A Chinese socialist consensus

By Carlos García Hernández (originally published in Spanish in El Común )

“(a) the monopolistic political power of the Chinese Communist Party (CCP) must not be challenged; (b) within the confines of, and to strengthen, condition (a), economic development should be interpreted as the essence of socialism, and thus of the utmost importance; and (c) regarding the central decision-making process, personalistic regime should be replaced by party rule, i.e., a consensus based collective decision-making process.”

Third Plenum of the 11^th Central Committee of the CCP, December 1978

The above quote reflects the consensus that has prevailed in China since 1978. This consensus marked the coming to power of Deng Xiaoping and the start of the economic reforms that have lasted until the present day, which marks the 100^th anniversary of the birth of the CCP. The quote was collected by Xu Chenggang, professor of economics at the Cheung Kong Graduate School of Business in Beijing, in his seminal research work “The Fundamental Institutions of China’s Reforms and Development”. Building on this work and on previous articles on what I have called fiat socialism and modern money consensus, I will analyse the Chinese consensus in order to propose the socialist reforms that I believe would help to improve the living conditions of the Chinese people. To do so, I will interpret the information provided by Professor Xu on two levels, one ideological and the other economic.

Xu calls the Chinese economic model a “regionally decentralized authoritarian system”. According to this model, the central government and the CCP leadership control and decide on the political representation of the various Chinese provinces. Once these officials have been chosen, they are responsible for managing most of the economy, since almost 70% of public spending is carried out at the regional level and more than 55% at the sub-provincial level. Then, what is established is a competition between the different provinces. They are placed in a ranking of economic growth and have to compete with each other to climb up the ranking. The provinces are further divided into municipalities (or prefectures), the prefectures into counties and the counties into towns. Competition is established in all subdivisions, so that the most successful subnational governments are rewarded by the central power with more resources. Access to more resources is therefore conditional on success in economic management. This is the basis on which the Chinese economy is established and what distinguishes it from any other economic model ever seen.

The economic results of this model are spectacular. Before 1978, Chinese annual growth was 4.4%; between 1978 and 2011 it was 9.5%. The share of total factor productivity in growth was 11% before 1978; between 1978 and 2011 it was 40%. As a result, between 1978 and 2011, GDP increased 8-fold, a level of growth unparalleled in human history. As Professor Xu explains, one of the consequences has been that “The Chinese population in absolute poverty (defined as $1/day income) has dropped from 50 per cent to 7 per cent in twenty years, while the number of individuals in absolute poverty was reduced by almost 400 million. This number is nearly three-quarters of the poverty reduction in the whole developing world (World Bank 2003)”.

What political interpretations can be drawn from this? In my opinion, one above all: China has definitively broken the link that Karl Marx established between the so-called problem of the realisation of profits and Law of the Tendency of the Rate of Profit to Fall.

Let us recall that, in the second volume of Capital, Marx is confronted with an inescapable question: How is it possible that the capitalists constantly take more money out of circulation than they put into it? Of course, the origin of this subtraction must be surplus value, but “the question […] is not where the surplus value comes from but whence the money comes into which it is turned”. The answer to this question is a turning point in Marx’s work. His reasoning is as follows: the origin of the money into which surplus value is converted must be compatible with the Law of the Tendency of the Rate of Profit to Fall, the fundamental thesis that Marx wants to demonstrate in order to achieve his ultimate aim, which is none other than to expose the inevitable collapse of capitalism, understood as a productive system based on the private ownership of the means of production.

However, this is clearly ad hoc reasoning. That is, instead of analysing the question empirically, Marx designs the answer to the question of the money into which surplus value is converted to fit his predetermined conclusions. Marx thus answers the question by means of the transactions that take place in the private sector and he ignores the existence of the public sector, and for this he resorts to the maxim of Parmenides of Elea, ex nihilo nihil fit, “nothing comes from nothing. The capitalist class as a whole cannot draw out of circulation what was not previously thrown into it”. This is one of the moments when the existence of the gold standard becomes a fundamental pillar of Marx’s work, without which his thoughts cannot be understood. If money cannot be created ex nihilo, then it must be a pre-existing natural phenomenon. Gold and its extraction are the pieces Marx finds to solve the puzzle. Capitalists withdraw more money than they put into the economy because more money is created from new extractions of gold and silver. Thus, “[capitalist production] develops simultaneously with the development of the conditions necessary for it, and one of these conditions is a sufficient supply of precious metals”. Sufficient here does not mean that all money is backed by precious metals, but that the quantity of precious metals must be sufficient to permit the circulation of commodities, which also depends on credit. According to Marx, this credit granted to allow private sector transactions, added to the reserves of precious metals, is enough to enable and explain all the processes occurring in capitalism, which he takes up in his schemes of expanded reproduction and simple reproduction, and he does not hesitate to resort to magical thinking to conclude that “circulation sweats money from every pore”.

