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Marxism and the Crisis of Western Capitalism

posted 13 Feb 2013, 15:13 by Admin uk   [ updated 13 Feb 2013, 15:25 ]

by Heiko Khoo    

One of the greatest puzzles in the deep and ongoing crisis of world capitalism is the weak influence of Marxist ideas and of leftwing and revolutionary political movements in Europe and America. Surely the prophetic wisdom of the Marxist critique of capitalism should give rise to a widespread intellectual acceptance of the validity of Marx's theories, and to an increasingly powerful challenge to the existing socio-economic system?    

True, Greece is one notable exception; there, Syriza, a coalition of Maoists, Euro-Communists, Trotskyists and other leftwing groups, founded in 2004, won 27 percent of the vote in the 2012 parliamentary elections, coming second. It is well placed to win a future election, if the present right wing government collapses. But in the battle for the streets, protest by the working class has declined, and the ominous rise of a violent fascist party, called Grey Dawn, is a worrying sign.

In France there are also grounds for optimism. During the 2012 presidential election, Jean-Luc Mélenchon, the presidential candidate of the Left-Front coalition, which includes the French Communist Party, managed to tap into a deep vein of revolutionary anger at mass rallies all over the country. The French street revealed its willingness to listen to revolutionary rhetoric, and huge crowds supported Mélenchon's call for a "citizens' revolution." But overall, the electoral influence of the radical left has remained weak throughout the crisis.

Reformist parties in the West subordinate their morality and deeds to the interests of their ruling class. For example, French Socialist Party presidential candidate, Francois Hollande, won the election, partly due to his left wing language -- but he has been unwilling to live up to it when faced with resistance from conservative forces. Here are two small but significant examples: The famous actor Gérard Depardieu fled the "regime," adopting Russian citizenship to escape French taxes; and France's constitutional court banned a 75 percent tax on the rich, revealing that protection of the wealth and power of the elite remains the highest constitutional good!

Indeed, to display his loyalty to the traditions of old France, President Hollande dispatched the military to conquer the deserts of Mali, a former colony of France. Absurdly, this was presented in the British media as protecting the ancient documents of Timbuktu and saving the people from Islamic tyranny! Cheering crowds were seen on television welcoming their imperial "saviors."

The Occupy movement swept across the Western world for a few months in 2011. It seized urban squares, questioned the way capitalism works, and created "liberated space" where dialogue, discussion and a sense of community flourished. These citadels of dissent provided an outlet to challenge the old ways of thinking. However, they also imposed bizarre consensus based decision-making rituals, which, by their nature, simultaneously undermined the clash of ideas required to give rise to transformative action. The Occupy movement acted rather as a generic call to question and take future action.

There are numerous small organizations in the West which seek to become the embryo of future revolutionary parties. Most claim some affinity to the organizational theories of the Russian revolutionary, Vladimir Lenin, who famously developed the organizational method of intense ideological debate and unified action, commonly called "Democratic Centralism". The Russian Bolsheviks (meaning "majority") developed as a faction of the Marxist Russian Social Democratic Labour Party. The Bolsheviks sought to protect revolutionary ideas against external and internal pressures; be flexible enough to incorporate a vibrant clash of opinions, and be capable of adjusting their theory and practice in the light of experience.

Lenin based his model of democratic centralism on the German Social Democratic Party. He adapted it to suit Russian conditions and maintain ideological clarity in the face of repression by the Tsarist secret police. It trained revolutionary forces – in legal and illegal conditions – for the inevitable revolutionary awakening of the masses.

When Lenin's Bolsheviks came to power, public debate and discussion in the party and society flourished. This continued after the ban on opposition parties in 1918, and the ban on party factions in 1921. This atmosphere of tolerance influenced new Communist parties around the world. Mao Zedong described debates in the early Communist Party of China, under the leadership of Chen Duxiu, as "rather lively" and free of dogmatism.

The Stalinist falsification of Leninism prohibited ideological disagreement and eliminated opposition. This generated the ossified party structure that ruled over the USSR and Eastern Europe. The USSR, on the surface, appeared to be vast, all powerful and united, but rapidly cracked and collapsed, due to its internal contradictions; the inability to develop the economy; and its inflexible bureaucratic response to the open debate and dialogue that burst forth after Mikhail Gorbachev became General Secretary of the Soviet Communist Party in 1985.

After this collapse, there was a crisis in every Western Marxist group. Some had hoped that a political revolution in the former Stalinist states would give rise to a new and higher form of society based on mass democratic control over the state and economy, modeled on the early dreams of workers' councils in the USSR, or on the "armed people" of the Paris Commune of 1871. But, although these ideas found some advocates within the Communist parties, they were rapidly sidelined, as the drive towards capitalism unleashed powerful counter-revolutionary forces, which used democracy to privatize public property.

The most comprehensive exposition of the failings of the Soviet system of bureaucratic planning and administration was written by János Kornai. His magnum opus, The Socialist System: The Political Economy of Communism (1992), deeply influenced Chinese economists like Wu Jinglian. It is based on the theory that a democratic centralist system cannot cope with the complexity of information of a sophisticated economy and society. It argues that patronizing and paternalistic bureaucratic power inevitably evokes a response that cannot be contained, after which a systemic transformation becomes unavoidable.

Today, China is the most information-rich country ever to be ruled by a Communist Party. So, according to Kornai's theory, an information-based crisis is inevitable. Instruments of communication today are qualitatively different to the crude means available in 1989 in Eastern Europe or the USSR. The Internet is a terrain of struggle more diverse than the physical terrain in which the Chinese revolutionary war was fought.

Everyone who wants can find ways to communicate their ideas. The core problem is to have sufficient vision to open up pathways of democratic participation and control that will often stem from outside existing structures, and will be uncomfortable or challenging to many in positions of authority and power. The rising objective strength of the working class must manifest itself in increasing control by the working class, both as producers and consumers, and as "masters of the state."

In 1842, Frederich Engels studied the working class in Manchester and wrote a book called The Condition of the Working Class in England. Nowadays, a universal survey of the condition of the working class in China is needed, and it should be produced by the workers themselves. When the workers see Marxist theory as their own, see Communists as their allies, learn how to stamp out corruption and graft, and see trade unions as their weapons of defense, these struggles within the system will advance workers' democratic participation and control, which can increase the total efficiency and unity of the national economy.

Marxists in the capitalist world have to work out how to overcome their isolation from the masses and simultaneously develop a sophisticated and critically-minded revolutionary force capable of providing guidance and leadership in the complex tactical and strategic struggles for economic and political power. This is complicated by the huge sway that reformist political parties still have over the outlook of the mass of working people. Revolutionaries have to find their way to raise the horizons of the masses and transform the struggles to reform society into a movement for fundamental change. The Marxist objective to overthrow capitalism and lay the foundations of communism requires long term strategic thinking about the nature of the system we live under; unity of the workers' movement worldwide; and a critical assessment and evaluation of the experiences of the 130 years of the Communist movement since the death of Karl Marx.

Kornai and China part 2 Where does China fit within Kornai's System Paradigm?

posted 18 May 2012, 09:17 by heiko khoo   [ updated 18 Feb 2013, 12:17 by Admin uk ]

Where does China fit within Kornai's System Paradigm?  By Heiko Khoo   Kornai’s Assessment of Contemporary China      

This chapter reviews contemporary Chinese political economy using tools developed by Kornai in ‘The Socialist System’. Although his recent writings on China are not extensive, he has applied his methodology to define its systemic character (Kornai, 2008).    

I review this assessment and the data that informs it, subjecting his conclusions to critical examination. Then, I attempt to locate the main features of Chinese reality within the wider spectrum of his reform socialist model.[1]


Research Questions


A study of China in the light of Kornai’s Socialist System needs to address the following research questions.


1.                    As the primary factor used to identify a socialist system is monopoly control by the Communist Party, how does the Chinese Party’s endurance fit within his theories?

2.                    The predominance of public property is given as the second characteristic of socialism. This poses theoretical and empirical questions. What defines ‘predominant’ ownership? Which ownership form is predominant in China? What forms of public ownership exist there and how influential is private ownership?

3.                    The third characteristic of socialism is the predominance of bureaucratic coordination. What is the scope and power of bureaucratic coordination in present-day China? What influence does the planning system retain?

4.                    In the sphere of economic appearances how does China resemble the features and regularities of reform socialism? Are factor markets free or bureaucratically controlled? How does the banking sector allocate credit? Do soft budgets predominate in the state sector? Do tendencies towards increased lobbying power by workers reveal themselves in China? Do firm managers in the state sector look primarily to vertical or horizontal relationships?

Kornai defines China’s transformation in the light of three lines of causation; rule by the Communist Party, the dominance of public ownership and bureaucratic coordination.


  1. As the CPC remains in power, and this feature is defined as the central motive force of the socialist system, Kornai’s model is confronted by a fundamental dilemma. He rejects the idea that China remains socialist, resolving this contradiction by proposing that the party has radically changed. The name remains communist but the content is capitalist (Kornai, 2008:58-59). Kornai argues that the party underwent a metamorphosis, in which, the other two main lines of causation, public ownership and bureaucratic control, were also transformed (Kornai, 2008:147-50).
  2. He notes that public ownership has radically declined and private ownership now predominates. ‘The first characteristic of capitalism –a dominant role for the private sector –either applies or is near to applying.’ (Kornai, 2008:148). The OECD statistics presented by Kornai, reveal that 60% of the value added to the national economy, derived from the private sector in 2005 (Kornai, 2008:149). As we shall see, there are problems with adopting these statistics as the criteria to define the relative weight of ownership forms. In addition, by applying the more wide-ranging methodology that Kornai developed in The Socialist System, I will attempt to contextualise the hierarchy of ownership and power in contemporary China. This will provide a more precise picture of the relative weight and influence of the private and public sectors. 
  3. The dominance of market price transactions is cited as evidence that the ‘second characteristic of the capitalist system –predominance of market coordination –clearly applies.’ (Kornai, 2008:148). Although, significant emphasis on planned prices is a feature of bureaucratic coordination, generic bureaucratic prices were not the definitional determinant of the dominant mode of coordination.[2] Kornai suggests that market socialist experiments in the reform era attempt to adjust prices by market methods, whilst maintaining bureaucratic coordination and control over factor prices (Kornai, 1992:525). His contention was that bureaucratic coordination within a market socialist environment distorts true price signals, as it operates through soft budget constraints and maintains the close relationship between the party, bureaucracy, public banks, publicly owned companies and other state entities (Kornai, 1992:512-27).


Kornai proposes that the transition from socialism to capitalism is complete when the following ‘necessary and sufficient’ conditions apply;


  1. “A dominant role in ownership relations for private ownership, with public ownership present in at most a subordinate, auxiliary role.
  2. A dominant role in the coordination of activities for the market, with centrally directed, bureaucratic coordination present in, at most, a subordinate, auxiliary role.
  3. No political power standing against capitalism, private ownership and the market. These institutions are either supported actively, or, at least, treated in a benevolent, ‘friendly,’ neutral manner.”[3] (Kornai, 2008: 126).


Kornai defines China as capitalist as he believes that all three conditions apply. I will critically evaluate this contention and show that China is more appropriately located within the reform socialist definition.



Rule by the Communist Party of China


Kornai points to contradictory observable facts. ‘The Chinese Communist party retains a monopoly of power in China, which to that extent remains a Communist Country.’ (Kornai, 2008:198). Official declarations proclaim adherence to Marx, Engels, Lenin, Stalin and Mao, however, anti-capitalism is expunged from political practice. Membership of the Communist Party is open to capitalists and there is increasing interpenetration of the leading stratum with business interests. This takes the form of functionaries, or their families and friends, directly engaging in business activity or utilising positions to promote it. Capitalists are permitted to assume positions of authority in the state, party and bureaucracy. The new stratum that supports and promotes capitalism ‘is developing before our eyes’ and the party is ‘advancing steadily’ in the direction of capitalism (Kornai, 2008:148-50).

However, Kornai does leave scope for doubt about the extent of capitalist transition in China. He describes China’s directional trajectory as ‘towards pro-capitalism’ (Kornai, 2008:152), and appears even more circumspect here: “There is a change of system taking place (my emphasis) in that vast country of 1.3 billion people. Will there be an uprising, bloody clashes, or a civil war claming millions of victims? Or will it occur peaceably? So far the latter seems more likely, for one reason, because the Communist cadres do not oppose the spread of capitalism. On the contrary, they are seeking their share of the profits. Party secretaries appropriate some or all of the factory assets. Municipal firms fall under the control of mayors. Sons and daughters of generals study at expensive business schools to prepare them for high positions in business. This is all rather repulsive, but has the advantage that the Communist party becomes the quartermaster instead of the enemy of capitalism. It is an immoral process, but it disarms the resistance of the old lords to the new system, giving them an interest in its prosperity” … “What if those old cadres were excluded from business and political life? That could easily warn the Chinese Communists away from peaceful transition. Then instead of surreptitious introduction of capitalism, they might prefer unbridled oppression and resistance to the change of system.” (Kornai, 2008:145-6). [4]


Ideologies of Socialism -Kornai’s View


Kornai identifies four ‘pure interpretations’ of the term ‘socialism’; that of Karl Marx, the Walrasian, the Leninist and the Social Democratic model. Then he compares contemporary China to these models with the following outlines.


  1. Karl Marx’s Socialism


Marx’s theory of socialism is not a blueprint, and is constructed by a negation of elements of capitalism.

a. In politics. A rejection of bourgeois democracy, support for a dictatorship of the proletariat and in ‘utopian’ phases, he argues that the state will wither away. The transitional period between capitalism and communism is of an unspecific duration run under a dictatorship of the proletariat (Kornai, 2008:49).

b. Ownership relations. Marx argues that that new state will ‘wrest by degrees, all capital from the bourgeoisie’ but he gives no timetable. Kornai claims, that Marx does not distinguish between big and small capital as the target for his attack on capitalism (Kornai, 2008:50).

c. Coordination. Marx sees the market as the manifestation of anarchy and claims it leads to waste. Socialism is to be based on rational conscious coordination of the productive forces, and labour allocation will be superior to the labour market. His ideas are not incompatible with a central plan, however the market cannot be the central coordinator of this form of socialism, as this contradicts the spirit of Marx (Kornai, 2008:50-51).

d. Ideology. Marx did not suggest that there should be any new ideology for socialism (Kornai, 2008:51).


2. Walrasian socialism


Oscar Lange’s vision of socialism is a system based on public ownership of the economy, or the dominant part of it, or one where the public sector is perfectly isolated from the rest of the economy. However, it is an economy where coordination would be organised via market exchange.

Kornai argues, that complexity of knowledge and information requires ‘decentralised incentives for gathering and applying knowledge’ and that only markets combined with private property automatically unify such information (Kornai, 2008:52). He claims that the incentives and sanctions needed to minimize costs or maximize profits would not be applied to public firms.

Without a market friendly environment, political and ideological hostility to genuine decentralization pushes the market into black and grey areas, instead of acting as the fundamental coordinator and integrator (Kornai, 2008:51-3).


3. Leninism


This ‘classical socialism’ is characterised by a Communist party monopoly of power. It is a system with public ownership of nearly all means of production and there is a confrontational attitude towards private ownership. It is a command economy coordinated by bureaucratic planning. The ‘Marxist-Leninist’ ideology is hostile to capitalism, private ownership and the market (Kornai, 2008:53-5).




4. Social Democracy


Social Democracy is based on parliamentary democracy and accepts defeats at elections. It supports some level of nationalisation but does not reject the dominance of private ownership. The market coordinates the economy and the state is redistributive. This ‘welfare state’ seeks the profound reform of capitalism, but not its overthrow. This ideology has cut its former links to Marxism (Kornai, 2008:55-7).


  1. Chinese Socialism


Kornai draws the following conclusions when comparing the above socialist models to that in contemporary China:


  • Marx’s: Marx’s opposition to the market and private property leads Kornai to reject any association between Marx’s vision of socialism and contemporary China (Kornai, 2008:58).
  • Walrasian: Oscar Lange’s model was one in which productive assets are under public ownership but coordination is by the market. Kornai believes that the extent of private ownership in China negates any viable comparison between China and this model (Kornai, 2008:58).
  • Leninist: As the Communist Party maintains its classical form: it retains its totalitarian nature and political monopoly, and represses opposition, thus in this respect, it is Leninist.  The party has changed its ideology by adopting a positive view of capitalists, private property and the market. However, Kornai argues that, “the ownership structure has undergone fundamental changes, in which the state-owned sector has given up its leading role. The role of bureaucratic coordination and central management has been drastically reduced and largely replaced by the market. The result is far from a classical socialist system, and fairly close to a typical capitalist system.” (Kornai, 2008:58-9).
  • Social Democracy: Kornai argues that the political system of competitive elections is missing in China and is rejected as a model. In addition, the welfare rights that used to exist in China have been diminished in order to increase competitiveness, improve the fiscal balance and the efficiency of the private sector. Inequality is increasing and society is moving towards a Manchester or Latin American model of capitalist exploitation (Kornai, 2008).


It is not clear why these four ‘pure models’ of socialism are used as comparators with respect to China, nor why possible hybrid combinations of these ‘pure models’ are not considered to be valid tools to comprehend Chinese reality. What is most surprising is that Kornai makes no attempt to fit China into his own model of reform socialism, an omission that this chapter seeks to rectify.


Ownership and Control of the ‘Commanding Heights’


Kornai identifies a predominance of the private sector in the Chinese economy based on the proportion of value added to GDP. He takes this as an indication that the ‘first characteristic of capitalism –a dominant role for the private sector – either applies or is near to applying’ (Kornai, 2008: 148-9). 


The state owned enterprise is at the core of Kornai’s political economy of socialism. It is ‘the first and most important property form’ of the socialist system. It occupies what Lenin called the ‘commanding heights’ “the positions that allow the other, non-state sectors of the economy to be dominated: mining, energy production and manufacturing, transport, domestic wholesale trading, foreign trading, banking and insurance. On the other hand, agriculture, retail trading, and other services to the general public, do not qualify as ‘commanding heights,’ and although state firms appear in them, other property forms occur alongside and may even predominate.” (Kornai, 1992: 71).


Recent research indicates that firms at the commanding heights of the world economy exercise ‘network control’ ten times greater than the proportion of wealth that they own. Of 40,060 Transnational Corporations (TNCs) the top 737 hold 80 percent, and the top 147 ‘super-entities’ hold 40 percent, of the control over the economic value of all TNCs. Financial intermediaries were found to make up 75 percent of the top 147 (Vitali et al., 2011: 6).


I shall argue that Lenin’s theory concerning the decisive importance of ownership and control over the commanding heights of the economy[5] was correctly identified by Kornai as the primary determinant of the dominant form of ownership of the means of production. Indeed Vitali’s work confirms both Lenin’s and Kornai’s analysis of the significance of the commanding heights, particularly in the context of the modern world economy. In this respect the early thoughts of Engels on the question of Communist economic strategy are also of interest.[6] It appears that although Marx and Engels’ objective was to abolish private property and this was a ‘cornerstone of the ideology’(Kornai, 1992: 444-5), a subtlety in their tactical approach is evident as early as 1847. In Lenin we find significant flexibility, in 1917 for example, he argued for minimal nationalisation - of the banks, insurance companies and large-scale syndicates - as the effective means of controlling the economy. [7]

Under Kornai’s model of socialist political economy the Communist Party government and its organs of power and influence, control leading publicly owned financial institutions and a comprehensive range of state enterprises. This enables the state bureaucracy to mobilise these resources to implement their plans. In these circumstances the economic power derived from ownership and control of the commanding heights is likely to be more concentrated and amplified than Vitali’s model of ‘super-entities’ suggests.


Let us look the at extent of public ownership of the ‘commanding heights’ of the economy in China: 


The state sector in China is divided into three parts.

  • State owned enterprises (SOEs) run by the State-owned Assets and Supervision Administration Commission (SASAC) under the State Council.
  • SOEs run by local SASAC’s under lower government tiers.
  • SOEs controlled by other SOE owners and enterprises that are owned and controlled through SOE subsidiaries.


The national SASAC was formed in 1999 it now supervises 121 Central State Owned Enterprises (CSOEs). It has its origin in the mid-1990s when Asset Management Companies (AMCs) were formed by China’s four state owned commercial banks in order to off-load bad loans. AMCs were supposed to make SOEs act in a more market responsive fashion.

Defining the Commanding Heights in China


Figure 1 shows the degree of concentration of capital in the hands of the largest 150 companies. According to the Economic Census in 2008,[8] there were 4.95 million registered corporations in China with total assets of 207,800 billion yuan (including domestic, Hong Kong, Macao or Taiwan invested (HKMTI), and foreign.) The assets of the largest 117 state owned companies within the top 150 firms are equal to 41.2 percent of China’s total corporate assets.

Figure 1

The above chart shows the assets of China’s largest 150 companies (as measured by revenue) Here ‘CSOEs’ refer to central state owned enterprises; ‘State’ refer to state enterprises owned by local government or state institutions; ‘Unclear’ refer to firms where I was unable to ascertain the predominant ownership status; ‘Private’ are firms which are predominantly privately owned. The data is from 2010 and was published by[9] and the All China Federation of Industry and Commerce.[10] The combined assets of these 150 companies make up 84 percent of the largest 500 companies.  See appended excel sheet.


In 2006, the Chinese government published a list of ‘strategic’ industries that it considers vital to national or economic security and that will remain permanently in state hands. They are defence, power generation and distribution, oil and petrochemicals, telecommunications, coal, aviation and shipping. In 2007, the list was extended to include shipbuilding, metalwork and construction. Fifty non-financial enterprises are deemed strategic and act as the commanding heights of the state sector. Provincial governments use the same terms of reference as the central state to define those enterprises that must be in state hands (Chan, 2009).


The state will also retain significant or absolute control over those sectors defined as ‘pillar’ and ‘basic’. These are machinery, automotive, IT, construction, steel, base metals, chemicals, land surveying, and R&D. Other sectors in which significant ownership stakes and control are to be maintained include, trading, investment, medicine, construction materials, agriculture, and geological exploration (Mattlin, 2007). In addition the government is increasing its share ownership in those sectors it deems as ‘key’ and ‘pivotal’, but the definition of these categories is fuzzy and is subject to political and bureaucratic pressure.


Although foreign mergers and acquisitions are allowed to encroach on state ownership, and the purchase of existing enterprises holds an attractive appeal for foreign investors, blocks on foreign investment outside the least prioritised sectors are commonplace. Even where local bureaucracies favour such outside investment, central bodies, particularly the Ministry of Commerce, (MofCom) flexibly interpret their definition of the importance of those companies in order to block mergers and acquisitions. The criteria for MofCom to review potential monopoly dangers are set at a relatively low benchmark, and are defined in terms of assets, revenue and market share, or by the number of enterprises in which investors hold stakes, resulting in greater restrictions on foreign investment and increasing selectivity over project approvals (Mattlin, 2007).


The Invisible Hand of the State


In the late 1980s, some advocates of market socialism in Hungary, Poland and China proposed the creation of stock markets where the shares of public enterprises could be bought from the state by various public entities. This was intended to foster greater fluidity and flexibility of response to market impulses. Kornai predicted that such firms would not change their behaviour as ‘there cannot be a real market in capital without capitalist private owners.’ (Kornai, 1992:503-4).


When stock markets were formed in Shanghai (1990) and Shenzhen (1991) there was a rapid decline in the state shareholding of listed companies. However, the fall in state ownership directly corresponded to a rapid rise in institutional ownership by the state. This transfer of shares did not change the quantity of state ownership at all (Wang et al., 2011).


Privatisation was never state policy but widespread insider privatisations of small SOEs reduced the total number of SOEs from 250,000 in 1995, to 127,000 in 2005 (Mattlin, 2007: 25). However, according to Wang it is “naïve to view the state as simply having divested itself from ownership of the state sector. Virtually all of the figures that scholars and the popular press have picked as evidence of the declining role of the state, relates to the decline in state shares but ignores the rise of institutional shares.” (Wang et al., 2011: 9). In 2004, the state was the largest shareholder in 70 percent of listed non-financial firms, which are commonly defined as private companies (Kyle, 2011: 10).


The transformation of SOEs into share-holding firms took several forms, shareholding cooperatives, jointly owned enterprises, limited liability corporations and limited shareholding corporations. These firms held over 50 percent of capital assets and generated 35 percent of national sales. They replaced SOEs as the dominant public sector employers in the interior of the country. These hybrid forms were supposed to operate under hard budget constraints (Lin and Hu, 2011: 725, 728).


State ownership is masked in shareholding companies resulting in a general underestimation of the extent of public ownership. It is also common to ignore the role of the state in joint ventures with foreign invested enterprises (FIEs), and in those cases where state enterprises acquired FIE status by registering outside the mainland in order to gain access to FIE concessions. Indeed, even nominally private companies may conceal significant state share ownership.[11] 

The widespread underestimation of the influence of state ownership in the economy is not simply a question of misidentifying concealed public ownership relations, but also of understanding the ‘dynamics of control’ exercised by organs of the party and state (Kyle, 2011: 25).


The above chart elaborates the overall networked chain of command over urban state owned and state controlled enterprises. The organisation department of the Communist Party appoints the heads of the SASAC and the top 50 centrally managed SOEs. Most leadership positions in SOEs and banks are also party appointments. The SASACs appoints the managers and supervises SOEs at a national and local level (Kyle, 2011: 72-76). SOEs also exercise control over Limited Liability Companies and Shareholding Companies through dominant share ownership. State banks provide credit to SOEs at a national and local level, as well as to Limited Liability Corporations, Shareholding Companies and Urban Cooperatives.


The dominance of state ownership in contemporary China may be minimized if one considers the total economic activity of the nation rather than the activity of the commanding heights. Huang believes that the key issue to define ownership is control rights. Who can appoint the managers, dispose of the assets and determine the strategic direction of the firm? This ownership definition is hard to discern from the datasets used to assess the ownership of Chinese industrial enterprises. The Organisation for Economic Co-operation and Development (OECD) produced a widely cited study of the extent of private ownership in China’s industrial firms, but the interpretation of their results is sharply contested. Huang pinpoints the categorisation of legal person shareholding firms as problematic. If one accepts that they are private, then the foreign and indigenous private firms share of China’s industrial profits was 28.9 percent in 1998, and 71.2 percent in 2005. If legal person shareholding firms are not counted as private, then foreign and indigenous private firms share of China’s industrial profits declines to 17.6 in 1998, and 39.8 percent in 2005. (Huang, 2008:14-16)


As regards GDP similar problems exist when trying to identify what exactly is a private or state owned firm in China. A recent comprehensive survey by Andrew Szamosszegi and Cole Kyle (Kyle, 2011) adopts a stance similar to Huang (2008), claiming that the state sector is far more influential than the previous consensus believed. This chapter agrees with their view, however, here, the emphasis is placed on the multi-spectrum character of party control and we pay less attention to the statistics than to the hierarchy and mechanisms of control.


Kyle notes that: “The observable SOE sector under reasonable assumptions accounts for nearly 40 percent of China’s economy. Given additional information on the prevalence of SOE ownership in China’s capital markets, anecdotal and observed data on the prevalence of SOE ownership among LLCs and other ownership categories, and the SOE role in roundtripped FDI, it is reasonable to conclude that by 2009 nearly half of China’s economic output could be attributable to either SOEs, SHEs, and other types of enterprises controlled by the SOEs indirectly. If the output of urban collective enterprises and the governmentrun proportion of TVEs are considered, the broadly defined state sector likely surpasses 50 percent.” (Kyle, 2011: 25)


In China a large proportion of the workforce is employed in non-socialist sectors, how does this fit with Kornai’s system? To answer this we can look at the USSR prior to 1928. Then, the overwhelming majority of the Soviet population lived and worked as peasants in non-socialist employment relations.[12] Kornai describes the forcible collectivisation of agriculture in the USSR, that began in 1928, as a key transition to the classical system from the “revolutionary-transitional’ era.  Prior to this “the dominant property form in agriculture was the small family undertaking that employed no outside labour on a regular basis. In addition, there were small private agricultural undertakings employing outside labour, but not in large numbers. According to Marxist classification the former are small commodity producers and the latter capitalist farms.” (Kornai, 1992: 77) Kornai notes that Yugoslavia and Hungary did not forcibly collectivise these sectors and this is cited as evidence that these countries never established a pure classical system. Thus reform socialism and the pre-classical transitional revolutionary system share a common characteristic – that a significant or even large majority of the workforce may be employed in non-socialist or capitalist sectors of the economy.  In the 1980s, agricultural reforms rapidly transferred the majority of China’s workforce to private agricultural employment - a situation analogous to the USSR in 1927. (Kornai, 1992:436)

Employment of urban workers by registration status

SOEs account for 28 percent of formal urban employment identified by the NBS for 2010, this means that informal employment of migrant workers is excluded. But the data also excludes SHEs as well as other mixed enterprises where SOEs are controlling shareholders which would significantly increase the role of the state in employment.[13]


The specific nature of China’s hierarchy of authority - deriving from the combination of Communist Party rule of the state and public ownership of the commanding heights of the economy - concentrates and multiplies the power and control over all the non-state sectors of the economy and wider society. This power multiplier stems from the totality of instruments at the disposal of the party. The leadership of the banks, judiciary, education, police, secret police, army, mass media, government officials, trade unions, youth organisations, national minorities and religious groups etc. are all vetted and selected by the Communist Party. Thus, deemphasising the issue of whether the majority of GDP derives from the state or the non-state sector or whether the majority of workers work for the state sector - as the definitional determinant of the system –is entirely consistent with the method used by Kornai to define systemic power relations in his socialist model.


Kornai questioned the viability of attempts to rationally combine bureaucratic and market coordination, as one of the system specific features of reform socialism is that horizontal coordination remains subordinate to indirect vertical dependence. Although ‘manager’s dress, vocabulary, and demeanour begin to resemble those of his or her Western counterpart’, these managers lack the identification with the profit motives of owners that capitalism produces. Their positions are dependent on evaluation by their superiors in the bureaucratic administrative hierarchy (Kornai, 1992: 504-5). As we shall see this remains true in contemporary China.


In corporations predominantly owned by central or local government or by state entities, the leading executives are appointed by party and government agencies. They are civil servants whose roles are often rotated between public industry and government positions. Managerial ownership stakes remain insignificant and managerial remuneration is modest. ‘Almost all of China’s largest and most powerful corporations are still in this category.’ (Walder, 2011b:31).


Kornai saw reform socialism as generating an environment where managerial control over the workforce weakens. Protests and strikes by workers become more commonplace, and are even tolerated, and official trade unions become more assertive. The loosening of control over ideology and state enforcement means that local party and trade union branches do not automatically side with the managers. Workers begin to act more boldly and engage in protests and strikes. Such discontented workers are now more capable of convincing superior bureaucratic powers to dismiss errant managers. In order to avoid this fate, populist managerial tendencies become more commonplace. Managers may act as ‘representatives’ of the workforce vis-à-vis superior authorities (Kornai, 1992: 469-70).


The dynamics and effects of pressure brought to bear on the authorities by subaltern groups demanding their rights, will be will addressed in a separate chapter. Nevertheless the process described by Kornai is clearly evident both in increased labour unrest, and in pressures that he defined as a tendency towards ‘self-management’, which weakens the control of managers over workers in publicly owned firms (Chan, 2005 , Philion, 2009).


Organs of the Party and State


Kornai’s theory that China has transformed into a capitalist system clashes with his earlier theory that the Communist party in power represents the deepest core of the socialist system. He accepts that “the Communist party still holds its political monopoly and the party-state has unrestricted totalitarian power. There is no legally permitted political competition between parties or ideologies; any opposition, dissent or truly independent, (sic) is repressed.” (Kornai, 2008: 58). However, he believes that the transformation in the ownership structure and the rise of market coordination has produced a system ‘fairly close to a typical capitalist system.’


Kornai says that the party’s embrace of the market and private ownership illustrates its abandonment of ideological adherence to Marxism-Leninism (2008:58-60). I shall return to the question of Marxist ideology, political reform and the CPC later in this thesis. Here, I seek to make the case that public ownership (not private ownership) and bureaucratic coordination (not market coordination) still predominate in contemporary China. If this contention is correct, then Kornai’s view, that the CPC is a capitalist party, does not conform to his analytical system.


It seems logical that the influence of the bureaucratic state should decline when the market mechanism replaces planning as the central coordinating force, but the reform era witnessed a major expansion in the number of officials on the government payroll from 20 million in 1990 to over 46 million in 2004. The fixed asset investment of the state apparatus as a proportion of GDP in 2002 was as high as in the early reform years. The expenditure exceeded that of either agricultural fixed asset investments or educational fixed asset investments that year (Huang 2008: 167-8). 


The executives of the top SOEs and banks are appointed by, and beholden to, the Central Organisation Department of the CPC. This means that the goals of the state override shareholder value and the pursuit of profit maximisation (Kyle, 2011: 3). The Central Organisation Department (COD) recruits, appoints, evaluates, promotes and removes, party and governmental officials at central, regional and provincial levels. The COD also operates through party committees at all levels of society. The COD keeps detailed files on all employees of the party, government, state enterprises, the judiciary, the mass media, and state entities and institutions. This facilitates universal control over personnel of the state. In addition the personnel files of urban workers employed by the state are stored under party control and are universal, secret and intrusive. Employment transfer is dependent on file transfer, which acts as a critical mechanism of control. Similar organisational supervision and control also extends to large private sector entities where party committees exist. However, in private and foreign owned entities the personnel files are less critical and the party may operate under the auspices of a trade union (Lin, 2011:72-3).


State organisations and work units in China are hierarchically ranked according to military principles, a practice that continues from ‘classical socialism’ (1949-1978). Personnel transfers use organisational and authority rank as the criteria to determine transfers, rotations and promotions within the state. Such transfers span politics, economics and state institutions. This generates loyalty to the party and state rather than to one’s particular employment, shareholders, or private interests (Lin, 2011:76). The upper levels of the hierarchy are all political positions. The central party and state vertically controls local government through their power to set objectives and targets, and through more direct intervention to remove anyone displaying disloyalty or too much independence (Lin, 2011).


Reform Socialism and Planning in Contemporary China


The ‘perfection of control’ is a tendency within reform socialism that seeks to amend and adjust the mechanisms of bureaucratic coordination, whilst leaving one party rule and the dominance of public property intact. It involves reshaping organisational control by function or location, or by centralisation and decentralisation. Public firms are reorganised into ever-larger units and computer models are devised to improve control systems (Kornai, 1992: Chapter 17).


Kornai believes that the complexity of millions of transactions in a national economy make calculations to effectively regulate and plan impossible. He argues that only the free market can carry out these functions, which it does automatically. This is a contention that one might question in today’s networked economy, and that has previously been challenged on non-technological grounds[14] (Lange et al., 1938, Stiglitz, 1996). However, we are not seeking to establish the validity or error of his claim, but to identify if Kornai’s description of reform socialism fits contemporary China.


The perfection tendency may involve reducing the quantity of planning indicators and placing greater emphasis on a smaller number of objectives, concentrating on quality not quantity, separating targets from past performance and concentrating on net production. The self-interest of decentralised bureaucratic entities comes into conflict with the central bureaucracy. To eliminate this imperfection the central bureaucratic apparatus reasserts its authority and control, tightens discipline, and centralises coordination and command. The identification of corporate ‘profits’ as the primary target indicator produces the superficial impression of a radical shift towards capitalism. However, Kornai believes that without decentralisation, free entry and free competition, profits are not a defining characteristic of capitalism (Kornai, 1992:Chapter 17).


Since 1953, China’s planning system operates through five-year plans. Originally, the plan directed state owned companies in production decisions and government ministries were responsible for each sector of the economy. After 1978, when non-state competition was permitted, planning was subsumed under the ambit of ‘reform’ and ‘development’ leading to the creation of the National Development and Reform Commission (NDRC) in 2006. The Central Committee of the Communist Party drafts Five Year Plans (FYP), which are then amended and adjusted under the control of the NDRC before approval by the National People’s Congress (Chow, 2011: 1-2).


The various bureaucratic entities that were combined to form the NDRC are steeped in a culture, habit and outlook, which allots the primary role to planning and a supplementary role to markets. The NDRC is composed of an amalgam of bureaucratic administrative organs directly inherited from the history of central planning. They set the targets and the State Council, through its ministries and offices, is tasked with implementing them. (Chow, 2011: 5-6)


The 12th FYP concerns nearly every aspect of society, agriculture, industrial upgrading, service sector expansion, regional and urban development, energy and environment, education, science and technology, people’s livelihood and welfare, the management of society, promoting socialist culture, perfecting reform, advancing the open door policy, promoting democracy and socialism, establishing a harmonious society and strengthening defence. The document outlines guiding concepts and directions and the means of executing them (Chow, 2011: 2-3).


The objectives of the FYP are defined through numerical targets. These include the following categories: total GDP and per capita GDP; the increase in the service sector as a percentage of output and employment; expenditure on research as a percentage of GDP; the rate of urbanisation; total population; reducing energy usage and carbon emissions; the quantity of cultivated land; years of schooling; the extent of urban employment and unemployment, insurance and disposable income; rural health coverage and net income. The objectives are designed to rally support behind the realisation of these targets (Chow, 2011: 3-5).


The direct control of the economic resources of state-owned enterprises is the primary means by which the plan is realised. In addition, monetary and financial policies encourage non-state entities to help achieve planning targets using interest rates, subsidies, tax breaks, government procurement and contracting policies. Party secretaries at all levels of society are directed to ensure the Plan is realised, and government agencies at all levels must implement the Plan under the direction of Party organs (Chow, 2011: 7).


A review of the current 12th Five Year Plan (FYP) for 2011-15 provides insight as to the influence, character and extent of planning in contemporary China’s political economy. In the plan, the SASAC identified key sectors for supportive government intervention including strategic and emerging industries. This entails the assimilation of imported know-how and its transformation into emulation and innovation. This policy is consolidated through state sector investment, regardless of whether this takes place at the expense of private sector competitors. Competitive capacity in global terms is facilitated by preferential state support though such methods as credit policy, tax preference and state procurement policies (Kyle, 2011:2).


In many ways the 12th FYP closely resembles Kornai’s description of the attempt to ‘perfect’ planning under reform socialism. It claims to be based on ‘scientific development’ and promotes a government led ‘informationisation’ strategy (Kornai, 1992: Chapter 13).


Its targets for social policy are overwhelmingly state driven policies aimed at expanding public sector control over housing, healthcare and education. Compulsory ‘binding targets’ to be attained by 2015 in these sectors include:

  1. An increase of urban residents enrolled in the basic pension scheme from 257million to 357 million
  2. Building 36 million apartments for low cost rental to low-income groups.[15]
  3. Basic urban and rural medical insurance enrollment is to increase by 60 million. The percentage of state payment is to exceed 70 percent.

Binding targets for environmental protection include:

  1. A 16 percent reduction in energy consumption per percentage of GDP
  2. A 17 percent reduction in CO2 emissions per percentage of GDP[16]


Naughton (2011) argues that the overall trajectory from the early 1980s was towards capitalism, but a policy shift to the left took place in 2003 under the leadership of Hu Jintao and Wen Jiabao. The shielding of state owned enterprises from privatisation, and the vast expansion in state provision of education, healthcare and housing, shows this. “Much health service provision, pharmaceuticals, and education, as well as a significant slice of housing, are now to be provided directly by government agencies without regard to market forces.” (Naughton, 2011: 323).


Industrial policy contained in the 12th FYP seeks to support ‘Strategic Emerging Industries’. These industries are biotechnology, new energy, high-end equipment manufacturing, energy conservation and environmental protection, clean-energy vehicles, new materials, and next generation IT.  The 12th FYP envisages an expansion of these industries from between 2-4 percent of GDP in 2010, to 8 percent by 2015, and 15 percent by 2020. If this is realised ‘they will be large industries driving the whole development process’ (Naughton, 2011:325).


Naughton sees the shift in China’s orientation as a major gamble on a ‘new model’ arguing that the previous long-term trajectory was characterised by a gradual but ever increasing market and private ownership based economy.[17] Naughton argues that China now stands uniquely alone amongst developing countries in having carried through a significant shift away from the market and towards state interventionism following the world financial crisis of 2008-9 (Naughton, 2011:328).




Kornai observed that price policy in reform socialism could vary significantly, from country to country; Yugoslavia had few controls over prices, whereas in the USSR they were ubiquitous. Reform of prices alters the coordination mechanism but does not in itself transform it. China moved from a dual track pricing system in the 1980s to one where market prices came to govern between 87 and 97 percent of production (Kornai, 2008: 148-9, Kornai, 1992: Chapter 22). Kornai cites this as proof that the market is the main coordination mechanism in China.


However, Kornai also claims that “the economic administration in all reforming countries tries to exempt factor prices from the trend towards deregulation and keep tight control over the setting of them. This effort succeeds to the extent that allocation of the factor concerned remains under the influence of bureaucratic coordination.”(Kornai, 1992: 518). By factor prices he means the price of capital, labour and land. These factor prices -for interest on bank credit, wages, land and rent -are shaped by administrative controls in China, although extensive grey markets exist alongside bureaucratically determined prices. I provide an overview of the administrative influence on finance and land here, and I will approach the question of wages in a separate chapter on labour and labour relations.





Financing the Commanding Heights


The Ministry of Finance (MOF) was responsible for the collection and allocation of all financial surpluses prior to 1979; the People’s Bank of China (PBC) was its sole bank. SOEs budgets were part of the state budget and the PBC was the accountant and cashier of SOEs. SOE reforms led to the restoration of four state-owned commercial banks. Reform permitted bank lending related to increasing deposits, and the stock exchanges in Shanghai and Shenzhen became sources of direct finance for listed companies and banks. Now state enterprises use profit retention, stock markets, banks and financial intermediaries (e.g. state owned insurance companies, investment companies and leasing companies) as sources of finance for state enterprises. The government restricts financial markets through controls over entry into the banking sector, restrictions on stock exchange listing and by interest rates (Lin, 2012:185-6).


Given the fact that SOEs are ‘not completely market based, liberalising the financial market would have greatly increased their capital costs’ (Lin, 2012:208). The financial system is treated as an instrument of state policy. Stock exchange listing is too costly for small and medium sized private sector companies[18] and SOEs receive 80 percent of bank loans. Therefore the development of the private sector is ‘crippled due to the lack of a normal financing channel’ (Lin, 2012:209). 


