Continuous debate on the nature of the Chinese economic system
Michael Roberts is an Economist in the City of London and a prolific blogger
Cross-posted from Michael’s Blog
Photo: Dong Fang (in the public domain)
I recently participated in a zoom seminar to review a new book entitled Socialist Economic Development in the 21st Century by Alberto Gabriele and Elias Jabbour. Gabriele is a Senior Researcher at Sbilanciamoci, Rome, Italy and Elias Jabbour is an Assistant Professor at the School of Economics, at Rio de Janeiro State University, Brazil.
You can see the comments of the various reviewers (including my own) and the replies of the authors (here). But below is a more considered review of the book. The puff for the book says Gabrieli and Jabbour “offer a novel, balanced, and historically rooted interpretation of the successes and failures of socialist economic construction throughout the last century.”
And as the foreword by Francesco Schettino says, “In this respect, it is interesting to note that about one year ago an internationally renowned economist, Branko Milanovic, published an article in El Pais, arguing that China’s public sector constitutes barely a fifth of the entire national economy, and therefore the PRC is not substantially different from ordinary capitalist countries.”
Milanovic’s claim is fully expressed in his book, Capitalism Alone, in which he paints a picture of a dichotomy between ‘liberal democracy’ (Western capitalism) and ‘political capitalism’ (autocratic China). This dichotomy seems false to me. And it arises because, of course, Milanovic starts with his premise (unproven) that an alternative mode of production and social system, namely socialism, is ruled out forever as there is no working-class around capable or willing to fight for it.
Milanovic’s disciple Isabelle Weber also published an acclaimed book entitled How China escaped shock therapy. This has had a wide and significant impact in academic leftist circles, endorsed as it is by Milanovic. Weber argues that the state has maintained its control over the “commanding heights” of China’s economy as it switched from direct planning to indirect regulation through the state’s participation in the market. Indeed,“China grew into global capitalism without losing control over its domestic economy.”
Weber appears to argue that China became capitalist at least from the point of Deng’s leadership in 1978 and all the debates thereafter were about how far to go i.e whether to go for ‘shock therapy’ or moderate moves towards ‘more capitalism’. But Weber is ambiguous on the economic foundation of the Chinese state. China ‘grew into global capitalism’ but still “maintained its control over the commanding heights”.
Gabrieli and Jabbour are much clearer on the nature of Chinese economy and state. Their analysis of China is subtle, but it is clearly a robust refutation of Milanovic’s thesis that China is a form of capitalism, albeit run by politicians (?) and not capitalists as in the West. The authors do not sit on the fence like Weber. Instead, they (correctly) argue that China is a ‘socialist-oriented’ economy and state, very different from capitalism, democratic or autocratic. “China’s economic success is the result not of capitalism but of its transition to socialism. It is a new social economic formation (SEF) that is beyond capitalism.”
The authors reckon that their term ‘socialist-oriented’ is useful because it is “easily understood in their ordinary significance” where “political forces claiming officially and credibly to be engaged in a process aimed at establishing, strengthening, or improving and further developing a socialist socioeconomic system, and b) can (or could) in fact be considered to be reasonably socialistic, i.e. to have advanced towards socialism along at least some (mainly positive) measurable dimensions in a multi-vectorial space representing key structural economic and social characteristics.” So “whether or not the State exerts (directly and indirectly) a decisively hegemonic role in steering the national economy… is obviously a crucial (although not exclusive) benchmark to gauge to which extent China’s economy can be considered socialistic.” The state must dominate but also those controlling the state must be “credibly engaged” in trying to develop “socialist socioeconomic system.”
The authors admit that this is a “much weaker sense” of what is meant by a socialist economic system which traditionally is “a nation-state (state? – MR) where the principle to each according to her work is universally applied and no forms of private property and of non-labor personal incomes exist -could be regarded as fully socialist. It is clear that such a purely socialist distributional structure does not exist in any place in the contemporary world.”
The authors reject what they consider is an ‘outdated’ formulation of socialism and opt for what they consider are new social economic formations. They reckon that there are already “embryonic forms of socialism – along with capitalism and pre-capitalist modes of production… are now present in some developing countries. Consistently, we refer to them as socialist-oriented SEFs, structured around relatively similar market-socialism models, in spite of the very uneven level of development of their respective productive forces.”
The authors argue that “the USSR and most European socialist states initially achieved high rates of economic growth, but their development trajectory eventually fizzled out. Due to internal contradictions, technological isolation, and unrelenting external pressure, the USSR and its allies did break at first the exclusive domain of capitalist powers on the world economy, but never managed to fully overcome its internal contradictions and eventually collapsed.” In contrast, while you might argue that “market-oriented reforms implied steps backwards with respect to the very socialist nature of China’s socioeconomic system”, actually it “led to an extraordinary development of productive forces and turned the People’s Republic of China (PRC) into a new type of SEF.”
