China on Transitional Economics

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On transitional economics - Why and how China went

capitalist (Part One)

Written by Jeppe Druedahl Friday, 30 July 2010

Does the development of China on a capitalist basis deny the theory of permanent revolution?

Does it mean that capitalism on a world scale has a new lease of life? What was China under

Mao? In this first part of a two part article, which we publish as a contribution to the

discussion, Jeppe Druedahl looks at these and other questions and draws lessons from the

development of the Soviet Union after the revolution and under the Stalinist bureaucracy.

China is by far the most populous country in the world. More than one in five people on the

planet live within its borders. In the last decades it has experienced an enormous economic

growth. In 1980 China accounted for only 2.6 percent of total world output. Today it accounts

for 8.7 percent and is with its huge trade surplus becoming an important factor in the worldeconomy

[1].

These facts in themselves make a thorough understanding of Chinese society necessary for

anyone who wants to understand and change the world we live in. As the centre of gravity of

world history has been moving from West to East, China is becoming more and more an

important political power. At the same time, the study of the history of China obliges us to

dwell on many important questions of Marxist theory.

In 2006 the IMT published the document China’s Long March to Capitalism [2]

. It analyses

the basic development of Chinese society from the revolution of 1949 onwards. The

document explains how Maoism in content was the same as Stalinism and that the “People‟s

Republic of China” therefore was a deformed workers‟ state, i.e. a nationalised state owned

planned economy controlled by a bureaucratic caste. With its revolution China left the realm

of capitalism, but it never achieved the stage of genuine socialism.

The Chinese revolution as an historical event is only superseded in importance by the Russian

revolution. The planned economy was a huge step forward for millions and millions of

Chinese peasants and workers. In 1950 average GDP per person was 36 percent higher in

India than in China. By 1980 India's GDP per person was 12 percent lower than in China.

Today it is almost 60 percent lower than in China (see the Maddison data on historic GDP atwww.ggdc.net/maddison/ ). [Editor's Note: due to a slip up in proofreading these figures were

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reported incorrectly in the article when first published. We have now corrected this.

September 6, 2010]

How can one explain this not unimportant detail? Only by the fact that China had benefitted

enormously from its previous period of having a planned economy. The high level of growth

of China today must also be seen in the light of the important economic steps forward(industrialisation, increasing level of education, etc.) that even a deformed Stalinist planned

economy without even a hint of workers‟ democracy had carried out.

The basic tenet of China’s Long March to Capitalism is its analysis of how the reforms,

beginning at the end of the 1970s, were a decisive move in the direction of capitalism and that

around the new millennium the dominating mode of production in China had become

capitalism.

However, two questions in particular relating to the characterization of Chinese society as

capitalist had to be looked into more deeply. The first is the relation between the worldwide

great recession and China. The second, and the focus of this article, is the precise dynamics of a transitional economy in the hands of a bureaucracy. But first we have to clear up some basic

misunderstandings.

The dynamics of the theory of permanent revolution

The Marxist method has never accepted eternal fixed categories. It was only the Stalinist

caricatured interpretation that turned Marx‟s historical materialism into a rigid schema that

saw different modes of production, primitive communism, slave society, feudalism,

capitalism, socialism, etc., all following on each other mechanically. That truth is always

concrete is the first law of dialectics. What is important for Marxists is always the process, its

dynamics and the direction of its movement.

Prior to the October revolution the Mensheviks argued that a socialist revolution was not

possible in Russia because of its semi-feudal mode of production which meant that the

socialist revolution was not on the agenda. Trotsky‟s answer was that only the proletariat

could solve the tasks of democracy and national emancipation (i.e. the bourgeois revolution)

and that the proletariat would not stop there but would continue with the tasks of the socialist

revolution. History verified every aspect of his analysis.