Land and Private Property


Land in urban China is owned by the state and rural land is collectively owned.[19] Land usage rights may be leased for profit in designated urban areas, but the same practice is illegal for rural leases from village collectives. The control of land is a major source of contemporary capital accumulation both by state entities and by private individuals and companies. Urbanisation leads to battles between contending users and claimants to land usage rights. Forced evictions and conflicts about land seizures are common sources of urban and rural unrest. The process of urbanisation is created by and creates; local state planners, landlords, financiers, builders, and an ever expanding urban state apparatus. Local leaders seeking land rents as revenue sell real estate projects in which rising property prices are used as indicators of success (Hsing, 2010:6-10).


The conflicting claimants to the control rights over land usage are territorially divided; this generates three primary levels of intra-state land disputes. 1. Between municipal governments and state entities such as SOEs, universities, the military etc. in the major cities. 2. Between urban and rural governments at the fringe of the expanding cities. 3. Between township and village governments at the rural fringe (Hsing, 2010:15, Huang, 2008). Huang believes that land grabbing may fundamentally undermine the faith of rural entrepreneurs in the security of property rights. On the one side, land grabbing is certainly a lucrative means for bureaucrats to transfer public resources to private hands through corrupt property deals. On the other, it also involves state bureaucracies extending the wealth, power and reach of the urban state. To a significant degree this conflict determines who owns China.




Kornai identified investment hunger and forced growth as system specific attributes of socialist political economy. They are driven by the perceived need to rapidly overcome economic backwardness and catch up with the advanced capitalist countries. All levels of the bureaucratic apparatus promote rapid expansion to increase their sphere of power. Whereas the rapid development of capitalist firms is restrained by personal risk, under socialism, this constraint does not exist. Socialist investment hunger is only constrained by fear of sanctions for making mistakes and restrictions on resource allocation (Kornai, 1992: 160-63).


Fixed investment may be the most appropriate means for determining the influence of the state sector because it reveals the forces determining the direction and orientation of the economy.  (Huang, 2008: 20-22). This view is reinforced by data on the share of state investment in a variety of sectors.


“In the majority of industries, the SOE/SHE (State Holding Enterprise) share exceeds 50 percent, as does the median share.” (Kyle, 2011:15). “SOEs and SHEs account for the majority of investments in most major sectors of the Chinese economy.”

This chart records the percentage of total investments in fixed asset in China in 2009 by ownership registration. National Statistical Yearbook 2010[20] The segments on the left of the chart are composed overwhelmingly of state owned or controlled entities, as Limited Liability Companies, Joint Ventures, Shareholding companies, Collective and Cooperative firms are all dominated by public sector ownership or control. These companies are often defined as capitalist enterprises and many do have significant private equity stakes, but most of these nominally private entities, are either majority owned by state entities, or have very significant state or state institutional ownership stakes. Such mixed ownership companies have expanded rapidly since 2001, and by 2008 held “half of the country’s total capital assets and generated over 35 percent of the national total sales income” (Lin and Hu, 2011: 728) Thanks are due to Xu Chenggang for  pointing to the need for greater clarity on this issue.


The Relations to the Private Sector


Kornai’s description of the development of the private sector in reform socialism involves the spontaneous development of private enterprises where the hostile environment of classical socialism is reduced or eliminated. The bureaucracy supports the private sector because it improves supplies and eases shortages and can reduce social tensions (Kornai, 1992:431-5).


However, the bureaucracy also relates to the private sector in an obstructive fashion. It governs the public sector from within, and the private from without, and this private sector autonomy is difficult for the bureaucracy to stomach. Resistance to private enterprise is a spontaneous and natural reaction of the bureaucracy in defence of its power and ideology (Kornai, 1992:450-1).


The bureaucracy fails to adequately guarantee the security of private property and controls access to all manner of permits and licenses. Restrictions can be placed on the size of firms and the sectors that are open to the private sector. The legal infrastructure is not designed to serve the enforcement of private contracts and leaves few avenues of redress against the state itself. Taxation can be arbitrary, and bureaucratic control over access to credit, materials and state procurement orders, act as severe constraints on private sector development (Kornai, 1992:451-4).


In academic and policy debates on the speed of systemic transformation during the 1990s, Kornai maintained that the transition must be organic (Kornai 2008:79), and argued that the design and implementation of comprehensive reform, requires experimentation and institutional transformation, whilst maintaining a broad constituency of support. Thus, ideally, such changes would impose a minimal negative impact on living standards (Kornai 2008: 80, 160-1).


Kornai argues that an organic and gradual economic transformation from socialism to capitalism has occurred in China. This was characterised by an evolutionary development towards private sector domination, stemming from the dynamic nature of entrepreneurial drives, which, encircled and outperformed the state sector (Kornai, 2008).


The main spheres of economic activity of private sector enterprises described by Kornai in 1992, were small scale, although medium and large private enterprises did exist at that time, particularly in China.


In the ideological sphere the growth of private enterprise evokes a crisis under reform socialism, in which pragmatism clashes with socialistic and anti-capitalist tendencies, provoking deep-seated reactions from broad sections of the population and within the ruling party (Kornai, 1992:444-47). Let us see if this description corresponds to the observable processes in China.


Private ownership restrictions were first relaxed in 1982, and the 15th Party Congress in 1997, declared the private sector to be an ‘important component of China’s socialist market’. The proposals were the subject of negotiation, dispute and sharp conflict. This reached a peak in 2005, when Gong Xiantian, a professor at Beijing University, publicly criticised the law in an open letter, which gathered support from thousands of prominent figures, including scholars, retired officials, and military generals, all opposed to a watering down of socialist property law. This furious public debate caused the legislative process to be temporarily suspended and further amendments were incorporated to deflect leftist concerns (Lee, 2010:37-40). In 2004, a constitutional amendment recognised private property, and in October 2007, the Real Property Rights Law was finally passed.


Although, in theory, the party-state could have simply imposed a new law, it engaged instead in a prolonged process of complex negotiation and debate. Indeed, the process to prepare the 2007 law began way back in 1993. There was a long and complex process behind the passing of the 2007 law, which reveals that the CPC, the government, state and general public, retain an ambivalent and conflicting relationship to the fundamental underpinnings of capitalist property relations (Lee, 2010).


The pressures to introduce legal protection for private property came from various sources. Foreign investors and states sought guarantees for the security of their investments. Domestic private enterprises developed into a significant part of the national economy, and their owners could be more readily co-opted in a legal environment that was friendly to private property. The Marxist ideological framework, within which the state operates, required some form of adjustment that would strike a balance between stability and legitimacy (Lee, 2010:29-31).


The private sector in China developed in an environment that was hostile to it, and access to critical inputs remains restricted by the in-built bias towards SOEs, and by the exclusion of the private sector from access to resources allocated by plan. Indeed, private sector firms often fear expropriation. However, discrimination against the private sector by local government is more pronounced in those areas where SOEs predominate in the local economy. An IMF study found that private enterprises were 90 percent self-financed, and a Chinese Academy of Social Studies survey in 2003, found that fees extracted by local government, consumed 70 percent of private enterprise profits, and this does not take account of the cost of approvals, permits and associated ‘red-tape’ (Kung, 2011).


Huang (2008) provides considerable empirical evidence that the gradualist and evolutionary interpretation of the development of Chinese capitalism is flawed. He locates the dynamic entrepreneurialism within the largely private, rural Township and Village Enterprises (TVEs) of the 1980s. During the 1990s, the repression of rural capitalism saw village level democratic control transferred to higher levels of power and to expanding, unelected, bureaucratic organs functioning at the township level.


Private financing and state funding of private enterprises was repressed and a general policy bias towards urban state-owned and controlled sectors prevailed. Although private TVEs flourished in the 1980s, the supportive environment that fostered such entrepreneurial dynamism was systematically undermined. In the 1990s, private companies were starved of finance and larger-scale collectivist TVEs, under the dominance and control of local government, were supported with finance and policy initiatives designed to produce paper viability (Huang, 2008:133-174).


Thus, TVEs were originally the foundation for rural capitalism in the 1980s but were forced back under government control by the repression of rural finance to private sector TVEs. This entailed a return to promoting cooperative firms with private revenue rights, which functioned under effective government control (Huang, 2008).


Huang contrasts Zhejiang province to Shanghai in order to reveal the difference between policies supportive of capitalist dynamics in the former, and an urban statist policy in the latter. Half of the largest private companies in China are located in Zhejiang province, whereas Shanghai exhibits Soviet characteristics -a dominance of state ownership, heavily restrictive entry into indigenous private sector activity and an industrial policy driven by state intervention. Huang sees the repression of small scale and labour intensive entrepreneurship, and the promotion of urbanisation centred development on a national basis, as an emulation of the ‘Shanghai model’ (Huang, 2008:175-232).


The Steel Industry in the Reform Era


Walder’s (2011a) study of the Chinese steel industry provides an overview of the development and character of this sector of the economy. The Chinese leadership rejected privatisation of large state owned firms but permitted and encouraged the privatisation and merging of small and medium sized state owned firms. This led to expansion of the size and influence of the largest state owned companies.


From the 1950s onwards steel was a model industry at the core of the planned economy, the most famous companies, Anshan, Ma’anshan, Benxi, Wuhan and Capital Iron and Steel were embryonic socialist citadels, providing a universal welfare state for employees and their families from company revenue. In the 1980s reform in the steel industry took the form of greater managerial autonomy over marketing, production, investment decisions and expansion plans, and provided profit retention opportunities. Despite expanding demand, the burdens of non-core costs made it difficult for steel giants to compete with a myriad of newly formed small steel mills, which were established by local governments with lower costs and newer technology. By the mid 1990s, the steel giants were increasingly in debt and reliant on state subsidy. Similar processes applied in other large-scale state-owned sectors of the economy.


The state increased the size of these giants by mergers and separated core business from welfare obligations and other activities through a process of corporate reformation. State sector employment declined radically but output rose rapidly, increasing 8 fold from 1989, producing 495 million metric tons in 2007[21] (Walder, 2011a:2-8). A radical shedding of labour took place and was accompanied by rapid output growth in the late 1990s.[22] Employment in the largest 80 steel companies continued to fall but at a slower rate, declining from 1.85 million in 2001, to 1.6 million in 2007 (Walder, 2011a:9).


However, the state reasserted direct control over these enterprises by mergers and restructuring, segregated the core enterprise activities from other obligations, increased fixed investment and even compelled the largest private steel company to merge with a state company. The controlling shares of 9 of the 10 largest companies were held by SASAC.


Restructuring provoked a wave of worker unrest in the mid 1990s, which was most militant in those towns dominated by steel enterprises. The workers generally demanded adequate compensation and pensions, but in the sharpest conflicts, they mobilised local people against officials and breeches of the law, and in some cases this led to violent conflicts.


Large state owned steel enterprises are not the nurturing ground for a new bourgeoisie, in the sense that they do not manufacture oligarchs from surplus value. Some wealthy private steel barons used their former employment and connections, to branch off and make money from their relationships with local government. However, no steel magnates made their money from within state owned enterprises (Walder, 2011a:11-13).


State owned steel firms in China operate as arms of the party-state. In this respect, they have changed very little in their essence from classical socialist firms. State ownership power is cemented through controlling the board of directors and appointing the leading executives. The share owning system in China prohibits trade in over 50 percent of the shares of state enterprises, which are non-convertible. Thus market valuation of such companies based on shares is ‘fictional’ as it cannot be used to determine real value.  


Communist Party appointments to run state-owned steel giants are ubiquitous and make the corporate leadership entirely dependent on the party. Indeed such corporate executives generally transfer to posts in senior party and government positions. They hold considerable leverage power, as such giant entities produce significant lobbying weight within the party and bureaucracy at the highest levels. This greatly increases their capacity to extract soft-budget loans and credits compared to before. Giant state enterprises have been ‘lavished with financing-especially since 2008-and similar credits are not available to domestic private firms.’ (here:Walder, 2011a:18). Walder sees such large state owned corporations, as political and economic projects in the much the same way as Anshan Iron and Steel was regarded as a model state project in Mao’s time (Walder, 2011a:14-18). 


Joint Ventures in the Automotive Industry


At the start of the reform era ‘developing the productive forces’ replaced ‘class struggle’ as the primary policy objective. Government entities made more autonomous decisions, which included increasing the range and volume of automotive production. Markets emerged with the relaxation of central planning; for example taxis were in high demand after taxis firms were first permitted. Localised incentives stimulated the proliferation of automobile factories. This led to the creation of some weaker local manufacturers. 


In 1994 the automotive industry was designated by the government to be one of the ‘Pillar Industries’. The fact that 10,000 parts and components make up a motor vehicle, means that the industry can shape the fate of enterprises in metallurgy, chemistry, coal, light industry, electronics and textiles etc. and this encourages specialisation and coordination in these sectors.


Development policy at the highest level of state planning decided on a long-term plan to consolidate and unify large-scale automotive producers, to advance component and product development capacity and promote car ownership. It envisaged a foundation stage of local development from 1994-6, large-scale groups and backbone enterprises with R&D capacity were to be created by the year 2000, and rapid development with a target output of 6 million vehicles per year, was set as an objective for 2010. Foreign investments in joint ventures with state owned enterprises increased when China joined the WTO in 2002, and the industry witnessed rapid growth rates of 38.8% in 2002 and 36.7% in 2003. In 2004 output grew to 5 million units (Holweg, 2005:11-15). ‘China supplanted the U.S. as the world’s largest auto market after its 2009 vehicle sales jumped 46 percent’ to 13.6 million units,[23] and vehicle manufacturing reached 13.79 million units.[24]


The automotive industry is dominated by joint ventures between foreign companies and state owned enterprises that produce 90% of passenger vehicles. However, large state owned enterprises have formed vast enterprise groups through share ownership mergers and acquisitions, including overseas activity. The Chinese government at national level regulated production from the 1950s onwards, although local governments also supported their own automotive champions. This delayed market responses such as consolidation and regrouping until recent times (Holweg, 2005:21-23).


Zhejiang’s Private Sector Model


Within Huang’s philosophy the city of Wenzhou is a role model, ‘the bastillion of Chinese capitalism’. Wenzhou’s entrepreneurs not only created the modern city of Wenzhou and partly financed its infrastructure, they also dominate European markets for garments, shirts, and cigarette lighters. Wenzhou’s capitalists can make or break real estate markets and emerged almost entirely from indigenous, small-scale, self-employed businesses (Huang, 2008:58).

The Wenzhou model represents industrial production of specific items based on clusters of thousands of (mainly) family firms engaged in labour intensive activities. For example, Wenzhou’s footwear industry is the world’s largest, producing 835 million pairs of shoes. Local SOEs and TVEs engaged in shoe production before 1979, acted as the seed factories spawning a proliferation of private companies engaged in all the subcontracted operations required to produce and finish products for domestic and international markets. The local government provided a facilitating environment by creating specialised markets in the city and instituting strict quality control measures to enhance Wenzhou’s shoemaking reputation (Xu, 2009:13-16).


Puyuan in Zhejiang province is the centre of China’s cashmere sweaters industry. A study by Xu & Zhang (2009) shows that it employs 70,000 people and produces 60% of the cashmere sweaters in the country. They mostly work for small companies employing less than 12 people, engaged in family weaving workshops, sweater shops, working as yarn dealers, or in printing and ironing workshops, or as independent drivers. There were 12,477 people employed in medium sized enterprises, 11,905 in 121 integrated firms, 3,072 in 42 finishing factories and 1,150 in 23 dyeing factories. Local government is involved in quality control issues, provides an important public training programme and created a large industrial park, which provides tax breaks, and low cost land and credits, but mostly supports the larger integrated companies (Xu, 2009:10-13).


The primary characteristic of these private sector industrial clusters is that they are composed of small and medium sized enterprises. These operate on a family business model with low cost of entry at the basic level, due to relatively low capital start up costs.  




Kornai set out to identify and isolate the essential features of socialism by a study of various countries, in which he abstracts the essential and necessary features of the system. One of the greatest strengths of Kornai’s ‘Socialist System” model is its clear method for systemic identification. Many analysts of China are flippant in their use of such systemic terminology as capitalism, socialism, or communism; Kornai is not.


This chapter makes a comparison between Kornai’s general method for classifying socialism and his specific statements on China. To facilitate this I presented the overall framework of Kornai’s reform socialism model in the first chapter. His method of analysis describes the inner workings and dynamics of transformation in the system. He elaborates the idiosyncrasies, contradictions and incoherence that penetrate the system as reforms take root. Notwithstanding this, he recognised that some countries were able to sustain reform socialist combinations for decades before facing revolutionary change.


This chapter looks at the functioning of Kornai’s three core lines of causation in China, public ownership, Communist party rule and bureaucratic coordination. I addressed each of these spheres in some detail.


The importance of public ownership of commanding heights of the economy is emphasized as the primary lever of economic power. In order to clarify the meaning of Kornai’s concept of the predominance of public ownership, I have drawn on Vitali’s study on the global concentration of economic power and reinforced the relevance of this by reference to Lenin’s definition of the commanding heights. This should help to clarify the scope for variability in ownership relations that might fit within Kornai’s concepts of the revolutionary-transitional era and reform socialism. By these means we can apply Kornai’s method to identify if the minimal necessary and sufficient conditions required for this core systemic feature - public ownership of the commanding heights of the economy – apply in China today.


The methods by which public ownership of the commanding heights is concealed are explained, and the continuing control exercised by the Communist Party is detailed. There are two interconnected spheres where Kornai believes that this has radically changed. The first is the penetration of capitalists into the party and the second is the ideological tolerance of private property. In this chapter I take the view that the penetration of private property was accepted only after a long and bitter conflict and that this reveals that the party is not yet ideologically conquered by capitalism. Similarly, the fact that significant numbers of capitalists are party members is not sufficient evidence that they control party policy or orientation. Whilst official policies are not overtly hostile to capital, the actual economic system certainly has an inbuilt inherent systemic bias towards public sector enterprises.


I have sought to explain the dynamic of economic planning under China’s Five Year Plans; which focus on state enterprises, banks, and government institutions as the agencies to implement targets and objectives. Although market prices play a far larger role than in any previous socialist system, it is clear that factor prices for land, labour and capital continue to be deeply influenced by state policy. The state determines the overall direction of the national and local economy through the Five Year Plan. A colossal mobilisation of resources is undertaken to attain planning targets that are not market determined, and indeed, which bureaucratically generate markets. Thus, it may be said that Kornai’s concept of bureaucratic coordination of the economy remains predominant in China, despite its specific deviations from other reform socialist models.


Kornai’s writings on contemporary China draw premature conclusions about the extent of systemic transformation towards capitalism. A significant body of current research on Chinese political economy questions to what degree China can be said to have transitioned. When this research on present-day China is dovetailed into Kornai’s original model of reform socialism, it produces a very close match to this ‘genetic code’. This reinforces the strength of the original reform socialist model elaborated by Kornai.


Contradictory systems coexist in Chinese ‘reform’. The natural self-reproductive and self-expansionist dynamics of capitalism, and the natural self-reproductive and self-expansionist dynamics of socialist political economy, are both present. As Kornai revealed in his original model, reform socialism is characterised by such inner contradictions. China’s system of political economy remains dominated by the party, the bureaucracy and public ownership.


The key distinctions between Kornai’s original model and China today are: the greater role for the market and private ownership than in previous reform socialist experiments: and the prolonged and exceptionally rapid rate of economic growth, which, has enabled the Communist Party to ameliorate many of the conflicts that confronted other reform socialist states.


This comparison between Kornai’s model of reform Socialism and China leads me to ask the following research questions. Is the coexistence of capitalist dynamics within reform socialist China a viable and enduring system for economic development? Or is China’s success due to some unique combination of chance factors? How does the process of urbanisation and industrialisation generate the expansion of state owned assets and the consequent reproduction of the system? Do the processes of revolutionary transition towards socialism necessarily produce classical socialism? And do the processes away from the classical socialism necessarily produce capitalism? What role does ‘class formation’ and ‘class conflict’ play in shaping the specific nature of the system? What is the affinity, if any, between the New Economic Policy in USSR of the 1920s and the Chinese model of political economy? How does the Soviet debate on industrialisation relate to China?

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HOLWEG, M., LUO, JIANXI., NICK, OLIVER. 2005. The past present and future of China's automotive industry: A value chain perspective. Cambridge, UK: Cambridge-MIT Institute.

HSING, Y.-T. 2010. The great urban transformation politics of land and property in China [Online]. Oxford: Oxford University Press. Available:

HUANG, Y. 2008. Capitalism with Chinese characteristics : entrepreneurship and the state, Cambridge, Cambridge University Press.

KORNAI, J. 1992. Socialist System : Political Economy of Socialism, Oxf.U.P.

KORNAI, J. 2008. From socialism to capitalism : eight essays, Budapest ; New York, Central European University Press.

KUNG, J. K.-S., MA, CHICHENG. 2011. Does It Pay to Have “Friends” in the Government? Insecure Property Rights, Political Connections, and Private Enterprise Growth in Transitional China. Hong Kong: The Hong Kong University of Science and Technology.

KYLE, A. S. C. 2011. An Analysis of State-owned Enterprises and State Capitalism in China. Capital Trade, Incorporated.

LANGE, O., LIPPINCOTT, B. E. & TAYLOR, F. M. 1938. On the economic theory of socialism, Minneapolis, Minn., University of Minnesota Press.

LEE, W.-C. 2010. Yours, Mine, or Everyone’s Property? China’s Property Law in 2007. Journal of Chinese Political Science, 15, 25-47.

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[1] Special thanks are due to Janos Kornai for taking the time to read an earlier draft of this document and providing his encouragement, views and feedback, and to his colleague Xu Chenggang for his challenging critical comments on key issues.

[2] In Yugoslavia “the bulk of prices for products and services were freed at the earliest phase of the reform process and the area where administrative prices apply remained narrow.” (Kornai, 1992 :514)

[3] This argument permits a Communist Party to be in power under capitalism provided it is not actively hostile to private property. It appears to be a definition specifically designed to permit the Chinese and Vietnamese examples to fit this model.

[4] The meaning and result of this process of ‘immoral’ accumulation and of capitalists entering the party is debatable; as Kornai explains, it is part of an unfinished process. Are the capitalists taking over the party or is the party taking over the capitalists? Kornai argued that the balance of social forces would determine this question. If public opinion finds expression in a form that opposes such ‘illegal’ accumulation, then the Party elite may lean towards traditional methods of rule - in which bureaucratic privileges and power are not dependent on accumulating private capital to become capitalists, but rather on – exploiting their control and use of public property, and even expanding such public property at the expense of capitalist property. The existence of capitalists inside the Communist party does not automatically mean that the party is a capitalist party.

[5] Lenin elaborates his New Economic policy as one in which the following balance of economic forces exists. (1922)

“7. What is the plan or idea or essence of NEP?

(α) Retention of the land in the hands of the state;

(β) the same for all commanding heights in the sphere of means of production (transport, etc.);

(γ) freedom of trade in the sphere of petty production;

(δ) state capitalism in the sense of attracting private capital (both concessions and mixed companies).”

[6] In part 17 Engels writes:  “Will it be possible for private property to be abolished at one stroke?

No, no more than existing forces of production can at one stroke be multiplied to the extent necessary for the creation of a communal society.

In all probability, the proletarian revolution will transform existing society gradually and will be able to abolish private property only when the means of production are available in sufficient quantity”.


Here Lenin emphasises the concept of needing to control the banks and other key sectors of the economy. “Modern capitalism, under which the banks dominate production, has carried this interdependence of the various branches of the economy to the utmost. The banks and the more important branches of industry and commerce have become inseparably merged. This means, on the one hand, that it is impossible to nationalise the banks alone, without proceeding to create a state monopoly of commercial and industrial syndicates (sugar, coal, iron, oil, etc.), and without nationalising them. It means, on the other hand, that if carried out in earnest, the regulation of economic activity would demand the simultaneous nationalisation of the banks and the syndicates.”





[11] For example Wangke is China’s largest real estate company and it is a private company, but its largest single shareholder is a government entity (Walder 2010: 33). Huawei is a private company, but one whose ties to the military and ambiguous relationship to share issuance and recordkeeping, make its credentials as a fully private company at the very least questionable (Huang 2008: 10-12).

[12] Soviet statistics show a total national employment of 73,836,000 of which 59,623,000 worked in agriculture in 1926-7, Soviet Union Information Bureau, Washington D.C. 1929.

[13] Data from the NBS

[14] This was Kornai’s view in 1992, before the widespread proliferation of networked computers and devices, in which intelligent feedback systems linking consumer purchases and the global production chain were developed. 

[15] To contextualise this figure the total housing stock of Germany is 40 million (2008)

[16] From the translation of the 12th FYP by the European China Trade Project.

[17] Naughton ignores the issues concerning institutional state ownership discussed in this chapter and therefore his view of the gradually declining role of the state is coloured by this.

[18] The cost of listing a company is about $3 million US a sum beyond the reach of most Chinese private SMEs. (Lin 2012:214)

[19] PRC Constitution Article 10. Land in the cities is owned by the state. Land in the rural and suburban areas is owned by collectives except for those portions which belong to the state in accordance with the law; house sites and private plots of cropland and hilly land are also owned by collectives. The state may in the public interest take over land for its use in accordance with the law. No organization or individual may appropriate, buy, sell or lease land, or unlawfully transfer land in other ways. All organizations and individuals who use land must make rational use of the land.


[21] China is the world’s largest producer, the figure was four times that of its nearest rival Japan. (Walder 2009:8) According to the China Iron & Steel Association ‘China's crude steel output reached a record high of 627 million tons in 2010 after the industry's average annual growth rate slowed to 12 percent from 2006 to 2010, compared to 22.6 percent from 2001 to 2005’. Xinhua, April 30, 2011 Accessed 12 Jan 2012

[22] Capital Iron and Steel shed 40 percent, Ma’anshan shed nearly 50 percent, Anshan’s labour force of 210,000 in 1975 was reduced to 166,000 by the end of the 90s. (Walder 2009: 8) 

[23] China Ends U.S.’s Reign as Largest Auto Market Bloomberg January 11, 2010 (accessed 19.40 11 Jan 2012)


Janos Kornai and China part 1 Kornai's Political Economy of Socialism

posted 18 May 2012, 09:05 by heiko khoo   [ updated 18 Feb 2013, 12:15 by Admin uk ]

Janos Kornai’s Political Economy of Socialism  by Heiko Khoo   

Special thanks are due to Alex Callinicos for reviewing various stages of the preparation of these two documents and for providing critical feedback and ideas throughout. In addition I was fortunate to receive detailed feedback and encouragement from Janos Kornai and Xu Chenggang on Chapter 2.       


Janos Kornai has been described as “the most influential scholar of the political economy of state socialism in the world today” and his book ‘The Socialist System’ (1992) as “ the last textbook one needs on the communist economy”.[1] Nove called it “a masterly presentation of the nature of the functioning of the Soviet-type system, and an equally masterly explanation of the failure of attempts to reform it.” (1993:1057). Lebowitz (2000) describes the book as a political economy of the ‘Vanguard Mode of Production’, which unravels systemic laws of motion in a similar way to Marx’s Capital.       


When the book was first published in 1992, the fall of the Berlin Wall and the collapse of the socialist bloc meant that its insight into the causes of the systemic failure were largely sidelined or ignored, as ‘pundits of far less talent had already rushed into print with superficial explanations of the events of 1989’ (Chirot, 1993:855). Indeed Shambaugh (2008:12) observes that among Western analysts, only Zbigniew Brzezinski predicted the collapse of the USSR and the socialist system in advance.           


After 1989, China followed a different path to countries where the system collapsed. However, Kornai believes that “China is not an ‘exception’ that refutes (his) theory” of systemic transformation. “It can be fitted, without difficulty, into the analytical scheme outlined”…”Furthermore, a still bolder statement can be risked: the analytical scheme provides a useful tool for analyzing the Chinese transformation in depth.” (Kornai, 2008:150). It is this task that is undertaken in the next two chapters.


The first chapter is a selective summary and exposition of the main ideas contained in Kornai’s book ‘The Socialist System’. All views in the remainder of this chapter are those of Kornai. I seek to accurately and uncritically present the key attributes of his ‘Socialist System’, in order to facilitate a review of their relevance to China. This comparative review is undertaken in the second chapter.


The System’s Paradigm


Janos Kornai’s study, The Socialist System, The Political Economy of Communism (1992), provides valuable methods to understand socialism[2] by abstracting systemic characteristics and using them as tools of analysis. This is a study of the central theses and main features of Kornai’s analysis. It is designed to help identify commonalities and differences between Kornai’s theory of socialism and ‘socialism with Chinese characteristics’, the self-definition used by the Chinese Communist Party to characterise its social system.


Kornai approaches the subject using the ‘systems paradigm’. This methodology represents an intellectual tradition begun by Karl Marx, who viewed capitalism’s political, economic, social and ideological spheres, ‘altogether and analysed interactions between them… looking at the sum of it’s institutions –not one part or the other, but at the system as a whole.’ (Kornai, 2008:186). Other thinkers who ‘ share the common conviction that a comparison of capitalism and socialism is worth analysis as research’ are included in Kornai’s systems paradigm tradition (Kornai, 2008:187).


The system’s paradigm seeks to study:

  • The system as a whole and the relations to its parts
  • Societal interactions through combining social scientific disciplines
  • Institutions within which transformative societal processes occur and the identification of their system specific or non-systemic genesis
  • Human organisation in the light of historical processes
  • Systemic impacts on individual preferences
  • Great transformations and big changes, uncovering underlying processes of decay and creation that lead to systemic transformations
  • The intrinsic dysfunctional features of a system
  • Systemic attributes by comparative analysis (Kornai, 2008:190-93)


Kornai’s Theory of Causality


Kornai’s socialist system refers exclusively to those countries governed by Communist Parties. The system’s ‘genetic code’ automatically generates ‘classical socialism’ when the Communist Party holds state power, shaping the features and fundamental characteristics of the system through three main lines of causation. 


The first line of causation stems from the rule of a Communist Party guided by the ideology of ‘Marxism-Leninism’, the second, from the dominance of public ownership within the economy, the third, from the preponderance of bureaucratic coordination. The political system and ideology bring about the dominance of public ownership by design and the combination of these first two lines of causation inevitably produces ‘the dominance of the mechanism of bureaucratic control’ (Kornai, 1992:363). Once the system of Communist Party rule is established, it finds real roots in society and does so with only limited resistance. The system is internally coherent and self-sustaining (Kornai, 1992:369).

Figure 1. The Main Lines of Causation (Kornai, 1992:361).

From three primary lines of causation (blocks 1, 2 & 3 above), subordinate features flow naturally and organically. The content of subordinate blocks (4+5) can vary significantly, only a few examples are provided here. I do not deal extensively with the subordinate features within block 4 and 5 here, except as they relate to reform socialism.


In all countries where the Communist Party seized power through indigenous revolution, these societies were characterised by backwardness and poverty; the pre-revolutionary order was brutal, and democracy and capitalism were immature. These factors played an important role in shaping and defining the characteristics of the post-revolutionary regime. They sought to overcome backwardness by forced growth and radical redistributive policies using dictatorial political structures; features that Kornai describes as common to all socialist societies (Kornai, 1992:373).


He identifies two main phases, which follow the initial revolutionary transitional system; the phase of the classical system proper (CSP) and the classical system in reform (CSR).


A Summary of Kornai’s Main Lines of Causation under Socialism


The following pages provide a detailed summary of the three main lines of causation.


1. The Communist Party Rule and Ideology


The ruling Communist Party presides over a one party state.[3] It is a voluntary body, whose branches are headed by a party secretary. Branches function under territorially divided hierarchies, the pinnacle of which are the Central Committee, its Politburo and the General Secretary. Functioning under a system of ‘democratic centralism’, leading bodies are elected and can pass resolutions, which are binding on lower organisations and individuals. Debates may be held inside the party until voted on, and then must be acted upon by all members without dissent. The party apparatus is composed of elected officials and unelected appointees, whose powers emanate from bureaucratic authority. The upper levels of the party select and groom future members of the party apparatus. Membership promotion, demotion or expulsion, are decisions made by the party apparatus (Kornai, 1992:33-36).

The state and the party are organically intertwined in so much as all candidates in elections to government are selected or vetted by the party. Government organisations are shadowed by parallel party organisations that monitor operations and ensure party instructions are implemented. Political and administrative functions are unified in the ‘party-state’ (Kornai, 1992:36-39).


Mass organisations of the youth, trade unions, women, minorities, artists, etc. exist by virtue of their subordination to the party leadership and their adherence to party decisions. The totality of the organisational power of the party and functionaries in the state, mass organisations and economy, constitutes a collective apparatus or bureaucracy (Kornai, 1992:39-40).


The bureaucracy is bound together by four main factors:

  1. Marxist-Leninist ideology and a sense of serving the people and mankind.
  2. The collective power to rule over society and the power to rule over subordinates.
  3. Prestige and Privilege: The former is derived primarily from rank in the bureaucratic hierarchy, the latter from access to goods and services in limited supply or of superior quality.
  4. Coercion: Decisions of the party and state must be implemented and defended, and are backed by sanctions, discipline and punishment in the event of either, failure in practice or perceived ideological deviation (Kornai, 1992:40-43).


Sectional, regional, industrial, organisational, ethnic, generational and other interest groups, inevitably emerge to constitute informal pressure groups - particularly when controversial issues are discussed and debated and when extreme repression is relaxed (Kornai, 1992:44-5).


The state is totalitarian in three senses; firstly, it extends to every aspect of life and there is no clearly defined private sphere; secondly, it reaches the whole society, and, through creating and monitoring comprehensive individual files, influences every citizen; and finally, decision-making and the legal system are subordinate to the particular and contemporary interests of the bureaucracy (Kornai, 1992-48).


Ideology under the Classical System Proper (CSP)


Open competition with alternative ideologies is forbidden, although religion is sometimes tolerated. Directly oppositional ideologies can only survive in underground publications or during short periods of openness.

The classical ideology itself is based on a combination of intellectual foundations: from Marx and the tradition of the European labour movement; from revolutionary movements in countries that became socialist; from the experiences of Communist parties shortly after seizing power, or from consolidated systems of power. National variation and the selective use of these ideological layers, form the basis from which the operative ideology is created.


Socialism is held to be inherently superior to capitalism because planning is believed to be capable of harnessing innovation for the collective good by eliminating anarchic market relations, associated fluctuations in supply and demand, and overproduction crises. It should reduce the competitive duplication of effort, place human labour at the centre of society, and eradicate parasitical class exploitation and attendant luxury consumption. It is also supposed to unleash workers’ ingenuity and enthusiasm, reduce supervisory costs and lay the basis for such a high level of productivity under communism, that wage labour and the monetary system itself disappears (Kornai, 1992:49-51).


Kornai argues that a breakdown in belief in the inherent superiority of socialism is a characteristic of departure from the classical system. Classical socialism promotes a sense of moral superiority and focuses on overcoming individualist and selfish ‘remnants’, and on creating a self-sacrificing and collectivist psychology that promotes social justice and egalitarianism. Ideologically convinced believers in socialism see its existence as the pathway to human emancipation, so they view specific failings, crises, or limitations in performance in this context. (Kornai, 1992:52-3).


A gulf exists between economic development in advanced capitalism and socialism, the superiority of the latter system is supposed to provide the basis to catch up and overtake capitalism. This requires the general mobilisation of enthusiasm and resources to stimulate rapid growth and assure future victory.


Welfare systems radically reduce inequality, unemployment is minimised and the state assumes a wide range of obligations in relation to basic needs and services. This ensures security in health, education, housing, employment, pensions, holidays and access to cultural facilities. Thus a tension emerges between the burdens of social provisions and the need for rapid economic advancement (Kornai, 1992: 53-4).


Party rule is legitimised through claims that it is a vanguard party, incarnating the historical interests of the most advanced class, the proletariat, whose dictatorship is normally backed by an alliance with the peasantry. Opposing forces are represented as class enemies or misguided allies, who require education to overcome ‘petty-bourgeois’ prejudices. The vanguard party’s ideology claims farsighted understanding of historical processes and societal needs. Ideological paternalism is combined with the ubiquitous provision of all basic needs. This paternalism may promote a cult of the individual and serve to justify centralism and bureaucracy (Kornai, 1992:55-7).


The moral imperative is characterised by discipline, loyalty, duty and submission to needs and objectives defined by the party and state. This can be traced to Communist practices in the pre-revolutionary underground struggle, which variously entailed, armed struggle, insurrection and civil and guerrilla war; conflicts in which discipline and obedience are necessary and highly valued qualities. During the era of post-revolutionary transition, establishing social order and reinvigorating economic activity also requires discipline and sacrifice. Those who serve the cause are regarded as heroes and revolutionaries, and those who don’t, are observed and graded in relation to their utility or hostility toward the system. The hostility of anti-communist forces, externally and internally, fosters and reinforces a siege mentality (Kornai, 1992:57-9).


The maintenance of power is an ideological objective in-itself and how firmly this power is held is a decisive criteria of success. Power and ideology are inextricably interconnected; ideologically motivated people shape the organs of the party and state. The need to legitimise and justify the actual system results in adjustments and modifications to the ideology. The classical system ‘develops and consolidates only where this official ideology of socialism just described enjoys a commanding influence’ (Kornai, 1992:61).


2. The Dominance of Public Ownership


The CSP is characterised by a massive preponderance of public ownership as a percentage of national income. The property rights of state-owned firms and other publicly and semi-publicly owned entities are inalienable. Bureaucratic administrators hold no property rights, and their incomes are not determined by the profits of these state companies. ‘State property belongs to all and to none’. Nevertheless, the bureaucracy exercises ‘some of the rights of ownership and all of those of control (Kornai, 1992:75). There is no profit motive determining the actions of socialist firms in the classical system. Private sector activity is almost totally eliminated. It is regarded as a hostile force and it is largely confined to informal and illegal ‘black market’ activities.

During the CSP state-owned firms occupy the ‘commanding heights’ allowing non-state sectors to be dominated. The residual income is difficult to identify and is broader than the quantity of taxes and profits. The bureaucracy determines all operating conditions, and all income and expenditure is part of the central state budget. However, individual bureaucrats are limited in their disposal rights by various rules and regulations (Kornai, 1992:71-3).


3. The Preponderance of Bureaucratic Coordination


The bureaucracy exercises control rights over state-owned production through a pyramid of power dominated by vertical hierarchal control. Overlapping bureaucratic organisations regulate and control individuals and organisations. They include, the political police, the youth organisation, the trade unions, the women’s organisation, the work unit, etc. All organisations are subordinate to the party structures and hierarchy, which have their own supervisory and disciplinary apparatus. State administration and governance is supervised legally and administratively and by mass organisations, and the population is also administered where they live. The ubiquitous nature of supervisory systems in the CSP, in theory, allows for failures to be spotted and rectified by multiple organisations. Commands downwards to subordinates can be issued, and subaltern groups or individuals can express disagreement, provided they do not challenge the fundamental tenets and principles of the system of power. The system provides no means to opt out or ‘exit’, as leaving any institution, moving home, changing job, leaving the union, or party, entails bureaucratic complications, possible sanctions, or worse (Kornai, 1992:97-100).


Planning and Bureaucratic Control.


Planning in the CSP is comprehensive; it encompasses production targets for the main economic sectors; the use of their products; a rationing mechanism for distribution, and quota systems for inputs. Balance between the sources and uses of production are agreed between relevant parties, and equilibrium is sought. Planning encompasses labour quotas, wage levels, investment, high priority projects, technical development, foreign trade, trade relations, and the balance of import-export ratios. It also includes finance of the state budget, banking and pricing.

Plans are subdivided between planning bodies, ministries and enterprises. They are imposed on the lower level organisations, but some scope for amendment is negotiated in advance of the final plan. Fulfilment reports are required after implementation (Kornai, 1992:111-14).


The bureaucracy decides on the formation, liquidation, break-up or merger of firms. It determines appointments, promotions, the dismissal of leaders and the parameters of managerial decision-making within the plan. Products and materials are allocated in such a way that ‘the bureaucracy takes the place of the market mechanism’ (Kornai, 1992:116). Upper levels of the hierarchy exercise direct bureaucratic control by constantly intervening in the operation of subordinate bureaucratic entities. Despite its rigidity, the absence of market impulses, and limits on innovation associated with this, ‘the tasks those running the system consider of primary importance are particularly likely to be accomplished.(Kornai, 1992:117).


Bureaucratic motivation is distinct from proprietary motivation, as no residual income benefits are derived from innovative decision-making. Supervision and sanctions from above tend towards a conservative passivity shaped by bureaucratic dependence. Individual bureaucratic motivations may be driven by ideological conviction, professional satisfaction, power and prestige, material benefits, the desire for a quiet life, and the fear of sanctions from above (Kornai, 1992:119).


A form of vertical bargaining emerges between bureaucratic entities. The lower levels seek a simple means of fulfilling their tasks, so they request excess labour and supplies. The higher level seeks to extract more production, so prescribes tighter plans than are realistic , aware of the impending bargaining process. This process pertains between each superior-subordinate relation of bureaucratic power where exchange occurs (Kornai, 1992:122-4).


Bureaucrats are not concerned with present and future profits, corporate value, market position, or commercial concerns. The top leaders pursue a drive for rapid growth. Attempts by lower level bureaucrats to match these demands are tempered by conflicting concerns with quality, and by bargaining interests which seek to minimize change. Planning in the CSP is inextricably interconnected with politics: managerial, technical, bureaucratic and political roles are combined and complementary faces of the bureaucracy when it negotiates on resource allocation, tasks, etc (Kornai, 1992:124-7).


The interests of those who provide planning information compromise its quality, as does the quantity of information required, and the rigidity of the implementation system. Adjustments to the plan inevitably have unexpected consequences. Thus a hierarchy of priority plans is devised, which result in the relegation of plans of subordinate importance (Kornai, 1992:127-30).


A presentation of Kornai’s overview of reform socialism


Kornai argues that the classical socialist system is a coherent unity, its breakdown and end is driven by impulses that come from four groups of internal contradictions and dysfunctions.