At this point, our authors become a little coy or tentative on where their argument is taking them. “The term ‘market socialism’ might imply on our part an implicit recognition that China’s present-day socioeconomic system is in fact a form of socialism indeed, albeit imperfect. Conservatively, we (as well as, in most cases, CPC leaders themselves) prefer to neither uphold or deny such an engaging ism.”
Nevertheless, they reject the designation of China as state capitalist. “the (often underestimated) sheer weight of direct and indirect public ownership of the means of production and, more broadly, the depth and extension of state control on the commanding heights of the economy do not allow us to see state capitalism as the dominant feature of Chinas present-day socioeconomic system.” Instead, China as developed as a socialist-oriented economy, where the state “can determine in the short-to-medium run the share, the rate of investment, its broad sectoral composition, the level and composition of social expenditure, and the level of effective demand. In the long run, planners in socialist-oriented planned market economies can set the speed and (to some extent) the direction of capital accumulation, innovation, and technical progress, and significantly affect the structure of relative prices by means of market compatible industrial and other policy interventions. Therefore, they …consciously and cautiously steer the unfolding of the law of socioeconomic value in order to achieve ex-post and ecological outcomes superior to those that would have been produced automatically by simply following market price signals.”
So finally, we have it. China and other countries like Vietnam and Laos are not like traditional ‘socialist’ states such as the Soviet Union, Cuba, North Korea or post-war eastern Europe. China has delivered a new social economic formation which could be called ‘market socialism’. And this is the basis of China’s phenomenal economic success, not the planned economy of the Soviet Union where little or no ‘forms of private property exist’. Instead, it is a socialist-oriented state with planning at the macro level, while capitalism and the market rules at the micro level in a fundamentally harmonious way. This new social economic formation is a model of the future for societies that have overthrown capitalism and are on the road to socialism.
Now I have profound doubts about this formulation of socialist-oriented economies. My first question or critique of Gabrieli and Jabbour’s approach is based on Marx’s theory of value. In the book, there is an extensive section on value theory. In this section, the authors adopt the value theory of the neo-Ricardian Piero Sraffa in preference to that of Marx. According to them, “the task of rescuing the classical approach (which they equate with Marx’s value theory) was left to the modern classical theory, pioneered by Sraffa and other heterodox economists, among which Garegnani was prominent. As the latter pointed out, Sraffa (besides effectively criticizing the marginal theory) re-discovered the classical approach and solved some crucial analytical difficulties that had escaped Ricardo and Marx.”
Really? In my view, Marxist value theory has been better defended by several Marxist scholars both against neoclassical theory and the neo-Ricardian assumptions of Von Bortkiewicz and Sraffa, among others – for example. Kliman, Moseley, Murray Smith. One of the key fault-lines in Sraffa’s value theory is that it rules out time, while Marx provides a temporal approach. Without incorporating time, any value theory becomes nonsensical.
Here is what the authors say: “taking into account Sraffa’s contribution, production prices can be seen theoretically as those stemming from the resolution of a system of simultaneous equations, jointly defining a photograph of the capitalist system in a given moment of time (and thus elegantly bypassing the necessity of assuming constant returns to scale). As such, they can be interpreted formally as intrinsic logical constraints necessary for the working of the system, rather than real empirically observable economic objects.” So Marx’s value theory becomes just a photo at a given moment of time, a set of equations rather than real or empirically observable. Instead of Marx’s temporal approach, the authors accept the simultaneous errors of his critics.
The authors recognise that “the so-called fundamental Sraffian theorem – if and only if workers are denied all of the goods they produce will the profit rate be positive – does not require per se a labor theory of value (! – MR). The authors in turn reject the approach of many Marxist economists that can show the logical (and empirical) connection between aggregate total values and total prices in production. In accepting Sraffa’s critique, they conclude that “both equalities on aggregates do not require any labor theory of value to be valid, and are compatible with an agnostic and weak interpretation of the LV”.
And what is this weak interpretation? Well, we can drop Marx’s axiom of the equality of aggregates and “uphold a non-fetishist” (and therefore labor-based) interpretation of the LV… via the simultaneous equations approach, without recurring to the principle of conservation of value.” Thus the connection between labour values and prices in the capitalist mode of production is severed and the profitability of capital is no longer determined ultimately by the creation and appropriation of surplus value: “we think that social scientists should not remain unduly fixated on formal models axed on the uniformity of the rate of profit across industries.”