Trotsky formalised this in the theory of the permanent revolution. As the second basic

postulate of the theory of permanent revolution he writes:

“With regard to countries with a belated bourgeois development, especially the colonial and

semi-colonial countries, the theory of the permanent revolution signifies that the complete and

genuine solution of their tasks of achieving democracy and national emancipation is

conceivable only through the dictatorship of the proletariat as the leader of the subjugated

nation, above all of its peasant masses.” (Trotsky, 1929, chapter 10)

For some Marxists this has raised the question as to whether China becoming capitalist does

not contradict the theory of permanent revolution. At first sight this could seem like a valid

concern. Let us for a moment forget that the same question should be raised in relation to at

least the former countries of the Soviet Union becoming capitalist in the 1990s (not tomention the manner in which capitalism was introduced in countries such as South Korea and



Japan much earlier). Let us even put to one side the fact that Trotsky (and Lenin also)

repeatedly warned of the possibility of a return of capitalism in Russia.

In fact what we have here is a total misunderstanding of the theory of permanent revolution.

We have to remember Trotsky‟s method: his argument as to why the proletariat is the only

class capable of solving the tasks of the bourgeois revolution in the colonial, semi-colonialand we could add the ex-colonial countries.

Even though Trotsky simultaneously argued that capitalism on a world scale had reached its

stage of decay, where it was more and more incapable of developing the productive forces, he

did not use this as an argument at all. Marx‟s great scientific breakthrough was his

understanding that the development of the productive forces is the decisive factor in the last

instance, but he never forgot that history is created by human beings. “Men make their own

history, but they do not make it as they please; they do not make it under self-selected

circumstances, but under circumstances existing already, given and transmitted from the

past”, Marx wrote in The Eighteenth Brumaire of Louis Bonapart e (1852).

Trotsky‟s line of argument was rather that the bourgeoisie of the colonial and semi-colonial

countries had arrived late on the stage of history and that their interests were bound up with

both the domestic landlords (thus opposing any agrarian reform) and the foreign imperialists

(thus opposing any genuine national independence). Or, to put it more bluntly, that the

bourgeois revolution was not in the interest of the bourgeoisie. Reading Results and Prospects

(1905) and the above quoted The Permanent Revolution (1931) this is the main point of

Trotsky‟s argument.

By this Trotsky in no way rejected the possibility that certain external factors could bring

forth the bourgeois revolution and the capitalist mode of production in full scale. One

possibility is that given certain political and strategic conditions it could be in the interests of

the imperialists to force through a capitalist reformation. This was the case of US imperialism

in relation to, for example, both South Korea and Japan which the US administration feared

would be lost to communism if the economic foundations were not strengthened.

Another possibility is that the proletariat is incapable of continuing with the tasks of the

socialist revolution and the capitalist counter-revolution gains power. The backwardness and

international isolation of the Soviet Union and the seizure of power by the Stalinist

bureaucracy, and the similar result with Mao in China, are examples of how the transition to

socialism was blocked and the road for a capitalist counter-revolution was opened up.

Dialectics in general and historical materialism in particular, is the science of possibilities

turning into probabilities and finally becoming necessities and concrete reality. At this point

of our analysis we are only at the stage of a theoretical possibility based upon the general

Marxist theory developed on the basis of world history and the experience of the working

class.

In the spirit of the above, some have also argued that the development of the forces of

production in China and the fast growth of the last decades must mean that the capitalist

system is still fully capable of developing the forces of production on a world scale. This is

completely off the mark. What has happened in China is only to a very small degree a real

qualitative development of the forces of production; to a much larger degree it is a simplequantitative expansion of the Chinese forces of production by the importation of techniques



already developed in the advanced capitalist world. And the potential in China was huge. In

1978 its productivity level measured as GDP per capita was only a twentieth of the US level;

in comparison the productivity level of Russia in relation to the US in 1917 was about a

fourth.

Let us now turn to the beginning of the process of the restoration of capitalism in China in theend of the 1970s.

The experience of the transitional economy in Russia

To understand the transitional economy of China in the 1970s it is important to see it as the

unity of on the one hand a planned economy as the economic base and on the other hand a

deformed workers‟ state with a Stalinist-type bureaucracy as the political superstructure. The

one cannot be understood properly without the other.