  1. Economic slowdown exposes technical lag, shortage and waste. Rapid extensive and forced growth neglects spheres such as health, housing, transport and telecommunications, and competitive military burdens limit the consumption power of the masses.  
  2. Public disaffection with the quality and choice of consumer goods, the poor natural and built environment and low living standards find expression. Restrictive and arbitrary bureaucratic power and propaganda, clashes with desire for greater freedom of expression and action, particularly amongst the intelligentsia.
  3. The elite unity breaks down as self-doubt replaces self-confidence; the sincerest believers observe the superior performance of capitalist countries. As a means of self-protection, they seek legal protection against repression; this dissolves internal bonding agencies.
  4. Collective international experience of reforms and revolts in other socialist states, impact all such states. This was evident in 1989 where, regardless of repression or control over propaganda, even isolated states experienced common upheavals (Kornai, 1992:383-6).


The radicalism of changes may vary by degree, from ending the old methods of rule entirely, to superficial adjustments. The relationship between the radicalism and depth of change, reveal connections and associations that facilitate an understanding of the system’s dynamics. For example, a radical change in property relations may generate associated political forces (Kornai, 1992:386-7).


Reform and Revolution (Kornai, 1992:387-92)


Kornai provides his own contextualised definition of ‘revolution’ and ‘reform’, in which, any change which fails to radically amend the three core lines of systemic causation: party rule, public ownership and bureaucratic coordination; cannot be considered as reform. Changes restricted to subordinate spheres are defined as ‘superficial phenomena in economic activity’, (Kornai, 1992:388), and are not classified as reform.


Reform must impact one of the three main lines of causation and affect the functioning of this sphere fundamentally and permanently, and yet not so fundamentally as to change the system away from the socialist ‘species’.


Kornai’s definition of ‘revolution’ requires an end to the undivided rule of the Communist Party as a precondition for a qualitative change of system. He rejects the view that revolution is defined by its rapidity, its origin ‘from below’, or its violent nature. The term revolution is defined as a qualitative leap from one family of systems to another, not by whether it is considered to be an advance or a retreat. ‘A consistently radical change in the deepest fundamental attributes of some society - that and only that is what in this book qualifies as a revolution.’ (Kornai, 1992:390).


Long-term ailments of the socialist system find expression in diverse forms. Triggers for change vary from the death of a leader, (Maozedong, Stalin) to change from above, (Tito) or initiatives from within the elite. Rumbling discontent or open revolt may characterise the forms of pressure from below.


The aim of Kornai’s analysis is to provide ‘abstraction distilled from the multiplicity of historical realizations’ (Kornai, 1992:394) that permits generalisation from observable tendencies of change. Thus his examination focuses on the ‘tendencies of the movement and the change, along with the countertendencies working against them.’ (Kornai, 1992:395).


The Perfection of Control (Kornai, 1992:396-408)


Advocates of ‘perfection’ are believers who seek to refine the system. They try to eliminate problems within the bureaucracy by amending the instruments of power and control. Firms are merged for economy of scale, although comparative capitalist enterprises are generally smaller. Under socialism, systems are designed for ease of control and monitoring, thus monopolies without overlapping boundaries are efficient from the standpoint of bureaucratic simplicity.


Mathematical and computer models promote rational planning and control, but are sabotaged, as planning functions through ‘vertical bargaining and horizontal reconciliation’ (Kornai, 1992:404). The concealment of information is in the interest of officials, thus, the checks and controls of computerized models are perceived negatively. The complexity of the calculations involved in the complete interrelations of a national economy, are too intricate and uncertain to be calculable (Kornai, 1992:405).

One trend seeks to change the importance of plan indicators by redefining parameters. This may include decentralisation; reducing the quantity of indicators subject to plan; greater emphasis on value; overcoming bureaucratic inertia by eliminating indicators based on past performance (which may contain false results); or changing calculations based on total output value, to emphasize net production or profits (Kornai, 1992:405-6).


Such adjustments dodge the issues, as new indicators produce new indicator successes at the expense of newly neglected factors. To elevate the profit motive to the chief indicator, superficially appears to constitute a radical emulation of capitalist methods, but without ‘real decentralisation’, free entry and free competition, these measures are antithetical to capitalism (Kornai, 1992:406).


Recentralisation re-emerges to restrict non-compliance and to tighten up on dodges and tricks. This requires more regulation, control, administrative layers and disciplinary measures. Thus ’perfection’ may strengthen conservative tendencies, but, where political loosening accompanies these changes, ‘perfection’ helps ‘break down the self-congratulatory official ideology’. A constituency, encompassing sections of the leading circles, comes to believe in more profound and radical change (Kornai, 1992:407).


Political Liberalisation (Kornai, 1992:407-32)


Kornai identifies typical origins, forms and countervailing tendencies that appear with political liberalization. Radicalism in this sphere determines the fate of all others.


The monopoly of Communist party power continues in three key areas.

  1. Appointments. Party appointments are ubiquitous in the state, economic management, the judiciary, and mass organisations. The public elect candidates nominated or approved by the party and bureaucratic apparatus.  Limited competitive elections may be permitted, some are sham, others, are real conflicts between individuals, ideas and programs. Individual political representatives may conflict with official views and policies and this represents the seeds of a multiparty system (Kornai, 1992:410-11).
  2. Government by decree.  There is no separation of legislative, executive and judicial power, and thus appeals against organs of the state are excluded. The Communists have a solid majority, so decisions are based on decrees rather than parliamentary procedure. In the reform era, demand for the ‘rule of law’ is raised, in order to subject all to judicial control, but law is adjusted to serve the bureaucracy and the party (Kornai, 1992:411).
  3. Armed force. The organs of force and repression remain under control of the party; it decides appointments, promotion, demotion, budgets and material resources. The disposal of these forces remains in the hands of the party leadership and is not subject to any endorsement procedure within the legislature. The classical and reform socialist eras do not differ in this respect (Kornai, 1992:411).


The Easing of Repression


An official condemnation of past errors shakes ideological conviction and is followed by a reduction in repression. This enables loyalists to express limited critical thoughts causing a moral crisis, which gives birth to ‘reform communist’ ideology inside the party, state and intelligentsia.


The reduction in repression alleviates tension within the apparatus and opens avenues for loyalists to express critical views and opinions, within the power structure. Targets of more constrained repression may include, opponents of the present ideological line within the party, external ideological opponents and those who attempt to form organisational opposition to the party. The extent and regularity in the use of repression declines, and there is a more nuanced and formalised application (Kornai, 1992:412-4).


Constant and Variable Elements in Official Ideology


Ideological revision is inevitable, but party ideologists seek to minimise adjustments to safeguard fundamentals and to justify the present line.


Some tenets remain untouchable:

  1. The leading role of the party in the state, the ban on factions and adherence to democratic centralism inside the party.
  2. The doctrines of Marx and Lenin are untouchable: errors are blamed on their misinterpretation.
  3. The superiority of public ownership and its predominance as the foundation of socialism.


It was previously taboo not to declare allegiance to these untouchable principles, now self-censorship prevents the explicit questioning of them. Underground literature and groups engage in dissent against the core axioms. If this dissidence on the fundamental taboos becomes a widespread, vocal and mass phenomenon, it may signal a change from reform to revolution.


Ideological flexibility leads to creative pragmatism, but compared to classical ideology it weakens the bonds. Certainty of mission and the sense of superiority over capitalism are undermined.  Material incentives replace ideology as key motivators, with an emphasis on consumption as opposed to industrialisation; although at times of economic hardship, appeals to moderation may reappear. A retrenchment of the state from comprehensive welfare provision, subsidies, and other social guarantees, is accompanied by an emphasis on personal responsibility. This ‘mental edifice’ lacks coherence. Permissiveness gradually and irreversibly conquers official ideology, taboos can’t be re-established, and any successes serve to reinforce this process. A weakening of ideological cohesion is reflected in the media and education. The press, radio and television become a terrain where the pressures of social opinion find critical expression (Kornai, 1992:414-8).



Seeds of Pluralism


Political reform unleashes centrifugal forces expressed in the following:

  1. Sectoral lobbies influence decisions such as investments, wages, bailouts and subsidies, reducing central power.
  2. Regional, national and ethnic minority pressure groups, assert greater independence, this enhances the power of regional party and administrative organs. A broadening of decision-making is encouraged, provided it does not give rise to ‘nationalist’ tendencies. Culturally derived communities tend to clash with hostile centralist forces, often resulting in physical conflict. In the reform era, harmonious federal states are not created and the assertion of national independence is prevented. 
  3. The repression of religious organisations decreases, a growth of religion corresponds to a systemic moral and ideological crisis. Spiritually independent organisations provide examples of alternative power.
  4. The union bureaucracy weakens in its role as a transmitter of commands from above and from the party. There is a tendency for the union bureaucracy to identify with their members and assert their interests more forcefully. Strikes and various forms of worker unrest are legalised or tolerated. Some of these conflicts occur under official auspices, others through independent organisations. Similar processes occur within other interest groups, e.g. scientists, artists, writers, students unions, peasants etc. The dual nature of these organisations as transmitters ‘downwards’ and representatives ‘upwards’ begins to shift emphasis towards the latter role. Autonomy increases and is expressed in increased influence and self-government. Independent organisations appear, some sanctioned, others semi-legal, emerging from below to represent special constituencies, e.g. tenants, pensioners, the disabled.
  5. The Communist party always contained dissidents; the reform era fosters factional organisation, and ‘reform communists’ form the germ of a multiparty democracy.
  6. In a grey zone of legality a range of ‘alternative’ movements emerge, initially as contributors to official events they stretch the parameters of legality. Repression becomes more problematic due to external and internal opinion. If critics are repressed such people may become models of heroic dissent (Kornai, 1992:418-23).


The changes produce ‘neither a pluralistic nor a monolithic system’ (Kornai, 1992:423), alternative political spheres, undermine the hold over people’s minds, weakening ideological faith and the dissuasive power of fear.


Opening to the Capitalist World


The reform era corresponds to a relaxation of international tensions and facilitates disarmament. The theory of class antagonism in international relations recedes. The Chinese phrase of ‘opening’ captures the essence of the change. Contacts with the Western world increase in personal, trade and official relations and exchanges. Western cultural goods and values proliferate, acting as a cultural distraction and as a source of affinity with Western values.


Conservative backlashes occur occasionally and align themselves with other conservative tendencies freed up by the intellectual thaw. The feeling of fresh air blowing through a stale environment opens a mass comparative analysis of systems, undermining the untenable edifices constructed around mythical claims of inherent systemic superiority (Kornai, 1992:423-5).


Change in the Scale of Publicity and Candor


‘Glasnost’, represented an end to secretiveness, and the start of more open decision-making processes and truthfulness in public life. Many problems of the classical system remain present and may constitute grounds for unrest. Opening the lid on pent up frustration increases the intensity of revolt. ‘Liberty is among the spiritual foods whose consumption whets the appetite for it.’ (Kornai, 1992:427) Sometimes, loosening control unleashed explosive change, in other cases; a failure to reform generated sudden unrest. The observation of events in other countries played an important role in the spread of revolt (Kornai, 1992:427).


The clash between liberalising tendencies and those seeking to conserve existing power characterises the reform era. The equilibrium of political forces can develop into a prolonged period of consolidation as in Yugoslavia, from the early 1950s until 1989, and in Hungary from 1968 to 1989. No stable equilibrium is established; tensions remain and can tip the balance. Such was the case in Poland at the time of the challenge posed by the Solidarity trade union in 1980-1, and in the Chinese democracy movement of 1989, both these cases were ended by repression.


This repressive and conservative reaction stems from the outlook and motivation of party members at all levels. They consider power to be an intrinsic value and thus, the loss of party power entails the destruction of their hopes and dreams. In addition, it may herald the loss of personal power, privileges and prestige, and engender reprisals against them. The Chinese reformer and former General Secretary, Zhao Ziyang, explained that the Western multiparty system cannot be introduced in China, as the party represents the people, and any reforms that are carried out, must be done within the system of Communist party rule. Multiparty systems permit the defeat of the Communist party and are rejected for precisely this reason (Kornai, 1992:427-9).


The Rise of the Private Sector


The formation of the private sector is the most profound change in the economic sphere under reform socialism. Private sector growth mushrooms naturally and spontaneously as soon as there is a decrease in hostility towards it. It is driven by material incentives, a desire for autonomy, the satisfaction of self-mastery and a thirst for independence. Part of the bureaucracy assists the private sector in order to alleviate shortages and to divert attention from political shortcomings (Kornai, 1992:432-5).


Private owners establish new enterprises parallel to state sectors, or acquire ownership of state or collective assets through privatisation. The first method tends to characterise the reform era, but privatisation can also take place outside the productive sphere, for example in housing stock (Kornai, 1992:444).


Private Sector and Official Ideology


The classical system defined the private sector as a vestige of capitalism. Leading reform Communists such as the CPSU general secretary Mikhail Gorbachev, declared universal public ownership as his objective as late as 1988, and CPC General Secretary Zhao Ziyang reiterated his faith in public ownership and its inviolability in 1989 (Kornai, 1992:445).


Small-scale producers can develop into large-scale capitalists and unearned income and exploitation is an anathema to Communist ideology. Thus high-income earners become the object of envy and hatred. Wide layers of society, imbued with the ruling ideology, share this outlook and approve of measures taken against ‘parasites’. The reform socialist ideology is an inconsistent combination, internally torn between the need for pragmatic solutions and the antipathy towards the agents and methods of these solutions (Kornai, 1992:446-7).


Affinity of Private Ownership and Market Coordination


There is an organic affinity between private ownership and market coordination. Private enterprises relate on a horizontal basis and do not hold administrative power over one another.  Individuals own and voluntarily engage in autonomously determined interconnections in conditions of decentralised coordination. Prices are the natural domain of the proprietor as costs and sales are the measures and means of material gain. Unhindered entry into the market, competitive rivalry and consequent failures, are normal market conditions.

‘All economic relations arising among private enterprises or between them and the general public are coordinated basically by the market mechanism. A natural advance of the market mechanism is inseparable from the expansion of the private sector.’ (Kornai, 1992:448).


Hard budget constraints pertain, as failure to generate sufficient income and profits, leads to survival crises for private enterprises. However, in reform socialism, bureaucratic coordination still dominates and impacts on the operation of private firms in a myriad of ways. This is a significantly different environment to interventionist state activity in capitalist countries (Kornai, 1992:448-9).


The Private Sector and the Bureaucracy


The nature of the bureaucracy’s relations with the private sector depends on which interests groups are involved. There is clash of ideology and power, because the bureaucracy governs the public sector from within, whereas it’s power relation to the private sector is from without. This undermines the power of the bureaucracy. Just as private sector activity is spontaneous and voluntary, so is bureaucratic resistance to it (Kornai, 1992:450-1)


The bureaucracy determines and defines the enforcement of the legal framework governing private operations, but the private sector seeks protection and guarantees for its property. The parameters of legal activity are amended, permitting previously forbidden activities, but simultaneously extending bureaucratic authority over them. Other previously illegal spheres may now be tolerated, and semi-legal activities proliferate. New forms of dependence on bureaucratic leniency develop.


Legal measures to enforce contracts are weak or non-existent. The state is protected against private sector interests by existing power, ideology and law. Tax rules are arbitrarily applied and the burdens imposed may eat into profitability. The tolerance of grey markets fosters a moral climate of lawlessness in tax relations.


Limited access to bank credit, materials and state orders, discriminates against the private sector, which has no voice in political life. This ambivalent environment and insecurity, promotes short-term money making as the norm for private sector activity. Conditions of shortage permit private firms to disregard quality, and the bribery needed to engage in their business activities, promotes a cheating culture. This in turn increases public hostility to private entrepreneurs. (Kornai, 1992:451-5)


Family based economic coordination increases in the reform era and creates a zone of privacy and independence from the state. Privatisation of housing promotes family ownership, engendering autonomy and positive identification with private property. The state begins to retreat from welfare responsibilities (Kornai, 1992:458).


‘Traditional’ family roles provide a retreat from the bureaucratic invasiveness of the past; this benefits state finances, whilst those dependent on subsidies, or unable to tap into the new sources of financial accumulation, become more impoverished. Women lose the independence provided by work and may be burdened with a wide range of welfare responsibilities previously shouldered by the state (Kornai, 1992:458-9).


Kornai predicted that after the demise of socialism the advance of the private sector would be all the more rapid where the private sector had already matured. Capitalism can be ‘abolished by state command’ in a relatively short time span, but the development of the private sector cannot be ‘performed by state command’ (Kornai, 1992:460).


Worker Manager Relations


The erosion of political tyranny and classical ideology produces a change in worker-manager relations. There is a slackening of control over the workforce and increased pressure in favour of workers’ interests. Unions adopt a more aggressive stance, workers become more mobile, and the administration is less able to control them. Managers are also less likely to be backed up by bureaucratic, party and union organisations, and workers discover that they are able to remove managers. So, a tendency for managers to become populist, as representatives of the workers, is generated by this combination of circumstances (Kornai, 1992:469-70).


Market Socialism


The principal concept behind market socialist ideas is for the market to fulfil the role of the basic coordination mechanism of the economy, or at least be equal in importance to bureaucratic planning, and for this to function in an economy dominated by public ownership. Various tendencies exist within this stream with differing ideas concerning how much power the market should have within the economy (Kornai, 1992:474).


This constitutes one of the main trends away from the classical system. Kornai argues, that the idea of market coordination is alien to Marxist traditional theory, which sees the market as an anarchical system of coordination. Marx proposed that market relations, reacting to supply and demand, would be replaced by conscious planning. Kornai believes that adopting market socialist ideas entails abandoning the axiomatic principles of Marxism (Kornai, 1992:475)


For reform socialists, combining a ‘plan-cum-market’, appeared to offer the prospect of correcting market failure in the social sphere, and minimising the need for intervention by central planners in everyday economic operations.  The system retains key features of the classical system and combines these, with independent firms, contractual relations, price signal tools, and other market based measures. Market socialist ideas emerged organically, several thinkers in different countries independently developed similar ideas to one another. These theories play a central role in the new ideological line developed under reform socialism, in which the market is allotted a respected role in economic activity (Kornai, 1992:477-9).


Various ‘socialist-market’ methods were used over time. They involve a degree of ‘deregulation’ i.e. they remove economic entities from direct bureaucratic command (Kornai, 1992:480).


There are differing criteria for assessing such deregulation.

a. The degree: to which it impacts on central command.

b. The scope: local, national, experimental, gradual, competitive, universal. 

c. The sequencing: sudden abolition of commands or gradual evolution.


The package of deregulatory measures differed substantially from country to country and experiment to experiment (Kornai, 1992:481).


Vertical Dependence


Some key features of the semi-deregulation of state owned firms are cited here. There is dual-dependence upon vertical ties to state authorities and on horizontal ties to the market of buyers and sellers. The system specific features of these vertical dependencies are catalogued as follows:


  1. Entry is determined by bureaucratic decision and permission.
  2. Exit is determined by bureaucratic decision, or halted by bureaucratically allocated soft-budget constraints.
  3. Mergers and splits are permitted, but final rejection or permission is a bureaucratic right.
  4. Appointment of leaders is decided or heavily influenced by bureaucratic powers. 
  5. Exports, imports and foreign exchange are less tightly controlled, but pressure is brought to bear to fulfil certain obligations or de-prioritise others. Technology or product development choices may be determined by superior organisations.
  6. Prices are generally still subject to some control.
  7. Wages are subject to pressures at the minimal and maximal scales, undermining free bargaining.
  8. Taxes and subsidies are subject to considerable scope for tailor made solutions and the bending of rules.
  9. Bureaucratic interests vertically control credit and loans; banks provide soft-budgets to save and sustain projects that are deemed important.
  10. Investments are partially deregulated to firm level decision-makers, who can spend retained profits. In large projects, the state intervenes more frequently.


Free enterprise does not apply in the state sector and rivalry between firms is restricted. The survival or demise of state owned firms and managerial promotion or demotion within them, is determined bureaucratically. However, formal regulatory frameworks fail to account for a myriad of intangible means by which the leadership bend firms to their will. There is a far greater scope for evasion and personal decision-making, more fluidity in power relations and more bargaining between superiors and subordinates. Direct bureaucratic control of the classical system gives way to indirect bureaucratic control in the socialist-market (Kornai, 1992:482-9).


Budget Constraints and the Responsiveness of Firms


Market-socialists hoped that reduced engagement in direct planning would free resources to concentrate on the short term macro economy and long-term economic strategy. However, micro-regulation continues and old planning routines become useless. Socialist-market planning is composed of ‘a series of improvisations’ (Kornai, 1992:489).


The profit motive is supposed to incentivise the behaviour of firms. Investments are partially financed by retained profits in the hope that prices and costs will begin to shape managerial action. Budgetary laxity means that the correlation between profits, prices and actions, remains limited. Soft budgets take the form of subsidies, tax benefits, credits and administrative pricing. The maintenance and expansion of unprofitable firms, by rescues and bankruptcy avoidance, is financed by the state.


Vertical bargaining produces customised solutions. Rules are subject to incessant adjustment, subsidies and deductions are complex and unique, and relate to the specific spheres of interest of bureaucratic powers. High profit companies are squeezed to subsidize other sectors in a form of egalitarian profit distribution. Profits are conjured-up by bureaucratic action rather than being produced by market relations and incentives.


The Communist Party and the bureaucracy are not profit driven owners of firms, so, ideological conflicts occur between the paternalistic promotion of solidarity and workers’ welfare, and demands to implement hard budget choices, particularly when this provokes workers’ unrest.


Under capitalism, property ownership generates innate profit seeking motivations and behaviour. The market is governed by this universal discipline. Kornai believes that public ownership negates this, and cannot lead to the application of financial discipline, because ownership relations do not divide the bureaucracy. The state is the owner and manager rolled into one. This can only be changed by private ownership, or if state enterprises are few in number and surrounded by capitalist enterprises (Kornai, 1992:493-5 see also note 35 p 495).


Entrepreneurial dynamism requires free entry into productive activity and access to credit for private individuals or companies. Market socialist coordination and control mechanisms involve micro-level decision-making on company activities by managers and their vertically superior bureaucratic organisations. ‘The more bureaucratic control remains dominant, the less the budget constraint can be hardened’ (Kornai, 1992:495).


The root of this problem is seen in the power structure, property relations and coordination mechanisms. In an economy in which budgets are ‘sufficiently weak to dampen substantially all demand and supply reactions, the market is incapable of fulfilling its role.’ (Kornai, 1992:496).


These factors produce firms which react with dulled market responses to price signals, producing less effective and slower reactions than their private free-market cousins. Price signals from companies that are kept alive artificially, in turn produce more artificial prices. 

The expectation of market-socialists was that firms would behave price-sensitively and financial control would replace physical input and output instructions. Investments would respond to interest rates and product substitution would be stimulated by prices. However the firms were overwhelmingly unresponsive to these control mechanisms. Despite the more active role for money, public sector economics in market-socialism remains only semi-monetized (Kornai, 1992:497).


The Affinity between Public Ownership and Bureaucratic Coordination


Reformers hoped that market mechanisms would occupy the vacuum created by the control or dissolution of the instruction system, but amended bureaucratic coordination filled the gap. Indirect vertical control predominates and is combined with subordinate horizontal relations. 

The resistance to implementing policy changes, by upper and lower level bureaucrats, is often blamed for the situation. But Kornai maintains that the bureaucracy is a ‘hierarchically structured social group’ rooted in every cell of society, so the natural survival instincts of this group pursue its continuance. They cling to their authority, identify with their respective organisational and social functions, and seek to complete them. They try to reinforce their rule and to prefect it. Firm managers want little interference from their superiors, but nevertheless seek out their superiors, and connections inside the bureaucracy, whenever difficulties are encountered. Their ‘capital’ is composed of these interrelations and these connections are their natural environment.


The attempt to match central control with independent firms is contradicted by vertical subordination. Bureaucratic self-reproduction is organically engrained in the system. ‘There is no need for a central command; on the contrary, bureaucratic coordination rises again even if some stern central resolution lays down that it must be curtailed.’ (Kornai, 1992:499).


Horizontal Relations of Firms in Public Ownership


There is a substantial growth of horizontal relations in the reform era, but these relations are not governed by prices, profits or rivalry. They are the result bureaucratic command. This market is a contrived affair, in which formulas and incentives are thought up and imposed, rather than naturally evolved. There is no affinity between the market and public ownership.

Contracts are broken with impunity, companies refuse to pay, or pay late, leading to debt queuing by firms and general liquidity crises, and state rescue as a last resort is taken for granted. Company to company credit and debt is permitted, but so is delay or the non-payment of debt.

Three forms of capital allocation for public firms emerge, central state budgetary funding, investment loans from state banks and investments from company savings. One method proposed, is to permit cross ownership is through joint - stock companies, which issue shares. Banks, insurance companies, pension funds and other state entities, hospitals, local governments and villages etc. are permitted to own and trade shares; these shares would be traded on state stock markets. Kornai believed that without private ownership, state entities owning these shares would continue to behave within soft-budget constraints (Kornai, 1992:500-4).


Proportions of the Two Kinds of Dependency


Vertical dependencies predominate over horizontal ones, despite the growth of the latter.  Coordination and control methods are altered but not fundamentally changed. There is a critical point at which bureaucratic intervention destroys market vitality, so the balance is between them not an arbitrary question.


The demeanour of managers assumes the appearance of their capitalist counterparts. They are not owners, but are granted rights of control over public firms, so their interests are not bound to the profit and net worth of the companies. Their positions are vertically dependent, “one eye on the market and the other on their superiors, the important thing, in fact, is for the eye cast upward to see clearly: their present bonus or penalty and their future promotion depends on their superiors. The proprietor, if any, is the sum total of the bureaucracy. But this is ‘intangible.’ What was established about the classical system remains true: public property belongs to all and to none.” (Kornai, 1992:505).


A new independent managerial class opposed to the bureaucracy and independent of the workforce fails to emerge. Managerial behaviour is governed by multiple roles: as intermediate managers dependent on their superiors, yet wielding local power; as recipients of residual income; as technocrats of production and development; and as representatives of employees’ interests (Kornai, 1992:505).


Relations between Publicly Owned Firms and the Private Sector


Contact between the two sectors is fraught with conflicts. Private entrepreneurs dislike the privileged access of state enterprises to power and credit. State managers envy the autonomy of the private sector, and that higher wages may ‘steal’ talented workers away from public firms. Workers in the private sector envy the security of public sector workers. Access to key materials may come only from public enterprises, so private companies often need to bribe officials to sell to them, and access to public sector contracts is restricted by the state. Fair competition does not exist, thus both sectors have legitimate grievances against the other (Kornai, 1992:505-7).


Interaction between the Mechanisms; Assessment of the Changes


In the reform era, managerial flexibility is increased, the quality and quantity of products improve, new product innovation and production is accelerated and buyers’ interests are considered more frequently. The rigidity of the economic atmosphere changes, and barrack like controls and fear, associated with the classical system, diminish.


The failings of bureaucratic and market mechanisms reinforce each other, producing a no-man’s land scenario where neither operates effectively. The old bureaucratic discipline is undermined and central power is no longer able to enforce policies, simultaneously, market discipline, governed by competitive rivalry is also absent.

Markets require a minimal trust level to develop ‘good will’ and avoid constant litigation. Instead of this, bribery, nepotism and ‘cheap commercialism’ predominate, and there is widespread petty theft of state property -as it is not endowed with ‘value in the public’s eyes.’ (Kornai, 1992:509).


In the 1980s, the Chinese a ‘dual-system’ economy encouraged the sale of subsidised goods at higher market rates. Managers often pocketed the difference. Those with bureaucratic connections spawned entire industries based on ‘back-door’ access to these state subsidized goods. The general public viewed the new rich with profound dislike, unconcerned whether the wealth was a product of entrepreneurial endeavour or theft. Hatred of corruption erupted in 1989, in a widespread social movement alienated by the results of the reform process (Kornai, 1992:509-10)


According to Kornai, the imaginable model of a rational, objective and neutral bureaucracy, behaving according to market impulses, was contradicted by the actual structure, surviving ideology and property relations, within which the attempts to create market socialism were made. He thinks that the main benefits of market-socialist experiments are that they shake belief in the command economy, promote spontaneous forms of economic activity, and improve the public perception of private enterprise and the market (Kornai, 1992:511).





Factor prices tend to remain under tight control


Under market socialism interest rates are set by state banks, where they are set at negative real rates, this indicates market coordination is not predominant. Interest rates should primarily be determinants of investment. Without this, forecasting and decision-making are undermined and this impacts on the entire pricing system. Private sector credit is charged at much higher rates and as there is no private banking system. Thus private access to capital is often secured through grey or black money (Kornai, 1992:519).


The employment of labour, capital, and associated investment decisions by state enterprises are protected by soft-budgets and thus have no intrinsic relationship to the relative scarcity of capital and labour. Therefore prices do not serve as indicative symbols. Private sector companies have to calculate their investment on capital and labour on the basis of scarcity and price indictors. The prices of land and rent prices are state determined and are arbitrarily fixed at below market value for state enterprises. Private investors, fearful of inflation and limited in their investment opportunities, often park their money in real estate. The discrepancy between state land prices and market rates is a field of lucrative enrichment and unequal terms of trade between the public and private sector (Kornai, 1992:520-1).


State Price Determination and Fiscal Redistribution


Administrative price determination deals with the differences between prices and costs in state owned firms. If state firms make profits they are taxed, but if they make losses they are bailed out. This process is not reduced under market-socialism.


In the reform era, prices should serve to produce equilibrium between supply and demand, however, no country attempted to make this a dominant principle. Rapid fluctuations in prices would conflict with bureaucratic yearnings for stability.


Compensatory principles are applied in justifying redistribution and subsidies, profits may be ascribed to luck and good fortune, (e.g. chance demand and previous investment in a specific machine) and likewise losses may be ascribed to bad luck and mistakes (e.g. bad weather, or an old machinery). This compensatory principle clashes with market and equilibrium principles. Prices and taxes are interconnected in this system of fiscal redistribution, and errors provide rational grounds for compensation. Arbitrary prices, arbitrary fiscal redistribution and soft-budget constraints, all feed off one another and combine to make rational pricing impossible (Kornai, 1992:521-25).


Employment and Wages


Full employment and a shortage of labour were characteristic of European reform socialism, and were underpinned by soft-budgets constraints. In China under classical socialism, there was surplus labour and concealed unemployment in agriculture, but a labour shortage in the cities. In the reform era, the employment planning of the classical system loosens and employees are permitted to leave employment more easily or voluntarily. When this is combined with a labour shortage, it empowers workers vis-à-vis managers.[4]


Pressure grows on the wage bill, which the central government seeks to control, in order to meet investment needs. As lower level bureaucratic enforcement is weakened, worker unrest spreads. In all manner of negotiations and discussions, workers become more militant and assertive. Bonds between managers and more senior officials are weaker, so managers become more dependent on their workforce. This may result in self-management tendencies, such as the election of managers by the workforce. This reinforces the tendency to dispel tension through concessions to the workers. Managerial autonomy in setting wage increases and evasion of central control becomes common. Workers in other employment settings, like education, healthcare, etc. also begin to assert themselves. Wages rises exceed productivity gains and produce inflationary pressure. Bureaucratic control is weakened and private sector discipline is absent, so wage discipline breaks down (Kornai, 1992:530-3).


Growth and Investment


The classical system seeks as fast a rate of growth as possible. The reform era bureaucracy is torn between the need for rapid growth and the need to improve living standards and reduce disproportions. As growth slows, the leadership becomes determined to stop the decline, simultaneously the surplus labour force is exhausted, (in Europe) and so investment is increased. There is a need for increased consumption to alleviate social discontent. Investment in neglected sectors that serve consumption is needed in such areas as housing, healthcare, catering, road transport and all manner of maintenance services.


These sectors require vast investments, but meeting immediate needs for consumer goods eats into this.  The classical system leant towards heavy industry, which now lobbies for its continued influence. These contradictory demands produce contradictory policies, speed-ups and slow-downs in investment and consumption. The tendency towards forced growth gains the upper hand as a conditioned reflex (Kornai, 1992:534-5).


There is a decentralisation of investment decision making, as firms are granted more autonomy. This may provide for profit retention as a source of investment or greater access to bank loans. Negative real interest rates and the fact that bank loans are treated as grants, means that the borrowing and investment decisions are not profit constrained (Kornai, 1992:536-7).


Credit and Monetary Policy


In the reform era, decentralised banks and banking coordination mechanisms appear to emulate capitalist structures. However, market coordination is not what determines the behaviour of banks, as property relations are public and motivations are bureaucratic, and are not driven the profit. Political pressures influence lending and the price of credit is set too low, and so there is a constant excess demand for credit. The “banking system in a reform economy is fundamentally a bureau for allocating credit and collecting and storing money, not a network of institutions running on commercial, market principles.” (Kornai, 1992:545).


Where there are negative real interest rates, it is entirely logical to borrow as much as possible. Credit is allocated not for the profits of the banks, but on the basis of all manner of bureaucratic lobbying and non-commercial deals. There are no incentives to restrain credit. Firms also impose forced credit on one another by the late payment of bills. This can generate wider liquidity problems, which may be resolved by further loans. 

The party appoints the leadership of the central bank and monetary policy is bureaucratically determined. The budget deficit is generally covered by the central bank instead of by issuing state bonds. The leniency of the central bank adds to inflationary pressures, exacerbated by a general lack of skill and expertise at all levels of banking administration. Monetary policy shifts, between relaxed and tight, but multiple bureaucratic and social pressures generate laxity (Kornai, 1992:545-8).


Living Standards


The effect of reform on living standards varies considerably. Private sector entrants are big winners. In China, this encompasses hundreds of millions of peasants, whose living standard rose significantly. This also led to a rapid improvement in food supplies to urban consumers. Private sector activity stimulates consumption in general. 


If there is a shift in priorities to current consumption, this can bring a rise in living standards through improved services, like health and housing. Imported goods, and improvement in the quality and availability of goods from public firms, may increase consumption. The improvements in Hungary, China and Yugoslavia are notable in this respect (Kornai, 1992:559-60).


Macrotensions break out in all socialist-market economies, although leaders try to conceal or postpone them. Under the classical system, driving down living standards could be carried out by repression, but more open and vocal environments limit the options to restrict consumption. Military budgets are generally ring-fenced by bureaucratic interests, so curbing investment or raising foreign loans remain the only options. As investment is the basis of future growth, backlogs generate discontent within the bureaucracy (Kornai, 1992:560-2).


Incoherence of Reform Tendencies


The classical system is a coherent whole, like a fully functional prison, whereas reform socialism is riddled with elements of repulsion and contradiction. The Communist monopoly clashes with newly unleashed competitive political pressures, these forces pose a mortal threat to party rule. Control over ideas weakens as dogmatic interpretations of official Marxism are abandoned. This leads to a questioning of the entire theory and honest investigation is encouraged. At first, problems are blamed on individual errors, then on incorrect political lines and later, on false models. Eventually, this leads to a questioning of the entire system. Contradictory messages between the eras, and inside the new era, provoke clashes in moral outlook, between sacrifice and purity, and hedonism and consumerism. Kornai believes that the reform era produces an unstable system whose contradictions inevitably bring it to an end (Kornai, 1992:570-3).




CHIROT, D. 1993. Review of The Socialist System: The Political Economy of Communism, Janos Kornai. Slavic Review, 52, 855-856.

KORNAI, J. 1992. Socialist System : Political Economy of Socialism, Oxf.U.P.

KORNAI, J. 2008. From socialism to capitalism : eight essays, Budapest ; New York, Central European University Press.

LEBOWITZ, M. 2000. Kornai and the vanguard mode of production. Cambridge Journal of Economics, 24, 377-392.

NOVE, A. 1993. Review of The Socialist System: The Political Economy of Communism by Janos Kornai. The Economic Journal, 103, 1057-1059.

SHAMBAUGH, D. L. 2008. China's Communist Party : atrophy and adaptation, Washington, D.C.; Berkeley, Woodrow Wilson Center Press ; University of California Press.



[1] Ivan Szelenyi, Contemporary Sociology, Vol. 22, No. 1 (1993) pp. 33-4

[2] Kornai is aware that the term socialism is contested as an appropriate definition for the states that he studies, but he considers their self-definition as socialist as adequate grounds to use the label, and the fact that various socialist schools will find common attributes of socialism are present in such societies.

KORNAI, J. 1992. Socialist System : Political Economy of Socialism, Oxf.U.P. pp 9-11 

The main point of Kornai’s analysis is to identify and abstract the fundamental trends and features of the specific system that ruled many countries in the 20th century in the name of socialism. Kornai identifies 26 countries as Socialist in 1987, encompassing 34.4% of the global population. Ibid. pp 6-7

[3] Where there are other parties they are completely subordinate to the Communist Party.

[4] China’s labour market is also constrained by the added factor of the Hukou, or household registration, I shall address these issues elsewhere.

Debate on China :Dynamics and interactions between private and state capitalisms in China

posted 18 May 2012, 08:59 by heiko khoo   [ updated 18 May 2012, 09:33 by Admin uk ]

Debate on China..A critique of Mick Brook's Article by Kostas Lambropoulos 30 April 2012         

Mick Brooks’ document Why China is not a capitalist country - 20120416 ( sides with the official thesis of the Chinese Communist Party - CCP that a principally state-owned mixed market economy managed by one single party is a post-capitalist socio-economic formation constituting, thus, the objective basis for the transition to socialism. It is noted that the Chinese government officials call the present economic system of China “social capitalism”.         


Brooks lets us know that in writing his contribution he has found assistance in the work and research of Heiko Khoo and Jonathan Clyne. His document deals in particular with some of the issues I have raised so far in the discussions about China and socialism. Indicatively, these issues include: the state-capitalist nature of the Chinese economy; the capitalist influence over CCP; the role of the export drive and foreign investment in the growth of the Chinese economy; etc.     


The text is well written and balanced but its writer lacks the necessary stock of knowledge on China and the analytical and political skills needed.      


For example, the writer does not know that the political system of China is not a single-party one as he thinks it is, but is indeed a multi-party one of popular-front type; he understands state-capitalism as the direction of capitalists by the state; he counts the capitalist influence over CCP by the number of capitalists who are members in it; he thinks that the WTO – China Accession Agreement is an insignificant piece of paper (signed just for mutual convenience) and so on and so forth …


Finally, I have also to note that the novice writer on China has not found –at least formally- any kind of interest in the works I have produced on China in order to include them -at least- in his obviously selected bibliography. Certainly, I feel that this “zero basis writing” is not the appropriate way of exchanging ideas constructively and developing them critically.





1. For whom is China a “model”?


The text seems to waver whether or not China is a “model”; and if it is, then for whom exactly.


The text assesses that “China … shows that there are different ‘models’ from that of free market capitalism.” So, China is one of the available alternative models to developed market capitalism.


But in the next line the text states that “China is not a model in the sense of being a form of society we should or could try to emulate.” So, China is not an alternative model to developed capitalism.


The next paragraph contains both the above two conflicting statements: On one hand “Obviously the Chinese way of doing things is not a form of society that we could import wholesale into the countries we live in even if we wanted to.”. On the other hand, “China offers an alternative to neoliberal capitalism …”…


So, what is China? According to the text it is simply a “model to study”.


Concretely, what the text is trying to tell us in this contradictory way is simply that the Chinese model has some characteristics or functionalities that might be of some usefulness to those “who are interested in improving their lot and changing society for the better.”.


So, China is not at all a partial or holistic alternative model for advanced capitalism but simply a source of inspiration to those who are struggling to change it with something which they do not yet know what it is. Of course, this unknown and under construction successor of capitalism is called by them “transitional” something.


However, when the text concludes that “China is a post-capitalist society.” and that  Its economic success shows that capitalism is a fetter upon the productive forces and that Marx therefore was right when he described capitalism as a barrier to humanity’s forward march.”, then we find ourselves in complete disarray. If it so, why then claim that “China is” not a model of post-capitalist society” for developed capitalism?


It is obvious that the text can not finally decide whether China’s “social capitalism” is or is not a model for the anti-capitalists and socialists to follow.


2. Why is China a “model to study”?


To this question the text answers that it is so because “China compared with the capitalist system we live under it is an undoubted economic success.”.


So, the text is comparing an under-developed socio-economic formation with a developed one and it concludes that the “under-developed formation” is “an undoubted economic success” because it grows faster than the developed-one.


The exclusive correlation of the economic performance only with the “nature” of the socio-economic formation –a methodological heritage of the defunct Stalinism that we ought to have already decline- is an act of political propaganda and not an act of social and economic sciences.


Let me remind the reader that Greece had also achieved during the period 1950-1973 extraordinary and of course better growth rates and structural changes than both the developed and under-developed economies. During 1950-60 the GDP was increasing by an annual rate of 5.7%. During 1960-73 the annual rate of GDP growth was 7.2%. Finally, during 1951-71 the contribution of the agriculture to the GDP decreased from 29.1% to 19.2%.


The propelling forces of such socio-economic performances were the state investments and planning as well as the export oriented foreign private investments. The whole configuration has been directed by right-wing autocratic parliamentary governments and –finally- by a formal military dictatorship. No one on the “Left” in Greece has ever thought to support the post-civil war political and military regimes because they achieved extraordinary growth performances and profound changes in the rural social structure of the country. The text is asking us now to do the opposite for a country which has a similar economic configuration with that of Greece during the period referred above. The only typical difference between the two cases is of political order, i.e., that a Communist Party rules in China. However, is this political difference a qualitative one? The text thinks that it is. Its answer will be scrutinised further below.  


So, the text does not count in the success equation it constructs implicitly the profitable assistance that imperialism has given to China by granting market access to her products and by making huge industrial investments in China.


Also, the text does not take into account the simple fact that a dictatorship, of any kind, usually achieves –all the other factors being equal- better economic performances than democracy at least for some period of time because it has not got any kind of formal opposition to its decisions, whether correct or incorrect. The dictatorial regime erases the delays particularly in the infrastructure projects and the foreign investments.


Finally, China is not the sole under-developed socio-economic formation of the world that has grown faster than the developed-ones. India also achieves better growth performance than developed capitalism. So, does Turkey, as do many other less or more under-developed economies.


So, if the text wanted to make a comparative analysis in economic growth and performance it would have had to compare China not to the USA or UK but with Turkey and India. If someone compares Chine, India and Turkey, as I have done[1], then the over-performance of China evaporates in front of the huge investments of imperialism in China without including the privileged (for strategic and geographical reasons) trade relation USA – China.  