The authors baldly come clean with their view: “Recent developments tend to confirm Sraffa’s fundamental insight: prices of production and the rate of profit are determined simultaneously. Marx’s famous formula for the definition and calculation of the average rate of profits, therefore, is not generally valid.” Clearly the authors have not digested the wealth of work done by Marxist scholars showing the empirical validity of Marx’s value theory and his law of profitability – readers of this blog are well aware of this. (See World in Crisis and The Long Depression).
Instead, the authors accept the critique of neo-Ricardians that Marx failed to show the connection (or lack of it) between values and prices. They state “It is well-known that Marx himself realized that the degree of completion of his system was not fully satisfactory, and for this reason, during his life, he did not publish the material contained in what have been subsequently become the II and III volumes of The Capital. This task was carried out later on by Engels, after many years of painstakingly perusing Marx’s handwritten notes.” Well, it may be well known to the authors that Marx was wrong, but subsequent work by Marxist authors have refuted this view and moreover rebutted the charge that Engels was at fault for publishing Marx’s errors in Volumes 2 and 3 of Capital.
Back to Sraffa. “Sraffa was very keen that, in capitalistic production, labour is on an equal footIng with packhorses (with subsistence wages assimilated to hay). Therefore, there is nothing special that labour transmits to the value of commodities …After all, this is faithful to Marx’s idea that in capitalism labour is a commodity, produced, operated, maintained, scrapped and reproduced as any other input. … Sraffa autonomously completed a solution to which Marx was very close.” But Marx was not very close to this ‘solution’ because he rejected it in favour of a theory of value based on abstract labour and socially necessary labour time. He would not have accepted Sraffa’s ‘production of commodities by commodities’ (and not labour).
The whole point of Marx’s value theory is that labour is not just a commodity like any other; it is special in that only labour creates value. Commodities (like pack horses) do not create new value. New value is only created when packhorses are put to work by human labour. Packhorses in that sense are the same as machines: machines do not create value without human labour controlling them (the story of robots I leave for another day).
That the authors should accept Sraffa’s view is disappointing. But why does all this matter and what has it got to do with China as a socialist country? Well, the authors explain why they want Sraffa’s theory of value and reject Marx’s. It’s because “by itself, the existence of surplus does not prove the existence, or non-existence,of class exploitation, and does not allow to precisely determine the degree of justice and fairness in a given society.” In other words, we can remove the key distinction between Marx’s surplus value under capitalism and replace it with a surplus created by the production of ‘commodities’, not value. As the authors say: “in our view, whatever the interpretation of this issue, the law of value in its weak sense (my emphasis) applies both to capitalism and socialism”. According to the authors, whether there is surplus value created by the exploitation of labour and appropriated by private capitals is no longer the key difference between the capitalist mode of production and socialism. What matters is the surplus (not surplus value) and how it is controlled. The capitalist and socialist modes can therefore be harmonised in the transition to socialism. This interpretation of the law of value under capitalism enables them to claim that there is no contradiction between state planning and the market economy because both modes can work in harmony to boost the surplus. Or as Deng famously put, “It doesn’t matter whether a cat is black or white, as long as it catches mice.”
In my view, this approach flies in the face of not only Marxist economic theory but also runs against reality by denying the fundamental and irreconcilable contradiction between the capitalist mode of production for the profit of capital and a cooperative socially owned planned system of production for social need ie socialism.
This brings us to the nature of transitional economies where the capitalist class has been overthrown and lost state power. Marx spelt out the basis of the nature of these transitional economies. There were two stages on the way to communism. With the working class in power, the first stage was to raise the productivity of labour to the point where social needs were met by direct production and commodity production for a market was phased out. In second higher stage, production is sufficiently high and abundant that each produces according to his or her ability and receives according to his or her need. The point is that in both stages, commodity production ends because it is in contradiction to production for social need.
Our authors reject the view of Marx, Engels and Lenin on this. For them Marx got it wrong: “In our view (which is of course the product of the benefit of hindsight, of the analysis of over a century of historical experience) this was a mistake, possibly related to Marx’s formation as a young Hegelian idealist and by the tension between Marx the social scientist and Marx the political militant.” Apparently, Marx needed to be less of a romantic militant and more of political scientist and then he would have dropped his idea of socialism without commodity production! Those who take Marx’s view (like both Engels and Lenin) are being rigid: “most efforts aimed at identifying the main features of socialism have been implicitly predicated on a relatively abstract dialectical negation of capitalism, while the analysis of real socialism experiences – with all their errors and (at times) horrors – have of been too brashly dismissed as fatal and treacherous deviations from what should have been the true path.” But surely the ‘errors’ and ‘horrors’ of Stalinist regime in the Soviet Union or in North Korea and eastern Europe should be seen as ‘fatal and treacherous’ deviations from the path to socialism? No?