If we begin with the economic base it is useful to begin with the experience of the young

Soviet state. We have to remember that immediately after the October revolution theBolsheviks only nationalised the land, which was distributed to the peasants, the banks and

the rest of the credit system.

Instead of directly nationalising the workshops and the factories, the young workers‟ state told

the private capitalists what they should do – what to produce and how much. It was demanded

that all private capitalists should abide by Soviet democracy and accept the implementation of

workers‟ control after October. As Lenin explained, “control over the production, storage,

purchase and sale of all products and raw materials shall be introduced in all industrial,

commercial, banking, agricultural and other enterprises employing not less than five workers

and office employees (together), or with an annual turnover of not less than 10,000 rubles.” [3]

This involved among other things complete access to the books for the workers. If the private

capitalists refused to follow these rules there firms were nationalised.

This situation was of course unstable in its very foundations. In the end you cannot control

what you do not own. But the capitalists solved this problem for the Bolsheviks by refusing to

follow the laws of the workers‟ state. And already in 1918 the process of nationalisation was

speeding up rather quickly.

War Communism (1917-1921)

As the Civil War increased in scale and intensity, and in the wake of the revolution the youngSoviet State could not allow that the hostile capitalists controlled any part of the economy.

Trotsky explained this at the Fourth World Congress of the Comintern in his speech on the

The New Economic Policy of Soviet Russia and the Perspectives of the World Revolution :

“It is perfectly obvious that from the economic standpoint the expropriation of the bourgeoisie

is justified to the extent that the workers‟ state is able to organize the exploitation of

enterprises upon new beginnings. The wholesale, overall nationalization which we carried

through in 1917-18 was completely out of harmony with the condition I have just now

outlined. The organizational potentialities of the workers‟ state lagged far behind total

nationalization. But the whole point is that under the pressure of civil war we had to carry this

nationalization through. (…) Every factory, every bank, every office, every little shop, every







Social Democrats all over Europe heralded this as the Bolsheviks having at last come to their

senses and that they would now return to capitalism. This had nothing whatsoever to do with

the truth. To use some bourgeois methods to run the economy is not the same as capitalism.

Of course there was a real danger that private capital could grow in strength and from being a

tool of the Bolsheviks could become the main force in the economy. Trotsky explained how

this was to be avoided:

“Our most important weapon in the economic struggle occurring on the basis of the market is

– state power. (...) Another weapon of the proletariat is that the country‟s most important

productive forces are in its hands: the entire railway system, the entire mining industry, the

crushing bulk of enterprise servicing industry are under the direct economic management of the working class. (…) The workers‟ state likewise owns the land (…) The workers‟ power

holds the state frontier: foreign commodities and foreign capital generally can gain access to

our country only within limits which are deemed desirable and legitimate by the workers‟

state.”

Trotsky explained that about a million workers were employed in the state-run factories andthat only 80,000 were employed in the privately run factories with about half of these in co-

operatives. The NEP was a retreat, but it was not a move towards capitalism.

The superiority of a planned economy

Why do Marxists argue that a planned economy is superior to capitalism today but that that

would not have been the case 500 years ago? How does the production process now differ

from then? The most important difference is that the production process in the early days of

capitalism was mostly private, and now it is social.

Private production in the extreme is production for the sake of only you and your family. In

feudal society production was mainly private. The peasants produced mainly for themselves.

Only a small part of the crops was sold on the market and it was out of the surplus product

that rent was paid to the landlord. Capitalism is in its core commodity production, i.e.

production for the sake of the market. Hereby production is social in the sense that the

consumption of the products is social. Each factory is related to each other by competition in

the market which leads to the closure of the most inefficient factories which are underpriced

by the more efficient ones. This is the progressive aspect of capitalism which has led to an

enormous development of the productive forces.