There is also an undesirable implication to the outcome of such a growth rates race: If the distance between developed and less developed countries decreases, as it has in the period 1989 – 2008, then world capitalism develops the productive forces in a global scale.


However, the real question to study is not the past growth rates of China -there are a lot of factors explaining them, including the advantage of the huge bureaucratic machinery that China has built and has trained in the Stalinist type quantitative planning- but their present and future sustainability. Can the Chinese socio-economic formation sustain or not the past growth rates in the present and in the future?


The majority of analysts, including my self[2], think not. Even the IMF, where China is a member-state, in its report, “China 2030: Building a Modern, Harmonious, and Creative High-Income Society”, released on February 27th, 2012, “recommends steps to deal with the risks facing China over the next 20 years, including the risk of a hard landing in the short term, as well as challenges posed by an ageing and shrinking workforce, rising inequality, environmental stresses, and external imbalances.”[3].


Those who seemingly support the opposite, as the text implicitly does, have not presented the least evidence for their claim. So, their claim can be considered simply as propaganda fairy-tale.


3. Where is China heading?


The text assesses that “China has some of the features of capitalism, and some features which are incompatible with capitalism. It is an economy in suspended transition. Since it is ruled by a bureaucracy that guards its own interests, it will not make the transition to socialism without a political revolution to overthrow the bureaucracy led by the working class.”.


The text also asserts that “China is not moving in the direction of capitalism, despite a small increase in private ownership of the means of production.”.


There is a dynamic logical contradiction between the above two statements.


Upon its victory, the Chinese revolution eliminated completely every capitalist form and activity in the economy and society. The text shares this view: “The Chinese Revolution actually smashed the bourgeois state more thoroughly than the Russian Revolution.”. This is the initial starting point in the process of degeneration of Stalinism in China.


The first assessment states that now “China has some of the features of capitalism”. Therefore, between then and now, “China has been moved in the direction of Capitalism”. This is a fact totally accepted by the text irrespectively of the degree of significance of this movement.


Therefore, the second assessment has to be reformulated either as (a) “China has stopped moving in the direction of capitalism” or (b) “China will stop moving in the direction of capitalism”.  


The first proposition is a statement of fact which is negated outright by, for example, the abandon of any effort to collectivize and plan agriculture and the continuation of making and accepting foreign investments in the country. Therefore, the “true” proposition is the alternative (b).


The second proposition is a conditional statement associated either with (i) the coming congress of the CCP or (ii) the coming political revolution, or (iii) both.


Without any analysis of the above alternative conditionalities, which the text does not make, the proposition becomes an expression of faith: The author of the text believes that “China will stop to move in the direction of capitalism”. Of course every one of us is free to believe in anything he or she wants to.   


If we now want to step down from the rosy theory to the harsh reality, we have to acknowledge that the Chinese Authorities -Central, Provincial and Local- face enormous and complex socio-economic problems that they have to resolve: the rotating migrants who return to their villages after the expiration of the term of their industrial / service contract in the cities and ports; the illegal migrants in the industrial towns and provinces; the over-debted Local Authorities; the low productivity and over-staffing of the state-owned companies; the incomplete social security system that does not yet guarantee a medical assistance and a pension to every migrant; the insufficient health and education systems which absorb an important portion of the family income; the financial management of the huge accumulation of foreign currency and credits; the social redistribution of the profits in the state-owned sector; the industrial pollution; the efficient development of the energy resources of the economy; the creation of an internal retail market; etc, etc.


I will not venture to predict here whether these problems will be resolved or not. However, I will note that an eventual failure to resolve all these problems plus the management of the relations and interactions between the private-capitalist, local and foreign, and the state-capitalist sectors in an ordered pattern will result in a break-down of the Central Government and the subsequent economic, social and –finally-political disintegration of China.


In such an eventuality, private capitalism, local and foreign, will prevail almost automatically as a chain reaction of decentralised / spatial ad hoc solutions to a global problem.     


In such a case, the actual great historical objective of world imperialism in respect to China, i.e. to partition both the state and the country in smaller and manageable independent entities, will have been successfully accomplished.





4. The defeat of the political revolution in China


Modern China begun to be formed as we know it today upon the defeat of the political revolution in 1968.


The assault of the political wing of the CCP on the state bureaucracy in 1966-8 passed in history as the “cultural revolution”. It was named “cultural” because it was unarmed. However, this did not mean that there were no causalities. In 1968 the military intervened and successfully restored law and order under the leadership of the ex-guerilla and then military marshal Lin Biao (1907-1971) who was the Minister of Defence since 1959. After the suppression of the political revolution Lin Biao sent over 16,0 million of Red Guards to “work re-education camps” in the country-side.


In 1969 the 9th congress of the party completely reconstructed the CCP under the supervision of the military wing. However, the political wing had been defeated but not eliminated under the political protection of Mao Zedong.


In the 10th congress of the CPC in 1973 the left current of the political wing attacked the military wing and its allied right current of the political wing on terms of “Confucius type right deviation”. Of course “confucius-ism” was a metaphor meaning “bureaucratism”. The military wing retreated under the blows. Deng Xiaoping, the “prime-minister” of the military wing, lost all of his official positions in the party and the state. 


In October 1976 the famous “Gang of Four” was arrested and the (historical) political wing of the CPC vanished for ever. The military wing started to implement gradually and carefully its development strategy (see next paragraph) aiming to bring China into modernity irrespectively of the social / class terms implied by this. In the 11th congress in 1977, Mao Zedong was implicitly designated as the “shadow fifth man” behind the “Gang of Four”.


5. Foreign investments in China


The first oil crisis in 1971-3 threw suddenly the development of China into a complete impasse. The country had to pay the imported energy by its exports if it wanted to survive. In order to create the extra exports needed so as to counter-balance the increase in the price of the imported oil, the country needed the appropriate exports generating investments that only the foreign capital could then provide. China, under the command of the military, was forced to open the gates to foreign investments and in particular to those coming from the USA.


After the admission of China into the United Nations Organization the US Presidential Advisor, Henry Kissinger, visited secretly Beijing in July 1971. In February 1972 US President Nixon visited officially Beijing and the strategic US – China alliance started to take shape.


It is noted[4] that between 1985 and 2008 China received a total foreign investment equal to 74% of its average GDP for the period while Turkey received only 19% and India 18%. Imperialism has invested over 3 times more in China than in Turkey or India.


The text gives a predominant role to the investments of the Chinese Diaspora abroad (Hong Kong, Taiwan, Macau) forgetting to indicate also its business partnership with the multinational capital. In the first period of the Chinese opening to foreign investments, the gates of entry were indeed these three states. In the subsequent period, the multinational companies made their subcontracting to local partners. Finally, the multinational companies established themselves in mainland China under the protection of the CCP officials associated with them.      


The foreign investment multiplier has been high and its significant impact on local growth has contributed to the illusion that China’s development has been historically endogenous.   


In such a context, the insufficient knowledge basis of the text makes it to state wrongly that “First economic growth is powered by Chinese firms, mainly publicly owned. Secondly investment in China is the driving force of economic take-off, not exports to the rest of the world.”.


The percentage variation of the annual growth rates of the real GDP in the period 2007 – 2012 evolves as shown in the graph below:


         Source of data: IMF, World Economic Outlook, September 2011.


Therefore, the “external immunity” of the Chinese economy suggested by the text is not supported by the actual data. The downfall in the world economy since 2008 has significantly influenced the economy adversely in a cyclical double dip pattern. Of course, it is quite normal to be so for the 2nd larger economy and one of the leading exporters and major capital importers in the world. China is a part –a large one but still only a part- of the world economy. China is not a universe apart.


If the text does not recognise the downturn impact of the world economy on the Chinese growth, then it has to admit that its cyclical growth fluctuation is due to an on going internal crisis of an economy which considers being “planned” and, thus, “crisis free”. Such admittance logically implies that there is an underlying failure in the “planning” to provide what it is supposed to do.


So, in both alternative conclusions the Chinese economy is not as “planned” as the text suggests. In reality, both conclusions are simultaneously true.  


6. The industrialization of China


In 1981 Deng Xiaoping succeeded Hua Guofeng in the post of the Chairman of the Central Military Commission of the CPC. This succession meant that the military wing had re-conquered the real power center in China.


The 12th congress in 1982 marked the start of the current economic development pattern of China. The envisaged new socio-economic structure, as an objective and as a way to achieve it, is scripted in the un-constitutional constitution of 1982. Simultaneously, the party was reshaped from top to bottom and became void of all kind of dissidence.  


The 12th congress confirmed the appointment of Deng Xiaoping to the position of the Chairman of the Central Military Commission of the CPC. He held the post until 1989. The military wing prevailed indisputably over the political wing. The defeated wing was ousted massively from the party. The “party” has been transformed accordingly to a technical apparatus of experts with one and only one mission: to implement the economic reforms program of the victors.


The dissolution of the agricultural collectives was accomplished by 1985. In this way China made available an infinite work force was to place in the industries that were to be built by the foreign, i.e. USA, investments. In May 1989 the military established a martial law and in June 1989 their tanks crushed the Tiananmen Square insurrection. Thousands of people were killed and many other thousands were sentenced to prison and forced labour camps in the country-side. The martial law was lifted in January 1990. Since then, the law and order that was imposed by the military continues to reign in China uninterruptedly.  


The historical uniqueness of the Chinese development experience is that China did not privatised the means of production, in the 1980’s no one in the world was really interested in the Chinese means of production, but the use of the available human resources. In the deal with imperialism, China provided the labour force and foreign investors provided the capital.


The acceptance of foreign investments has been complemented with granting some market access in the metropolitan markets to the products produced in China, especially in the labour-intensive industries. In such a context the growth has taken off but not for long.


The negative and almost stable trend of the annual variations of the real GDP growth rates around -4,3%, that has been identified for the 2007-2012 period in the graph above, indicates irrefutably that growth in China is decreasing during the current crisis 2008-2012 period by an average annual rate of -7.5%. This implies that the aggregate growth of China has been sized down by -32.4% during the current crisis period!   


7. Foreign market access to the products made in China


In the period 1995-2000 the Chinese exports begun to fall. Consequently, the economic growth stagnated. So, the Chinese Authorities had to negotiate with imperialism the future of their country in order to gain the needed access in imperialism prosperous metropolitan markets.


The trade deal formulated with imperialism was made official with the Accession Agreement of China in the World Trade Organization –WTO in November 2001 after continuous negotiations since 1987. With the gates of the metropolitan markets completely open, the Chinese exports have taken off vertically.


In order to grasp the significance of the China’s entry into the WTO let me note that China’s foreign exchange reserves in 1982 were only $11.3 billion. In 2000 they were $165.6 billion. In June 2010 they were $2.45 trillion!


In consequence, the industrial employment in the imperialist countries took a severe blow by the Chinese imports while the off-shore profitability of the importing –mainly- multinational companies hit an all time high. World-wide accumulation of capital took a global boost. 


However, irrespectively of these facts, the text considers the WTO Accession Agreement just as “a piece of paper”. Further, it considers –with a particularly vigorous revolutionary decisiveness- the mental state of all those who consider this document as an historical deal with imperialism as that of “an advanced legal and constitutional cretinism.”. Finally, the text concludes that “The idea that joining the WTO has caused or signalled a social counter-revolution in the interior of China is ridiculous.”.


Of course, it is ridiculous to write a text on the class character of China without having previously studied in depth its Accession Agreement to the WTO.


If one reads the 103 pages long Accession Agreement with its annexes and its reference Agreements then one realises immediately that all the bla - bla about the “commanding heights of the economy”, “planning”, “planned economy”, etc, are simply nonsense.


I’m not intent to do here the work that any responsible person should already have done by analysing the WTO – China Accession Agreement. Simply, I invite –and not for the first time- every one who considers him/herself responsible to read at least and at last the documentation package of China’s WTO Accession Agreement.


In order to give an idea of what the China’s Accession Agreement really is, I will give few examples below:  


Article 9, Par. 1 establishes the market determination of prices and abolishes the central planning of prices: China shall, subject to paragraph 2 below, allow prices for traded goods and services in every sector to be determined by market forces, and multi-tier pricing practices for such goods and services shall be eliminated.


Article 10, Par. 3 abolishes the central financial planning and management of the enterprises: China shall eliminate all subsidy programmes falling within the scope of Article 3 of the SCM[5] Agreement upon accession.


So, what remains from the central price and financial planning and management of the “commanding heights of the economy”? Absolutely nothing!




Article 5, Par.1 abolishes in principle the foreign trade monopoly: Without prejudice to China's right to regulate trade in a manner consistent with the WTO Agreement, China shall progressively liberalize the availability and scope of the right to trade, so that, within three years after accession, all enterprises in China shall have the right to trade in all goods throughout the customs territory of China, except for those goods listed in Annex 2A which continue to be subject to state trading in accordance with this Protocol.  Such right to trade shall be the right to import and export goods. 


Article 6, Pr. 1 abolishes the central planning and management of the import trade: China shall ensure that import purchasing procedures of state trading enterprises are fully transparent, and in compliance with the WTO Agreement, and shall refrain from taking any measure to influence or direct state trading enterprises as to the quantity, value, or country of origin of goods purchased or sold, except in accordance with the WTO Agreement.


So, what remains from the foreign trade monopoly and planning? Absolutely nothing!


Therefore, I conclude, that the final planned output that the Chinese Authorities have produced is the ordered establishment of capitalism defined in and by their WTO Accession Agreement.


Since the entry of China into the WTO, the State Planning or Managing Authorities no longer have the formal right to do what they want to do with their state-owned companies. The state has been transformed from the owner of the company to the (majority) owner of the capital of the company. The difference between these two successive situations is qualitative.


8. Capitalism is China


China is an immense country and not a homogenous one. China is made up by many smaller “countries”, provinces and regions, costal and inland, industrial and administrative towns and ports which have different socio-economic and development characteristics as well as linguistic and religion particularities and cultural heritages. 


Capitalism is defined by a number of elements: wage, price, capital, convertible money, stock-exchange, circulation of capital, commodities and human resources. All of those elements are today distributed in the territory of the Chinese state in an uneven manner.


In Hong-Kong and Macau, which are integral parts of China and at the same time completely autonomous semi-states[6] (Special Administrative Regions of the PRC), we have fully developed capitalisms with their own convertible money.


It is reminded that in 2011 the Gross National Income per capital was in the USA was US$ 47,140, in Macau US$ 39,500, in Hong-Kong US$32,900. In main-land China the Gross National Income was only US$ 4,260 per capita...


Also, it is reminded, that one of the biggest international banks of the world is the famous HSBC which stands for Hong-Kong and Shanghai Banking Corporation. In addition, it is reminded that the Hong-Kong Stock Exchange (SEHK) is the third largest in Asia (behind Tokyo and Shanghai) and the sixth largest in the world in terms of market capitalization. In the SEHK are listed 1,477 companies whose market capitalization was HK$16.985 trillion as on 30 November 2011. The foreign currency reserve assets of Hong Kong were US$ 223.3 billion in August 2009.


The South East China (from Macau and Hong-Kong to Shanghai) is industrialized and economically fairly developed as well as the four Metropolitan Municipalities of Beijing, Shanghai, Tientsin and Chongqing as well as the various other administrative centers of the country.


However, the common denominator of this uneven structural distribution is private property and labour: in all of the Chinese territory the private contracts of work are permitted, agriculture is private, ownership of at least one home is authorised and ownership of capital stock-shares is unlimited.   


The text adopts an incredibly original and certainly false stand on the capital-shares of the Chinese joint-stock companies inside and outside the two stock-markets of the country (Shanghai and Shenzhen). It claims that these “shares do not actually represent part ownership of the company in China. Rather they are just a way of sharing in the profits.”.


In order to avoid indicating the organic privatization of the state-owned companies which is effectuated by the introduction of their joint-stock capital in the stock-exchanges, the text invents a new type of shares which … are not at all shares. It is a pity to distort reality when it does not fit into one’s pre-established convictions. 


Simply, the text does not want to realise that the state-owned companies entering the stock-exchanges are also entering automatically into a pattern of privatization. 


In logical consequence, the text is obliged to state that “At present a class of idle rentiers, passive owners of the means of production who live off dividends, has not yet come into existence in China.”. This statement is false and contradictory to the above statement of the text that the Chinese “shares do not actually represent part ownership of the company in China. Rather they are just a way of sharing in the profits.”.


In order to clarify the issue, let me remind the reader that the number of the stock-holding accounts in China exceeded in May 2007 the symbolic level of 100 million[7]. This number is larger than the actual CCP membership which was 78.1 million in June 2010. Therefore, the number of stock-holders in modern China is larger than the number of the officially registered communists in the country even without counting the number of the stock-holders in the companies which are not listed in the stock-exchange (like, for example, the famous Huawei). 


According to the People’s Bank of China[8], the ratio of the stock-market capitalization to the GDP has surpassed it in 2007. It reached at 121.10%. This means that a value in means of production, stock and sums of money larger than the annual product of China is available for private appropriation.  


So, there is in China a fully developed but decentralised capitalist structure with Hong-Kong and Macau operating as its nucleuses and interfacing elements between the world capitalist economy and the rest of China[9]. Almost, the same role is played by Taiwan which is formally an independent state but it is considered also by the PRC as an integral part of the country.


In qualitative terms, the vector of capitalism has been established fully in the Chinese territory in an uneven spatial distribution. In quantitative terms capitalism is predominant only in some parts of the Chinese territory. Concretely, besides Hong-Kong and Macau, it is in those provinces where the main bulk of the foreign investments and companies are concentrated, i.e. mainly in South-East China. In the other parts of the country the industry and services sectors are operating predominately under state ownership and management but equally in value terms. Accordingly, these sectors are state-capitalists.


9. State capitalism in China


Where the text hits on a hard rock is state capitalism. The relevant paragraph under the headline “State capitalism?” cannot decide whither or not China’s economy is a state-capitalist one, wholly or partially, or not, wholly or partially.


It is obvious that the larger part of the industrial and service sectors of the aggregate Chinese economy are state-owned or mixed with private capitals. So, basically China has a state economy. However, this aggregation in “one economy” is in the case of China more formal than essential. It is like adding apples and oranges.


The state sector operates according to the calculus of value -i.e. prices, wages, capital, interest and profits- the operational principle of capitalism. So, the state economy of China is a capitalist one, i.e. producing surplus-value, i.e. wage-earners’ exploitation in terms of value, i.e. capital.


However the text does not want to recognise what is evident at first glance. It hides itself behind an indeterminant reference to one of the failed past pabloite theoreticians, Ted Grant[10], by stating that “For this reason Ted Grant upheld the position, in a polemic on the nature of the Stalinist economies after the Second World War, that state capitalism as a system where the means of production are owned by the state cannot exist.”.


Of course any such reference to the particular work of Grant is completely irrelevant to our case. Grant supported–correctly- the position that the USSR and the other East-European countries were deformed workers’ states while Tony Cliff supported the position that these countries were state-capitalists formations in the context of being centrally planned economies in use-values / kind. An economy can not be a state-capitalist economy if it operates according to the calculus in use-values / kind. So, the USSR could not be a state-capitalist economy. For an economy to be a state-capitalist one it has to operate according to the calculus of value as contemporary China does. So, China is a state-capitalist economy.  Therefore, the particular reference of the text to Grant is misleading.


In every country of the world the state owns and manages productive resources in kind as well as capital. So, in every country of the world there is nowadays a state-capitalist sector in the economy. In some countries, as in China, Russia, Venezuela, Greece, and others, the state-capitalist sector is the larger sector in the economy. If, however, this owning and managing state is a workers’ state or –alternatively- a proletarian dictatorship then according –at least- to Lenin we have a “proletarian state-capitalism”.


Like Grant who could not accept the collapse of Stalinism in 1989-1993, the text can not accept the obvious fact that the Chinese economy is predominately a state-capitalist one. The text, feeling that the reference to Grant is not at all convincing in relation to the Chinese millionaires’ reality, seeks assistance from Lenin himself. It “interprets” appropriately Lenin by stating –again without a specific quotation- that “Lenin actually used Germany in the First World War as an example of what he called ‘state capitalism’, in other words of state directed capitalism.”. So, according to the text “state-capitalism” exists where and when the state dictates to capitalists what to do.


But, even in such a case, China is a state-capitalist economy through the supposed “central planning of the commanding heights of the economy”! In the case of the Chinese agriculture the text unwittingly admits that the whole configuration is a state-capitalist one: “Agriculture in China, whilst dominated by private family production units at the micro level, is dominated by state purchase and distribution at the macro level. … Thus, contrary to appearances, Chinese agriculture is dominated by the state.”. This means that -contrary to all the contrary assertions of the text- private agriculture operates within a state-capitalist framework!


To redress the damage the text is doing to both theory and history, let us be reminded of what Lenin[11] meant by “state capitalism” not for Germany in the First World War but for post revolutionary Russia in 1922: “The real nature of the New Economic Policy is this—firstly, the proletarian state has given small producers freedom to trade; and, secondly, in respect of the means of production in large-scale industry, the proletarian state is applying a number of the principles of what in capitalist economics is called “state capitalism”.”[12].


Of course the “number of the principles of capitalist economics” to which Lenin is referring to is simply the calculus of value which is fully operating in all the enterprises, private, state and cooperative, in China.


However, the understanding of the text goes to the opposite direction: “From these examples it is clear that Lenin did not conceive that state capitalism could ever become the dominant mode of production in Russia after the Revolution.”.


Before and after the revolution Lenin[13] states in his Left wing childishness and the petty bourgeois mentality in 1918, to which the text is referring by name, that “… state-monopoly capitalism is a complete material preparation for socialism, the threshold of socialism, a rung on the ladder of history between which and the rung called socialism there are no intermediate rungs.”[14].


Lenin[15] had already explained some months before, in September 1917, that “For socialism is merely the next step forward from state-capitalist monopoly. Or, in other words, socialism is merely state-capitalist monopoly which is made to serve the interests of the whole people and has to that extent ceased to be capitalist monopoly.”[16].


It is a shame to distort in such a way both theory and history in order to side oneself with the political illusions and the theoretical confusion of the “Left” current inside the CCP who want –on the one hand- to base themselves historically on the New Economic policy in Soviet Russia but they do not want –on the other hand- to call theoretically its underlying economic mechanism “workers’ state-capitalism” –apparently- because they do not consider –correctly- that the Chinese state is a “workers’ / proletarian state”.


10. A comparison of the state and private capitalism behaviours


Does state-capitalism behave like private capitalism? Of course it does not do so completely. While private capitalism sets almost as its unique operational objective the maximization of the profit, any state owned enterprise sets also –according to the conjuncture and conditions- additional objectives to fulfil like, for example, employment or wages, etc. However, such an addition does not annul the non-loss operational principle. Therefore, private and state capitalism are simple alternative ways to manage the same fundamental operational principle of capitalism, the calculus of value.


In state-capitalism the surplus-value concentrated and accumulated in the hands of the government is distributed in this or the other way in economy and society, for good or bad. However, in this distribution an additional interfacing factor is the reproduction of the state itself as the undisputable manager of the distribution of the surplus-value accumulated. The managers, being also the controllers of themselves, use a part of the capital they manage in order to reinforce their own position and role in such a lucrative management. Then, they begin to use some of the capital they manage for their own benefit (stock-market speculation, selling of inside information, etc). Finally, the most powerful, clever, experienced, audacious or –simply- greedy of them, i.e. practically all of them, divert some of the capital they manage into their own pockets (off-shore companies, etc). Corruption is a systemic characteristic in state-capitalism especially under dictatorial regimes like that in China.


So, the “democratic control of state-capitalism” is simply a political illusion. How can one “democratise” or put “under workers’ control” the every day operation of a financial investment fund active, night and day, in all the stock-markets of the world? It is not a challenge to the right of the dictatorial state over surplus-value but it is a challenge to the common-sense even of inexperienced people.


Further, state-capitalism is not sustainable in the long run. As the economy grows in volume and complexity, especially in the case of China, the government can not follow business development and technology progress either domestically or abroad. An extended state-capitalist sector is bound to collapse because of its inherent corruption generated by the internal and external accumulation of capital in its framework. 


In the industrial and financial investment abroad, state-capitalism behaves exactly like private capitalism, i.e. is seeking the maximum possible return for its investment.


So, even if state-capitalism in China behaves domestically in a socially “correct” and a more “workers’ friendly” manner than elsewhere, in the arena of world economy it behaves like any private investment fund; though, it is true, in a more conservative and in a less risk taking pattern.


11. The planning that does not result to a planned economy


If I have counted correctly, the text contains the noun “plan” 65 times, the noun “planning” 19 times, the adjective “planned” 6 times and the phrase “planned economy” only 2 times.


The meaning of this statistical exercise is obvious: there are a lot of plans and planning in China but this does not achieve to produce a “planned economy”.


Why is it so? It is because agriculture is not included in the planned sector of the economy. The same is also true for the local private companies as well as for the foreign companies. The same is –conditionally- also true for the mass investments of the multinational and other foreign companies as are, for example, the Greek companies operating in China.  Therefore, the “plan is” not so “far-reaching” as the text suggests.


What remains from this “not so far-reaching plan” is the financial management of the state-capitalist sector by the Central, Provincial and Local Authorities. This management is effectuated, indeed, through the corresponding state sector of the banking system which is controlled uniquely by the Central Bank of China - CBC. However, the CBC is formally independent from the government and of course of the CCP. Expression of this fact is the accumulation of huge amounts of foreign currencies and financial assets by the Central Bank of China and its specialised financial institutions. In a word: planning in China does not know what to do with the trade surpluses it plans to achieve!


Of course, the behavioural difference between state and private capitalism mentioned above is valid also in the financial field. In this case that means the credit redistribution of funds to non-competitive industrial enterprises in order to avoid their bankruptcy and the dismissal of their personnel. Their financing comes from the taxation of the private companies, both local and foreign, and the partial sale of their capital in the stock-market.


However, large and very large scale export, energy, technology and defence companies have no need of such a kind of bank financing. They can issue their own debt and increase their own capital in the domestic and international financial and capital markets. So, they are outside the grip of the financial control of the state. In reality these giant companies in association with the military are dictating the policies to the state; the CCP is subsequently invited to implement them.


Therefore, the supposed “socialist” financial planning is even more restricted in the state-capitalist sector than it appears to be at first glance and finally is resulting in the stock-market privatization of the state-owned companies. This is the organic perspective of the state-capitalist sector of the Chinese economy.


Further, it has to be noted that China is a member of the International Monetary Fund – IMF since 1945. This means that the Central Bank of China is obliged to act in a “financially correct” way defined by its IMF formal engagements. One of them is the pursuit of the long term objective to make the mainland national currency, the Renminbi, fully convertible.    


In the Executive Summary of the IMF report “China 2030: Building a Modern, Harmonious, and Creative High-Income Society”, released on February 27th, 2012, is noted that “Integrating the Chinese financial sector with the global financial system, which will involve opening the capital account (among other things), will need to be undertaken steadily and with considerable care, but it will be a key step toward internationalizing the Renminbi as a global reserve currency.”.


Certainly, making the Renminbi a fully convertible currency –as it is inevitable- means the full capitalization of the Chinese economy.


The second field of central, provincial and local planning is the planning and financing of the public projects and infrastructure works. This kind of planning is common in every country, less, under or fully developed, of the world.


The third field of planning, and this is indeed unique to China, is the management of the labour inflows from the country-side into industrial and administrative towns and ports. This management is effectuated by the CCP in co-ordination with the receiving Provincial, Local Authorities and companies.


The text states that “… the CCP is in charge of the planning mechanism of the Chinese economy.”.


This is so, mainly in relation to the 3rd form of planning, i.e. the management of the migrant flow from the country-side to industrial sites. This function of the CCP explicates also why the peasantry is –as can be seen further below- the most important social class in the CCP membership.  The peasants, in order to be preferred for migrant selection, are entering the CCP en mass and therefore they constitute the larger single segment of its rank and file.


In relation to the 2nd form of planning, i.e. the public projects and infrastructure works, the Local Authorities have a significant role to play. It is well known that the conflict of priorities and interests between Local Authorities and the CCP undermines the integrity of the planning process.


Finally, the degrees of liberty in the 1st form of planning, i.e., the financial planning, is very limited as shown above. Therefore, the CCP can not “use the banks to ensure they serve the Plan.” in the extent that the text suggests.


Therefore, the comprehensive global “state planning” and the overall “state planned economy” in China are in reality official propaganda myths designated to make “state ownership” to look like something else that it can not be, i.e. a vehicle to socialism.   


Let me add a final comment concerning the efficiency and the cost of planning. If one does not measure the final outcomes of the planning (roads, ports, factories, etc) against their cost of realization plus the cost of the planning process itself, then one can not evaluate the final social benefit of the planning. The huge debt of the state-companies is a strong indication both of inefficient operation and ineffective planning.  





12. The political system


The text states that “The Chinese Communist Party (CCP) is the ruling party in China today, and the only legal party.”. This statement is false.


China is not constitutionally a single party dictatorship as was the USSR or as Cuba is today. It is a dictatorship of a Popular Front under the leadership of the CCP exercised through the National Congress of the People’s Representatives. The successive constitutions of PRC have institutionalized the historical Popular Front parties and organizations as well as their Conference under the permanent chairmanship of the representative of the CPC. In other words, the Popular Front is so far a political hostage of the CPC.


In the Preamble of the so-called constitution of the PRC it is defined that “In building socialism it is imperative to rely on the workers, peasants and intellectuals and unite with all the forces that can be united. In the long years of revolution and construction, there has been formed under the leadership of the Communist Party of China a broad patriotic united front that is composed of democratic parties and people's organizations and embraces all socialist working people, all patriots who support socialism and all patriots who stand for reunification of the motherland. This united front will continue to be consolidated and developed.”


Therefore, the CPC is the “leader” of a Popular Front which is composed by the initial historical forming eight organizations considered officially as “democratic parties”. These parties[17] are the following: China Zhi Gong Dang (1925), Chinese Peasants and Workers' Democratic Party (1930), China Democratic League (1941), Jiusan Society (1944), China Association for the Promotion of Democracy (1945), China Democratic National Construction Association (1945), Taiwan Democratic Self-government League (1947) and China Revolutionary Committee of the Kuomintang (1948).


However, besides the official parties there are in China a lot of semi-legal and illegal political formations of various sensibilities.


The following organizations of unknown influence are included in the organizations which are not recognized officially as political parties: Party for Freedom and Democracy in China, China/Chinese Green Party, Human Rights Party and United People's Party of China.  


The following organizations of unknown influence are included in the organizations which are officially illegal: Chinese Democracy and Justice Party (1998), Wang Bingzhang; China Democracy Party (1998), evolved from the Chinese Democracy Wall Movement (1978) and the 1989 Democracy Movement (1989); China New Democracy Party (2007), Guo Quan and Union of Chinese Nationalists (2006) related to the Pan-Blue coalition on Taiwan.


The conclusion is that any political concept that admits the existence only of one party in China, i.e. of the CCP, is misleading on the actual political situation in China.


13. Is China a workers’ state?


The text finds “powerful evidence that China is not a capitalist country.”. If China is neither a capitalist nor a state-capitalist state -as the text claims- then it has to be a “workers’ state”.


So, is China a workers’ state?


If Trotsky was considering the USSR as a workers’ state this was due to the fact that the USSR was a single class proletarian society. In the USSR there was only one social class: the wage-earners. Besides this class there were two social groups: the slaves in the forced labour camps and the outstanding outlaws (murderers, thieves, prostitutes, black market traders, speculators and marketeers, , , etc).


Is China today a single-class proletarian society? Of course it is not. Contemporary China has been constructed by and through the ex-nihio creation of a petit and big bourgeoisie in the country-side, towns and ports in business partnership and association with imperialism. The text acknowledges that “Nobody denies that a class of private capitalists exists in China today.”. However, the text forgets to inform us that this private capitalist class is the majority of the population in the form of the peasantry. Contemporary China, despite its extraordinary growth performance in the past, still continues to be a rural country. Concretely, the rural population in China numbers the 54.7% of the total. In the USA it numbers the 16.0% of the total population.


Therefore, China is not a workers’ state in the broad, social, sense of the term. It is certainly a workers’ and peasants’ state where the peasantry stands for the main bulk of the petty-bourgeoisie. 


However, China can be a workers’ state in the narrow, class, sense of the term, i.e. as a political proletarian dictatorship over a multi-class and basically peasant society (taking into account that the internal migrants are only temporarily in the ranks of the working class).


So, is China a proletarian dictatorship?


14. Is there a proletarian dictatorship in China?


It is obvious that there is a dictatorship in China. The text acknowledges this fact: “China is a dictatorship, a one party state.”.


Is this dictatorship a proletarian one? For a dictatorship to be a proletarian one it has to be exercised at least by a proletarian political party at the expense of the other classes, i.e. limiting the private accumulation of capital both in towns and villages.


In China we observe that neither the CCP is a proletarian party nor the state policies implemented are directed against the private accumulation of capital.


According to the data provided by the text only the 10.8% of the 73.3 millions strong CCP was workers in June 2007. In June 2010 the number of workers fell to 8.9% of the 78.1 millions strong CCP[18]. Thus the CCP is a proletarian party without proletarians! Much worse, it seems that the proletarians are deserting the CCP!


In contrast, the peasantry (farmers, herdsmen and fishermen) is the relative majority in the CCP with 31.5% in June 2007 and 30.8% in June 2010. It is reminded, simply, that the peasantry is the main bulk of the petty-bourgeois class in China.


It is reminded also that[19] in 2006 81.6% of the Chineses population was living in their own home while the corresponding ownership rate was 68% in the USA and 42% in Germany. Consequently, the number of the property owning proletariat is larger in backward China than in fully developed USA and Germany. So, the Chinese proletariat has a relatively strong petit-bourgeois aspect.  


Thus, the conclusion of the text concerning the CCP that “In membership terms this is not a Party of capitalists.” has to be reconsidered fundamentally. 


Therefore, the CCP is a multi-class party and the state policies implemented by it are in favour of the private accumulation of capital, both national and international. Further, the Chinese government itself is a big capital owner of some US$ 2.45 trillion, a significant industrial investor abroad and the biggest single lender of the USA government.


So what is the CCP? It is a populist formation, so common in under-developed socio-economic formations operating according to the calculus of value.


In such political formations the influence of capitalists it is not exercised by their membership number, in capitalism capitalists are always a tiny minority in society, but by their ability to offer employment and wages to the rest of their “comrades” in the party. Further, they have the money power to corrupt not only the leadership but also the rank and file. The purchase of votes is a long established tradition in all countries of the world, even in Chavez’s Venezuela. Therefore, the numerical argument of the text is invalid. A single owner of a big factory exercises more influence in the local CCP affairs than thousands of devoted communists. We do know that from our relevant experience with PASOK in Greece.


Besides -at least according to Lenin[20]- the small peasantry inevitably vacillates between the proletariat and the bourgeoisie even under a proletarian dictatorship. So, the influence of capitalism is transmitted into and it is reproduced inside the CCP also by the peasant component of its rank and file which is also the largest.


Specifically, the liberation of the internal movement of persons from any restriction and administrative controls, i.e. practically the abolition of the so-called “internal passport”, as well as the freedom of establishment anywhere in the country is the “natural” demand of the rural population. However, such a demand is a de facto operational challenge to the actual dominance of the CCP. Therefore, objectively, it is a demand bearing a latent pro-capitalist content and dynamic. Without its grip on the internal movements of the population, the CCP can hardly continue to have its compact character and dominant position it has for the time being.


Much worse, the populist CCP is commanded by the military cast. Concretely, the CCP is the political executive tool of the Chinese Army Forces in the framework of the ruling nine parties’ popular front through which the military cast exercises its dictatorship in China.


15. Is China capitalist?


The conclusion of the text that: “Taken together, the extent of public ownership and the existence of a far-reaching plan provide powerful evidence that China is not a capitalist country.” is logically ambiguous.


If there is socially a significant capitalist class –as there actually is - China is also, at least partially, a capitalist country. It has been indicated how this functions spatially in the framework of a private agriculture which provides –according to the text- 12% of the GDP and 40% of all jobs.


However, the existing capitalist class is not, so far, the ruling class of the Chinese state. The state in China is self-ruled under the leadership of its military component with the CCP acting as its transmission mechanism and interfacing sub-system with society. As the main but not unique transmission mechanism and interfacing sub-system, the CCP is also, at least partially, a component of the system ruling the state. Besides CCP, the existing popular front with its eight “sleeping” political parties provides to the military caste an alternative ruling transmission mechanism and interfacing sub-system which is not only outside the framework of the CCP but it can also be turned –if such a social or political need arises- against the CCP itself. 


The Boards of Directors of the big domestic business and the multinationals investing in and trading with China act –for the time being- as lobbyists, consultants and advisors in the process of decision taking, i.e. of “planning” according to the terminology of the text..


Therefore, China is not a capitalist state but never the less this non-capitalist state operates on the calculus of value, i.e. capital. Thus, structurally, the state operates capitalistically in most of the cases, i.e. as if it was basically a capitalist state.


Therefore, both the economy and the state are, at least for the time being, basically state-capitalist.


16. Is China a post-capitalist society?



1.    there is not a workers’ state in the broad sense of the term in China but a multi- class society,

2.    there is not a proletarian dictatorship in the narrow sense of the term in China but a military dictatorship exercised through a multi-party political system and a multi-class populist Communist Party,

3.    There is no collective sector nor any kind of state planning in agriculture which has been de-collectivised and reversed to a private one,

4.    the majority of the population is peasantry and this peasantry constitute the main bulk of the existing petit capitalist class,

5.    there is not any kind of  foreign trade monopoly and planning,

6.    there is not any kind of enterprise and price central planning,

7.    the planning of the public projects and infrastructure works is not an exclusive state task but is done jointly with the Local Authorities as in any country of the world,

8.    the financial planning is predominantly a partial regulation of joint financial viability of the financing banks and the debt ridden enterprises and Local Authorities,

9.    there is an enormous accumulation of capital in the hands of the government generating surplus-value by its industrial and financial investment inland and abroad,

nevertheless the text concludes arbitrarily that “China is a post-capitalist society. Its economic success shows that capitalism is a fetter upon the productive forces and that Marx therefore was right when he described capitalism as a barrier to humanity’s forward march.”.


If China is considered to be a “post-capitalist society”, this means that it is irreversible to “capitalism”. If it is so, then the supposed on going current “transition” can lead only to “socialism”. In consequence, China is a “pre-socialist society” irrespectively of the simple fact that it is a backward country in which the vast majority of the population is composed by the rural and urban petty-bourgeoisie. In terms of the class composition of its population, China is basically an “under-developed” capitalist society dependent on the imperialist structure and dynamics of the world economy.


For a socio-economic formation to be a “post-capitalist” one it first has to have established that it is not reversible to capitalism. This means that it is more developed, economically, socially and politically, than metropolitan capitalism.


On the economic level while the GDP of China in 2011 was 49% of that of the USA, its per capita GDP was only the 15.8% of that of the USA. On the social level, China is a predominantly a petite bourgeois rural society. On the political level, China is a politically disguised military dictatorship.   


In summary, rural and urban petite bourgeois and dictatorial China is less developed than semi-industrialised and autocratic Russia in all the above criteria. Russia, and by the same token, Russia is less developed than, e.g., industrialised and democratic Belgium in all the above criteria.


Therefore, both the state-capitalist China and Russia are heading -through a class conflicting political pattern- towards either private capitalism or socialism.  


16. Misleading by an outdated concept of socialism


Methodologically, all the argumentation of the text concerning the Chinese “post-capitalism in socialist transition” is based on a concept of socialism defined as “state ownership” plus “planning” plus “a proletarian party as the instrument of planning”.


This three component socialist structure is familiar to all of us and accepted by many of us. So, instinctively, the conclusions of the text look plausible, especially in the actual context of the crisis even in the meaning of socialism.


However, in China, behind such a familiar façade is hidden an unfamiliar reality almost to all of us.


It has been indicated that China is predominately a petty-bourgeois rural society in which the initially established planned collective agriculture has been reversed into private and unplanned. So, the relation between agriculture and the state sector is of state-capitalist character while its relation with the private sector is simply capitalist.  


It has been demonstrated that that the “state ownership” in China is the “majority state ownership of the joint-stock capital of the enterprises inside and outside the stock-exchanges”. So, the Chinese state-ownership is a state-capitalist one.


It has been demonstrated that the “planned economy” is simply the combined financial viability state regulation, on the one hand, of the debt ridden small and medium local state enterprises and municipalities and, on the other, of the financing state banks. So, the financial planning is a partial and specific one in order to avoid the joint bankruptcy of all the agents involved and not a global one covering the whole of the economy. So, the Chinese planning is not an instrument to form the future but an emergency tool to avoid impeding catastrophe.


It has been demonstrated that the CCP is not a proletarian party but a populist puppet in the hands of the Chinese military. So, the “party” is not an instrument of the liberation of the working class but a subjugated chain.


Finally, the sole essential argument that the text provides in favour of the “irreversibility” thesis of the Chinese “post-capitalism” is the simple fact that there is a military dictatorship in China having some societal engraving and much more control over society in the form and by the means of the CCP.


However, any “irreversibility” based on the military bayonets has inherently a limited numbers of days or months or years of life before it. This is one of the great lessons that the instantaneous collapse of the USSR has taught us. 





17. The unnecessary return to the Social-democracy of the past


Workers’ state-capitalism in Soviet Russia during 1918-1927 and the associated New Economic Policy during 1921 – 1927, which generated a small scale private capitalist sector in the economy, were typical social-democratic policies.


Lenin[21] explained to his comrades in the Bolshevik party that gold was the operational basis of their workers’ state-capitalism as well as of its interaction with the private capitalist sector. So, the Soviet Government issued the gold backed Chervonets paper-money and gold currency as the money item in the domestic towns - villages and international exchanges, saving and accumulation.


The convertible Chervonets fared well in its exchange, saving and accumulation role until the international agricultural crisis of 1926-7. The crisis interrupted the normal exchange flows between towns and villages as well as between Russia and abroad. The interruption of trade flows provoked the massive withdrawal of the golden Chervonets from the circulation and multiplied overnight the conversion of the Chervonets paper-money into gold. However, the available gold reserves of the banking system were insufficient to cover the increased conversion demand of the paper-money into gold. In consequence, the Chervonets paper-money collapsed, i.e. it became inconvertible in gold. The Russian economy collapsed along the monetary collapse. The only way out of the economic ruin was the return back to an exchange system in kind between cities and villages, i.e. between workers and peasants. This could not be done other than by a return to a less violent version of the war communism economics in kind.