At this point I would remind readers of what Che Guevara said exactly on this question of commodity production under socialism or what the authors call ‘market socialism’. In 1921 Lenin was forced to introduce the New Economic Policy (NEP), which allowed a capitalist sector in the USSR. Lenin considered this necessary, but a step back from the transition to socialism. Che Guevara argued that Lenin would have reversed the NEP had he lived longer. However, Lenin’s followers “did not see the danger and it remained as the great Trojan horse of socialism”, according to Guevara. As a result, capitalist superstructure became entrenched, influencing the relations of production and creating a ‘hybrid system of socialism with capitalist elements’ that inevitably provoked conflicts and contradictions that were increasingly resolved in favour of the superstructure. In short, capitalism was returning to the Soviet bloc.
And when we look at the experience of the Soviet Union, it was the Bolshevik economist Preobrazhensky who pointed out that Soviet Union was a transitional economy that contained two opposing forces, not working in a harmonious and complementary way as the authors claim for China’s new social economic formation of ‘market socialism’. Preobrazhensky’s emphasis on the contradiction between the law of value and planning for primitive socialist accumulation is not mentioned in the book. For the authors, Che Guevara and Preobrazhensky presumably took an “abstract dialectical negation of capitalism’ and ignored historical experience – although they were there at the time. Surely, it is the historical experience of the Soviet Union that eventually revealed the law of value cannot work in harmony with the public ownership and the planning mechanism and eventually there was reversal back to capitalism.
And then there is workers’ democracy. Marx and Engels made it clear that even before we get to socialism, under the dictatorship of proletariat (where capitalists lose state power to working class), two clear principles of workers democracy must be maintained in order to make the transition to socialism: the right of recall of all workers’ representatives and a strict limitation on their wage levels. Remember this is before even the economy starts to reach the lower stage of communism (or socialism, as Lenin called it).
None of these principles of workers democracy apply in China where the CPC rules without accountability except to itself. Indeed, in China the inequality of income and wealth is very high, if not quite as high as in other peripheral economies like Brazil, Russia or South Africa; or in the US and UK. But these inequalities are not just between rural and urban households, but also between average Chinese households and the fast-multiplying numbers of billionaires. How can an economy supposedly making a transition to socialism (let alone having already achieved some ‘first stage’ socialism) be compatible with billionaires and financial speculation on a grand scale?
One example of the contradictions involved in China is in housing and real estate. Instead of the state building homes for rent for fast-expanding cities, for over 30 years the CPC opted for private developers building homes for sale, funded by huge issuance of debt – a completely capitalist approach to basic housing needs. These chickens have come home to roost with the Evergrande debt disaster and a real estate crisis. The CPC now wants to control the ‘disorderly expansion of capital’ and move to ‘common prosperity’ measures, but it faces considerable opposition among financial circles and pro-capitalist elements.
The authors show how China’s state-led economy and macro-planning has been key to its phenomenal economic and social success, totally missing in capitalist economies, whether advanced or ‘emerging’ – just compare China to India.
As Gabriel and Jabbour show, in China, the state “can set the share of the surplus at the macroeconomic level and capture an important part of the latter not only by means of ordinary fiscal policies but also in virtue of the State’s ownership rights on industrial and financial capital.” P40. And they have also developed a novel view of that planning mechanism: the ‘new projectment economy’, where planning is for specific projects, both at home and abroad. “We chose the quasi-obsolete term projectment (to refer holistically to the utilization of both plans and projects as tools to steer the economy towards a rationally conceived development path).” As a result, China’s success is unparalleled: there have been no regular and recurring slumps as in capitalist economies and over 850m Chinese have been taken out of official poverty in a generation.
But, as far as I can see, Gabriele and Jabbour ignore all the growing contradictions in the Chinese transition story. The ‘trojan horse’ of a large capitalist sector and an unaccountable CPC within the socialist-oriented Chinese economy remain a serious threat to any transition to socialism. Indeed, there is still a significant risk of a reversal back to capitalism as the pressure of imperialist encirclement of the Chinese state proceeds over the next decade and as the pro-capitalist elements in the CPC mount a case for ‘opening-up’ the economy to capitalism.
The authors see no such danger or risk because they have developed a view of China’s ‘market socialism’ as the new harmonious way forward towards socialism. But in so doing they have rejected Marx’s value theory and argue that Marx’s view of the transition to socialism is an ‘abstract dialectical negation of capitalism’. They ignore the serious inequalities in China and the dangerous development of speculative finance capital; and do not consider workers democracy (as defined by Marx, Engels and Lenin) as a necessary base for the transition to socialism.
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