However, the social character of production increases as capitalism develops. Infrastructure(transport and communication) becomes necessary to reach markets far away and to get raw

materials from afar. The social division of labour is increased and intermediate markets for

capital goods and subcomponents arise. The companies are linked in a long chain from the

raw material to the final commodity. Simultaneously large scale production becomes

absolutely necessary to be able to stand competition – this creates monopolies.

The production of even the most common everyday goods becomes an intertwined complex

process involving all parts of society – production becomes truly social. And we have not

even discussed the role of research done at the universities or in the research departments of

the big corporations which creates new types of goods and completely new branches of

production.



In the early days of capitalism the market was effective because it fostered the most effective

production process. But when production becomes social the effectiveness of one firm

depends completely on other firms, and their individual contributions to the overall level of

productivity cannot easily be separated and with the rise of monopolies the markets lose all

their former power and effectiveness. Billions and billions of dollars and enormous amounts

of human brain capacity are wasted in parallel research in competing firms due to businesssecrets and “intellectual property rights”.

The need for a conscious plan therefore arises. Private appropriation, where everything has to

be sold at a market for a private profit, comes into contradiction with the social process of

production.

The important point here is that the overwhelming part of production in Russia prior to the

revolution was actually not social but private in character. Therefore total nationalisation was

not economically appropriate.

The programme of the Left Opposition

Here, however, we are still only at the level of the ABCs. As the NEP started to work,

agricultural production was increased and industry was massively improved. But as a result of

this the kulaks (rich peasants) and NEP-men (private traders) grew in power. How the right

and the left reacted to this problem was clearly seen in the so-called “scissor crisis”. The

problem was that the kulaks were demanding higher and higher prices for their grain. But this

would divert funds away from investing in and improving industry. Bukharin, as the

theoretical leader of the right wing, wanted to accommodate the kulaks and instead develop

industry at a “tortoise tempo”. “Get rich!” was his slogan to the peasants. Even the idea of

denationalisation of the land gained some support within the bureaucracy.

Trotsky and the Left Opposition had a completely different perspective. They understood that

improvements for the peasants, especially the poorer layers, were necessary, but they

explained that the most effective way of achieving this would be to have a more developed

industry able to provide the peasants with, for example, tractors. This would then create the

basis for collectives in the countryside and even more effective agricultural production freeing

labour for a needed enlargement of industry.

But the only basis upon which this could have been achieved was a plan of industry which

Stalin at first denied drawing up. What was needed was a plan for what was called “primitive

socialist accumulation”. Primitive socialist accumulation can be based on two sources:

1) The surplus product of the state sector can be reinvested.

2) A part of the product from the private sector can be retained and used to expand the state

sector.

Preobrazhensky, the economist of the Left Opposition until he capitulated to Stalin, explained

this in the following way:

“The more backward economically, petty-bourgeois, peasant, a particular country is which

has gone over to the socialist organization of production, and the smaller the inheritancereceived by the socialist accumulation fund of the proletariat of this country when the social



revolution takes place, by so much the more, in proportion, will socialist accumulation be

obliged to rely on alienating part of the surplus product of pre-socialist forms of economy and

the smaller will be the relative weight of accumulation on its own production basis, that is, the

less will it be nourished by the surplus product of the workers in socialist industry.”

(Preobrazhensky, p. 124)

The point of the NEP was exactly to strength the private sector and then tax it (or distort

prices in favour of the state sector) and in this way turn primitive capitalist accumulation into

primitive socialist accumulation. Stalin and the right wing ridiculed this idea, claiming that it

was impossible and accused the Left Opposition of being “super -industrialisers”.

Total nationalisation and collectivisation (1929)

However, once Stalin had defeated the Left Opposition in 1927-8 his main concern became

the right wing and especially their economic base in the form of the NEP-men and the kulaks.

