handling of private property. According to party theorist Liu Shuiyuan, the New Economic Policy program initiated by Soviet authorities in the aftermath of the war communism program is a good example of flexibility by socialist authorities.” (From Socialism with Chinese Characteristics Wikipedia page)
According to Liu Shuiyuan, New Economic Policy explains the Chinese hybrid economy. New Economic Policy was a policy of Soviet Russia proposed by Vladimir Lenin in 1921. It was temporary state capitalism, where state capitalism is a market economy, under state control. The policy was instantiated to lift the Soviet Union out of the depressed economy resulting from the Russian Civil War (1914-1918). It was considered by Lenin as a “retreat for Socialism, in order for it to later advance”. According to “Socialism with Chinese Characteristics”, leaning capitalist is similar in the sense that capitalism should be used as a tool toward full blown Marxism, i.e. communism. The difference is that there seems to be nothing temporary about China’s policy of, “reformation and open nation”. In January of 2018, at the World Economic Forum in Davos, Liu He, Xi Jinping’s vice premier, gave a speech and made the following very telling comment:
“China will continue to let the market play a decisive role in resources allocation, and we must focus on better protection of property rights, especially intellectual property rights. We will fully incentivize entrepreneurs, encourage competition and oppose monopolies. We will continue to improve the mechanisms for macroeconomic regulation.”
You’ll notice the first sentence in the above excerpt is in bold. Remember, resource allocation is one of the questions economic policy must answer. In planned economies, resource allocation is a task assigned to a central planning authority, i.e. the government. In market economies, the market determines resource allocation. China is not backing away from capitalism; China is announcing its continued commitment to capitalism.
There is another stream of thought when theorists try to explain how China can be a socialist country embracing free market economic policy. That thought says the CPC realized during its first 30 under Mao Zedong rule, that it had failed to build wealth as a nation, despite its abundance of labor and natural resources. Therefore, traditional Marxism could not apply to a undeveloped nation; that is to say, a nation cannot be socialist if it has no wealth to distribute.
“Party theorist Li Xuai said that private ownership inevitably involves capitalist exploitation. However, Li regards private property and exploitation as necessary in the primary stage of socialism, claiming that capitalism in its primary stage uses remnants of the old society to build itself. Sun Liancheng and Lin Huiyong said that Marx and Engels, in their interpretation of the Communist Manifesto, criticized private ownership when it was owned solely by the bourgeoisie but not individual ownership in which everyone owns the means of production and hence cannot be exploited by others. Individual ownership is consistent with socialism since Marx wrote that post-capitalist society would entail the rebuilding of “associated social individual ownership”.” (From Socialism with Chinese Characteristics Wikipedia page)
The above basically says a couple of things. First, private ownership is only bad when the owners take advantage of those who do not own. This tends to happen in the early stages of capitalism. It lead to kids working in factories, and the type of stories one might read in books like Upton Sinclair’s, The Jungle. This is why unions and labor laws are considered socialist, because they advocate for people who do not own any private capital. Without those laws, exploitation occurs. That is to say, pure capitalism leads to exploitation of people who are not part of the business ownership class. The above goes on to say that one way around exploitation is by giving people individual ownership in business. What is individual ownership? Well, one form is individuals owning shares in companies. In China, they do individual ownership very well. 80% of stocks in China are owned by retail investors, meaning mom and pop traders and home investors. In addition, Chinese mom and pops have plenty of money on deposit at the bank, in addition to both property and non-property assets. We’re talking about trillions of dollars in equity here. In the US? Not so much. Most stocks are owned by institutional investors, and 48% of Americans have less than $10,000 in savings. In short, we are a debtor nation. Even though the US has the largest and most accessible stock market in the world, the top 10% of Americans own 84% of stocks. This contributes to America’s very real wealth disparity problem. The success of the US is always pointed to as evidence of the success of capitalism. But in reality, our capitalism is flawed, and in the US, consistent intervention by the central authority (the US government) has been, and will continue to be, required. So are they right, is capitalism merely a stepping stone toward the inevitability of socialism?
“The CPC don’t believe that they have abandoned Marxism. The party views the world as organized into two opposing camps; socialist and capitalist. They insist that socialism, on the basis of historical materialism, will eventually triumph over capitalism. In recent years, when the party has been asked to explain the capitalist globalization occurring, the party has returned to the writings of Karl Marx. Marx wrote that capitalists, in their search for profit, would travel the world in a bid to establish new international markets – hence, it is generally assumed that Marx forecasted globalization. His writings on the subject is used to justify the CPC’s market reforms, since nations, according to Marx, have little choice in the matter of joining or not. Opting not to take part in capitalist globalization means losing out in the fields of economic development, technological development, foreign investment and world trade. This view is strengthened by the economic failures of the Soviet Union and of China under Mao.” (From Ideology of the Communist Party of China Wikipedia page)
The above excerpt, the last I’ll point out, tells us that China saw joining the WTO (World Trade Organization) as an inevitability, despite the difficult reforms it required of it. If China sees socialism as ultimately prevailing, then this adds further evidence to the thought it sees capitalism as simply a weapon toward its ultimate goal of a Marxist Socialist state.
Interestingly, the Fundamental Doctrine of the CPC, has three names on it. The first is Mao Zedong, the party’s founder. The second is Deng Xiaping, China’s president from 1978 to 1989 and the founder of “reform and open”. The third and final name on that list is China’s current president, Xi Jinping. His “Socialism with Chinese Characteristics, Xi Jinping Thought”, is leading China into the next phase. There is evidence the next phase under Xi could be further entrenchment of market economics; there is also evidence of the opposite, a return to Marxist Socialism. My guess would be a continuation of the hybrid approach, but with more forceful government presence.