The majority of the Bolshevik party eliminates in 1927-8 the minority opponents to such a return (Joint Opposition of Trotsky and others) and implements the 1st 5yrs plan in kind in 1928-1932. The plan eliminates every capitalist element in production and trade. Stalinism is established. Stalinism collapses in 1989-1993 and Russia reverts to a three sector private, collective and state capitalist economy. However, the small-scale private agriculture is not re-established but the collective structures continue to operate. The second difference is that the political system is reshaped into a multi-party presidential democracy. The Russians elect a right-wing authoritative government of nationalist consonance. 


China has transited along a similar line. Ready-made Stalinism is established by the militarised CCP in 1949 but in a nine parties’ popular-front political form under the command of the CCP. Central planning in kind collapses in 1962 (“the great leap forward”). The collectivist system is partially abandoned in agriculture by 1965 and the private food trade between towns and villages begins to prosper. This return to small scale capitalism generates the political revolution in 1966-8 (“cultural revolution”). The military crushes the revolution and subsequently starts since 1971 to negotiate trade, investment and assistance with the USA and eliminates gradually the opposition inside the CCP by 1976 (“Gang of Four”). Since 1982 (12th congress of the CCP, new constitution), the Chinese Government gradually re-established the private capitalist sector by accomplishing the privatization of the agriculture by 1985, opening the frontiers of the country to the foreign investment and by reforming the operational mechanisms of the state sector from that of calculus in kind to that of the calculus in value. Thus a two sector private and state capitalist economy is created gradually in China. The entry of the country in WTO in 2001 validates the transformations and limits the intervention of the government (“planning of prices and quantities”, “subsidies”, etc) in the business sector, both private and state. The next macroeconomic objective, related to the IMF membership of the country, is the achievement of the full convertibility[22], [23] of the main-land currency that implies the complete capitalization of China.


The differences between the Russian and Chinese developmental experiences are –so far- the following four: China can not afford a collective agriculture while Russia can not finance a private one. China –being in the 60’s an almost totally closed and unskilled economy- could absorb locally the consequences of the collapse of the centrally planned economy while Russia –being in the 90’s a relatively open and relatively skilled economy- could not. China has privatised its labour force while Russia its scientific personnel and specialised means of production. China can not afford a competitive multi-party political system while Russia can. In all the other essential aspects, the two socio-economic formations are similar.  


It is obvious that these differences are due to the different levels of global development of the two counties. In summary, China is less developed than Russia and Russia is less developed than the countries of the metropolitan capitalism.


The third relevant case is, of course, that of the developed mixed economies.


The mixed state-capitalist, private capitalist and co-operative economy was the child of the post-war I European Social-democracy that grew and matured in the post-war II era mainly in Western Europe. The famous welfare or social state has been the organ for the surplus-value re-distribution between the classes through the multi-party political system controlling the state, its expenses and incomes. In the social-democratic view, socialism is nothing more than the public sector and public works guarantying skilled and unskilled employment; education and medical care free of charge; and unemployment benefits; all of which are financed by the heavy taxation of private capitalism and employment.


The developed version of that which the Chinese Authorities name officially “social capitalism” has revealed a structural defect in the social-democratic system. The system in order to be sustainable it has to be self-financed, i.e. it needs continuously increased tax income from the private sector. The private sector can provide the additional tax income demanded only by expanding abroad, investing in other countries and trading in the world markets, i.e. importing surplus-value. But from the moment that the private sector operates outside the jurisdiction of the National Taxing Authority it has no motive to repatriate its profits in order to be heavily taxed. It prefers to accumulate them in more hospitable places, e.g. in Hong-Kong, in Macau, in Cayman Islands or in Switzerland, and to invest them through opaque business vehicles, i.e. off-shore companies, everywhere in the world.     


The higher round of the globalization of capital that followed the collapse of the USSR, the consequent obligatory opening of the less developed countries (including China) to the foreign investments and the development of the new digital technologies in communication and computing have opened a black hole in the financial sustainability of the national state and thus to the viability of the Social-democratic social system.


On the level of the international economy every company, private, collective or state, is too small to behave differently than a private one, i.e. to seek, in principle, the maximum of return. So, whatever a national state can gain from the activities of its own state-companies in other countries will be lost by the activities of the state companies of the other countries inside its territory. So, the play is a zero sum game. If there is not the reciprocity principle, then the national state-capitalist case turns to that that of National-socialism. 


Therefore, the social-democratic welfare system is not sustainable in the long term either in terms of private capitalism or in terms of state capitalism. However, the actual problem with it, and also for all of us, is that the “theoretical” long term has already become the past in Europe today. Most of the European countries have already traversed the frontier of sustainability of their welfare socio-economic systems.


Of course, this long term perspective is also valid for the Chinese “social capitalist” version, whether a copy or an adjustment of them. Whatever actual difference it has with the European precedents, it is not due to its supposed “planned” physiognomy or other, real or invented, structural characteristic of it but mainly to its lower level of global developmental content. The rudimentary Chinese social security system makes fully the case of the economic inequality between China’s and the European precedents. 


Another qualitative difference in the Chinese configuration is the total absence of the democratic political component of the typical social-democratic welfare system. This essential difference will certainly curtail the life span of the Chinese “social capitalism” but in which direction? 


Is dictatorship extending or curtailing the life span of the model? Will democracy extend or curtail the life expectancy of the model?


In this respect, let me add two things: First, the wrong answer to the above dilemmas implies almost the semi-automatic collapse of the Chinese configuration. Second, the correct answer is not valid once and for all time but it has to be updated continuously.   


18. Globalization as world-wide capitalization


Completely outside of the current historical context as described above, the text puts an existentialist dilemma to its readers, who –admittedly- are socialists: “If the world can develop a new momentum of growth then capitalism remains a progressive system because it is developing the productive forces. That should pose a serious question to socialists – are we wasting our time?”.


It is noted again that if the distance between more developed and less developed countries decreases, as it actually happens, then world capitalism develops the productive forces on a global scale because all the world growth is effectuated in terms of the calculus of value except in North Korea and Cuba.


Therefore, the text completely misses the essence of the current crisis of the historical euro-atlantic imperialism: world capitalism is developing the productive forces world-wide, China included, at the cost of the western proletariat which is called to finance -through the cuts in its employment, wages, social services and living standards- the global expansion of capitalism, also in China. Globalization is the process of world capitalization. In this process, the states are downgraded to the second rank and the multinational financial, industrial and trade companies are upgraded to the first rank of significance.


So, the Chinese bureaucracy is the best ally and business partner of the world imperialism inside China. Outside China, the bureaucracy is an integral part of world imperialism.


19. The “Left” current inside the CCP


In the framework of its overall agreement with the CCP’s line, the text sides particularly with the “Left” current inside the CCP which stands, behind the banner of the fight against bureaucratic corruption, abuse and speculation, against the privatizations of the state-owned enterprises; against the granting of further inner economic space to the activities of the multinational companies; for the rank and file participation in the decision making processes (“democratization”); for the re-activation of the representative collective bodies (“control of and participation in the management”) in the institutions (party, communes and municipalities, enterprises, etc). Accordingly, the “Left” current is a hybrid mixture of a retiring Stalinism (not committed to political democracy) and a perspective Social-democracy (committed to the state’s predominance) on a basis of populism, i.e. of politically unelaborated class differences appearing for this reason functionally as coincidence of economic interests that structurally are opposites. The sources of inspiration of the “Left” are located in the Ideology and International Affairs Departments of CCP, in the Universities and in some Research Institutes in social, economic and political sciences. In a word, the motivators of the “Left” are theoreticians outside the hard core operational decision making mechanism of governance.


The text concludes vaguely that “What is needed in China is a political revolution.”. At first sight this revolution seems to be magnificent. But the objectives of this political revolution are very limited in scope: they do not envisage the establishment of the delegative council political system, neither the establishment of the class independence of the trade unions nor the establishment of the economic self-management of society but simply “The central demands will be for democratisation of the state and for workers’ control and management of industry.”. This is not the programme of a revolution, of any kind. This is a programme of endless reforms aiming to lessen the gap between the governing and the governed without changing the existing mutual hierarchical positioning of either.


To give a voice to the “Left” current inside the CCP is of course something important, first of all for the Chinese themselves. But to reproduce uncritically their analytical fallacies and political illusions is quite another.


The European Social-Democracy has failed to establish the “democratisation of the state and for workers’ control and management of industry” in the post-war II era even in relatively backward countries such as Portugal and Greece. Pablo had put forward exactly the same demands when the USSR was collapsing but without any impact. With the same slogans Chavez has led the working class movement in Venezuela into an impasse. With the same objectives, PASOK has completely destructed the working class movement in Greece and subsequently is implementing a full scale privatisation of the economy. Now, the “Left” tries to tell us exactly the same old story but in Chinese.


20. Socialism as an immediate class objective


Today, it is the time for socialism on a world wide scale and not the time for an illusionary –at least for the metropolitan socio-economic formations- version of state-capitalism modified in a somewhat more worker friendly fashion. It has been indicated that state-capitalism does not generate the taxes needed for the conservation of the welfare state in Europe and elsewhere.


The text asserts that “It is clear (from Critique of the Gotha Programme, 1875) that Marx conceived of society going through a long phase of evolution after the overthrow of capitalism before we arrive at socialism.”. These words and meaning are not, of course, of Marx but of Pablo, Grant and Woods.


Let us take a look at the authentic passage of Marx: “Between capitalist and communist society there lies the period of the revolutionary transformation of the one into the other. Corresponding to this is also a political transition period in which the state can be nothing but the revolutionary dictatorship of the proletariat.”[24]. There is no time duration indicated in the passage. So, the “long phase of evolution” is simply an invention of the text. Therefore, the text is again distorting theory and twisting common sense.


Lenin[25] approximates subjectively in May 1918, immediately after the victory of the October revolution, the time duration involved in the transition: “It has not occurred to them that state capitalism would be a step forward as compared with the present state of affairs in our Soviet Republic. If in approximately six months’ time state capitalism became established in our Republic, this would be a great success and a sure guarantee that within a year socialism will have gained a permanent firm hold and will have become invincible[26] in our country.”.


So, what in reality Lenin thinks about transition is  that in the case of an industrially and financially developed economy and country, e.g. Germany, socialism would be essentially an affair of only of eighteen months even in the 1920’s!


Today, socialism is possible and feasible in the metropolitan socio-economic formations immediately, tomorrow morning, in weeks and months, and not after centuries of supposed bloody class battles. Only the under-developed and the less-developed socio-economic formations need additional time in order to eliminate their existing development gap. Not the developed ones.


So, to be clear, the “theory of transition” that 4th International formulated in the post-war II, concerns exclusively the less-developed and the under-developed economies and societies.


However, even in the worse cases of under-development the best way to cover their global developmental gap is not to extend even further their transition time span, i.e. to add centuries to their social under-development, but to establish socialism in the developed socio-economic formations as quickly as possible.


What is socialism in the developed socio-economic formations the day after? This is the question to elaborate collectively in relation to the next day in Europe, North America, Japan and Australia and not to try to invent another new “transition” inside a “transition” which is another phase of a never ending transition from under-development to a more developed level and structure which the text and many others confusingly name as “transitional to socialism”.


21. From state-capitalism to socialism


The text assesses correctly that China is not socialist: “Nobody can seriously suggest that China is as yet even on the lower rungs of this stage of transition to socialism as Marx defined it.”.


How can socialism be established in China?


In order to become a post-state capitalist society, China has first to distribute equally at least the profits of the state-owned companies to all of its citizens and then to also distribute to them also their ownership in the form of capital joint-stock shares. 


In order to become socialist, i.e. irreversible to capitalism, China has to establish the delegative political system which incorporates the right to recall all the elected delegates and determines that each elected delegate represents in all the Institutions (Parliament, Central Bank, Board of Directors, Committee, Factory Committee, etc) the number of votes casted in his / her favor every single moment.


This is the post-stalinist and post-social-democratic socialism, based on the intertwinement of the economic and political civil rights in a socialized -and for this reason- inherently planned economy.  





Kostopoulos [20080403] L., Soviet bureaucracy: a new state based class or the working class commanding layer in the industrialization process and the associated social restructuring of an under-developed country? Critical evaluation of Elif Çağlı’s views on the class character of USSR.


Kostopoulos [20100124] L., The coming crisis in China and its global impact.


Lambropoulos [20100924] K., The ethno-linguistic and religion situation of China: a note.


Lambropoulos [20101010] K., The Stalinist dictatorship – part 3; The particular case of China.


Lambropoulos [20101105] K., The developmental performance of China: an appraisal, 1960 – 2007.



[1] Lambropoulos 20101105.

[2] Kostopoulos 20100124.

[4] Lambropoulos 20101105.

[5] "SCM Agreement": Agreement on Subsidies and Countervailing Measures.

[6] See, e.g., International Monetary Fund [February 2006] People’s Republic of China—Hong Kong Special Administrative Region: Selected Issues, IMF Country Report No. 06/51.

[8] PBC [2008] China: Financial stability report 2008, China Financial Publishing House.

[9] See: Associated Press, Hong Kong stock market plans yuan futures, widening role as offshore hub for China’s currency, Washington Post 20120420,

[10] Grant [1949] T., Against the Theory of State Capitalism, Reply to Comrade Cliff,

[11] Lenin [19221027-1105] V. I., Interview with Arthur Ransome, Manchester Guardian Correspondent, October 27 - November 5, 1922: Collected Works, 2nd English Edition, Volume 33, pages 400-409, Progress Publishers, Moscow, 1965.

[12] Italics in the original text.

[13] Lenin [1918V05] V.I., “Left-wing” childishness and the petty-bourgeois mentality, Collected Works, vol.27, p.323-354.

[14] Italics in the original text.

[15] Lenin [19170914] V. I., The impending catastrophe and how to combat it, Collected Works, 4th English Edition, Vol. 25, pp. 323-69, Progress Publishers, Moscow 1974.

[16] Italics in the original text.

[17] with the date of their constitution in parentheses.

[18] People's Daily June 28, 2010, translated by CT.

[20] Lenin [191811] V.I., “The proletarian revolution and the renegade Kautsky, Collected Works, vol.28, p.226-325: 296.

[21] Lenin [1921XI] V.I., The importance of gold now and after the complete victory of socialism, Progress Publishers, Collected Works, v.33:109-116.

[22] Hang Luo R. & Jiang C. [2005] Currency Convertibility, Cost of Capital Control and Capital Account Liberalization in China, Journal of Chinese Political Science, vol. 10, no. 1, April 2005.

[23] Arce [20090507] A., China takes steps towards full convertibility of the Yuan,

[24] Italics in the original text.

[25] Lenin [1918V05] V.I., “Left-wing” childishness and the petty-bourgeois mentality, Collected Works, vol.27, p.323-354.

[26] Lenin’s term “invincible” means today “irreversible”.

Why China is not a capitalist country

posted 18 Apr 2012, 04:43 by Admin uk   [ updated 18 Apr 2012, 11:22 ]

  By Mick Brooks

 This article is heavily based on previous writing and research by Heiko Khoo and Jonathan Clyne. I am, of course, solely responsible for the present work.


A new era

For the last three decades we have all been told a lie. The lie that working people have been sold is that capitalism is ‘the only game in town’. The lie appeared to gain traction from the collapse of the Stalinist economies, falsely described as socialist, after 1989. But the toxic effects of neoliberal ideology went further. It was argued that any attempt to regulate or control ‘free markets’ was bound to fail.

The working class, it was argued, had no defence against the power of capitalism. For instance part of the ideology of neoliberalism was the theory of globalisation. This argued that capital was footloose and fancy free, while workers were unable to move around the globe to improve their conditions. Any attempt to fight against an employer would immediately provoke an outflow of capital to a place where wages were lower, and would leave the workers who tried to fight back unemployed.

The consolation for this alleged complete victory of capital was supposed to be that, left to itself, capitalism was the most efficient system possible. It would deliver the goods to workers.

Now we see that capitalism, ‘free market’ capitalism, has failed utterly. The flood of financial deregulation we have seen over recent decades produced an orgy of corrupt speculation. This in turn led to a huge crash that left millions of workers jobless, millions homeless and millions more workers poorer than they had been before.

While capitalism sank into the mire, the ideology of neoliberalism became completely discredited. The same bourgeois politicians who had lectured us on the need not to interfere with the sacred workings of the free market hastened to hurl enormous sums of money, our money, at the rotten banks in order to bail them out. This was socialism for the rich.

China offers an alternative to the idea that neoliberalism is the only option available to humanity. It is for that reason that it is worth studying closely. The Chinese government intervenes extensively in the economy, and that has delivered outstanding results in terms of growth and rising living standards for most of its people. It shows that there are different ‘models’ from that of free market capitalism.

China is not a model in the sense of being a form of society we should or could try to emulate. It is an authoritarian society, no doubt about it. China remains a backward country compared with Britain or the USA.  Hundreds of millions of its people are still desperately poor by our standards, though 620 million have been lifted out of official poverty levels.

Obviously the Chinese way of doing things is not a form of society that we could import wholesale into the countries we live in even if we wanted to. But compared with the capitalist system we live under it is an undoubted economic success. China offers an alternative to neoliberal capitalism and a model to study for all those who are interested in improving their lot and changing society for the better. There are both positive and negative lessons we can learn from China’s example.

The alternative it opens up has been drawn attention to by Seamus Milne in the Guardian (China’s success challenges a failed economic consensus 18.01.12):

“It has been the slump in Europe, the US and Japan that has most dramatically underlined the yawning gap in performance between the world’s long-established economic powers and China. In the four years from 2007 to 2011 US national income increased by less than 0.6%...the EU shrank by 0.3% and Japan declined by 5.2%. In the same period, despite the decline in export markets in these economies, China grew by more than 42%.”

Problems of analysing the class or social nature of China

China is important politically, both on its own account, and as part of the world economic and political order. It is the most populous country on earth and, if the present remarkable rate of growth continues, will overtake the USA to have the biggest economy in terms of Gross Domestic Product (GDP) later this century. If we do not understand what China is, and how the Chinese economy and society is likely to behave, then we can’t understand the world we live in.

The country is mysterious and articles on China can be confusing and contradictory. There is much debate as to the validity of statistics relating to the country, Most of the writing about China, even when accurate, is superficial and impressionistic. The financial press, for instance, deals with house price bubbles and property speculation in Shanghai as if it were California. This is pure impressionism. Concepts appropriate to California are being imposed on events in China. We agree that property speculation exists in China. We do not believe that this ‘evidence’ can be used without more ado to characterise the whole country as capitalist.

This use of analogous reasoning without considering the social context is the same procedure that Marx criticised in earlier economic theory. For instance Torrens characterised a stone as capital (presumably because it was appropriated by a human being). Marx ridicules this (Capital Volume I, p.291):

“In the first stone which he [the savage] flings at the wild animal he pursues, in the first stick that he seizes to strike down the fruit which hangs above his reach, we see the appropriation of one article for the purpose of aiding in the acquisition of another, and thus discover the origin of capital.” (R. Torrens: “An Essay on the Production of Wealth,” &c., pp. 70-71.)

According to this ‘theory’, we have always lived under capitalism, from the stone age to the present.

This criticism of impressionism is also valid of many writers who regard themselves as Marxists. They simply assume that China is capitalist (or behaves like a capitalist society in any case) without ever specifically arguing the case. This kind of coverage doesn’t deal with the dynamics of the system. But that is precisely what Marxism sets out to do.

One example of the kind of writing we criticise here is that of David Harvey. Harvey is an important and influential Marxist theorist. He is a geographer, which adds an important dimension to his writing. He deals with the link between capital accumulation and urbanisation. His latest effort mentioning China is ‘The urban roots of financial crises’, an article in Socialist Register 2012 (see pp.20-5 for ‘The China story’). This develops themes from his book The enigma of capital, 2010.

One of Harvey’s key concepts is ‘accumulation by dispossession’. This appears to mean the same as primitive accumulation, a concept Marx used to explain the emergence of the preconditions for capitalist production, namely the piling up of money fortunes and the dispossession of the toiling population, forcing them to work for wage labour. Harvey correctly sees accumulation by dispossession as a continuous process under capitalism, not a once and for all period preceding the full flowering of the capitalist mode of production. He places more emphasis on this contemporary accumulation by dispossession than we would generally in the contemporary world. In the process Harvey downplays the exploitation of the working class as the key feature of capitalism today.

Harvey analyses China as being involved in a massive process of accumulation by dispossession. He perceives the peasantry as being dispossessed in preparation for their journey into the ranks of the migratory proletariat. Chinese urbanisation is seen as chaotic and unsustainable, and accompanied by massive displacement and alienation.

Harvey does not specifically characterise China as capitalist: he just assumes it. In his article he refers to the government bailout of the banks after a speculative house building bubble in the 1990s in Shanghai. He compares this with the 2008 bailout of the banks in the USA and other crisis-hit capitalist countries. He even compares the preceding Shanghai bubble with the Florida land boom of the 1920s.

Harvey’s writing on China is comparatively thinly researched. Whereas he normally engages with scholars of different opinions and shows a deep awareness of different points of view, in the case of China most of the footnotes in this latest piece refer only to newspaper reports or magazines, not to scholarly journals. This is all too typical of writing on China by outsiders.

What is socialism? Is China socialist?

What sort of society is China? Nobody in the West is arguing that China is socialist. Some members of the Chinese Communist Party (CCP) will argue that case. Other CCP members take a different view or use concepts such as ‘socialist market economy with Chinese characteristics’. The unfortunate fact is that the well informed insiders writing on China are usually pursuing their own political agendas through the ruling Party. The characterisation of China is all part of an argument within the ruling group. We can never accept people’s definition of themselves at face value in any case.

China is definitely not socialist according to Marx’s definition. It is clear (from Critique of the Gotha Programme, 1875) that Marx conceived of society going through a long phase of evolution after the overthrow of capitalism before we arrive at socialism:

“What we have to deal with here is a communist society, not as it has developed on its own foundations, but, on the contrary, just as it emerges from capitalist society; which is thus in every respect, economically, morally, and intellectually, still stamped with the birthmarks of the old society from whose womb it emerges.”

Marx goes on to speak of the continued existence of “bourgeois right” in this transitional phase.

Later we will see the full flowering of communism. (Marx and Engels speak interchangeably of socialism and communism. Lenin later clarified the terminology by referring to socialism as the ‘lower phase’ of communism.)

“In a higher phase of communist society, after the enslaving subordination of the individual to the division of labour, and therewith also the antithesis between mental and physical labour, has vanished; after labour has become not only a means of life but life's prime want; after the productive forces have also increased with the all-around development of the individual, and all the springs of co-operative wealth flow more abundantly -- only then can the narrow horizon of bourgeois right be crossed in its entirety and society inscribe on its banners: From each according to his ability, to each according to his needs!”

Nobody can seriously suggest that China is as yet even on the lower rungs of this stage of transition to socialism as Marx defined it.

Is China capitalist?

The case for:

·         Rich and poor exist

·         Exploitation is a fact for millions of workers

·         China can’t be socialist because it is ruled by a one party state.

The case against:

·          China has achieved higher growth rates over a sustained period than any other country in history

·          It shows a different dynamic of development

·          The regime has managed a unique response to mitigate the effects of the recent world crisis of capitalism on China.

We propose to argue that China is not capitalist. This is a minority view. Most analyses simply assume that China is capitalist, without really bothering to argue the case. One reason people argue that China is capitalist is that the working class there is oppressed by the ruling Communist Party and have no say in their own future. This is not in dispute. But just because we see that China can be a bad place for workers to live in is not an argument that the country is capitalist. If we were to rely entirely on emotional responses rather than scientific analysis we may as well describe modern China as a slave society or a new form of feudalism.

Another reason that many feel China is capitalist is this:

 There definitely exist some capitalist-type social relations there. As we have seen, it was Marx’s view that remnants of the old capitalist order would exist for a considerable period of time after a social revolution. The real question is, not that these relations continue to exist? It is, are these capitalist relations dominant?

Some of these views that China is a capitalist country are easy to rebut:

China has got capitalists, quite a lot of them. Some of them are extremely wealthy, even billionaires. This does not mean that capitalism is the dominant mode of production in China. That is the view we intend to refute.

There are millions of wretchedly poor people in China. Workers very often feel themselves to be miserably exploited and put upon. They frequently experience the ruling Communist Party as an alien, corrupt and repressive institution, not as ‘the party of the working class’. Millions of Chinese people are involved every year in forms of active protest against policies and decisions of the regime. None of this is in dispute. None of this makes China a capitalist country.

China is not a socialist country either. We are not arguing that it is a workers’ paradise. Whether or not China is a ‘nice place’ to live in and whether workers have any say in their country’s future has no bearing on a scientific characterisation of its class character, of the underlying forms of property in the means of production that exist there.

 We have to consider the economic ‘base’ of society (the mode of production) separately from the form of government that exists. As we discuss in greater detail later on, different modes of production (such as slavery and capitalism) have had their relations of production (or property relations) defended by very different forms of the state. Whether a country is ruled by democracy or a dictatorship gives no clue as to the property relations which that state defends.

These arguments, put briefly here, will be reprised at greater length in the course of this work.

Modes of production

We present a Marxist analysis of China. Marx put the definition of a mode of production at the centre stage of his theory of history. He outlined the core principles of his analysis in the Preface to A Contribution to the Critique of Political Economy:

“In the social production of their existence, men inevitably enter into definite relations, which are independent of their will, namely relations of production appropriate to a given stage in the development of their material forces of production. The totality of these relations of production constitutes the economic structure of society, the real foundation, on which arises a legal and political superstructure and to which correspond definite forms of social consciousness. The mode of production of material life conditions the general process of social, political and intellectual life.”

 Every mode of production has its own dynamics. Capitalism is governed by its own laws of motion. “The natural laws of the Asiatic, the ancient or the feudal mode of production were essentially different.” (Marx Engels Collected Works Vol. 34 p.236) Quite simply, different modes of production behave differently from one another. What are China’s dynamics?

Is China an example of the capitalist mode of production? As we find out, China has features in common with capitalism and others that are at odds with it.

China since the Revolution

The 1949 Revolution

By the 1930s the Chinese Communist Party (CCP) was completely rooted in the Stalinist tradition which had captured the Communist International by that time. Mao himself was a fairly uncritical admirer of Stalin, and the Soviet Union was widely seen by Chinese Communists as a model for the coming Chinese Revolution.

But the Chinese regime had its own features from the start. The Revolution, in its later stages, took the form of a war of armies (not just a guerrilla war) and not a classical workers’ revolution. Chiang Kai Shek’s supporters fled wholesale in 1949 after the Communist victory. Mao’s army had a basis of support, sometimes for more than twenty years before the Revolution among the peasantry, in the ‘red areas’. These were established after the defeat of the 1925-27 Revolution in the towns. This first Revolution had been led by the working class but failed because of catastrophic leadership errors imposed on the Chinese Communist Party by the Communist International. Confined to the vast Chinese countryside the Communists had built little models of the kind of state machine they intended to impose nationally after victory.

The 1949 Revolution overthrew capitalism and landlordism. The Chinese Revolution actually smashed the bourgeois state more thoroughly than the Russian Revolution. In Russia the revolutionaries were forced to incorporate Tsarist officers and civil servants into the state machine after the Revolution, because of the exigencies of civil war and invasion, and the prevailing backwardness of the country.

The other crucial difference with the Russian Revolution is that the Chinese Revolution was supported overwhelmingly by the peasantry. Armies are usually autocratic organisations by their very nature. The Red Army was no different, however enthusiastic many of the soldiers may have been in the cause for which they fought. It was essentially a peasant army.

The working class didn’t intervene in the Chinese Revolution as an independent revolutionary force after the first, failed Chinese Revolution of 1925-27. That means that the only class that could have implemented workers’ democracy and planned production was sidelined from the start. China was even more backward in 1949 than Russia had been in 1917. Unlike the Russian Revolution, which began as a classic workers’ revolution and degenerated on account of backwardness and isolation the Chinese regime was bureaucratically deformed on Stalinist lines from the outset. By Stalinism we mean a form of society with post-capitalist property relations but ruled by a bureaucracy. The workers and peasants overwhelmingly supported the Chinese Revolution. They had no say in its further evolution. That was up to Mao and the other leaders of the Communist Party.

 Without the 1949 Revolution, and the accompanying agrarian reform that broke the stranglehold of landlordism and unified the country, the present growth miracle would not have been possible. This is recognised by the Marxist writer David Harvey. He explains, “The astonishing economic performance and revolutionary transformation that has characterised China since its shift towards institutional and administrative reforms from the late 1970s onwards has rested solidly on the real achievements of the Maoist period.“ He goes on to praise, “The dramatic reductions in infant mortality and increases in life expectancy” that accompanied this period after the Revolution. (The enigma of capital, p.137)

It was generally recognised at the time, both on the right and the left,  that Mao’s China was a variant of as type of society that we characterise as Stalinist (though it was never strictly ‘a society in the image of Russia’). Capitalism and landlordism had been overthrown, but from the start there was no workers’ democracy. Very few people regarded Maoist China as capitalist.

Developments since 1978

The first steps in the transformation of China in what is supposed to be the direction of capitalism were taken in 1978. These were the leasing of land to individual peasant households and the establishment of Special Economic Zones (SEZs), where foreign capital was permitted to operate. The role of foreign investment will be discussed more fully later.

It should be emphasised that these ‘reforms’ closely followed the New Economic Policy established in 1921 in the Soviet Union, when peasants were permitted to sell their crops on the market, subject to a tax in kind payable to the state. In addition limited openings for foreign capital were made available in the USSR at the same time.

At the beginning of this ‘reform’ process, nobody thought the Chinese bureaucracy was setting a course for the restoration of capitalism.  This was particularly the case as China was seen as part of a ‘socialist’ bloc (though Mao had asserted his independence from the Russians) in which the Soviet Union was the world’s second superpower. Of course the intentions of the leadership, important as they are in the historical process, are not the fundamental determinant of the social nature of a country.

After 1978 the land was operated by families rather than communally, but remained the property of the villagers. Since 1978 communes (local administrative units) have carried out periodical redivisions of the land. Initially these changes provided a huge boost to peasant living standards and unleashed a revolution in agricultural productivity. Most peasants benefited at first, but opening up to the market inevitably meant opening up inequalities between different regions and between different layers of the peasantry.

Theorists in the CCP began to speak of a ‘planned commodity economy’ or of a ‘socialist market economy with Chinese characteristics’. Though these characterisations are vague, as we explain below the existence of a market and widespread private property in the means of production among peasants and small producers are normal features of a transitional economy, particularly in a backward country.

In 1992 Deng Xiaoping declared, “To get rich is glorious.” This is often taken to be the verbal embrace of a policy aimed at restoring capitalism. In fact it bears a striking resemblance to Bukharin’s exhortation to the peasantry during the period of the Soviet New Economic Policy in the 1920s, “Enrich yourselves.” Bukharin was not actually advocating a restoration of capitalism, but a greater reliance on market methods.

The iron rice bowl was an arrangement from the Mao era where workers in traditional state owned enterprises were provided with a whole range of social services at workplace level. Over the following decades the iron rice bowl came progressively under threat for many as the state sector hived off more and more activities and the workers in these subsidiaries lost these ‘privileges’.

 In the 1980s the special arrangements for multinationals in SEZs were progressively extended to the rest of the country. Workers in the foreign owned multinationals in the SEZs were treated from the outset as proletarians pure and simple and paid as little as possible accordingly. Core workers in state owned enterprises still retain the crèche, health care insurance, pensions and other facilities supplied by the employers. Provision of such services is not typical of capitalism, particularly in a relatively backward country.

The Township and Village Enterprises (TVEs) emerged as significant over this time. Some were publicly owned by the locality. Others were private firms. As we see below, who really owns the TVEs has been a puzzle and remains so.

The ‘reform’ process was temporarily put on hold after the Tienanmen events of May 1989, which appeared to threaten the basis of bureaucratic rule. It provoked a struggle between different wings of the ruling bureaucracy and encouraged those opposed to further opening up to the market. The Tienanmen events provided food for thought for the leadership, as it coincided with the beginning of the events which caused the collapse of ‘socialism’ in the Soviet Union and Eastern Europe.

Why did China survive as a Stalinist state, unlike Russia and the East European countries? Our reply is that, unlike in Russia which had clearly slowed down almost to a halt over the previous two decades, in China the productive forces were still developing and the living standards of the majority of workers and peasants grew by leaps and bounds.

As is well known the destruction of the Soviet Union and the ‘socialist bloc’ coincided with the restoration of capitalism in Eastern and Central Europe. This took place by means of wholesale privatisation of existing state owned enterprises. Usually the beneficiaries of this privatisation were members of the old Stalinist bureaucracy, who took over ownership of these firms for a song and became immensely wealthy oligarchs and private capitalist owners. The destruction of the planning mechanism, which provided the economic links between these enterprises, produced a devastating collapse in the economy and the living standards of the vast majority. In Russia, for instance, the collapse was more severe than that experienced by the USA in the Great Depression of 1929-33.

In China by contrast there was no widespread privatisation. Though the hyper-centralised planning mechanism was reined back over time and the number of targets reduced, most industry remained state owned. State Owned Enterprises (SOEs) often hived off operations for ‘efficiency’ reasons and were progressively allowed to produce more and more for the market. Nowadays most prices are set by the market, but key product prices remain state controlled.

These changes were implemented gradually over decades. Investment continues to be guided by the availability of funds from the state owned banks rather than the direct allocation of resources as part of a central plan. These banks offer virtually no funds to private companies. The difference in performance is clear. While Russia and Eastern Europe fell into a ravine, China soared ahead.

The positive record of Chinese development in removing 620 million people from poverty in the years after the Revolution, and in particular in the present growth spurt after the death of Mao, should be applauded and stressed. Should capitalism take the credit?

The Chinese economy

The state sector

The popular image presented in western media is that the State Owned Enterprises (SOEs) are the last remaining relics of Maoism in China, soon to die out. They are the remnants of a failed system – socialism. In fact 46 of the biggest companies in the world were Chinese and mainly state-owned, according to Fortune Global 500, 2010.

We use the data from the publication of the U.S.-China Economic and Security Review Commission (October 26, 2011) called  An analysis of state owned enterprises and state capitalism in China extensively as it strikes us as the most reliable, authoritative and up to date analysis of the Chinese economy available. It declares:

“It would be a mistake to write off the country’s SOEs as dying vestiges of China’s Maoist past or to minimise the current role of the state and the CCP in shaping economic outcomes in China and beyond.” (p.4)

The state owned firms are not just being kept artificially alive by the state banks, feeding them cheap credit.  In 2003 only 87 of top 500 SOEs made a loss. China’s 1,287 domestically listed companies, most of which are SOEs, reported an average return on assets of 6.2% for the first 9 months of 2003. (Fortune Global 500, 2007)

Declared profits are actually understated because SOEs have social responsibilities to their workers such as housing, education, health insurance, pensions and de facto unemployment benefits, and are overtaxed compared to private companies and Township and Village Enterprises (TVEs).

The SOEs completely dominate the capital intensive industries in the economy. It is difficult to see how Chinese capitalists will ever be able to compete with the resources of the state in these areas. Not even foreign multinationals, with all the resources they have at their command, are able to do so.

It is also important to look at what proportion of investments is channelled through the state sector, because investments are the driving force of the economy. In 1981 – 1989 the state was responsible for 78.6% of all investments. In 1990 – 1992 it rose to 81.2 %. For 1993 – 2001 it further soared to 86.7%. It then fell back slightly between 2002 and 2005 but remains higher than it had been in 1981. (Yasheng Huang: Capitalism with Chinese Characteristics, 2008)

These figures show not only that state the plays an absolutely decisive role in the economy, but also that state investments as a proportion of all investments have increased substantially since the 1980s. This confirms that China has not been moving towards capitalism in recent decades.

If and when the Chinese SOEs which own and control the commanding heights of the economy are privatised then we could call China a capitalist country. That is not the case now and there is no indication that it will happen.

The SOEs have changed significantly. Taking welfare benefits, housing, pensions and social security into account, the total wage bill for workers in the state sector is far higher than in any part of the private sector.

China’s state owned firms compete on the capitalist world market. How would a mobile phone company in any workers’ state in the world compete with firms in the USA, Japan and other capitalist countries if not on a capitalist basis on the world market? There is no separate socialist technique for a state owned firm like China Mobile to compete with firms in the USA or Japan.

 The law of value operates on the level of the world market.  Goods made in post-capitalist countries have to compete on price and quality with those made in capitalist lands. State companies inevitably compete in the world market ‘on a capitalist basis’, buying and selling on markets with the aim of increasing the wealth of the state sector, its technology, means of production, influence, market share and the productivity of labour. That is how a transitional economy shows in practice that it is catching up and overtaking capitalism.

State Ownership of the Banks

In China three quarters of all bank loans go to SOEs, and state owned banks own the overwhelming majority of the assets in the Chinese banking system. The state banks offer cheap credit to the state sector and hardly any to the private sector. Most capitalist companies have to raise money from outside the banking system.

In effect savings are transferred from the private sector via the banks to finance the investment and social obligations of the state sector. The loan of funds through the state owned banks, rather than the direct allocation of resources through the central planning mechanism, is the predominant way that the state plans the pace and direction of economic growth

A stock exchange was set up in Shanghai in 1990, and later in Shenzen. How does this affect the picture? Most of the companies quoted on these exchanges are state owned. Equity markets are used as a means of raising revenue by selling minority shares in SOEs to domestic and foreign investors. It should be explained that shares do not actually represent part ownership of the company in China. Rather they are just a way of sharing in the profits.

Shanghai is growing as a financial centre. But there are severe restrictions on dealings in the companies quoted on the exchanges. Foreigners cannot take their money in and out at will. China still has capital controls on its currency, which is as yet not fully convertible. For China to develop a city like Shanghai as a real global financial centre, the Renminbi must become convertible in order to function as a currency of world trade. At present that is a long way off.

The private shareholders in state owned firms don’t control or own the companies they invest in. Neither do these firms act in all respects as conventional capitalist firms. Investors just have to put up with it if the company prioritises welfare or state objectives rather than investors’ interests. State owned firms are not classical profit-maximising outfits. SOE managers treat bank loans as an automatic right not a commercial agreement. It remains the case that the state owns the banks and the Communist Party controls the banks and the SOEs.

The Communist Party uses the banks to ensure they serve the Plan. SOEs are allowed to accumulate unsustainable debts if it is regarded by the ruling Party as necessary. Managers bear no personal risk for borrowing. Banks determine lending on the advice of government departments. These are not the characteristics of capitalist banks or companies. Bank lending in China resembles the European concept of grant funding rather than ‘normal’ capitalist commercial operations.

Township and Village Enterprises

The township and village enterprises (TVEs) are normally industrial businesses owned by the township (composed of about 3,500 households) or the villages (about 200 households). The local government controls the enterprises.

The origins of TVEs are to be found during the Great Leap Forward, when the rural communes created enterprises to industrialise the countryside, in the 1970s agricultural mechanisation saw such enterprises re-emerge as repair shops, food processors, and sub-contractors to urban SOEs. They grew mightily in the 1980s during the ‘reform’ era. TVEs were public sector companies that plugged a market gap to provide goods or services to needs outside of the urban planned sector of the economy. Village and township officials mobilised resources on a localised basis to meet rural demand and create local jobs.

This collectively owned sector grew rapidly – in 1978 there were 1.5 million such enterprises employing 28 million people. By 1995 there were 22 million TVEs employing 128 million people. An estimated 800,000 TVEs had been privatised by 2002. This is a huge number, but the reader should bear in mind that a TVE of the average size employs six people. Ownership restructuring, as in SOEs, has been implemented with workers, managers, townships and collectives all owning stakes in these enterprises. This is not classical capitalist private ownership, nor classic privatisation as we know it under capitalism.

From the 1990s TVEs began to change, from being collective or township property used for the development of local communities; some were simply using the pretence of a collective legal status to gain preferential state benefits and loans, and for protection in case of a change in the political environment. Private entrepreneurs are not confident of the CCP’s dedication to protecting capitalists.

Some TVEs are fully private companies. There are no accurate up to date figures on the ownership of TVEs. Generally privatisation means a mixture of ownership in which the township, village, manager and workers all own shares.

Private domestic capital

Private business was effectively eliminated between 1957 and 1977.

After 1977 private firms were permitted to soak up unemployment, but these firms were informal and lived primarily from profiteering through trade, rather than production. Hardly any of these small businesses ever grew much bigger.

In the 1980s the private sector of the economy was restricted to individually owned enterprises, street vendors and very small-scale firms. These enterprises were limited to a maximum of 8 workers including the boss. From 1988 more than 8 employees were allowed, but to this day the average workforce is only 10.

Unlike in the former USSR and Eastern Europe the private sector did not emerge from the privatisation of the state sector of the economy. Rather the private sector emerged from foreign investment and new start-ups. Private funds were raised almost entirely from outside the banking system and private sector savings enter the coffers of the state banks. Members of the Communist Party and the state bureaucracy who became private capitalists are not dominant, even though their theft and acquisition of state assets puts them in command of many of the most lucrative sectors of the private sector economy. They remain numerically and politically weak, and live in fear that their wealth will be challenged as criminally acquired property.

The private sector is dominated by small sized enterprises. Only 5% of private enterprises employ more than 500 and only 2% more than 1,000 workers. Contrast this with the state sector where 80% of workers work in companies employing over 500 workers. The number of private companies rose from 90,000 in 1989 employing 1.4 million workers, to 3.6 million companies in 2004 employing 40 million workers.

74% of private companies originated as new start ups. Only 7% are privatised state owned companies, 8% are privatised rural collectives and 11% are privatised urban collectives. The average income of an entrepreneur is $6,600 US per year (2002 figures). This gives an idea of the small scale of the overwhelming majority of private sector enterprises in China. (OECD Economic Survey China Sept. 2005 p.83-95)

The independence of private companies is limited, as many are to a certain extent dependent on the state for supplies, distribution and even customers. In many private firms the state has a minority shareholding and takes seats on the boards of these companies. Unlike in the West, proxy voting is not permitted at shareholders’ meetings. This favours those that own many shares. In China, that is often the state.