In 1929 Stalin turned against Bukharin and carried out the programme of the Left Opposition

in a completely distorted fashion. The farms were all nationalised down to every unhatchedchicken. All markets were closed and replaced by a bureaucratic centralised plan. Foreign

trade was almost erased due to the idea of self-sufficiency. In many ways this was a return to

War Communism but on a qualitatively higher level. Both Stalin‟s left and right policies were

out of touch with the needs of the workers‟ state.

Trotsky was the first to acknowledge the great economic achievements of the Soviet Union

under the Five Year plans under Stalin. In his article The Soviet Economy Danger (1932)

Trotsky explains:

“Socialism, as a system, for the first time demonstrated its title to historic victory, not on the

pages of Capital, but by the praxis of hydroelectric plants and blast furnaces. Marx, it goes

without saying, would have preferred this method of demonstration.

“However, light-minded assertions to the effect that the USSR has already entered into

socialism are criminal. The achievements are great. But there still remains a very long and

arduous road to actual victory over economic anarchy, to the surmounting of disproportions,

to the guarantee of the harmonious character of economic life.” (Trotsky, 1932)

In the NEP-period Stalin and the right wing had only focused on the need for private

incentives and the need of markets. Now it was the other way around, with an exaggerated

focus on the plan. Trotsky explained that three elements are necessary for a transitionaleconomy to function properly:

1. The state plan

2. The market

3. Soviet democracy

Trotsky explains:

“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. (…) The innumerable

living participants in the economy, state and private, collective and individual, must serve

notice of their needs and of their relative strength not only through the statistical

determinations of plan commissions but by the direct pressure of supply and demand. Theplan is checked and, to a considerable degree, realized through the market. The regulation of

the market itself must depend upon the tendencies that are brought out through its mechanism.

The blueprints produced by the departments must demonstrate their economic efficacy

through commercial calculation.” (Trotsky, 1932)

The point is that the plan shall grow in size as the forces of production are developed and

assume a socialised character. This process was called primitive socialist accumulation

relating it to Marx‟s concept of primitive capitalist accumulation. The idea of the NEP was

precisely that the period of primitive capitalist accumulation had not finished and that it was

therefore necessary to let primitive capitalist accumulation exist side by side with primitive

socialist accumulation. Concretely, the main point of the NEP was to increase agriculturalproduction freeing labour for the industrial sector and simultaneously increasing labour

productivity in industry by huge levels of investment based on taxing the peasants.

The Stalinist bureaucracy instead shifted to a complete command system focusing only on the

plan and fixing all prices centrally. This was very ineffective as is confirmed by all the stories

about factories producing only shoes for the right foot to meet targets, peasants feeding pigs

bread instead of grain because it was cheaper or natural gas not being exploited in Central

Asia because approvals from 27 different ministries were necessary.

In the end, the planned economy in the Soviet Union is said to have produced 200,000

different types of commodities. It was clear that a centralised bureaucratic commission had no

possibility of planning this. The bureaucratic central management of every detail is

problematic even in a simple newly industrialised economy, but it is totally crazy within a

highly specialised economy as the Soviet Union developed into in the decades after World

War Two. In the 1970s the growth of the Soviet economy slowed down and eventually came

to a halt in the 1980s. This was the economic basis for the collapse of Soviet Union.

As we demonstrate below, this shows how a bureaucracy which is a relative fetter on the

development of a less developed planned economy, becomes an absolute fetter in a more

complex one. According to Alex Nove in his Economics of feasible socialism there were

about 12 million different commodities in Russia at the beginning of the 1980s - simply toomany to manage for a bureaucracy.

Post-Mao headaches in China

Precisely the same kinds of problems were present in Maoist China in the 1970s. The Great

Leap Forward (1958-60) and the Cultural Revolution (1966-69) had been complete failures.

There were, however, some differences between the Chinese and Soviet system. China was

not as centralised as the Soviet Union. In 1970 it was as a consequence of the Cultural

Revolution that only 7.1 percent of industrial output in China came from centrally owned

enterprises, which was down from the 42.2 percent in 1965 (Sweetman and Zhang, 2009, p.