By not resorting to the public sector as a source of profit realisation, Marx also manages to save his Law of the Tendency of the Rate of Profit to Fall, since the production of gold and silver, with its particularities, is also explained as the production of the rest of commodities. Thus, the contradictions within the private sector, in which the capitalists are forced to constantly lower wages and increase working hours in order to be able to compete with each other, can only tend to increase to a point where the capitalists’ share of profit, due to the ever-decreasing consumption capacity of the workers, is so reduced that the whole capitalist system collapses.

Now we get into a time machine and travel about a century into the future. When we get out of the machine, capitalism is still there. It is the 1^st of January 1979. Deng Xiaoping lands in Washington D.C. to meet with President Jimmy Carter. What happened at that meeting astonished the world. The top leader of the Chinese Communist Party outlined to Jimmy Carter the three points of the Chinese consensus with which this article begins. Unlike the Soviet leaders, Deng did not frame the relationship with the US as a confrontation between two opposing and competing economic systems destined to destroy each other. There were no references to inexorable historical laws. There were no mutual threats. What Deng offered Carter were trade agreements. Deng explained to the Americans that his goal was not the destruction of capitalism in the US, but economic cooperation based on non-interference. If the Americans recognised and respected the sovereignty of the Chinese people, China would not interfere in their internal affairs. On the contrary, it would offer US companies a mutually beneficial access point to the Asian market. Carter not only seized the commercial opportunity offered by Deng, he also officially recognised the People’s Republic of China that emerged from the 1949 revolution.

In my view, the intelligence displayed by Deng Xiaoping at the time was astonishing. I am convinced that it is only thanks to this that the CCP is still in power today. What did this veteran communist militant know that Marx did not? The answer can be found in the date of the meeting, 1^st of January 1979, more than 7 years after President Richard Nixon ended the gold standard on the 15^th of August 1971. That is more than 7 years of proving that money has always been created ex nihilo. Deng knew this perfectly well, as he was not only the heir to Mao’s revolution, he was also the son of the country that created paper money in the 7^th century. To approach China’s relations with the US from a vantage point from which to advocate the imminent collapse of capitalism would have made no sense.

Deng knew that such a collapse was not going to happen. This allowed him to go beyond the Trinity Formula enunciated by Marx in chapter 48 of the third volume of Capital, according to which there are only three sources of income: capital-profit, land rent and labour-wages. Deng knew that there were not three sources but four, since to Marx’s list public expenditure must be added as a source of profit realisation. That is why China’s central bank, called the People’s Bank of China, has played a key role in the country’s development since 1978 by financing sub-national government spending and ensuring that competition between different provinces is on a level playing field.

As Professor Xu explains, this regionally decentralised structure “converts local officials into entrepreneurs”. Decentralisation allows successes or failures to be experienced first at the local level, without destabilising the country as a whole, and allows citizens to feel closer to institutions, which weakens political opposition. This is possible because China’s regions, being so big, are largely self-sufficient, allowing a wide range of goods to be produced. The number of goods under central government control has never reached 1000 and there are only 30 ministries in China. As a result, the central government is much smaller than in other socialist countries and it only controls essential economic sectors (land ownership, banking, energy, telecommunications, railways, etc.). If a reform succeeds in one province, it is possible that other provinces will adopt the same reform. If the reform fails, it is rejected. In any case, the stability of the country as a whole is not put at risk. This is how the transition from a centrally planned economy to a mixed market economy, in which there are all kinds of enterprises (public, private, cooperative, jointly owned, etc.), came about.