In some areas the contribution of private companies can appear to be impressive. 70% of the world lighters are made by private Chinese companies in the city of Wenzhou. However, these lighters are produced by 3,000 small firms, some specialising in components, some in final assembly. Their specific weight in the Chinese economy does not amount to much. 90% of private companies employ less than eight people. Companies like that cannot compete for influence with the giant SOEs.

This much is clear: the key industries and banks, which constitute the backbone of the economy, are state owned. The commanding heights of the economy are in state hands. The relative number of workers in the public and private sectors is not decisive. If the small and medium sized enterprises were state owned – and the largest companies and banks were privately owned, and the banks lent almost exclusively to large private companies – it is quite clear that China would be a capitalist economy even if the majority of workers worked in state owned companies. But this is the opposite of that which exists in China.

Some critics of the view that China is not capitalist have been misled by the wholesale nationalisations that took place in Stalinist Russia and various client states. The snuffing out of small business, including sole proprietorships, is by no means necessary to secure the existence of a workers’ state, whether healthy or bureaucratised. We would expect a transitional economy in a backward country to have a substantial private sector, as is explained in the section on transition.

Recently the Cuban regime has privatised hairdressing. We have to ask: what were the conceivable advantages of nationalising it in the first place? What was the point of concentrating individuals armed with nothing more than clippers in a larger workplace? What were the scale economies? There were none.

The nationalisation of small business in Russia was a panic-stricken attempt by the bureaucracy to gain political control over the petty proprietors in the view that any survivals of private business represented a threat to Stalinist rule. Other countries dominated by the Soviet Union implemented the same system. This was economically unnecessary and counterproductive. So long as the commanding heights are in the hands of the workers’ state, small business will fill in the holes in the plan executed by big firms in the same way as it follows behind big business under capitalism.

Foreign capital

Foreign direct investment (FDI) is also a part of the private sector. Is that eating its way into the planned economy? Already in the early 1980s foreign capital began to arrive from Hong Kong, Taiwan, Macau and to a lesser extent from Malaysia, Indonesia and other parts of the Chinese diaspora.

This foreign capital has been used to build factories in China’s Special Economic Zones (SEZs). Companies in these zones enjoy tax incentives and greater independence. Many of them import components from abroad, put them together in China, and export them. The whole process provides very little positive input to the development of the rest of China. The technical level of production is not particularly high. Foreign capitalists come to the SEZ because labour is cheap and because the government builds an excellent infrastructure for them.

These capitalists are in China for what they can get out of it. They give as little as they can and take as much as possible. In practice they have a license to exploit at will. They employ mainly migrant labour fleeing from poverty in backward rural areas. Many of these migrants are not allowed or do not want to officially register as urban dwellers and therefore have very few rights.

The workers lead a semi-legal existence. They work long hours, and sleep in the factory or in barracks and are subject to all kinds of abuse and harassment by the employers. This is pure imperialist exploitation, with only a limited benefit for the country. If the workers are just assembling components made elsewhere, skills and technology are not transferred to China. The Taiwanese owned firm Foxconn, which employs hundreds of thousands of workers making components for computers and applications for Apple for sale in the advanced capitalist countries, is a classic example.

But investment by the Chinese diaspora in the SEZ since the early 1980s only tells part of the story of FDI in China. Those investments that the Chinese government considers of importance for the Chinese economy as a whole, and not only as a source of foreign currency and political prestige, are subject to much greater control.

Since the mid-1990s the vast majority of the world’s largest companies have established themselves in China, most as joint ventures with the Chinese state. However, despite all the optimism, a lot of foreign companies have encountered problems in China. The Chinese government regulates entry of FDI closely. Entry of foreign firms is often conditional on the achievement of industrial policy goals as laid out by the state. Foreign firms are most welcome only when these goals cannot be fulfilled by domestic firms. For instance the Chinese leadership has the power to insist on the transfer of technological know-how.

The entry of a foreign firm can be subject to numerous conditions, for example, such performance requirements as having to use local suppliers, often designated by the government, or locating in certain areas, or setting up the local operation as a joint venture. The international monopolies have to accept a rate of profit in China that is lower than anywhere else. They simply can’t afford not to have a stake in China – the world’s fastest growing market.

There is actually some evidence that foreign capital has been withdrawing from China in recent years. Firms have given up the battle for success in the Chinese market or found the conditions imposed upon them by the Chinese authorities too stringent.

Dominated by foreign capital?

Another central myth in the financial press and beyond is that China is a vast sweatshop dominated by foreign capital and oriented towards exports as the key to success. That myth needs to be taken on and disproved. Not only are domestic firms dominant in the economy, not foreign multinationals. Investment is the driving force of economic development, not exports.

There is a widespread misperception that the country is totally dependent on export earnings to explain its astonishing growth record. In effect China is being exploited by private capitalist firms from the advanced capitalist countries as a site to export to the rest of the world. If this were the case then China would be completely dependent upon the performance of rest of the world economy and would grind to a halt in the case of economic crisis. This has not happened.

There are two things wrong with the conventional picture. First economic growth is powered by Chinese firms, mainly publicly owned. Secondly investment in China is the driving force of economic take-off, not exports to the rest of the world. Though China is integrated into the international division of labour, the Great Recession has shown that the country is pursuing its own trajectory, not helplessly dependent upon events in the advanced capitalist countries.

Jonathan Anderson (in Is China export-led?) estimates net exports as being responsible for about 9% of Gross Domestic Product (GDP). The Chinese authorities themselves announce that investment has made up about 40% of national income in recent years. The Chinese Xinhua News Agency announced recently that, “Investment accounted for 92.3% of China's Gross Domestic Product (GDP) growth in 2009.” Anderson’s 2007 paper gave advance notice that China’s economic performance would not be totally dependent on that of the advanced capitalist countries.


Under capitalism the boom/slump cycle has been a global phenomenon. Ever since capitalism first became the dominant mode of production in the world, it has been accompanied by crisis of overaccumulation. These crises, which were already documented in the Communist Manifesto, can appear every periodically every ten years or so. They can be deep or mild, but they continuously reappear. They are essential to the functioning of capitalism. The world division of labour has meant that the periodic crisis of capitalism expresses itself as a world crisis. How has China been affected by the boom/slump cycle?

The Chinese economy was completely unaffected by the world recessions of 1991-1993 and 2001-2003. India, by contrast, showed steep declines in growth during the two world recessions. There is no doubt that China was hit by the Great Recession of 2007-9. This was a much more serious recession, and China was by then more integrated into the world economy. China affected because the Chinese economy is a significant part of the world economy and a major exporter to the capitalist world. This is not in dispute. How did the Chinese leadership respond?

The difference with the capitalist world is that the Chinese government launched a huge investment boom at home to compensate for the loss of export markets. The government took steps to manage the economy, with what was in effect a Keynesian stimulus. Capitalist countries couldn’t do this. They didn’t do in the Great Recession when it could have really saved their bacon. China’s growth rate fell from 14% in 2007 to 9% in 2009 and then bounced back. For the rest of the world, growth fell from 4% in 2007 to minus 2% in 2009.

Marxists have traditionally argued that a Keynesian boost, increasing government spending to maintain the level of economic activity in a slump, won’t work under capitalism. The experience of the Great Recession confirms indeed that Keynesian measures won’t work. Yet in China reflation did, after a brief pause, maintain the giddy rate of economic growth. This is surely more evidence that China is not capitalist.

Marxists have always argued that Keynesianism won’t work to get the system out of a slump. Why not? Because what capitalists need are profitable markets in order to maintain and expand output. Simply providing a market won’t do. Keynes argued that the level of output is determined by aggregate demand. The remedy is therefore boost demand and output will follow. He was proved wrong.

In China state owned firms were simply instructed to increase investment. In other words aggregate demand was boosted – and output followed suit. The SOEs were also supplied with the wherewithal, from the state owned banks, to carry out this investment. Private enterprise followed behind, filling in the gaps.


The bureaucracy is well aware that housing bubbles can and have emerged in the Chinese economy. The reason is that capitalism has not been completely superseded. In the first place housing in the market is not just a commodity, but can function as an appreciating asset. Whereas the rise in the price of a commodity under capitalism is likely to be met with an increase in supply and the formation of a new equilibrium price, the rising price of housing can provide a signal to speculators that prices are likely to increase further. This is how bubbles form.

This is particularly the case since private capitalists in China are starved of profitable opportunities in production, and may well rely on property speculation to augment their incomes. There is a sensible discussion of these problems in the China Daily: European Weekly edition 20-26.01.12 by Wu Jiangang (Housing bubbles: reasons and ways out). Briefly bubbles in the housing market are a problem of the continued existence of some of the laws of capitalism operating within China. The government has intervened in the housing market to puncture the bubble that threatened to get out of control and make housing unaffordable for the millions.


Forced collectivisation in the Soviet Union was disastrous. It produced a famine. The ‘experiment’ demonstrated that farming should continue to be mainly privately owned in a backward country for a protracted period after a revolution.

One of the largest parts of the private sector is agriculture. This consists of hundreds of millions of peasants who have tiny plots that they lease from the state. The state is their biggest customer and distributor. Agriculture is still important to the Chinese economy, accounting for 12% of GDP and providing 40% of all jobs. Productivity per unit of land is generally high, though labour productivity in agriculture is relatively low.

Since 1978 the peasants leased land and after 1984 the communes were broken up and peasants were allowed to sell their surplus on private markets. Productivity increased by leaps and bounds. It tripled between 1978 and 2002. Many peasants were no longer needed on the farm and migrated to the towns and cities to seek their fortune as workers.

Until the 1980s the state purchased all the grain and guaranteed distribution through rationing systems. Despite individual peasant production, the state still controls Chinese agriculture through its monopoly over distribution networks and other means. In the 1980s and early 1990s, open markets became more important as the government was no longer the sole purchaser. This policy was reversed in 1998. The government retains control over the distribution of grains, but allows other foodstuffs to be sold on the free market.

In 1998 the state tightened its control over agriculture. There was an increase in government intervention in grain production and marketing. Agriculture in China, whilst dominated by private family production units at the micro level, is dominated by state purchase and distribution at the macro level. The state also intervenes to support and subsidise farming. This ensures that China is able to feed itself, and that supplies of essential grains reach the entire national consumer market. Imports and exports of grain are determined by the state and implemented by its organizations. Thus, contrary to appearances, Chinese agriculture is dominated by the state.

The commanding heights of the economy

China is not moving in the direction of capitalism, despite a small increase in private ownership of the means of production. Appearances can deceive. If the facts are put in relationship to basic Marxist theory a different picture emerges.


The U.S.-China Economic and Security Review Commission poses the question: “How big is the state sector in China? How big is the private sector? Ironically, given the pronouncements on the vibrancy of China’s private sector, the truth is that nobody knows for sure.” (p.6)

One reason for this confusion is the mysterious ownership of the TVEs. Another has been the policy of the state sector, since 1992 in particular, of ‘letting the small firms go’ and concentrating on building the big SOEs as national champions on the world market.

To reduce wastage and costs, state enterprises separated their total operations into independent units. Each unit would be responsible for their own staff and profits. These entities generally remain half, or at least part owned by the parent company. The divesting of subsidiaries helplessly dependent on the performance of the big firms does not of course reduce the effective power of the state within the economy.

Finally there has been a deliberate proliferation of cross-holdings of shares in companies which has made it very difficult for researchers to work out who actually owns what.

The Commission quotes Jiwei Wang, ‘A comparison of shareholder identity and governance mechanisms in the monitoring of CEOs of listed companies in China.’ China Economic Review 21 (2010): 24–37: “To ensure state control, the government limits individual shares to less than one third of the total. In other words, the state still controls more than two‐thirds of most listed companies, either through the holding of state shares by {government agencies} and SOEs, or indirectly through legal‐person shares.” (p.14)

As for the private sector: “A common mistake is to assume that any entity that is not an SOE belongs to the private sector. As noted by one China expert, ‘Share‐holding SOEs are manifestly not private actors and assessments of the corporate sector that assume so are fatally flawed from the outset’ (State‐owned Enterprises in China: Testimony of Derek L Scissors 2011).” (ibid p.10)

The Review concludes: “As shown in the table below, which is based on the strict definition of the private sector applied in the CSY (China Statistical Yearbook), the private sector shares range from 11 to 30%. “ (p.22)  And: “The observable SOE sector under reasonable assumptions accounts for nearly 40% of China’s economy...“It is reasonable to conclude that by 2009 nearly half of China’s economic output could be attributable to either SOEs, SHEs (State Holding Enterprises) and other types of enterprises controlled by the SOEs indirectly. If the output of urban collective enterprises and the government‐run proportion of TVEs are considered, the broadly defined state sector likely surpasses 50%.” (p.25)

“A singular focus on calculating the true SOE share of GDP misses the forest for the trees...The Party and state continue to maintain significant control over state and non‐state sectors alike. The dynamics of this control, and its effectiveness, are more relevant for understanding China’s economy, and its impact on the U.S. economy, than is the output share of China’s SOEs.” (ibid.)

The total control of the state sector, in other words, is much wider and more complete than the bare ownership figures show. The Chinese state retains ownership and control of the commanding heights of the economy.

The U.S.-China Economic and Security Review Commission concludes:

“The state owned and controlled portion of the Chinese economy is large. Based on reasonable assumptions, it appears that the visible state sector – SOEs and entities directly controlled by SOEs, accounted for more than 40% of China’s non-agricultural GDP. If the contributions of indirectly controlled entities, urban collectives and public TVEs are considered, the share of GDP owned and controlled by the state is approximately 50%.” (ibid.)

This is a strange capitalist economy indeed!

Chinese social classes and politics

Politics and the capitalist class

The Chinese capitalist class emerged with the ‘reform’ era. Some came from setting up small enterprises. Others acquired their wealth from the hiving off of sections of large SOEs, or from the transformation of small to medium sized state, collective and village enterprises into private and semi-private firms.

The permission of the bureaucratic apparatus is generally the condition for the existence of viable private economic entities, nurtured and sustained through contracts, finance, and patronage. In this sense the new bourgeoisie can be said to emerge from within the bureaucratic system, but it is dependent upon it, fearful of it, and dominated by it.

Some of the new capitalists are very rich. There are more than 300,000 US dollar millionaires in China. The growth of the new rich class has been extraordinarily rapid.

 However their financial and numerical growth does not reflect itself in political strength. Most of those who became capitalists as a result of the privatisation processes hold Communist Party membership as a signal of loyalty and a shield of protection, providing connections to those with political influence and power.

Capitalists from the strictly private sector tend to run small enterprises. In order to expand operations they are dependent on establishing co-operation with government entities that have access to the state banking system. Generally joint ventures involving state and private organisations are required to facilitate this private sector growth. These private capitalists are often the product of direct intervention by the bureaucracy and as such are dependent on the arbitrary whims of this same bureaucracy to survive. Central government has delegated regulatory power over the marketisation process to local government.

One consequence has been that laws are often non-existent or not enforceable. Thus, entrepreneurs face constant risks of expropriation and discrimination since they cannot rely on the legal system to protect their private property.” (Goodman-The New Rich in China 2008 p.11)

Private property rights remain insecure, despite the passing of the Property Law in 2007, which is supposed to guaranteed the right to private property. This is shown by the career of Bo Xilai, Party Secretary in Chongqing. Deposed in early 2012, Bo was accused of arresting and torturing local billionaires in order to deprive them of their wealth. According to the Financial Times there were, “Brutal purges of wealthy businessmen accused of being gangsters and heavy spending on social services and state housing.” That wouldn’t happen in Britain or the USA! The prospect of faction fighting and of policy U turns within the ruling bureaucracy means that private capitalists remain in fear for their property. There is no evidence of stability for the capitalist class in present day China.

The Chinese Communist Party

The Chinese Communist Party (CCP) is the ruling party in China today, and the only legal party. It is divided into factions and different interest groups, as you expect an organisation of more than seventy million people to be. About one in 15 Chinese are Party members. At the top level the CCP is composed of the supreme rulers of the country. There is little doubt that, at a lower level, many members regard themselves as sincere and dedicated Communists.

The CCP is an important part of the ruling bureaucracy, but they are not one and the same thing. There are reckoned to be about 40 million bureaucrats running the country. There are more than 70 million members of the CCP. The Communist Party is therefore not simply an apparatus of bureaucrats. There are millions of rank and file members, though there is a substantial overlap between the CCP and the bureaucracy. The Chinese bureaucracy is not a conscious thinking being that plans ahead. It is an apparatus of power, which responds empirically to threats to its privileges.

Russia under Stalin also had a stratum of central planners and factory managers. They led a privileged existence. Many joined the Communist Party to hold on to and enhance their privileges, which became a central organ of bureaucratic rule rather than the mass working class party it had been in 1917 at the time of the Revolution.

Nobody seriously argues that these Russian factory managers actually owned the means of production till the collapse of the Soviet Union and the Eastern bloc. In the 1990s they took over ownership of the factories as part of the mass privatisations of industry in East and Central Europe. The change in the status of these former Stalinist managers into capitalist oligarchs as a result was plain to see.

The Chinese bureaucrats are not effectively owners of the state owned means of production. They are just managers with privileges as in Stalin’s Russia.

Is the CCP a Party of capitalists?

So the membership of the CCP is wider and not the same as that of the ruling bureaucracy, though there is an overlap. There is no doubt that the CCP is the body where vital decisions are made. Has it become a Party of capitalists?

How much influence do capitalists have on policy? Certainly millions of careerists aspire to join the Party in order to feather their nests. If China is supposed to be a capitalist country then we would expect capitalists to queue up to join and dominate the ruling Party and run the country in their interests.

For many years capitalists were forbidden from joining the CCP. In 2003 the CCP constitution was revised to allow ‘entrepreneurs’ (capitalists) back in. Does this represent a fundamental change in the nature of the Party and the Chinese state?

Since 2003 there has been an increase in the number of Party members who are defined as capitalists. What does this mean? It could mean that capitalism and capitalists are increasing their influence within the ruling Party. Equally it could mean that the CCP is striving to have more say in the affairs of private capitalist firms in order to knit them closer into the Plan. Some recent utterances from the Party leadership suggest that they encourage entrepreneurs to join the CCP for precisely that reason. Who is really influencing whom? In fact the situation demonstrates the contradiction between what remains a state dominated economy run by the Communist Party and the interests of private capitalists.

The overwhelming majority of CCP members who are entrepreneurs were CCP members before they became entrepreneurs. The Party provides them with networking potential. The capitalists inside the CCP undoubtedly use their connections inside the party to promote their economic interests but they also use their Party card as a protective shield against accusations of theft and corruption. They are widely disliked because they are seen as an alien influence. Their political influence is far more limited than their wealth might suggest.

The symbiosis between the management of the economy by the CCP and the private interests of capitalists obviously provides ample opportunities for corruption. Paradoxically corruption usually occurs when economic power cannot openly be reflected in the political decision making process. If the capitalist class were the ruling class, and they had direct control over ‘their’ state, they would not need to use corruption to get their way. They could just instruct the state to do their bidding. It is because they have money and influence, but the state has different objectives, that they need to bribe officials to get their way.

What are the Party’s relations with the capitalist class? Nobody denies that a class of private capitalists exists in China today. Though more individual capitalists are now Party members, it is not the case that the CCP is dominated by capitalists in its decision-making processes. Nor are the majority of Party members private capitalists.

We then encounter a more subtle argument, dealt with in more detail in the section on state capitalism. This is that the CCP is in charge of the planning mechanism of the Chinese economy. This is true. Secondly most of the managers of the big SOEs are Party members. This is also true. Are these people collectively the new capitalist class? It should be recognised that this is actually a separate argument. The ruling bureaucracy is supposed to have become a ‘state capitalist’ ruling class, collectively owning the nominally state owned commanding heights of the economy. This state capitalist ruling class is not the same as private capitalist owners in Western lands. A third argument which we deal with later is that the ruling bureaucracy is just nurturing a nascent and feeble capitalist class.

A separate stratum of supervisors of labour exists in capitalist countries as well as in China. But these managers of capitalist firms are not by and large the capitalist class. The actual owners of the means of production in Western capitalism are for the most part completely idle. They pay other people – managers who are not usually capitalists themselves, though they certainly know what side their bread is buttered on - to supervise the firms on their behalf.

The actual capitalists own the big companies by holding shares in them. Very often they don’t even know what shares they own and pay stockbrokers to select their shares for them.

There is some shareholding in Chinese firms (sometimes in complex interlocking relations). Private holdings in state owned firms are a minority of shares, and do not give ownership rights or effective control. At present a class of idle rentiers, passive owners of the means of production who live off dividends, has not yet come into existence in China.

Where do the members of the CCP actually come from? The People’s Daily, the official organ of the Communist Party, reports:

Currently, nearly three million of the party’s 73 million members come from non-public enterprises. ...Given that 70 million party members, are or were involved in or tied to, the non private sector it is quite clear that the interests of the Communist Party remain welded to ‘public assets’.” “(October 20, 2007 People’s Daily)

So who is the party membership actually made up of? According to the Peoples Daily Oct 8th 2007:

“By June 2007, the Party had 7.96 million, or 10.8%, workers; 23.1 million, or 31%, farmers, herdsmen and fishermen; 21.3 million, or 29%, cadres, managerial staff and technical specialists; 1.6 million, or 2.2%, army men and armed police; 1.95 million, or 2.6%, students; 13.77 million, or 18.8 %, retired people, and 3.64 million, or 5%, ‘others’”.

In membership terms this is not a Party of capitalists.

What about the people’s Liberation Army (PLA)? The Chinese army is not involved in business. It therefore has no material interest in the defence of capitalism or capitalists. In 1998 the PLA was compelled to strip itself of business interests. The reason was that the commercial operations of the PLA from 1978 to 1998 spread corruption and made officers vulnerable to pressure from capitalists who they were in contact with.

State capitalism?

The fact that a majority of industry in China remains state owned but that these firms produce for the market might suggest that we have an example of what some have called state capitalism. The Economist mooted China as an example of this socio-economic formation in a recent survey on State capitalism (21.01.12). In fact the Economist is concerned to contrast and compare the performance of a state directed form of capitalism with the free market capitalism it advocates, not with state ownership of an outright majority of industry.

In reality this pure free market capitalism advocated by the Economist has only existed and only ever will exist in the pages of economics textbooks. Capitalists are not ideologues. They are practical people and will always call on the aid of the state when it suits their purposes. All capitalist countries have come into existence through the extensive use of force by the state power and continue to rely on state intervention, state support and the state monopoly of effective violence for the survival and advancement of the capitalists and their system.

All the same, the Economist is on to something. The magazine recognises that the dominant neoliberal ideology of recent decades is under severe strain. The Great Recession has demonstrated the complete failure of free market capitalism to provide full employment and rising living standards for the vast majority of their population. Meanwhile China has been surging ahead.

The Economist presents China as an alternative model of capitalist development. It is forced to admit that this model has been very successful compared to their favoured free market version. “The crisis of liberal capitalism has been rendered more serious by the rise of a potent alternative: state capitalism, which tries to meld the powers of the state with the powers of capitalism.” The Economist eschews a definition of this state capitalism and in a sloppy fashion mixes China in with countries like Saudi Arabia where a single ruling family, and therefore the state, owns the oil wealth. The Economist in its usual doctrinaire manner, predict that state capitalism will crash and burn one day.

The fact that the Economist, the US-China Economic and Security Review Commission quoted earlier and others have all characterised China as state capitalist is important (Seamus Milne calls it a “hybrid”.). They all recognise that the country is different. It is not capitalist as we know it.

 Now what is the relation of the bureaucracy to the ruling class under ‘state capitalism’? There are three variants:

·          They are the ruling class. They collectively own the means of production.

·          The state intervenes in and administers the economy on behalf of the ruling class. The Economist is actually talking about state directed capitalism in this sense most of the time.

·          They are nurturing an infant ruling class.

To take the last point first: why should the state bureaucracy nurture a ruling class that is incapable of looking after its own interests? Why not strangle the child and take its place? What unique skills and powers does the infant possess, that makes it indispensable for the future?

As we have occasion to point out the Chinese bureaucracy are a pragmatic bunch. They are motivated not by high ideals but by their own interests. They don’t believe as a group in capitalism or socialism as an ideal (though some members may believe fervently in either one of these principles); they believe above all in themselves, and calculate every move according to their survival and benefit.

We examine the connections between the ruling Party and the owners of the means of production in more detail earlier. As we know the CCP has more than 70 million members and the state bureaucracy at all levels consists of about 40 million people. So the CCP has a rank and file who are not bureaucrats. Many do not even aspire to become bureaucrats, full time state functionaries. Some members of the Party, as we see in more detail in the section on the CCP, are capitalists. We show there that the CCP cannot simply be described as an instrument of the capitalist class, private owners of the means of production.

What is the relation between the political elite and the ruling class? Marxists have drawn a clear separation between the ruling class in any mode of production and the state functionaries. The ruling class is defined by its ownership of the means of production. But if a majority of industry is state owned, doesn’t that mean that government officials own the means of production? In the Chinese context doesn’t that mean the CCP, or at least some of its members, are the ruling class?

Briefly we uphold the Marxist position that, though individual state officials may be members of the ruling class, and that owners of the means of production may have all manner of connections and influence within the state machine, there is a clear functional separation between the ruling class and its state. For this reason Ted Grant upheld the position, in a polemic on the nature of the Stalinist economies after the Second World War, that state capitalism as a system where the means of production are owned by the state cannot exist.

Lenin actually used Germany in the First World War as an example of what he called ‘state capitalism’, in other words of state directed capitalism. In such a case some state ownership may well exist, but it is a buttress to the rule of the bourgeoisie.

Lenin also used the term ‘state capitalism’ in a conditional sense after the Revolution to describe one of the transitional economic forms that emerged in the backward conditions in Russia. In Left wing childishness and the petty bourgeois mentality written in 1918 he asks, “But what does the word ‘transition’ mean? Does it not mean, as applied to an economy, that the present system contains elements, particles, fragments of both capitalism and socialism? Everyone will admit that it does.”

He then enumerates the socio-economic structures in existence in Russia at the time.

1)       Patriarchal i.e. to a considerable extent natural peasant farming.

2)       Small commodity production (this includes most of those peasants who sell their grain).

3)       Private capitalism.

4)       State capitalism.

5)       Socialism.

As instances of state capitalism he gives the grain monopoly, state controlled entrepreneurs and traders and bourgeois co-operators. From these examples it is clear that Lenin did not conceive that state capitalism could ever become the dominant mode of production in Russia after the Revolution.

Lenin makes it very clear in his 1919 lecture on The state that the state is quite separate from the ruling class. It emerges in order to defend the interests of the ruling class and does its bidding:

“It has always been a certain apparatus which stood outside society and consisted of a group of people engaged solely, or almost solely, or mainly, in ruling. People are divided into the ruled, and into specialists in ruling, those who rise above society and are called rulers, statesmen. This apparatus, this group of people who rule others, always possesses certain means of coercion, of physical force...The methods of violence changed, but whenever there was a state there existed in every society a group of persons who ruled, who commanded, who dominated and who in order to maintain their power possessed an apparatus of physical coercion, an apparatus of violence, with those weapons which corresponded to the technical level of the given epoch. And by examining these general phenomena, by asking ourselves why no state existed when there were no classes, when there were no exploiters and exploited, and why it appeared when classes appeared—only in this way shall we find a definite answer to the question of what is the nature and significance of the state.

“The state is a machine for maintaining the rule of one class over another.

Bureaucratic collectivism

Others, also understandably repulsed by the reality of Stalinist rule, toyed with the notion of a new mode of production unknown to Marx called bureaucratic collectivism. The idea once again was that a new ruling class had emerged based on the collective ownership of state owned means of production. After the workers’ revolution had degenerated along Stalinist lines, a full-scale social counter-revolution had taken place. Here is not the place to fully re-examine these old debates.

If a new form of society such as bureaucratic collectivism emerges from a social counter-revolution against a workers’ state, then presumably the process of exploitation would be different from any form of society that had gone before, and the working class would be producing surplus product for the new ruling class. All class societies rest on a surplus exacted from the toilers, but only under capitalism does it take the form of surplus value. The laws of motion of this new society would be quite different from that under capitalism, and also from a transitional economy where important vestiges of the laws of capitalism still apply.

The central problem of ‘bureaucratic collectivism’ was that a whole mode of production is supposed to have inserted itself between capitalism and socialism. Those of us who believed we lived in the era of the decline of capitalism and the dawn of a new, higher form of society were sadly mistaken. How long this new bureaucratic collectivist mode of production would survive, and where its development would take humanity, was all a big mystery. Perhaps fortunately, the collapse of Stalinism has cut short such ruminations. To our knowledge nobody regards modern China as an example of bureaucratic collectivism.

What happens to the surplus?

Marx makes it clear in the Critique of the Gotha Programme that workers will not individually receive ‘the full fruits of their labour’ after the overthrow of capitalism. There will still be a surplus, though in principle this surplus would be at the disposal of society as a whole. Under Stalinism the surplus was disposed of by the bureaucracy, who no doubt passed themselves off as the representatives of society as a whole. The bureaucracy consumed a part of this surplus. Even under a healthy workers’ state administrators and planners, who are not directly productive, would have to be fed at the expense of the associated producers.

Capitalism is a mode of production with its own laws of motion. The system is founded on the extraction of surplus value from the working class. This is achieved by economic laws unique to capitalism analysed at length by Marx in Capital. All forms of class society are based on the extraction of a surplus from the exploited class, but only under capitalism does this exploitation take the form of the production of surplus value.

 Under Stalinism the sum of wages did not just represent the value of labour power. Housing and food were heavily subsidised. This was just the residue from the Revolution, where the working class received many essentials free, because it was seen as their right.  They were after all supposed to be the ruling class, and indeed they were at the outset in 1917. We know that it is still the case in Chinese state owned enterprises that the workers receive all manner of services and support that a capitalist boss would not feel obliged to provide as part of the value of labour power. This is a significant expense. According to the World Bank (The Chinese economy; fighting inflation, deepening reform) in 1996 more than half (52%) of total SOE labour costs consisted of housing, pensions, health care and education for their employees or their families. In foreign owned firms workers are of course treated as proletarians pure and simple.

In a workers’ state wages are no longer a subsistence grudgingly provided by employers in return for the extraction of surplus value, but as part of the provision of the means of life to all the citizens. During the transition to socialism workers will still receive much of their remuneration in the form of money, but that doesn’t mean that these wages are a subsistence representing the value of labour power. Likewise the laws of capitalism don’t apply fully and the workers are not producing surplus value as they were under capitalism, even though much of the surplus may appear in a monetary form. The laws of capitalism apply here only in part. As the transition to socialism proceeds, they will be progressively superseded.

Ted Grant expresses it thus in his 1949 pamphlet The Marxist theory of the state, alternatively called Against the theory of state capitalism:

“We only have to pose the problem: what was the surplus value produced when Russia was still a workers’ state – though even then with bureaucratic deformations? What was the process by means of which, from being surplus product before 1928, mysteriously became surplus value after 1928? What was this curious unexplained process? We would like to ask a question here: did the existence of capitalism outside Russia before 1928 have a similar effect on Russia’s economy? Of course it did. In fact a far greater effect because of the weakness of the Russian economy. Why was there not capitalism in Russia then?”

This same question can legitimately be addressed to all those who believe that China has moved from a post-capitalist order back to capitalism at some indeterminate time in the recent past. The social services provided to workers in core SOEs have not been scrapped. This transformation back to capitalism would be so dramatic that by comparison the change of water and wine into the body and blood of Jesus Christ would be a mere bagatelle. Why did nobody notice it at the time?

So when is this counter-revolution supposed to have taken place? This is particularly important since China is the most populous country in the world. It is supposed to have undergone a social counter-revolution. To be fair to Tony Cliff, whose theory of state capitalism Ted Grant was polemicising against in 1949, quite dramatic changes took place in Russia in 1928. The economy took on a whole new tempo with the launch of the first Five Year Plan and the forced collectivisation of agriculture amounted to the liquidation of the kulaks (rich peasants) as a class.

No such dramatic events took place during the supposed social transformation in China. A counter-revolution is a life-or-death issue for the ruling class that is being overturned. Yet this restoration of capitalism was a completely cold process, unnoticed by anyone on the globe at the time. Is this remotely plausible?

Those who advocate that China has undergone a counter-revolution have to persuade us that this took place in a cold manner. When? Various dates are suggested: China’s membership of the World Trade Organisation (WTO) in 2001; the lifting of the membership ban on capitalists joining the CCP in 2003; and the passing of the Property Law (guaranteeing the right of private property) in 2007. What all these suggestions have in common is an advanced legal and constitutional cretinism. Signing a piece of paper with the WTO is a social counter-revolution!

We have discussed the significance of the Property Law and the lifting of the ban on capitalists joining the Communist Party elsewhere. Consider the case of the WTO. Some people argue that the nation state is powerless against the forces of global capitalism. The ‘globalisation’ perspective is part of the ideology of neoliberalism that has failed utterly. In this view China is bowing down to the global forces of capitalism represented by the WTO.

In fact the nation state is far from powerless, as the case of China shows. If a state bows down before the god of free markets, that is not because it is powerless but because that is what it wants to do anyway. Globalisation is just an excuse.

Take the case of the coalition government in Britain in 2012. It is trying to persuade the British people, with tears in its eyes, that it is only imposing unprecedented austerity because it has to show ‘the bond markets’ that it is doing its best to cut the government budget deficit. In fact the Tory-dominated coalition has long yearned to dismantle the welfare state. The crisis is just the perfect alibi.

China will have rows with other nation states on trade and other issues within the WTO. If it were not a member of the WTO, it would be having those arguments outside. Nation states defend their interests against each other in a capitalist-dominated world. The idea that joining the WTO has caused or signalled a social counter-revolution in the interior of China is ridiculous.

The working class

At the time of the 1949 Revolution, more than 80% of the population of China worked in the countryside. It remains the case that nearly 40% of the workforce is engaged in farming. The effect of the 1978 reforms has produced a huge increase in rural productivity. This has enabled a smaller number of peasants to produce the food needed to feed the cities. It has also liberated 250 million peasants to move to the cities in an effort to improve their lives.

The Chinese working class now composes almost 400 million people and continues to grow by leaps and bounds. It is the biggest working class in the world. It was declared at the end of 2011 that the majority of the Chinese people now live in urban areas.

The traditional working class in state owned industry was protected by the iron rice bowl. All their basic needs were provided by the workplace. They almost never needed to leave the work compound. No such protection was afforded to many of this new layer of workers from the villages in private industry. Breakneck industrialisation did not produce a reserve army of unemployed. Instead it mopped up the ‘surplus’ workers produced by the rise in productivity in the countryside

Family registration laws mean that everybody is either recorded as living in the towns or in the country. The ex-peasants seeking work in the big towns are registered as village dwellers. Their legal status in the cities is a grey area, which of course makes them susceptible to super-exploitation. In effect China has evolved a classic two-tier labour force with hundreds of millions of migrant workers. This is not unique.

The Bantustans in apartheid South Africa were regarded by the racist state as most black workers’ homelands. In fact they were barren; it was impossible to make a living there. The workers therefore had to seek a living in white-controlled South Africa. They subjected themselves to the oppression of the pass laws and a semi-legal existence where they could be deported back to the ‘homeland’ from a job at any time.

The status of Chinese migrant workers is not a deliberate contrivance, as it was in South Africa. But it has some of the same consequences. In fact migrant workers are reluctant to give up their registration in their home village as they would be giving up their right to land. Many see their status as urban workers as temporary.

The actual conditions that workers confront are not solely determined by their legal status of course. The supply and demand for labour, and their own struggles, are also important. The demand for their labour has been ever-growing. But the workers’ semi-legal status effectively ties one hand behind their back in struggle. It makes it much easier to victimise natural leaders and ‘troublemakers’.

The lot of migrant workers in China, especially in foreign owned multinationals and private capitalist firms, is of a standard 12 hour day working for a small fraction of what American workers would be paid for doing the same job. Often they are housed in compounds provided by employers and spied on. A system of fines like those Marx described in Victorian England is often in operation. Health and safety laws frequently go by the board, withholding wages is quite common and bribery for overtime or coveted work positions is rife.

Official government figures record that there are hundreds of thousands of local revolts against bad working conditions and other problems every year. Over recent years there has been a wave of disputes, mainly over wages, in foreign owned factories such as car manufacturers. These have mainly been spontaneous, in the sense that they have not been led by the All China Federation of Trade Unions. In fact the ACFTU has drawn the ire of militants for an at best stand-offish attitude to the workers’ struggles. The ACFTU is the only legal trade union structure in China. It is carefully controlled by the CCP and is in effect part of the ruling establishment, much as Russian trade unions were in the Soviet Union.

Another significant wave of protest movements against the regime is against land seizures by business interests. Since local authorities do not have the power to raise enough local tax to pay for the upkeep of the locality, there is pressure on the communes to sell land to business and speculators. China is a densely populated country where hundreds of millions are still dependent on farming for their livelihood. The cumulative effect of this land grab is of course to expropriate the peasantry bit by bit – unless it is stopped. There was a particularly dramatic example of this process at the end of 2011 in Wukan. The corrupt headman decided to sell the villagers’ land to a speculator. There was a huge movement against this, and the peasants took charge of the village and declared new elections.

These battles are very important. They show a working class becoming conscious of its power and a peasantry prepared to stand up for their rights. If China continues to grow, then the workers and peasants can win important concessions. But as long as the system can deliver the goods in terms of living standards for the vast majority, these struggles are unlikely to culminate in a revolutionary conflict to overthrow the system of bureaucratic rule as a whole and install a regime of workers’ democracy

Problems of transition

Bourgeois revolution and proletarian revolution

The fundamental differences between post-capitalist societies such as China and capitalist countries flow in part from the way in which one mode of production replaces another – through the social revolution that brings that mode of production into being. Marx saw capitalism emerging from feudal society over a period of centuries. The classic bourgeois revolution only took place after the rising capitalist class had built up substantial economic power.

Marx saw patches of primordial capitalism in operation long before the appearance of manufacturing capitalism or agrarian capitalism. These primordial forms were merchant capital and money lending capital. These forms of capital existed for thousands of years in the pores of pre-capitalist modes of production. They were not necessarily revolutionary in the sense that they were antagonistic to and tended to overthrow the old order of things. Rather they were parasitic on the old order. The funds of money they had accumulated however proved useful when the conditions for capitalist production began to germinate.

Elements of capitalism, including wage labour, existed in manufacturing and farming as well as in trade for hundreds of years before the great bourgeois revolutions. These early capitalists learned to adapt to an order not based on the norms and principles of capitalism. Being well to do, they used their economic power to gain political influence within feudalism. Though we know of the great bourgeois thinkers and revolutionaries such as Cromwell and Robespierre, and of their contempt for pre-capitalist modes of thinking, their attitude was not typical of these early capitalists. The latter were deferential. They were accommodating to the old order while gradually building up economic and political power in a non-revolutionary period as the productive forces developed.

It is for this reason that, even when the bourgeois revolution failed utterly as it did in Germany in 1848, many of its tasks were carried out in a caricatured form by other social forces. Bismarck was a representative of the junker landlord class. He was well aware that wars could no longer be won by knights on horses with lances, but by cannon. This artillery in turn had to be forged in the finest and most modern (capitalist) iron foundries. Hence the representative of the junkers encouraged the development of capitalism. Bismarck unified Germany, not as Marx and Engels had hoped through a democratic pan-German revolution, but under the auspices of and in the interests of Hohenzollern Prussia.

Point for point the proletarian revolution is fundamentally different. The working class has no power but its numbers and its key role in capitalist society. The workers cannot gradually build up economic and political power within capitalist society. They cannot buy the bosses out one by one. Individual enterprises such as workers’ co-operatives cannot out-compete capitalist firms. They may have the benefit of a loyal working class consumer base, but the capitalist firm can invest much more because the capitalists have much more to invest.

The advantages of socialism come from an overall plan that knits the individual enterprises together, and concentrates all the resources and determination of society behind them as according to a single will. It mobilises all human and material resources to benefit the needs of society. It allocates investment to the optimum use. In doing so it makes the efforts of each producing unit much more useful to all of us than if it were operating alone, producing for a market and oblivious to the overall needs of society. That is how socialism overcomes the central weakness of capitalism – its unplanned nature and the fact that production only takes place if it is profitable.

The working class must therefore begin the socialist transformation of society with the taking over of the commanding heights of the economy and the expropriation of the big capitalists. This will inevitably entail a clash with the ultimate guarantor of capitalist property relations, the capitalist state.

The Chinese revolution, as we have seen, was not a classic workers’ revolution. It overthrew capitalism and landlordism. In that sense alone we call it a workers’ state, because it installed post-capitalist property relations like those that would exist after a healthy workers’ revolution. The proletariat took no independent leading role in the Revolution. But Chiang Kai Shek’s state was probably smashed more completely than the Bolsheviks achieved in Russia in 1917, as we have seen.

 Mao was not committed to the foundation of a workers’ state on taking power. The Stalinist ideology he held meant he advocated a form of popular front (called the ‘bloc of four classes’). One of these classes was the democratic national bourgeoisie. Unfortunately it didn’t exist. The real bourgeoisie fled with Chiang. Faced with a power vacuum Mao installed a variant of the regime existing in Soviet Russia.

The first task of the workers’ revolution is to expropriate the big capitalists in order to prepare the ground for a planned economy. So why did this not happen in the only example of a workers’ state that Marx lived to see – the Paris Commune? The first reason for this was the leadership. The Communards were catapulted unexpectedly into power. They were mainly Jacobins, inspired by bourgeois revolutionaries such as Robespierre. In other words they were not socialists at all. The Internationalists (supporters of the International Working Men’s Association led by Marx) in Paris were in fact Proudhonists. These were moderate and utopian socialists who wanted to build up ‘labour exchanges’ and so bypass the capitalist class rather than taking it on. They were also apolitical and reluctant to challenge the existing state power. That is why the autocrat Napoleon III tolerated their existence

The second reason was that the Commune only lasted 72 days, not enough time for them to learn from their mistakes. The third point, and the most important, is that it was precisely the reluctance of the Communards to challenge the power of big capital that led to their destruction. In particular they didn’t lay a finger on the Banque de France. The Banque, situated in the middle of Paris, actually mobilised the funds to rebuild a bourgeois army that would crush the Communards, after the defeat of Napoleon III by the Germans.