15). This figure had probably risen in the 1970s but it was still low compared to the SovietUnion. On the other side the focus on self-sufficiency was driven to the extreme in China.



However, what Mao left behind when he died in 1976 was basically a Stalinist deformed

workers‟ state characterised, apart from the fundamental deformity of the lack of workers‟

democracy, by deformities such as over-nationalisation, over-planning and the already

mentioned self-sufficiency (autarky). The serious character of the problems facing the

Chinese bureaucracy was further underlined by the slowdown in the growth of the Soviet

Union – their “future picture” we could say. Therefore a number of “reforms” wereimplemented when Deng Xiaoping became leader in 1978.

The basic points of these reforms were:

1. The self-sufficiency policy was aborted.

2. Foreign investors were invited on strict conditions.

3. The peasants were given the possibility of leasing the land individually for 30 years.

4. Markets started playing a bigger role in determining prices.

5. It became possible to set up collective and private Town and Village Enterprises

(TVEs).

In short this can be seen as a Chinese NEP; Deng even described it as “market socialism”, and

this was in general correct even from an abstract Marxist point of view. But two key aspects

have to be taken into consideration. Firstly, the bureaucracy did not dare to use the most

effective medicine against the problems of the Chinese economy, the introduction of genuine

workers‟ democracy. In analysing the Chinese transitional economy (and the transitional

economy of all deformed workers‟ states) it is important to remember that these are in a

“blocked transition”. Socialism is not possible with a bureaucracy running the economy;

socialism is characterised by the state “withering away”. Secondly, in the same manner we

must not confuse the dynamic laws of a “true” transitional economy in a healthy workers‟

state with that of a transitional economy controlled by a Stalinist bureaucracy.

In The Revolution Betrayed (1936) Trotsky clearly explains the relation between the political

and economic demands in a deformed workers‟ state.

“Let us assume first that the Soviet bureaucracy is overthrown by a revolutionary party having

all the attributes of the old Bolshevism, enriched moreover by the world experience of the

recent period. Such a party would begin with the restoration of democracy in the trade unions

and the Soviets. It would be able to, and would have to, restore freedom of Soviet parties.

Together with the masses, and at their head, it would carry out a ruthless purgation of the state

apparatus. It would abolish ranks and decorations, all kinds of privileges, and would limit

inequality in the payment of labor to the life necessities of the economy and the stateapparatus. It would give the youth free opportunity to think independently, learn, criticize and

grow. It would introduce profound changes in the distribution of the national income in

correspondence with the interests and will of the worker and peasant masses. But so far as

concerns property relations, the new power would not have to resort to revolutionary

measures. It would retain and further develop the experiment of planned economy. After the

political revolution – that is, the deposing of the bureaucracy – the proletariat would have to

introduce in the economy a series of very important reforms, but not another social

revolution.” (Trotsky, 1936, my emphasis)

[To be continued…]



[1] These figures come from the IMF. If GDP is adjusted for differences in purchasing power

across countries the figures are 2.0 percent for 1980 and 13.3 in 2010.

[2] Available online here

[3] Source: Draft Regulations On Workers’ Control (Lenin)

On transitional economics - Why and how China went

capitalist (Part two)

Written by Jeppe Druedahl Monday, 02 August 2010

In this second part of Jeppe Druedahl's contribution to the discussion on China, he explains

how initially the Chinese bureaucracy, after the death of Mao, introduced market methods as a

means of stimulating production within a planned economy. However, over time the capitalist

methods began to dominate and the relation between the plan and the market were overturned.

Quantity was transformed into quality, and capitalism has come to dominate. [part one]

The role of bureaucracy

The basic motive of every bureaucracy is its own material interests. Two important aspects of

this are the question of inheritance and that of consolidating wealth and income. The perfect

solution to this is a regime of private property and capitalist relations of production. Only by

turning itself into a new ruling class can the bureaucrats secure their own position and that of

their children.