Being a mainstream economist, there is a moment in his paper when Professor Xu doubts and wonders how it is possible that China has been so successful. Mainstream economics is dominated by the Washington consensus and Say’s law, according to which non-intervention is essential for flourishing markets to emerge in which, by magic, supply creates its own demand. China is an example of the opposite. There, state and CCP intervention is enormous in all areas, however, economic growth is much higher than in the West. This shows that the Chinese model, despite its obvious shortcomings, is much less corrupt and much more efficient than that of Wall Street, the European Union and all other bodies governed by the Washington consensus, the absurd Say’s law and supply-side economic models.

However, it is also necessary to address the major deficiencies of the Chinese model, since these flaws arise largely from the introduction of neoliberal economic paradigms into its institutions. The most important example of this can be found in the person of Prime Minister Li Keqiang (to whom, fortunately, Xi Jinping does not seem to pay much attention). The economic policies promoted by Li, who holds a PhD in economics from Peking University, are markedly neoliberal in character and deeply influenced by the Washington consensus. As always in these cases, the neoliberal bias translates into an irrational aversion towards public deficits. On the 28^th of May 2021, Li said during a press conference:

“The central government is taking the lead in living a tighter life this time. We will reduce the central government’s direct spending by more than half, so that funds can flow to grassroots enterprises and people’s lives. All levels of government must live a tighter life. It is absolutely not allowed to engage in formality, and do those things that spend a lot of money.”

The neoliberal bias of these statements is evident. According to Li, public spending confiscates savings that diminish investment. Like all neoliberals, he understands economic phenomena backwards. Government spending encourages investment because it increases the balance of bank reserves. This encourages demand and therefore investment. To reduce public spending and to think that companies and people’s lives will benefit from this is to miss the point. The reduction in public spending advocated by Li will only increase private indebtedness and unemployment.

This graph shows the evolution of China’s public deficit and its projected evolution until 2026.

Source: IMF

COVID caused the deficit to increase to 11.39% in 2020. Thanks to this deficit, China was able to contain the pandemic. From a socialist perspective, this data should make it easier to interpret the public deficit for what it really is: a tool to tackle social problems, which in China’s case are many and growing in severity. Therefore, instead of making the reduction of the public deficit an end in itself, Li should forget about the level of the deficit and focus only on social problems. To this end, my proposal for fiat socialism is based on what I have called the Lerner index, which is calculated as the distance between a particular economic situation and one in which unemployment and the absolute value of inflation are equal to zero. In the case of China, the evolution of the Lerner index between 2000 and 2016 was as follows:

Chart: year / unemployment rate / inflation rate / Lerner index

The method to bring the Chinese economy to the Lerner point should be the job guarantees based on employment buffer stocks, as these schemes turn permanent full employment, guaranteed by law, into an automatic price stabiliser. The process of reaching the Lerner point in China should not be very complex, since in 1994 the Chinese government took back tax collection as one of its functions and since then has been able to control inflation very efficiently. Therefore, the establishment of full employment and the corresponding price level should occur as soon as possible.

This should be the first step towards the achievement of what I have called the five goals of socialism, which let us remember are:

1. guaranteed and permanent full employment.
2. full and prudent use of natural resources.
3. a guarantee of food, shelter, clothing, health services and education to every citizen.
4. social security in the form of pensions and subsidies.
5. a guarantee of decent labour standards.

China has sufficient resources and capabilities to guarantee these five points for its entire population. I am therefore of the opinion that these five points should be incorporated into the three points of the Chinese consensus established by the great Deng Xiaoping. The effort to achieve these five points should not be too great for the Chinese government and the benefits to it would be glorious. I think that is the spirit of these statements by Deng in 1994: “to build socialism it is necessary to develop the productive forces […]. Not until […] we have reached the level of the moderately developed countries, shall we be able to say that we have really built socialism and to declare convincingly that it is superior to capitalism. We are advancing towards that goal.”

Unfortunately, millions of people are not assured of these five points. In China, there are still conditions of misery and exploitation, as in the most savage of capitalist societies, that have made the country one of the most unequal in the world in terms of the distribution of wealth. If the CCP decided to end this exploitation by implementing the five goals of socialism, it would gain enormous support among the lower classes, the same classes that created it 100 years ago, and would strengthen its rule of the country.

Euro delendus est