The Bolsheviks also came to power in October 1917 committed to a programme of nationalising the banks, and very little else. E.H. Carr reports, “Extensive nationalisation was thus no part of the initial Bolshevik programme.” (The Bolshevik revolution 1917-23 Volume 2 p. 87)They stuck to their programme for the first months of Soviet power. The nationalisation of industry was forced on them by the exigencies of civil war and the treachery of the Russian bourgeoisie. Carr says these nationalisations were ‘either spontaneous or punitive’ (ibid). In either case they were political responses to the conjuncture, not a rational unrolling of a plan of production.

Seizing the commanding heights of the economy and expropriating the big capitalists is a necessity for the maintenance of workers’ power. This is what happened in China, despite Mao’s programme.

The transition to socialism and communism

China has some of the features of capitalism, and some features which are incompatible with capitalism. It is an economy in suspended transition. Since it is ruled by a bureaucracy that guards its own interests, it will not make the transition to socialism without a political revolution to overthrow the bureaucracy led by the working class.

As we have seen Marx and Engels insisted that a long period of transition was required before a post-capitalist society could be regarded as socialist, let alone communist. They were assuming that socialist revolutions would occur first in the advanced capitalist countries. It was a truth generally recognised by Marxists that Russia in 1917 was not ready on its own for socialism. The only hope of the Russian revolutionaries was to hang on for a revolution in an advanced country such as Germany. What was true for Russia was still more the case for China in 1949.

A period of transition was needed for two reasons. The first was that the productive forces were too undeveloped to sustain a society of relative abundance. “This development of the productive an absolutely necessary practical premise because without it privation, want is merely made general, and with want the struggle for necessities would begin again, and all the old filthy business would necessarily be restored.” (German Ideology, p.49)

The second reason is that only the revolutionary working class has the maturity and experience to run a socialist society. Yet in Russia in 1917 and China in 1949 the working class was a tiny minority of the population. In China it did not even play a leading role in the overthrow of capitalism and landlordism.

In any case capitalism imposes a worldwide division of labour. Even an advanced capitalist country could experience shortages and hardships after a revolution, since it could be wrenched out of this global division of labour and forced into isolation. This is quite apart from the problems provided by the attentions of the global counter-revolution. This is not to say that the Russian and Chinese revolutionaries should have ‘held their horses’. Russia in 1917 and China in 1949 would not have grown readier for socialist revolution by refusing to seize power. Most likely both countries would have disintegrated under the pressures of counter-revolution, with massive destruction of the productive forces and of the power and numbers of the working class.

A transitional economy

Money and the market cannot be abolished. They are a product of the overarching reality of humanity’s stay on the planet so far – scarcity. As long as we have not yet arrived at a society of abundance, money will remain as a ration ticket. In a pure communist society people will work solely because they see the task as necessary and wish to gain the respect of their fellow human beings for performing it. We cannot guarantee that everybody (for instance career criminals conditioned by capitalism) will behave like that on the day after the socialist revolution. Any attempt to ‘abolish’ money and the market will only lead to a black market and corruption. Money and the market must become unnecessary and be superseded over time, probably over generations. Trotsky explains:

“The two problems, state and money, have a number of traits in common, for they both reduce themselves to the problem of problems: productivity of labour. State compulsion like money compulsion is an inheritance from class society... In a communist society, the state and money will disappear. Their gradual dying away ought consequently to begin under socialism... Money cannot be arbitrarily ‘abolished’, nor the state and the old family ‘liquidated.’ They have to exhaust their historic mission, evaporate, and fall away. The deathblow to money fetishism will be struck only upon that stage when the steady growth of social wealth has made us bipeds forget our miserly attitude toward every excess minute of labour, and our humiliating fear about the size of our ration. Having lost its ability to bring happiness or trample men in the dust, money will turn into mere bookkeeping receipts for the convenience of statisticians and for planning purposes. In the still more distant future, probably these receipts will not be needed. But we can leave this question entirely to posterity, who will be more intelligent than we are.” (Revolution betrayed p.65-6)

An isolated workers’ state, where capitalism has been overthrown, will have to trade with the rest of the world if it can, and will feel the acute pressures of the world market. In particular a backward country will find home produced commodities expensive compared with those available by way of international trade. Domestic capitalism too will provide a rival to goods produced in socially owned workplaces. In a backward country in particular the public sector could easily be overwhelmed by superior capitalist productivity, which is as much to be feared as the bullets, shells and bombs of the counter-revolution.

In Stalinist Russia in the 1930s during the period of the first Five Year Plans almost all industry was nationalised. Transactions between state enterprises were managed by bureaucratic fiat as part of the Plan. Monetary relations between firms were purely a bookkeeping operation, if they existed at all. All the same there remained a sort of labour market and consumer goods market. Workers by and large went out and looked for a job rather than being subject to direction by the state. They spent their (low) wages as they pleased on consumer goods, though there were ‘distortions’ to the operation of the market. (Basic foodstuffs were subsidised and housing and some other services were very cheap.)

The continued existence of market relations is particularly important in overwhelmingly agrarian countries. In both Russia and China the peasantry was by far the most numerous class in the country. In both revolutions peasant support was vital to their success. Politically and economically it was crucial to retain that support. But this can be difficult.

 A peasant is a petty bourgeois in the classic Marxist usage of the term. Whereas capitalists live by owning and wage workers by earning, peasants both work and own (usually a small amount of land). The peasantry as a whole is being driven down to the ranks of the propertyless by the pressure of the capitalist system. Meanwhile individual peasants may aspire to the status of a small (or even a big) capitalist.  Some may even achieve their dream. As petty proprietors and traders the petty bourgeoisie has no interest in the socialist reconstruction of society and can be expected to show a fierce opposition to their own expropriation. For the sake of the support of the peasantry alone, the market cannot simply be abolished.

So these pressures from market forces cannot be ignored altogether, though they must be countered. There is thus bound to be a conflict between the law of value, expressed above all in world market prices, and the planning principle, by which the socialist government aspires to build the basic building blocks of socialism by degrees from the bones of a backward capitalist economy.

The Soviet Union during the 1920s, between the system of War Communism forced upon them by the exigencies of civil war and invasion and Stalin’s insane policy of forced collectivisation, which produced a famine in the 1930s, adopted what was called the New Economic Policy (NEP). The government retained ownership of the ‘commanding heights of the economy’ in industry, but abandoned the system of grain requisitions and allowed the peasantry to sell their products on the market, subject to payment of a tax in kind to the state. Small business also flourished amidst the market relations that were dominant outside of transactions between state owned enterprises.

Stalin’s ultra left turn at the end of the 1920s was not a product of economic calculation but of political panic. The bureaucracy feared the rising economic power of the kulaks and so throttled them as a class. In doing so they expropriated almost all small business, and produced a famine. This proved to be a blind alley.

Despite the tremendous achievements in fighting off the Nazis and rebuilding the economy after the Second World War, in the end this form of Stalinist economy could not compete with capitalist powers such as the USA.  After all Western Europe and North America were already much more advanced than Russia before the 1917 Revolution. These countries did not suffer the same extent of War damage from Hitler as the Soviet Union. The Eastern and Central European ‘socialist bloc’ collapsed after 1989 because they could not compete with capitalism as a system.

Stalinist planning was, like the compulsive nationalisation of almost all business, a caricature of the socialist ideal of an economy where production is for social use and every sinew is used in harmonious output to achieve the ends democratically decided upon. Stalin’s first Five year Plan was actually a shambles. Perceptive commentators like Moshe Lewin have written of, “The disappearance of planning in the plan.”

Trotsky had the same opinion:

“If a universal mind existed, of the kind that projected itself into the scientific fancy of Laplace – a mind that could register simultaneously all the processes of nature and society, that could measure the dynamics of their motion, that could forecast the results of their inter-reactions – such a mind, of course, could a priori draw up a faultless and exhaustive economic plan, beginning with the number of acres of wheat down to the last button for a vest. The bureaucracy often imagines that just such a mind is at its disposal; that is why it so easily frees itself from the control of the market and of Soviet democracy. But, in reality, the bureaucracy errs frightfully in its estimate of its spiritual resources. In its projections it is necessarily obliged, in actual performance, to depend upon the proportions (and with equal justice one may say the disproportions) it has inherited from capitalist Russia, upon the data of the economic structure of contemporary capitalist nations, and finally upon the experience of successes and mistakes of the Soviet economy itself. But even the most correct combination of all these elements will allow only a most imperfect framework of a plan, not more.” (Soviet economy in danger, 1932, p.113)

He saw three conditions as necessary for real planning. “(1) special state departments, that is, the hierarchical system of plan commissions, in the centre and locally; (2) trade, as a system of market regulation; (3) Soviet democracy, as a system for the living regulation by the masses of the structure of the economy.” (ibid.)

Trotsky later warned that a plan could only be a working hypothesis:

“Administrative planning has sufficiently revealed its power – but therewith also the limits of its power. An a priori economic plan – above all in a backward country with 170 million population, and a profound contradiction between city and country – is not a fixed gospel, but a rough working hypothesis which must be verified and reconstructed in the process of its fulfillment. We might indeed lay down a rule: the more ‘accurately’ an administrative task is fulfilled, the worse is the economic leadership. For the regulation and application of plans two levers are needed: the political lever, in the form of a real participation in leadership of the interested masses themselves, a thing which is unthinkable without Soviet democracy; and a financial lever, in the form of a real testing out of a priori calculations with the help of a universal equivalent, a thing that is unthinkable without a stable money system.”(Revolution betrayed pp.66-7)

China avoided the fate of East and Central Europe. For various reasons, some being the backwardness and the sheer size of the country and the complexity of the task, China was never subject to the sheer number of plan targets and the obsessive micro-management that characterised European variants of Stalinism. Given the chaos behind the facade of planning revealed by insider accounts like Rakovsky’s 1930 Five year plan in crisis it would be correct to call these countries instances of command economies rather than instances of socialist planning.

 The main reason for China’s survival and success though was because, starting from a lower level than East and Central Europe, it continued to develop the productive forces. China moved progressively further away from an economic model based on Stalin’s Russia after 1978 and embraced many of the principles embodied in the New Economic Policy of the 1920s.

The NEP poses some similarities to the evolution of the Chinese economy since 1978, though there are of course huge differences. For instance we saw earlier that the banks themselves allocate resources to the SOEs rather than the central planning bureau doing so, as was the case in China earlier. There has also been an issue of shares in state owned firms. Private owners of these shares have no means of privatising the firms they hold shares in. They are just being tapped by the state sector for funds, and in return receive a share of the profits. The planning mechanisms are quite different from those of Russia in the 1920s, as we would expect

How would a transitional economy work? There are tremendous tensions and threats, including the ever-present danger of counter-revolution from without and alien class forces within. Political and economic considerations were thus inextricably fused. The practical conditions for the possibility of a successful transition towards socialism were laid out in the Platform of the Opposition, 1927. The programme however could only have come to fruition with an international extension of the revolution, which the Oppositionists hoped and believed would refresh the prospects for workers’ democracy in Russia. In fact the Soviet state was already under bureaucratic rule and, without an international extension of the Revolution, the prospects for Russia to make the transition to socialism were non-existent.

The theoretical outlines of the problems of transition were laid down in Preobrazhensky’s book The new economics, written in 1926 during the period of NEP. Preobrazhensky may be regarded as the ‘economist’ of the Left Opposition. The state planners could not just grab the agricultural products they wanted from the peasantry for the obvious reason that the latter would just refuse to plant. Moreover, since Russia like China was an overwhelmingly agrarian country, the Soviet government had to win the support however grudging of the peasantry. So how would the state acquire the crops they needed without coercion? They would have to trade with the peasants. How would they use the framework of a market economy (Preobrazhensky sometimes called it a commodity-socialist economy) to negate the outcomes of a market economy?

Preobrazhensky’s most important contribution to the theoretical underpinning of the Platform of the Opposition was the conflict between the law of value (the law of motion of capitalism) and what he called the law of primitive socialist accumulation. Trotsky agreed that this was the correct way to look at the problems of transition. “The analysis of our economy from the point of view of the interaction (both conflicting and harmonising) between the law of value and the law of socialist accumulation is in principle an extremely fruitful approach – more accurately, the only correct one.” (Challenge of the Left Opposition 1926-27, p.57)

The law of primitive socialist accumulation was an analogy with Marx’s process of primitive capitalist accumulation, by which he meant the preparing of the conditions for capitalist production. Primitive accumulation was the accumulation of money fortunes by the future capitalist class and the dispossession of producers to create a proletariat. These processes developed within the feudal mode of production and served to dissolve the old order. The workers’ state was to progressively wrest the initiative from the remaining forces of capitalism and build up the state owned sector at the expense of market forces, but without abolishing the market.

Trade between the state owned large scale industrial sector and small peasant production is an example of “non-equivalent exchange”. Preobrazhensky pointed out that this already takes place under capitalism. This non-equivalent exchange under commodity-socialist economy would represent a transfer of a part of the surplus generated in the private sphere to the public sector.

This is not just a matter of a rapacious grab. Preobrazhensky emphasised the dynamics of the process that, “The task of the socialist state consists here not in taking from the petty bourgeois producers less than capitalism took, but in taking more from the still larger incomes which will be secured to the petty producer by the rationalisation of the whole economy, including petty production, on the basis of industrialising the country and intensifying agriculture.” (New economics p.89)

The author gave as examples of primitive socialist accumulation railway charges imposed by state owned railways upon private producers; preferential loan treatment of state owned firms by the publicly owned banks (exactly as happens in China); taxes on profits; procurement prices for farm goods; and the state monopoly of foreign trade.

In the transitional economy as theorised by the Opposition in the 1920s the state would act as the universal buyer of farm products. It would manipulate the relative prices of commodities such as wheat and flax so as to give the peasants the incentive to produce the right quantities of these crops in order to fit in with the overall plan.

The state also imposed a state monopoly of foreign trade. Left to themselves some peasants (kulaks) were getting rich and would be inclined to buy motor cars, perfumes and other luxuries from abroad. In fact the government refused to import such fripperies, prioritising the purchase of capital goods such as machine tools. The monopoly of foreign trade thus acted as a sort of limit upon the spending power of wealthy peasants.

The idea of the state monopoly of foreign trade was to build up state owned industry so as to supply the needs of the peasantry as a whole cheaper over time, rather than allowing cheap foreign goods to destroy fragile domestic industry here and now. In the end the NEP was destroyed by Stalin, who feared the political power of the kulaks, and launched the policy of collectivisation of agricultural land to destroy them as a class. This act set back farm productivity for decades.

China and transitional economics

How does China fit in with these general laws of a transitional economy? China is open to the world economy. It is not autarchic, as the Eastern and Central European countries were to a much greater degree. (They mainly traded with each other.) There has been no bull-headed intention to disregard the laws of capitalism, which is as pointless and impossible as ‘disregarding’ the law of gravity.

China has been subject to the laws of world capitalism, but it has not capitulated to them. The Chinese government has achieved much more favourable outcomes for the country and its people by recognising that the pressures of capitalism are alien pressures. One example of such a policy has been discussed previously. The regime countered the dangers of a downturn caused by the collapse in exports as a result of the Great Recession by decreeing a shift of economic resources towards a corresponding increase in domestic investment. This is a clear instance that China is not just ruled by the laws of capitalism.

The degeneration of the Russian Revolution

The obstacle to a transition to socialism was that by the 1920s the Soviet state (as in China) was already in the hands of a bureaucracy, headed by Stalin.  A transition was blocked by the bureaucratic degeneration of the Revolution. The bureaucracy would have to be overthrown first.

Trotsky reminded us (in The Revolution Betrayed) that where there is want there will be a queue for bread. The queue will be supervised by a gendarme who will, of course, ensure that he at least is well fed. Bureaucratic rule arose after the Revolution in consequence of the backwardness and illiteracy of the country, and bit by bit infected the ruling Communist Party.

The state began to represent the interests of the bureaucracy, not that of the working class. The workers had been politically expropriated. The only gains remaining from the October revolution was the overthrow of capitalist property relations. It is in this sense that Trotsky referred to the Soviet Union under Stalin as a bureaucratically degenerated (or deformed) workers’ state. It was a workers’ state (and the workers were thus the ruling class) only in the sense that the means of production were no longer in the hands of the capitalist class.

In the Critique of the Gotha Programme Marx had already mentioned that the toilers in a post-capitalist society would continue to produce a surplus over and above their own needs, as is the case in a class society such as capitalism. If a bureaucracy rules rather than the working class directly, as in China and as formerly was the case in Stalinist Russia, then the working class has no voice in the disposal of that surplus.

The process, whereby the ruling class loses all control over the state that is supposed to protect its interests, is by no means confined to post-capitalist societies. Marx in his writings in the wake of the failed revolutions of 1848 identified the phenomenon of Bonapartism. Napoleon III, like his uncle before him, ruled France after 1851 as a dictator in his own interests.  The capitalist class were not consulted over decisions of state.

All the same Marxists characterise this as a bourgeois regime. In what sense? In one narrow sense alone, that Bonaparte and his nephew both defended forms of society in which capitalist production relations and property relations dominated.  Trotsky often called Stalinist Russia a form of proletarian Bonapartism. The working class were both the ruling class (in the narrow sense that they had overthrown capitalism) and a class oppressed by the Stalinist bureaucracy.

Contemporaries of the Bonapartes in the nineteenth century recognised this political phenomenon from history. They called it Caesarism. Julius Caesar became dictator of Rome. The governing Roman Senate of slaveholders lost all political power. Their wealth and economic power was however defended very ably by Caesar, in a situation where the Roman Republic was being torn apart. This is an instance where society was ruled by a state which defended the slave mode of production, but in which the ruling class was politically rendered voiceless.

From degeneration to counter-revolution

The countries in the Soviet bloc saw their productive potential stagnate and slip into crisis by the 1980s. By contrast growth under Mao was generally good, despite two manmade catastrophes (the Great Leap Forward and the Cultural Revolution). According to Peter Nolan between 1960 and 1981, “Official World Bank data show China’s have been 5% per annum, compared to 1.4% for low income countries, excluding India and China, and 1.4% in India, in many ways the most relevant comparator country.” (China’s rise, Russia’s fall, p.47)

Sections of the bureaucracy in all Stalinist countries aspire to own the means of production they manage. There exists a nomenklatura by which the ruling bureaucracy tries to pass on its privileges to its children. But in Eastern and Central Europe (ECE) it was mainly the managers directly turning themselves in to owners through privatisation frauds that marked the return to capitalism. This has not happened on a large scale in China.

The counter-revolution in ECE and the restoration of capitalism was accompanied by an economic collapse of catastrophic proportions. Russia suffered a bigger fall in output than at any time since the invasion of the Mongols, who left behind them pyramids of skulls. This collapse is the form taken by the happy rebirth of capitalism in the former Stalinist states. It all goes to prove the Marxist contention that capitalism has become a fetter on production, in heartbreaking human terms.

The nature of the epoch

Can capitalism develop the productive forces?

As we have seen, the progressive role of a mode of production is that for a time it develops the productive forces. The productive forces have developed faster than anywhere else on earth in China over the last 30 years. Is this because China is now capitalist? If so, that is a tremendous argument for capitalism.

Just because the productive forces are developing in China doesn’t mean that the working class won’t fight to defend their interests. The Chinese workers and peasants are doing this even as we write. But, if the Chinese regime is still relatively progressive, it is unlikely to be overthrown by workers’ revolution.   If it is still developing the productive forces then it can afford to improve the living standards of the mass of toilers, as it has already done by liberating hundreds of millions of Chinese from dire poverty.    

Marxists regard capitalist property relations as a fetter on the development of the productive forces. That doesn’t mean that we argue that capitalist countries won’t grow at all in the future. In addition it is always the case that some capitalist countries will develop faster than others, as the law of combined and uneven development foretells. The development of the productive forces is not reducible to the question ‘can the economy grow?’

The traditional view held by socialists is that capitalism cannot develop the productive forces as fast and harmoniously in the interests of society as socialism will. That is why we are fighting for socialism. That is the nub of our case for changing society.

In his Preface to A Contribution to the Critique of Political Economy Marx goes on to explain how each successive mode of production at first develops the productive forces compared with the form of society it has superseded. Then the relations of production become a fetter on further development:

“At a certain stage of development, the material productive forces of society come into conflict with the existing relations of production or – this merely expresses the same thing in legal terms – with the property relations within the framework of which they have operated hitherto. From forms of development of the productive forces these relations turn into their fetters. Then begins an era of social revolution. The changes in the economic foundation lead sooner or later to the transformation of the whole immense superstructure.

He goes on. “No social order is ever destroyed before all the productive forces for which it is sufficient have been developed, and new superior relations of production never replace older ones before the material conditions for their existence have matured within the framework of the old society.

We have to assume that those who advocate that China is capitalist are also arguing that capitalism has acquired a new lease of life. Hitherto socialists have believed that they live in a society where capitalist production relations have become fetters on the forces of production. That provides the objective conditions for social revolution. Now we are told we are mistaken. Capitalism has quite possibly only just begun on a whole course of renewed development of the productive forces. Who knows what other countries will be swept up by this process, and for how long? Who knows where it will all end up?

According to this narrative it gets worse for us socialists. China is forging ahead because it is capitalist. The miserable husk of the old Stalinist order that held the country back for so long is being progressively discarded. Not only is capitalism the (indefinite) future for humanity. The Chinese Revolution, which inspired us as a step forward in human emancipation, has proved to be a blind alley.

Those of us who believed that the social ownership of the principal means of production was a “practical recognition of the social nature of the modern forces of production” (Engels-Anti-Duhring p.384), recognition of the objective socialisation of the production process under capitalism, were wrong. Marx was wrong. We who imagined that the Revolution in China was a partial step towards a transition to a higher form of society were profoundly mistaken. Instead it represented a lower form of society, a mere launching pad for capitalism.

If other countries can develop as fast as China because they are also capitalist, then a change of society in the direction of socialism is ruled out. If the world can develop a new momentum of growth then capitalism remains a progressive system because it is developing the productive forces. That should pose a serious question to socialists – are we wasting our time?

We have to say; this is not the picture of success that world capitalism presents to the workers of the world at the present time. Despite the isolated patches of growth the overall scene is one of crisis and apparently never-ending austerity and gloom. It is therefore of general significance that we settle the question as to whether China is capitalist. If it is, China is a capitalist success story. How many other successful capitalist countries may follow her path?

 Our argument is that China has grown faster over the past thirty-odd years because it is not capitalist. We do not know how fast or in what direction the Chinese economy will grow in the future. This work does not set out to foretell the future. Its purpose is much more modest – to analyse the social and class nature of China at present from its history in the recent past. Our conclusion is that China has shown a completely different dynamic from capitalism. China is a post-capitalist society. Its economic success shows that capitalism is a fetter upon the productive forces and that Marx therefore was right when he described capitalism as a barrier to humanity’s forward march.

The role of the state

The ideology of neoliberalism avers that government is best when it governs least. As Ronald Reagan declared when he took office, “Government is not the solution; it is the problem.” This is a reassertion of the traditional liberal view of the state. The rising capitalist class developed this ideology as a weapon against the interfering tendencies of the pre-capitalist state against private capital prior to the bourgeois revolution.

The ideologists of the rising capitalist class set their faces against the feudal regimes and absolutist monarchs of Europe. Absolutist monarchs were another example of what Marxists call Bonapartism, for they gained their independence and power from balancing between the rising capitalist class and the old feudal order. They intervened extensively in the economy, taxing and spending at will.

The ideological representatives of capitalism in contrast preached freedom, by which they meant above all freedom for capitalists to do what they wanted with their money. They argued that the state should just defend private property and not interfere in the economy, as the monarchs they opposed did. Their ideal was the ‘nightwatchman state’.

Though neoliberalism returned to the old watchwords of the dawn of capitalism, and abandoned interventionist theories such as Keynesianism, the Great Recession saw the total discrediting of this world outlook. ‘Free market’ capitalism careered to ruin, and the state responded by massive and heavy-handed interventions to bail out the rich at the expense of the rest of us. Neoliberalism has proved to be a catastrophe and a farce.

This turnaround drew attention to the fact that the extent of state intervention in the economy has always been contested terrain under capitalism. A good case can actually be made out that the most successful economies under capitalism are those where the state is most interventionist. Just as hypocrisy is the homage that vice plays to virtue, so ‘state-isation’ is the homage capitalism pays to socialism.

The nightwatchman state was only ever an ideal, not the reality of capitalist class rule. The capitalists are pragmatic, and will go crying to the state to intervene whenever it is to their advantage. Violence, including state violence, has been the midwife of the birth of capitalism. Modern capitalism provides many examples of extensive state intervention in the economy.

The state and capitalist development

An extreme instance of the intertwinement of the state with the economy is provided by what is called the ‘developmental state’. The point about this is that the state intervenes systematically in the economy in order to correct the failings of free markets. A good example of this is the Republic of Korea (South Korea). Korea’s economic miracle is usually dated from about 1960. The Korean government dragged up the economy by its bootstraps, totally ignoring the advice of orthodox economists in the process.

In fact important developments before that time laid the basis for the progress since then. The Korean peninsula was the site of a vicious war between North and South in the 1950s. Both countries were used as proxies in the great power struggle of the Cold War. The Americans insisted upon land reform in the South in order to forestall the attractions of communism to the peasantry in the South. Fundamental land reform eliminates the payment of rent to the landlord class and raises the productivity of labour in the countryside by giving the peasants an incentive to raise output. The countryside can therefore feed more urban workers. The rise in productivity also allows more peasants to leave the land and join the industrial workforce. Land reform is therefore an important precondition of industrialisation.

In the most usual case the intertwinement of the landlords and capitalists as the ruling class prevents the capitalist state from carrying out significant land reform. For the same reason the ruling class is usually incapable of solving the national question. Together these are the principal tasks of the bourgeois revolution. This is the nub of Trotsky’s theory of permanent revolution, that these tasks can only be carried out when the working class is at the helm of the state. But, having taken power with peasant allies, the revolution will grow over in a permanent or uninterrupted way to carry out the socialist reconstruction of society.

In the case of Korea the susceptibilities and interests of the landlords were just thrust aside in the strategic interests of US imperialism. This remains an exceptional case. Korea began its industrialisation with five year plans. This was based on a handful of privately owned chaebol (conglomerates) which responded to government advice, direction, protection and favouritism. At one time the most productive steel plant in the world, the Korean firm Posco, was state owned and run by a retired Korean army officer. All the same, nobody seriously argues that South Korea is a Stalinist state, despite this homage paid to successful non-capitalist industrialising economies.

Korea was one of the ‘Asian Tigers’, fast-growing capitalist economies in East Asia. The others were Singapore, Hong Kong and Taiwan. They were a much-discussed phenomenon before the advent of the BRICs. There were different reasons for their take-off, but they were small countries which were seen as exceptions to the rule. And they were, and are, exceptional.


The advance of Brazil, Russia, India and China (the BRICs) has been adduced as further evidence that capitalism has acquired a new lease of life. Though capitalism may have stumbled in its heartlands, the BRICs are forging ahead. This is said to show that China provides an example to the rest and that the rates of growth achieved in China may be a harbinger of capitalist progress for the future. What we are saying is that China is different from the other BRICs. It has been growing fast for more than thirty years. The other BRICs have a much less impressive sustained growth record. The reason for China’s success is that it is not capitalist

 The other BRICs are indeed all growing fast at present, though all for different reasons. There is no common thread. Alex Callinicos (Bonfire of illusions, p.116) has surmised that the concept of the BRICs is a ‘broker’s fantasy’. Russia is completely dependent upon the export of natural resources, particularly oil and natural gas. The price of these resources on world markets can be very volatile. A large country like Russia cannot depend on export earnings from these resources to feed its people for ever. We should also remind ourselves that Russia is bouncing back from a terrible collapse as a result of the restoration of capitalism

 Brazil is also dependent on commodity exports for its recent spurt of growth. It is slowing down in 2012 but has grown fast in the recent past.  Its past growth record over a longer time span, in spite of its magnificent heritage of natural resources, has been poor.

India has a huge home market, but seems very dependent on the export of services to the advanced capitalist countries for exports. You cannot feed a population of 1.2 billion by providing call centres and the like. Large tracts of the country and hundreds of millions of its people are enmired in rural backwardness and see none of the benefits of the partial and one-sided economic growth that is going on.

To be sure, all these countries are growing quite fast by historic capitalist standards, but all for different reasons. One reason for their progress is their trade links to China, in effect travelling on the country’s slipstream. The BRICs are all capitalist countries and so part of the system. They are all more dependent on the rhythms of the capitalist world marker than China is. The future for world capitalism in the years ahead is grim. The other BRICs are therefore unlikely to all continue on this upward growth path in the years that lie ahead.

We expect some capitalist countries to grow faster than others. That is the way of the world since capitalism began – competition develops winners and losers. Combined and uneven development is after all a basic feature of growth and development under capitalism. Will the other BRICs pluck hundreds of millions out of poverty and begin to challenge the hegemony of the advanced capitalist countries, as China has? There is no sign of this at present.

Chinese growth feeds economic development all round the world. For instance Western Australia and Indonesia are both growing fast, exclusively on the basis of raw materials exports to China. While the area around Perth is booming, the Southern and Eastern quarter of the continent, where most Australians live, seems to be in recession. Likewise Indonesia, home to more than 200 million (mainly very poor) people is being kept afloat by exports of coal and palm oil to fuel Chinese growth.

Nationalisation and socialist planning

The percentage of industry that has been nationalised is not decisive as to the class nature of the country.  Having said that, China has the biggest public sector of any major economy in the world. As we have seen the Chinese government controls the commanding heights of the economy, if not a majority as measured by number of employees or as a percentage of GDP. China also has the fastest growing economy in the world. Surely there is a lesson there?

Though initiated by Stalin in the Soviet Union, the existence of Five Year Plans cannot be regarded as final evidence that China is not a capitalist country. We have seen that capitalist countries, such as the Republic of Korea (South Korea), used Five Year Plans as part of their drive to industrialise. But planning can be a more important lever of growth for a post-capitalist society than under state-directed capitalism. The Plan provides limits and sets directions for the operation of privately owned firms. We see that private capitalists in China have to work within the parameters set by the Plan.

Some underdeveloped capitalist countries have adopted measures of planning, in order to force a hothouse development of capitalist industrialisation.  Some other capitalist governments have intervened extensively in the economy for pragmatic political and economic reasons. Planning in China is much more significant than the partial and temporary measures taken in capitalist countries. That is because it is not a capitalist country.

Planning, as in South Korea, is the exception that proves the rule. Most capitalist countries make no serious attempt to plan the economy. The capitalist class resists the encroachments of the state upon their managerial prerogatives and potentially their profits. Capitalist countries suffer accordingly from the anarchy of world capitalism.

If the managers of state owned enterprises in China are a capitalist class or represent a capitalist class, then this is the most unusual capitalist class in the history of the world. They do what they are told by the state! It is a fundamental principle of Marxism that the ruling class moulds the state to its needs and interests, not the other way around.

Traditionally Marxists have characterised capitalism as an anarchic, unplanned society. This is not accidental. Individual capitalists undertake production solely for profit. The capitalists are not motivated to satisfy social need. Individually they cannot know how many commodities of any kind are required at any time. The result of their exertions is an unconscious worldwide division of labour imposed through the operation of the law of value behind their backs. China has to a large extent overcome capitalist anarchy by striving to plan the economy.

The mighty Chinese public sector and plan are evidence that the ruling bureaucracy has methods of controlling the economy that are not available under capitalism. Taken together, the extent of public ownership and the existence of a far-reaching plan provide powerful evidence that China is not a capitalist country.

China is a dictatorship, a one party state. There are plenty of other dictatorships around the world, capitalist dictatorships. The rule of the sword exists elsewhere in order to perpetuate the exploitation of the workers and peasants by the ruling class. For the most part these countries’ growth record is poor and the regime’s attention to the welfare of their people non-existent.

China is different. Despite its totalitarian political system, its economic performance offers a ray of light to the common people of the world. It has lifted hundreds of millions out of poverty! It shows that capitalism is not the only system possible, and not even the most efficient one. Despite its imperfections and bureaucratic distortions it shows a glimpse that a socialist alternative possible and, once implemented, that socialism will show that capitalism is a bankrupt economic and social system.

What is needed in China is a political revolution. We should not minimise the transformation in the consciousness of the masses for this to happen. But the basic structure of a planned post-capitalist economy is in place. It just needs to be democratised. The central demands will be for democratisation of the state and for workers’ control and management of industry.

This is not as monumental a task as a social revolution, which involves a massive upheaval, the abolition of an entire ruling class and its hangers on. Since the ruling ideas are always the ideas of the ruling class it also requires struggling against and eradicating all the ‘common sense’ norms and precepts that have been rooted in and permeated society for centuries as part of class rule.

It is widely understood that most poor countries, remaining on the basis of capitalism, have extreme difficulties in industrialising and steadily improving the living standards of the mass of their people. That is still the case.  Capitalism can be seen as a system that had failed most of those living in the ‘third world’, and failed workers in advanced capitalist countries too. This all remains true, and is the fundamental reason that we should dedicate ourselves to its overthrow, and to the worldwide victory of the socialist revolution.

16 April 2012


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Economist survey on State capitalism,21.01.12.

Grant-The Marxist theory of the state, alternatively called Against the theory of state capitalism, in The unbroken thread, Fortress Books 1989

Harvey-The enigma of capital, Profile Books 2010

Harvey-The urban roots of financial crises, article in Socialist Register 2012, Merlin Press 2011

Yasheng Huang-Capitalism with Chinese Characteristics, Cambridge University Press 2008


Lenin- Left wing childishness and the petty bourgeois mentality, Progress Publishers, 1968


Lenin- The state, Progress Publishers, 3rd 1976


Lewin-Political undercurrents in Soviet economic debates, Pluto Press 1975


Marx- Capital Volume I, Penguin Books 1976


Marx- Critique of the Gotha Programme, Progress Publishers, 1966


Marx- Preface to A Contribution to the Critique of Political Economy, Lawrence and Wishart, 1971


Marx and Engels Communist Manifesto, Merlin Press 1998


Nolan- China’s Rise, Russia’s fall, Macmillan Press 1995

Preobrazhensky-New economics, Oxford University Press 1965

Rakovsky- Five year plan in crisis,

Trotsky-Challenge of the Left Opposition 1926-27, Pathfinder Press, 1980

Trotsky-Revolution betrayed, New Park Publications, 1967

Trotsky-Soviet economy in danger, in Towards socialism or capitalism? New Park Publications, 1976

U.S.-China Economic and Security Review Commission (October 26, 2011)-An analysis of state owned enterprises and state capitalism in China,

World Bank-The Chinese economy; fighting inflation, deepening reform, World Bank 1996


After The Fall…Bo Xilai and the Crisis in the CPC

posted 12 Apr 2012, 04:02 by Admin uk   [ updated 15 Apr 2012, 15:53 ]

The drama surrounding the fall of Chongqing's Mayor Bo Xilai has exposed a crisis of authority in the system of rule by Communist Party of China. Its inner cohesion is based on governance capacities and adaptability to sharp changes; it leans on a solid foundation of strong economic growth and a history of radical shifts in orientation to resolve accumulated conflicts. This growth is rooted in the uniquely effective system for the exploitation of public ownership of the commanding heights of the economy. The capacity to radically apply the authority of the state bureaucracy to mobilize resources is based on the ‘Democratic Centralist’ party structure and state model. The CPC rule and public ownership are the key factors to control all levers of state power and this permits general mobilization to attain objectives.              

Paradoxically, it is precisely the loosening of classical methods of dictatorial control from the centre and the flabby permissiveness towards all that is not explicitly forbidden that generated the conditions in which Bo Xilai’s political power play was rehearsed, set and performed.   

Bo sensed out the opportunity to perform to the masses by pinpointing the gap between official ideology and real conditions. The socialist iconography of the party and state remains the foundation of its legitimacy. Whilst it is claimed that the collaboration with business and wealth serves national development, those at the bottom of the seesaw see those above as elevated to such heady heights, precisely due to the exploitation of the mass.

The older generation in Chongqing were touched by Bo’s appeal to the spirit of a lost collectivism, reincarnated in ‘red singing’. The urban workers were impressed by his appeals to put the interests of masses first by a ‘red growth’ model and a radical fight against business-mafia interests.

All over China, strikes and other forms of unrest in state enterprises and other non-private units are commonly led by party cadres, PLA veterans and former managers, who articulate the grievances of the workers and utilize their knowledge of the structures and weaknesses of the bureaucracy to bring effective pressure to bear and win concessions.

Bo Xilai’s political ascendance sailed on winds driven by the universal social pressures generated by urbanization and proletarianization. Housing shortages, discontent at inequality, anger at corruption, and the criminal interpenetration between the party officials and business interests dependent on their sanction, permission or support. The myriad everyday struggles of the workers to find some stability and quality of life sharply contrasts to the lives of the wealthy and the powerful.

By cracking down hard on crime syndicates and their business allies, Bo Xilai’s Chongqing regime naturally attracted supporters among the urban masses, who are less concerned with the fineries of tactics than with determined action. But winning friends and influencing people by such methods was always a dangerous game. Bo’s attack on ingrained interests and his brazen play for national leadership set off alarm bells in the minds of those who felt threatened. If hundreds of ‘mafia gangs’ are smashed in Chongqing, what happens if others emulate such ‘populism’ and are backed by the urban masses? In addition, if leaning on popular support can be used to leverage power, is this not the pathway to unleash uncontrollable democratic pressures that would threaten CPC unity and rule?

Premier Wen Jiabao’s ominous warnings of the dangers of a ‘new Cultural Revolution’ preceded Bo Xilai’s demise. The radical shift in Bo’s situation - with the arrest of his wife for the murder of a shady British intelligence operative and his suspension from the Politiburo and Central Committee - appears to be part of an offensive move by pro-capitalists within the leadership. The recent World Bank Report China 2030 called for widespread but carefully sequenced privatization, and Wen Jiabao recently used flamboyant rhetoric, threatening to ‘smash the monopoly’ of large state banks. In addition to this, the closure of three influential neo-Maoist websites might lead one to conclude that a capitalist restoration is in sight.

The reasons for skepticism regarding this scenario are rooted in the balance of social forces and the consequent nature of power. The public sector bureaucracy - the party, PLA, trade unions, local governments, police, judiciary, etc. - have been constantly expanding their terrains and spheres of influence in the past decade. This process has accelerated since 2008, funded by a vast expansion of state investment. The bureaucratic command over the economy and state has vastly extended and intensified in the last three years. The balance of forces of the bureaucracy vis-à-vis domestic capitalism is poignantly revealed by events in the capitalist citadel of Wenzhou. The Wenzhou capitalists are the leaders of the indigenous bourgeoisie, yet these business leaders bemoan the terrible burden that they suffer, crushed between the twin pincers of state control and global economic crisis. In 2011, dozens of Wenzhou’s business leaders went into hiding, lest they be arrested and imprisoned as their business finance arrangements unraveled. The case of the 28-year-old Wu Ying, a.k.a. ‘Rich Sister’, sentenced to death for illegally raising funds, sends a chill down the spine of business leaders.

The People’s Daily’s editorial on 11 April appealed for unity behind the leadership in its action against Bo Xilai’s ‘violations of discipline’. Simultaneously, the spreading of provocative rumours on the Internet has been condemned and repressed. Such ‘democratic centralist’ demands, to uncritically trust the word of the leadership, are made for reasons of bureaucratic self-preservation. However, bureaucratically manufactured unity cannot overcome the contradictory pressures generated by the tectonic motion of social forces, to which the bureaucratic machine must respond and react.

A tragicomic theatre has unfolded over the last days. Although some in China might like this to end in an all out assault on the left, this scenario is unlikely. The bizarre mystery surrounding the story and tales of Bo Xilai’s elitist, aristocratic and business associations enthuses those who would paint the CPC leadership as nothing but a ‘kitchen of thieves’ who are engaged in a vast capitalist confidence trick to plunder the people. It also evokes memories of a John Le Carre spy novel from an apparently bygone era. But superficial appearances should not form the basis of analysis. The relation of class forces governs the root of systemic dynamics. The objective power relations between the classes are ingrained in the organizational form of CPC rule. This system reproduces itself by expanding the power of the state and bureaucracy.

Indeed, paradoxically, it is possible that the new CPC leadership will launch a nationwide anti-corruption campaign emulating features of Bo’s anti-Mafia crusade. We are also likely to see a greater emphasis on social objectives - aimed at winning over the urban masses – and a concentration on the core social and welfare policies that the state is already pursuing under the Twelth Five Year Plan. Only by stealing the cloak, mask and dagger of this fallen actor can new and less popular actors retain the attention of their restive audience.

Prospects for China - Michael Roberts

posted 9 Apr 2012, 03:06 by Admin uk   [ updated 25 Jul 2012, 04:43 ]

  March 19, 2012

 China’s National People’s Congress, the supposed decision-making body for China’s leaders, has just finished meeting.  And the main debate (apart from behind the scenes discussions on who would take over as the new leaders from the retiring leadership) was about the state of the Chinese economy.

Mainstream economics is confused about which way the Chinese economy is going.  Some media and economists reckon Chinese growth is slowing fast from its double-digit pace seen in the last few years and indeed is heading towards a crisis or slump brought on by ‘over-investment’, a reversal of a credit-fuelled property bubble and a spiralling of hidden bad debts in the banking system. On the other hand, some economists reckon that economic growth may be slowing, but the Chinese authorities will be able to engineer a ‘soft landing’ through the easing of credit and financing of the writing-off of debt from cash reserves built up over past years.

Behind this debate on the immediate future also lies a debate on whether China can continue to grow fast through investment in industry, infrastructure and more exports or will need to switch to a consumer-led economy that imports more and supplies goods to a ‘rising middle-class’ like advanced capitalist economies supposedly do.  Mainstream economics reckons that this cannot be done without developing a more ‘market-based’ economy i.e. capitalism, because the ‘complexity’ of a consumer society can only work under capitalism and not under ‘heavy-handed’ central planning of government and state industries.

In this first part of a look at the Chinese economy, I’ll consider what will happen over, say, the next two years or so.  China has experienced truly exponential economic growth over the last decade in particular.  And that growth continued apace right through the Great Recession that the major capitalist economies suffered from 2008-9.  But now the question is: can that ‘breakneck’ pace continue or is it really breakneck?

Chinese economic growth is clearly slowing down.  In the first two months of this year, industrial production grew 11.4% yoy compared to 12.8% in December 2011, while China’s power generation increased 7.1%, the slowest growth rate in a year. Fixed asset investment, the main driver of the Chinese economy, was below historical averages. Fixed asset investment growth actually accelerated to 21.5% yoy up from 18,2% in December, although this acceleration was concentated in unproductive investment in property sectors. The comsumer weakened and passenger car sales fell 4.4% yoy to 2.37m vehicles and total auto sales fell 6% yoy to 2.95m units.  Retail sales increased 14.7% yoy in early 2012, down from an 18.1% ypy in December 2011.  Overall real GDP growth has slowed from a peak of 11.9% yoy in Q1 2010 to 8.9% in Q4’2011,  At the People’s Congress, the Chinese leaders targeted real growth at just 7.5% this year, something not seen since the depth of the Great Recession in Q4’2008.

Yet, by global standards, that’s a growth rate to envy: the US can barely manage 2%; Europe and Japan are flat at best, while even fast-growing India will not achieve that rate of growth this year.  But the Chinese economy needs to grow by at least 8% a year in real terms if it is to generate enough jobs to absorb the influx of workers from rural areas into the cities without unemployment rising.  So there would appear to be a problem ahead.  But remember, a target is just a target: China’s GDP has always grown more than projected. Take a look at the chart below. The yellow line shows how China has conservatively set its target GDP growth for the past decade. Every year, actual GDP growth has been higher and much higher in some cases. For example, in 2007, while the government projected GDP to grow 8%, actual GDP growth came in much higher at 14%!

GDP Growth

The main argument presented for expecting that China is heading for a sharp slowdown, or even what is called a ‘hard landing’, is that its fast growth in recent years was based on excessive credit injections by its banks, creating a property bubble that is now bursting.  Much of the property bubble was engendered by local authorities borrowing huge hidden amounts from the banks and financing their spending by selling off land to private developers, often literally over the heads of the local villagers.

That property bubble is now bursting.  Property prices are falling in most Chinese cities and are down 1.5% yoy.  Huge debts have been run up local authorities and developers and hidden in special purpose vehicles off the balance sheets of the banks.  The level of the what is called the total social funding of the economy by the banks has reached 180% of GDP.  This ‘shadow banking’ is similar to the off-balance sheet mess that the US and European banks got into that led to the financial collapse of 2008.  The risk is that China is heading the same way.  But is it?

First, the government has succeeded in reining in inflation, mainly caused by higher food and energy prices globally.  Inflation is now at its lowest level since 2010.

Lower Inflation

So the government is now able ease its monetary policy by cutting the reserve requirements imposed on the banks to hold cash at the central bank, so they can lend more or at lower rates and take some of the pressure off borrowers over the rest of the year.  Monetary growth is already beginning to turn up.  And the new budget announced by the government offers some support to growth, if not as much as the humongous increase in public spending adopted in 2008 to counteract the global economic slump.

Fiscal spending will rise 14% this year with spending on health, education and social security up 19% – hardly austerity.  Taxes on small businesses are being cut as is VAT.  Local government financing through property sales will be curbed, so the issue of local government bankruptcies remains.  But central government has huge reserves to fund such defaults from FX reserves of $3trn and fiscal reserves of CNY500bn in the budget.

Mainstream economics has made much of the news that China ran a deficit on its trade with the rest of the world in the first two months of this year, the first time in a decade or more.  Exports are important to China. During the global crisis, mainstream economics predicted the collapse of Chinese economy because exports accounted for 35% of GDP. With the negative demand shock from the West, export-led growth collapsed, and so would China – that was the conclusion they considered only logical.  But GDP is driven by net trade (exports minus imports), not just by exports. In fall 2008, net exports were 8% of GDP and today are still about 4%.  Private domestic demand has been strong.  And easing  fiscal policy will boost aggregate demand.

The stories of gloom and doom for China have been around ever since the onset of the global crisis in 2008-9. A new round of doomsday prophecies has been accelerating since summer 2011, when the Eurozone crisis escalated and Washington’s debt-ceiling debacle resulted in the downgrade of the U.S. sovereign credit-rating.  Now the argument is that Chinese economy is about to face a “hard landing” because of a bursting property bubble, disproportionate reliance on exports, and excess capacity caused by growth through investment.  But since the housing downturn is induced by policy, it can also be reversed by changes in policy, which is precisely what happened in China during the global financial crisis.  At worst, China is likely to experience slower growth than in previous years.  That’s all.

The big story that came out of the People Congress was the sacking of Bo Xilai as party boss from Chongqing.  Bo was a controversial and flamboyant figure ostensibly attacking inequalities and pro-capitalist policies.  So what does his removal  mean?  I’ll deal with this and the long-term prospects for China in part two.

Which way for China – part two

The sacking of Bo Xilai, the controversial and maverick party secretary of the Chongqing municipality highlights the strategic split that exists at the top of the Chinese government about what direction to take the country over the next generation.  Mr Bo is the son of a revolutionary hero, one of the so-called ‘princelings’, the children of the elite families that rule one and half billion people.   Considered a “prince among princelings”, Bo Xilai is the son of Bo Yibo, one of the Eight Immortals, the group of senior revolutionary veterans who served as the backbone of Deng Xiaoping’s support in the 1980s.

It’s no coincidence that just days after Bo Xilai came under criticism, prominent Chinese academics were attacking him publicly, saying that his career and the entire Chongqing Model were finished   These attacks were from the ‘pro-capitalist roaders’ faction in the Chinese leadership.  This camp disliked Bo because they saw him as a demagogue supporting populist, statist economic policies.  They hinted at corruption, such as Bo’s son driving a red Ferrari – as if most of the princelings and especially the pro-capitalist wing did not do something similar.

What alarmed the top leaders and led to his downfall was partly Bo’s tactic of “mobilising the masses” in ways that explicitly invoked the Cultural Revolution.  That called up deep-seated fears that populist fervour might be used as a weapon against Bo’s rivals.  But Bo’s Chongqing Model also worried the pro-capitalist faction because they are concerned about the current move towards a larger role for the state sector to protect China from the impact of the slump in the capitalist world. The refrain of “guo jin min tui” (the state advances, the private sector retreats) has been the recent sound across China, not just in Chongqing.  Bo jumped on that bandwagon.

The sacking of Bo is a minor moment in the major debate within the leadership on whether China can continue to grow fast through investment in industry, infrastructure and more exports or it needs to switch to a consumer-led economy that imports more and supplies goods to a ‘rising middle-class’ like advanced capitalist economies supposedly do.  Mainstream economics (and their pro-capitalist supporters in China) reckons that this cannot be done without developing a more ‘market-based’ economy i.e. capitalism, because the ‘complexity’ of a consumer society can only work under capitalism and not under the ‘heavy-handed’ central planning of government and state industries.

Leading up to the National Peoples Congress, the pro-capitalist wing was loudly demanding a change of direction by the government.  This was highlighted by a World Bank report on China’s future (China 2030;, published in conjunction with China’s advisory body, the Development Research Center of China’s State Council.  The report argued that there would be an economic crisis in China unless state-run firms were scaled back.  China needed to implement ‘deep reforms’, selling off state-owned enterprises and/or making them operate more like commercial firms. According to the World Bank, China’s growth would decelerate rapidly once people reached a certain income level, a phenomenon that these economists call the “middle-income trap.”   The report said the answer to set up ‘asset-management firms’ to sell off state industries, overhaul local government finances and promote ‘competition and entrepreneurship’.

Two things struck me particularly about this report.  The first of its six strategic measures is the privatisation of the state.  This is put right up front. In contrast, there is no mention of the democratisation of the state, the ending of one-party rule; the ending of the suppression of individual rights and freedoms, allowing trade union rights etc.  What hypocrisy!  The World Bank authors want capitalism, but they don’t care about democracy.  The report is also totally blind.  It wants China to abandon its current economic model and publicly-controlled financial system, which brought it successfully through the world financial crisis, and instead adopt the very model that led the US and Europe into disaster.

But what is also interesting about the report is that it admits that the capitalist mode of production still does not dominate in China – indeed that is the problem according to the World Bank and its domestic supporters.  The report recognises that China’s incredible economic success over the last 30 years was based on an economy where growth was achieved through bureaucratic state planning and government control of investment.  China has raised 620 million people out of internationally defined poverty.  Its rate of economic growth may have been matched by emerging capitalist economies for a while back in the 19th century when they were ‘taking off’.  But no country has ever grown so fast and been so large (with 22% of the world’s population) – only India, with 16% of the world’s people, is close.  As John Ross has pointed out ( in 2010, 87 countries had a higher per capita GDP than China, but 83 were lower.  Back in the early 1980s, three-quarters of the world’s people were better off than the average Chinese.  Now only 31% are.  This is an achievement without precedent.

Even if China slows down as the World Bank predicts, it will still add over $21trn to its GDP before the end of the decade and reach the size of the US economy by then.  Even though China’s consumption as a share of GDP is very low by capitalist standards (anywhere between 35-45% of GDP, depending on how you measure it, compared to 65-75% in mature capitalist economies), it will add another $10trn in annual consumption by 2020, equivalent to the size of America’s annual consumption.  These figures come from the World Bank report itself.

This has been achieved without the capitalist mode of production being dominant.  China’s “socialism with Chinese characteristics” is a weird beast.  Of course, it is not ‘socialism’ by any Marxist definition or by any benchmark of democratic workers control.  And there has been a significant expansion of privately-owned companies, both foreign and domestic over the last 30 years, with the establishment of a stock market and other financial institutions.  But the vast majority of employment and investment is undertaken by publicly-owned companies or by institutions that are under the direction and control of the Communist party. The biggest part of China’s world-beating industry is not foreign-owned multinationals, but Chinese state owned enterprises.

A recent report by the US-China Economic and Security Review Commission (26.10.11) called An analysis of state- owned enterprises and state capitalism in China provides a balanced and objective review ( “The state owned and controlled portion of the Chinese economy is large.  Based on reasonable assumptions, it appears that the visible state sector – SOEs and entities directly controlled by SOEs, accounted for more than 40% of China’s non-agricultural GDP.  If the contributions of indirectly controlled entities, urban collectives and public TVEs are considered, the share of GDP owned and controlled by the state is approximately 50%.”  The major banks are state-owned and their lending and deposit policies are directed by the government (much to the chagrin of China’s central bank and other pro-capitalist elements).  There is no free flow of foreign capital into and out of China.  Capital controls are imposed and enforced and the currency’s value is manipulated to set economic targets (much to the annoyance of the US Congress).

At the same time,the single party state machine infiltrates all levels of industry and activity in China.  According to a report by Joseph Fang and others (, there are party organisations within every corporation that employs more than three communist party members. Each party organisation elects a party secretary. It is the party secretary who is the lynchpin of the alternative management system of each enterprise. This extends party control beyond the SOEs, partly privatised corporations and village or local government-owned enterprises into the private sector or “new economic organisations” as these are called.  In 1999, only 3% of these had party cells.  Now the figure is nearly 13%.  As the paper puts it: “The Chinese Communist Party (CCP), by controlling the career advancement of all senior personnel in all regulatory agencies, all state-owned enterprises (SOEs), and virtually all major financial institutions state-owned enterprises (SOEs) and senior Party positions in all but the smallest non-SOE enterprises, retains sole possession of Lenin’s Commanding Heights.

The reality is that almost all Chinese companies employing more than 100 people have an internal party cell-based control system.   This is no relic of the Maoist era.  It is the current structure set up specifically to maintain party control of the economy.  As the Fang report says: “The CCP Organization Department manag(es) all senior promotions throughout all major banks, regulators, government ministries and agencies, SOEs, and even many officially designated non-SOE enterprises. The Party promotes people through banks,regulatory agencies, enterprises, governments, and Party organs, handling much of the national economy in one huge human resources management chart. An ambitious young cadre might begin in a government ministry, join middle management in an SOE bank, accept a senior Party position in a listed enterprise, accept promotion into a top regulatory position, accept appointment as a mayor or provincial governor, become CEO of a different SOE bank, and perhaps ultimately rise into upper echelons of the central government or CCP — all by the grace of the CCP OD.”

This does not look like the normal relationship of state owned companies or agencies in mature capitalist economies, where the newly nationalised banks in the UK or the now publicly owned General Motors in the US are owned and controlled at ‘arms length’.  In other words, the taxpayer funds them, while they operate purely on the profit motive.  In contrast, Chinese banks have targets for lending and investment set by the government which they must meet, whatever the impact on profits.

The law of value does operate in China, mainly through foreign trade and capital inflows, as well as through domestic markets for goods, services and funds.  In so far as it does, profitability becomes key to investment and growth.  So what has happened to China’s profitability in the last 30 years?  There have been various attempts to estimate the rate of profit in China.  I did so in my book, The Great Recession, chapter 12.  There are other studies that reach slightly different conclusions than I did (Zhang Yu and Zhao Feng, 2006,; and Mylene Gaulard, 2010, ).

I found that there were three cycles of profitability.  Between 1978-90, there was an upswing as capitalist production expanded through the Deng reforms and the opening up of foreign trade.  But from 1990 to the end of that decade, there was a decline, as over-investment gathered pace and other economies, particularly in the emerging world went through a series of crises (Mexico 1994, Asia 1997-8, Latin America 1998-01).  The falling rate of profit then was accompanied by slowing in the rate of GDP growth.  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).  A more recent study by the Fung Global Institute (www.fungglobal shows that profit margins in industry rose steadily from 1999 as unit labour costs stayed flat, confirming my work (see below).

We may be reaching a peak in profitability again, heralding slower growth over the next decade, as world capitalism struggles big time.

So the Chinese economy is affected by the law of value.  That’s not really surprising.  You can’t ‘build socialism in one country’ (and if a country is under an autocracy, by definition).  Globalisation and the law of value in world markets feed through to the Chinese economy.  But the impact is ‘distorted’, ‘curbed’ and blocked by bureaucratic ‘interference’ from the state and the party structure to the point that it cannot yet dominate and direct the trajectory of the Chinese economy.

Market forces and the law of value remain pernicious, however.   Inequality of wealth and income under China’s ‘socialism with Chinese characteristics’ has never been so bad.  It was one of the issues that Bo Xilai made much of.   He put it thus: “As Chairman Mao said as he was building the nation, the goal of our building a socialist society is to make sure everyone has a job to do and food to eat, that everybody is wealthy together. If only a few people are rich, then we’ll slide into capitalism. We’ve failed. If a new capitalist class is created then we’ll really have turned onto a wrong road.”  China’s Gini coefficient, an index of income ineqaulity, according to Sun Liping, a professor at Beijing’s Tsinghua University, has risen from 0.30 in 1978 when the Communist Party began to open the economy to market force 0.46.  Indeed, China’s Gini coefficient has risen more than any other Asian economy in the last two decades.  The rise in inequality is partly the result of the urbanisation of the economy as rural peasants move to the cities.  Urban wages in the sweatshops and factories are increasingly leaving peasant incomes behind (not that those urban wages are anything to write home about when workers assembling Apple i-pads are paid under $2 an hour).  But it is also partly the result of the elite controlling the levers of power and making themselves fat, while allowing some Chinese billionaires to flourish.

By the end of this decade, China’s GDP will be higher than that of the US, although average living standards, even in the urban and coastal belts, will be only one-third of that of Americans.  But as living standards rise and China gets older (by 2025, the workforce will stop rising and retirees will rise sharply), the Chinese people will want to obtain the material benefits of a modern economy.  That does not mean just cars, hi-tech gadgets and fashion as mainstream economics emphasises.  It also means decent pensions, proper transport and infrastructure, health services and education – the so-called public goods.

Is mainstream economics right to argue that people’s needs and aspirations can only be met by a capitalist economy?  The evidence of the Great Recession and the ensuing long depression suggest otherwise.  If the capitalist road is adopted and the law of value becomes dominant, it will expose the Chinese people to chronic economic instability (booms and slumps), insecurity of employment and income and greater inequalities.  On the other hand, if the surplus created by the Chinese people remains under the control of an elite backed by an army and police and ruling without dissent, then the needs and aspirations of a more affluent and educated population will not be met.

A socialist or capitalist road?  Well, the elite is united in opposing socialist democracy as any Marxist would understand it.  But they are divided on which way to sustain their power.  The people have yet to play a role.  They have been fighting local battles over the environment, their villages and their jobs and wages.  But they have not yet been battling for more democracy or economic power.  The middle classes are still backing the regime.  In a spring 2010 survey by the Pew Research Center’s Global Attitudes Project, 87% of Chinese said they were satisfied with the way things were going in their country.  In another poll taken last November, creating a “democratic political system with Chinese characteristics” was supported by 50% of those interviewed, but only 15% wanted a ‘Western-style democracy’.   Indeed, nearly 70% were against the “total Westernisation” (whatever that might mean) and 69% opted for the ‘social stability‘.

But the key to continued growth and more equality will be democracy.  China needs to move from ‘socialism (i.e. a planned economy) with Chinese characteristics (i.e. autocracy and corruption)’ to a China with socialist foundations (democratic planning and equality).

The Case of Japan: A reply to the IMT on their verson of Japanese history

posted 16 Sept 2011, 09:42 by Sky Arundel   [ updated 9 Apr 2012, 03:08 by Admin uk ]

  By Adam Fulsom

 This document was written by myself back in 2009 as a reply to the IS of the IMT using Japan's development of capitalism for support in their argument that China is capitalist. Their view was and is that the formerly feudal government of Japan, facing pressures from the outside, decided to introduce capitalism and gradually, from within the state and without revolution, abolished feudalism peacefully and switched to capitalism.
I argue that this is factually incorrect, for the real situation in Japan was not a peaceful or gradual transition, but was revolutionary in character. Though led by some elements from within the existing state, it smashed the old state and changed thousands of years of Japanese tradition within a generation. It is still considered by Japanese today as the major turning point in their history, and is depicted in pop culture to a great extent and extensively covered by Japanese historians and Marxists.
I appologize but I no longer have the digital copy, so this document had to be scanned. I intent to write a more detailed piece on the Meiji Revolution soon.

Comments on the Chinese Question

posted 12 Sept 2011, 07:44 by heiko khoo   [ updated 12 Sept 2011, 07:50 by Admin uk ]

The following is a contribution from Claudio Belotti one of the leaders of the Italian section of the International Marxist Tendency. The article is a challenge to the IMT's official position that defines China as capitalist.      


The process of capitalist penetration in China presents us with some features which have no historical precedent, both in terms of what we have seen in the past few decades in the ex-Soviet bloc and in some fundamental points of Trotsky's analysis in the Revolution Betrayed. One fundamental difference is on the economic plane. Trotsky had predicted that capitalist restoration would have led to a catastrophic economic and cultural collapse. This prediction was only too eloquently borne out in the events that unfolded in the former USSR, former Yugoslavia, etc. However, in China in the last 20 years or more, the introduction of capitalism and the penetration of foreign capital have coincided with an unprecedented development of the productive forces. This is an element of crucial importance in determining the tempo, the duration and the gradual nature of the process.   

 Another fundamental difference is that in the former Soviet bloc the more or less gradual opening up to market forces went hand in hand with an increasing corrosion of the power of the bureaucracy, which rapidly lost its authority both internally and internationally, up to the point where this created the conditions for the sudden collapse in 1989-91.

On the other hand the Chinese bureaucracy today sees its prestige growing on a world scale. After one and a half centuries China is once again a major player in world politics.

A satisfactory definition of the process that is presently taking place can therefore only be achieved through an understanding of the process as it has developed historically, in its concrete evolution and in its peculiarities. In the given context, seeking a simple label to attach to what is happening in China risks us making important mistakes when we come to develop the perspectives. A definition of the process and the tasks that flow from this must be rooted in the analysis of the phenomenon and not imposed on it.

With the opening up to the market and to private property, new contradictions are emerging within the Chinese economy.

First of all, one must not forget that in spite of the enormous development (not only in the last 20 years, but also since 1949) the Chinese economy is still relatively weak compared to the main capitalist countries. Participation in the world market, combined with what is still strong control on the part of the state, has undoubtedly produced, and will continue to produce, important and even spectacular successes, as the successes of the space programme underline. However, this is not enough to define the general position of the Chinese economy which, without the strong control that the state continues to exercise, would not be able to compete with the main capitalists economies.

If China were really open to capitalist competition, without the role played by the state and the bureaucracy, it would be reduced once again to being a semi-colony as it was prior to the 1949 revolution. The ruling elite of the CCP is well aware of this and,

in spite of all the opening up so far carried out, it takes great care not to allow the country to go in this direction and tends to keep control of the necessary instruments.

Stephen Roach sums up the present situation the Chinese economy finds itself in:

"China chose the occasion to announce a critical transition point on the road to reform. For the first time since the Communist Revolution in 1949, the old numerical targeting and sectoral allocation conventions of central planning have all but been eliminated from the multi-year framework. Only broad aggregate growth guidelines remain - 7.5% average gains in real GDP through 2010 - but they were presented as more of a forecast than a top-down edict. In effect, the Chinese leadership is telling us that the dawn of a new market-based approach to macro policy management is at hand. (...)

"At this point in time, however, the transition is more in theory than in practice. China basically has only one leg in the Promised Land of the market system - the other remains planted firmly in the old framework of centrally-directed controls. While Chinese ownership conventions are shifting away from state-owned to private-sector enterprises, the transformation to market-based pricing continues to lag. That's certainly true of the legacy system of administered pricing of many goods and services that still exists for utilities, public transport, coal, natural gas, oil, gasoline, and indirectly for food due to state-sponsored agricultural inventory management programs. But it is also true of the prices on a variety of financial instruments - namely, interest rates, the currency, bank credit lines, and bond prices. These prices are still tightly controlled by leadership decisions made at the highest levels of the Chinese power structure. As financial sector reforms continue apace, I have no doubt that market-based pricing will spread into these areas as well. But for now, that is far from the case.

"The resulting hybrid system is not without some serious problems. (...) China evidently does not yet feel that the institutional conventions of its newly reformed system are strong enough to withstand the full-blown pressures of market-driven forces." (S. Roach, Inside the China Debate) []

The preponderance of Foreign Direct Investment (FDI) has had the effect of creating an imbalance in its weight within the economy and a relative weakness of the bourgeoisie proper. In this sense we can make a comparison between these investments and other similar kinds of investments that in the past have been used by the imperialist powers to set up their industries in colonial and semi-colonial countries. However, this analogy reaches its limits at the decisive point. In the latter examples economic dependence led to direct political dependence. The State was merely the local storekeeper for the imperialist masters. This was the position of pre-revolutionary China, with its hundreds of territorial, economic and military "concessions" to the imperialist powers, which rendered it a semi-colonial state even though it was fomially independent. Today that situation cannot be repeated without breaking down the structure of the Chinese state, i.e. without a fight to the death with the bureaucracy. Today's Chinese state is radically different from the state that existed towards the end of the imperial era or even of the "nationalist" period of the 1920s and 1930s, which was a state in decomposition. Today it is a sovereign state

that feels sure of its own strength, as its growing willingness to participate in world politics demonstrates.

Precisely because of these reasons, whatever the immediate advantages the multinationals may reap from their investments in the country, the attitude of imperialism towards China and its regime remains one of distance, suspicion and hostility. Yes, there are different points of view about the relationship with China. The extremist wing - that has the vain hope of overthrowing the regime, possibly by using the national question - is not in the driver's seat. This is in spite of the fact that Bush has defined China as no longer being a "strategic partner" but a "strategic enemy" — which in any case comes far closer to describing the real situation. Another wing, which is making huge profits by investing in China, declares angelically that "sooner or later" economic growth and relations with the outside world will bring about the "democratisation" of China. Although this may seem more subtle, this second position is more than anything else an admission of weakness. In any case, neither of these two wings of the bourgeoisie thinks that the Chinese state, its bureaucracy and the Communist Party can be trustworthy instruments in defending their historical interests.

The Chinese bureaucracy is getting stronger and has been legitimised even on the political and social plane, above all with the constitutional changes in 2004 and the CCP opening its doors to the capitalists. However, the latter remains a weak class that still relies on cultivating good relations with those who have "power", i.e. with the CCP. The fact that 30% of the capitalists interviewed in an opinion poll joined the Party, rather than indicating the strength of the bourgeoisie, indicates that it feels so weak that it cannot express itself through its own party.

This is how one author of a recent analysis of the Chinese "reforms" expresses herself:

"In the PRC, however, there is little chance for the leaders of the private economy to play a central role in China's political change in the near future. The delayed development of private industry has resulted in a sector that, while growing rapidly in terms of employment and output, remains small in scale, often dependent on local governments for support, and still facing discrimination in credit opportunities. In fundamental ways, FDI has become the substitute for large scale private industry in China. This substitution has important effects on the possibilities for democratization in China." (Mary Elizabeth Gallagher, Contagious Capitalism - Globalization and the Politics of Labor in China)

Replace "democratization" with "restoration of capitalism" and the meaning of what is being said becomes abundantly clear. The weakness of the Chinese bourgeoisie is clearly demonstrated in its inability to express itself through its own party: "The main slogan of the liberals is 'down with the Communist Party'. But the workers make a distinction between the Party of the Maoist era and today's Party, which increases further their conflict with the liberals" (interview with one of the editors of the China Workers website, closed down by the authorities). This statement is of the utmost importance: the liberals, or rather the political and ideological spokespersons of the bourgeoisie, dream of destroying the CCP. However, the real flesh and blood capitalists join that very same party: it is clearly a confirmation of the weakness of the Chinese bourgeoisie, not of its strength.

In the course of capitalist restoration in the USSR the CPSU fragmented and was destroyed. Leaving aside the different interpretations of that process, it is indisputable that there were several breaking points and qualitative turns that are clearly identifiable: 1989 with the opening of the borders and the collapse of the East European satellite regimes; the failed coup in August 1991 that led to the dissolution of the USSR and the disbanding of the CPSU, a party that on paper counted 18 million members was banned without it putting up any serious resistance; this was a blow that objectively dislocated the bureaucracy leaving it at the mercy of the restorationist forces led by Yeltsin.

In 1993 the conflict erupted once more with the clash between the President (Yeltsin) and the White House (the parliament, around which were gathered the forces that in some way were trying to put a break on and block the process of capitalist restoration). This was a clash that verged on civil war, and from which once again Yeltsin emerged victorious.

To date, none of this has happened in China. The cause undoubtedly is to be found in the radically different economic situation, which has allowed for a reconciliation of different interests with the prospect of development for all. However, this has had the effect of keeping substantially intact the political domination of the CCP, i.e. of the bureaucracy.

This does not mean that the problem has been resolved with gradualist methods, but rather that the decisive confrontation has been delayed.

The question of the CCP and of the nature of the state remains an open one. The position that states that the bureaucracy has become nothing less than an instrument of the new bourgeoisie is one-sided. The CCP was and remains the backbone, the skeleton of a powerful bureaucratic apparatus still capable of imposing its interests and decisions on the nascent bourgeoisie. In a certain sense one could say that to date it is the bureaucracy that is using the bourgeoisie to achieve its own aims rather than the other way round.

The development of Chinese capitalism can only be understood within the context of the general perspectives for world capitalism. For at least a decade the process of capitalist restoration in China has had a stabilising effect on a world scale. Industrial development and the rapid proletarianisation of the population have provided fields of investment and above all they have kept up the rate of profit on a world level. This reduced the impact of the 1997 "Asian crisis" and, at least to date, has allowed the US economy to defy the laws of gravity and to continue to grow in spite of its gigantic trade deficit, which is covered precisely by the finances generated by the Chinese and more general Asian growth.

The thesis of the "completed transition" implies recognising that effect has been transformed into cause, taking the whole process onto a higher level. According to this way of thinking, the relative softening of the contradictions of capitalism on a world scale have allowed for the completion of the process of Chinese restoration in a molecular and almost imperceptible manner. Thus in China we would have the possibility of new development similar to that in the USA in the 19th century, with all the effects that this would have on a world level. Capitalism would thus have found in China a terrain for its own rejuvenation, a new "frontier". This would be the case not only on the economic plane but also on the level of the class struggle, if one takes into account what the consequences would be of a victory obtained through the mere application of economic pressure. A new historical phase would open up, a long historical period of slow accumulation of the contradictions, before any new revolutionary possibilities would appear on an international scale. Our characterisation of the epoch would have to be profoundly revised.

However, such a development is excluded for now precisely because of the inherent contradictions within the process of capitalist restoration in China and the consequences of all these both internally and internationally. Should the process continue along the same lines that we have seen so far, (and as things stand this is the most likely perspective) a breaking point will be reached which will be determined by the contradiction between the bourgeoisie, both national and international, and the Communist Party, i.e. the bureaucracy. The very successes of the "reforms", at a certain point would pose the new bourgeoisie with the following question: why should we the owners of the country have to live under the totalitarian (and very costly!) domination of an all-powerful, greedy, corrupt and authoritarian apparatus? Just as we govern the economy, we must control the state, the bureaucracy, the army, and the political system.

An analogy can be made with the USSR in the 1920s when the very success of the NEP led to a rupture between the renascent bourgeoisie and the bureaucracy. It is worth remembering that the first blow was struck not by the bureaucracy but by the rich peasants, event though in the end the bureaucracy won out.

Secondly, the penetration of foreign capital at a certain point could put in doubt the national independence of China. This is a perspective that the bureaucracy, and in particular the army, would never accept and against which they would fight with all the means at their disposal.

Thirdly, the social consequences of the march towards the market could spark off the struggle of the proletariat, which has been enormously strengthened. This struggle would inevitably have an effect on the official trade unions and the CCP itself.

Obviously it is true that the corrosion produced by private capital, the corruption, the social and regional differences, in the long run can all weaken the possibility of resistance on the part of the bureaucracy, strengthen the openly bourgeois wing within the bureaucracy and put into question the final outcome of this conflict. However, it is one thing to say that the outcome of the process is uncertain and that the balance of forces could eventually tip in favour of the restorationist forces. It is a radically different thing to say that this confrontation has already taken place and that the elements of contradiction are merely residual. The first statement is true, the second is false.

The position according to which the transition has been completed implies clear political consequences. The first concerns the definition of the state: a bureaucratic-

totalitarian state that defends the interests of capitalism implies a clear choice of slogans, programme and tactics. The labour movement would have to pose itself the problem of presenting transitional demands of a democratic character: freedom of the press, parliamentary democracy, etc.

However, such an approach would not correspond at all to the real situation inside the country, nor would it allow us to connect with the most advanced layers, who — as is also demonstrated by the material published by our international — are well aware of the need not to be confused with the "democratic" demands raised by the liberals (inside and outside China).

The development of the class struggle inside China will express itself also in the form of a conflict within the CCP, involving not just rank and file elements but also higher levels of the apparatus that tomorrow could find themselves in opposition to the bourgeois line. Given the traditions of the CCP and of the country, it is practically inevitable that the conflict would express itself also at the highest levels of the Party and thus of the bureaucracy, although at the moment it is not possible to accurately anticipate the timing and the forms in which this would unfold. The history of post-revolutionary China is one of sudden and violent turns which on more than one occasion have brought the country to the brink of civil war. These ruptures within the leadership have taken place even though every time right up to the last minute everything seemed to be under control and on the surface there seemed to be conciliation between the different positions and interests.

A correct definition of the process now taking place is indispensable if we want to develop demands and a programme that we need for the intervention in China. It is not by chance that the position of the "completed transition" remains silent on this question. What should be the economic and social programme'? What political demands should we raise? What is the relationship between the democratic and the economic demands? The question of the programme helps to place the analysis on a concrete plane.

What should our demands be?

Firstly, the right to organise trade unions and to set up workers' committees in the factories, as essential tools in the struggle to win decent wages and living conditions; - a programme of social welfare protection (healthcare, education, pensions, etc.) which would guarantee egalitarian social conditions, something which is completely missing at this moment in time. - A review of the agreements reached with the foreign investors, which would guarantee the basic interests of the workers and of the Chinese people; expropriation of those companies that refuse to accept the new conditions. - A new plan of short, medium and long term investments to redress the huge social imbalances that the rush towards capitalism has created, and that rationalises economic development with the aim of meeting the needs of the workers and peasants. - An offensive against the widespread corruption. - A public investigation under the direct control of the workers of all the privatisations that have taken place in the recent years, at the end of which a decision would be taken on which sectors and which companies should be renationalised.


The political demands flow directly from the economic and social programme: trade union rights, workers' control, workers' and peasants representation at all levels (factory councils, soviets) right of recall of the leaders, the right of expression and of organisation for all genuinely socialist positions.

Democratic demands which we would put forward in a normal capitalist context (parliamentary elections, freedom of the press, etc.) should be considered in an extremely conditional manner precisely because of the nature of the party in power in China (and thus of the regime that flows from this), which, over and above the labels we place on it, we cannot treat purely and simply as if it were the bureaucracy of a "normal" capitalist state.

Even now a genuinely proletarian government could apply such a programme without the need for a thorough social revolution. The State still has control of the financial and fiscal levers and of the strategic industries (often belonging to the army). It is evident that we have here is a "hybrid" programme in which certain tasks of the social revolution are mixed together with those of "reform" (in the sense given to that word by Trotsky when he refers to the political revolution being a "reform" of the Soviet state). This is dictated by the hybrid and still uncompleted nature of the process taking place.

To define the process of restoration as uncompleted and the bureaucracy as still a distinct organism from a normal bourgeois bureaucracy does not mean hypothesising a simple "return backwards" guided from above. What it means is that we take into account the following: 1) The decisive conflicts provoked by the process of restoration are not behind us in the past, but still have to unfold in the future; 2) The dynamics of the forces that are being played out cannot be reduced to two sides, proletariat and new bourgeoisie, with the state apparatus and the CCP being mere instruments of the latter; 3) The process can be considered as completed only once a genuinely bourgeois state apparatus is in place, which is not yet the case. On this road the bourgeoisie will have to come into conflict with important sections of the bureaucracy and also with the working class. The conditions for this conflict and the relationship between the different forces on the ground are yet to be defined. 4) This conflict will decide the future of the CCP, which will be torn apart by the two opposing camps. 5) Twenty years or more of opening up to the market have greatly strengthened the position of the bourgeoisie and imperialism. However, the outcome of this conflict will not be automatically determined solely by the forces operating within China, but will be deteimined by the world context as a whole.


May 23, 2006

On Hu Jintao's Call for Marxist Innovation

posted 22 Jul 2011, 01:48 by Admin uk   [ updated 22 Jul 2011, 02:24 ]

Article by Heiko Khoo also published on     

Hu Jintao's speech at the CPC's 90th anniversary gathering covered a wide range of historical, contemporary and future issues confronting Chinese Marxists. The main issue that the Western press concentrated on was Hu's emphasis on the need to combat corruption and maintain social stability in order to avoid the fate of Communist parties in Eastern Europe and the USSR. Although the speech did focus on corruption, institutional efficiency, social stability and democratic participation, Western observers decided to ignore the fact that Hu Jintao used the words "Marxist" or "Marxism" 24 times in his speech. This is no doubt because Hu argued that Marxist ideas and innovation could provide the solutions to the main problems confronting China.

The fact that corruption is universally acknowledged as a major negative factor in Chinese development reveals something extraordinary. It means that if corruption can be reduced, China can develop even more rapidly, more smoothly and with greater equality.

Market fundamentalists inside and outside China agree that corruption is corrosive to development, but they argue that public sector command over the economy is the root cause of corruption. They point out that administrative power tempts officials to demand unearned rents, and that businesses find bribery and the corruption of officials a way to get things done. This theory fails to explain why China's economy has developed so rapidly despite such corruption, while comparative capitalist countries, where private companies overwhelmingly dominate the commanding heights of the economy, have fared far worse. Indeed the extent of corruption exposed by the world financial crisis in the wealthy capitalist democracies makes a mockery of the endless finger pointing at the corruption and "lack of transparency" in China.

Hu Jintao argued that the key to fighting corruption is vigilance and forceful measures, and that leading officials at all levels must only exercise power as agents of the people. "We must serve the people, hold ourselves accountable to them, and readily subject ourselves to their oversight."

Hu placed great emphasis on Marxism and scientifically verified practice as the guiding ideology and method of the Chinese Communist Party. He reiterated one of the fundamental and oft forgotten principles of Marxism: "without democracy there can be no socialism" whilst recognising that the development of "China's socialist legal system has not fully met the need of expanding people's democracy" and that real socialism requires that "all state power belongs to the people".

Hu Jintao explained how the Party founders integrated "Marxism, Leninism with the Chinese workers' movement". The dream of Chinese and International Marxists of the 1920s was that the Communist parties would lead the working class to overthrow backwardness, semi-feudalism, imperialism and capitalism everywhere in the world in a chain of international revolutions. Then the workers' states would take the commanding heights of the economy into public ownership and place them under democratic administration. The societies were to be run according to the principles elaborated by Karl Marx's study of the Paris Commune, and reiterated by Lenin in his booklet the State and Revolution. This envisaged the election and recall of all officials, average workers' wages for officials, a rotation of administrative duties and workers' militias.

These are familiar slogans for Chinese Communists as they were popular in the Cultural Revolution, particularly in Shanghai, in the late 1960s and early 1970s. The problem was that in both Russia and China the working class was a minority class at that time. Therefore the idea that a democratic workers' state would be established, in which state power begins to wither away, was utopian in that context.

The Communist parties of the Third International were engaged in several revolutionary adventures, which used undue haste to try to force the pace of revolutions in some countries and misused the nascent Communist Parties as tools of Soviet foreign policy in others.

Lenin recognized that the attempt to storm heaven by global revolution was postponed and the introduction of the New Economic Policy (NEP) provided practical and essential experience in the methods of primitive socialist accumulation, as applicable to socialist revolutions in less developed countries. The Soviet NEP was the ideological and practical experimental foundation, for the policy that was successfully applied in greater scope and over a much longer period by the Chinese Communist Party after 1978.

The USSR abandoned the New Economic Policy primarily because the bureaucratic tendency gathered around Stalin saw the accumulation of wealth and power by rich peasants and traders as the threat to their political power. They embarked on an ultra-left process of forced socialist accumulation by universal nationalisation and collectivisation. This policy led to famine and chaos, but it simultaneously shaped the characteristics of the mode of bureaucratic planning that donned the mantle of socialism until 1989.

It was the distance between the urban masses and the bureaucratic administration and state power that exploded in social discontent in 1989 in Eastern Europe. This led to the overthrow of bureaucratically planned economies in one country after another dealing a major blow to world socialism. There were many who argued at that time for a reformed and democratic socialism, but due to prolonged periods of economic stagnation they were rapidly sidelined and swept away, as bureaucrats turned into kleptocrats, and formed an unholy alliance with Western capitalists. In this way they moulded the new world order on the bones of the planned economies.

It is therefore extremely interesting that there is such an acute awareness expressed in Hu Jintao's speech of the need to face up to drastic changes in the world environment and inspire party members, particularly the youth, to boldly innovate, enrich and develop Marxist ideas on the basis of systematic study and scientific practice.

One of the areas in which Chinese Marxists can play a vital role is in the struggle to create effective forms of democratic management of enterprises. It is universally known that China encouraged foreign investment in labor intensive operations for three decades. This served to acquire capital and know-how and to provide employment for migrants, but it simultaneously produced capitalist forms of exploitation, which are often the focal point for the expression of mass incidents of unrest, strikes and demonstrations. They are also the main focal point for anti-Chinese and anti-communist propaganda in the West.

All this can be rapidly changed. A few years ago China was universally condemned for its environmental destruction, now China is the world's leading investor in Green technology and is creating test-bed environmental cities, towns and villages, which will be world models of environmentalism.

A radical shift in the condition of China's working class is likewise underway. The policies to expand the welfare, social security, pensions and healthcare provision, and the construction of tens of millions of low cost apartments for the masses are major advances for the working class. In addition big wage rises of between 20-40 percent, following labor unrest last year, are a very good step forward. However the All China Federation of Trade Unions (ACFTU) is far less proactive in the defence of workers' rights than they should be, now this appears to be changing for the better.

The meteoric rise in membership of the ACFTU to over 220 million workers over recent years is the result of systematic recruitment, increasing awareness of legal rights, and the extension of workers rights in the Labor Law of 2008. The grass-roots members of the trade unions, and the workers in general, must be encouraged to stand up for their rights, express their grievances and channel their power into the ACFTU, in order to generate an organized expression of the struggle to realise the workers' legal and constitutional rights. They can expose employers who break the law and officials who are corrupt and abuse power, and this can act as an essential check on power. Workers who feel in command of their work are more likely to generate innovative and creative solutions, which results in increases in the productivity of labor.

China's Labor and Enterprise Laws provide workers with paper legal rights far superior to workers in most advanced capitalist countries, but paper rights must be realized by action. The Chinese workers' constitutional right to elect their managers and democratically administer major enterprises is a right that is unheard of in the Western world. Wherever it is realized it will act as a beacon to progressive people worldwide.

Workers' control did not function efficiently in the USSR in the early 1920s, it rapidly gave way to one-man management. In Yugoslavia the democratic election of the management by the workers existed from 1948-1989, and despite many problems it did foster social harmony and economic well-being for the workers. A stark contrast with the wars and ethnic cleansing that subsequently tore that country apart! In Israel, Kibbutz systems functioned relatively well for decades. Experiments with workers' control are being tried out in Venezuela and other South American countries, but generally in unfavourable conditions. Perhaps the most vibrant and successful models of collective, democratic and efficient work processes are to be found in software production, in the free software movement and other similar collaborative intellectual endeavours. The issue of democratic control over work processes and management is a vital area for research and experimentation for anyone seeking to develop and create socialist forms of democratic administration.

China has the means to test-bed systems of democratic management, not simply as nostalgic throwbacks to Maoist collectivism, but as practical means of organising social production and modern life. Test-bed experiments were the foundation for the development of many of the most successful advances in the reform era and before. The Household Responsibility System, Township and Village Enterprises, Village Elections, and Special Economic Zones, were all scientifically tested before they were generalized into state policy. Why should experiments in workers' control and democratic administration not produce new breakthroughs in democratic enterprise management, galvanising the innovation, creativity and energy of the masses?

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