However, there are also important countervailing factors, especially resistance from the

proletariat but also the threat of imperialist economic or military takeover. This was of

concern for the conscious capitalist roaders within the bureaucracy in the Soviet Union as

well as in China. What the bureaucracy is interested in is not capitalism as such, but

capitalism where they rule.

In chapter 11 of The Revolution Betrayed Trotsky outlined three possibilities:

1. A political revolution towards genuine socialism

2. A bureaucratic counter-revolution back to capitalism

3. The bureaucracy turns into an absolute fetter on the development of the productive

forces – and either option 1) or 2) in the end.

Trotsky renounced predicting in advance which possibility would prevail. Only the relative

power of the proletariat and the bureaucracy could determine this. In the Soviet Union, for

many reasons we cannot dwell on here, the proletariat was incapable of carrying out the

political revolution. However, in the end the bureaucracy was also too weak to control thesituation. The result was a collapse and chaotic backsliding into capitalism.

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The Chinese bureaucracy took note of this process, beginning with the slowdown in growth in

the 1970s and ending with the collapse in the 1990s. This was the basis for the introduction of

“market socialism” in 1978.

A NEP kind of policy is, however, very dangerous for the workers and peasants, especially in

the context of a deformed workers‟ state, because it has the tendency to strengthen all the pro -capitalist elements. Possibility becomes probability, and then probability becomes reality.

Imagine for example a complete NEP in Cuba today – US imperialism would take over the

country in no time. From an abstract economic point of view a NEP in Cuba would be correct,

but politically it would be suicide.

During the period of the Cold War things were seen in terms of contradiction between the

Stalinist bureaucracies and capitalism. But as Bukharin already showed in the 1920s there

need not by any such kind of conflict. Had Bukharin and not Stalin succeeded in gaining

power a capitalist counter-revolution could have been on the agenda as far back as in the early

1930s. But as the rest of the bureaucracy were aware, the living memories of the October

revolution were still alive and the perspective of a successful counter-revolution where theystayed in power was not that likely. Thus they bet on Stalin instead.

In China the situation was very different. It is important to remember that the People‟s

Republic of China was born as a deformed workers‟ state from the very first day, while the

Russian revolution was a genuine workers‟ revolution that only started to degenerate in the

conditions of backwardness and isolation in the early to mid-1920s. The traditions of the

Russian proletariat were therefore much stronger than those of the Chinese proletariat. For

many years this put so much fear into the bureaucratic caste in the Soviet Union that they did

not dare to take any steps towards capitalism. In the 1960s and 1970s when new generations

of workers without any direct experience of the Russian revolution took the stage, the

freedom of action of the Soviet bureaucracy was instead limited by the falling growth rates.

These limitations were much weaker for the Chinese bureaucracy, who for this reason had a

better possibility of experimenting with introducing capitalist elements.

Primitive accumulation in China – of which sort?

Looking at the concrete process it is first of all necessary to understand that neither the

Chinese bureaucracy as such, nor Deng in particular, had “a roadmap to capitalism” from the

beginning. Bureaucracies are by nature not characterised by ideological decisions but rather

by empirical zig zags. They adopt policies that serve their interests and stop everything else.

This was especially clear in the behaviour of the Chinese bureaucracy where new policieswere introduced in stages and certain regions were used as test zones. In a deformed workers‟

state the bureaucracy has risen above the working class and they thus play an independent role

as a social layer.

But despite the empiricism, four periods of China‟s transition to capitalism can be outlined:

1978-1989 - The first reform period: from NEP and beyond

1989-1992 - The Tiananmen Slowdown

1992-2001 - The second reform period: downsizing and restructuring of the plan

2001 to the present - The final reform period: Transition to capitalism

1978-1989: From NEP and beyond



The first sector affected by the reforms was the agricultural sector. In 1979 the Household

Production Responsibility System (HPRS), which leased the land individually to the peasants

for a 30-year period, was introduced, thus dissolving the communes and giving the peasants

the possibility of increasing their income by selling their produce for a profit on markets.

The system was an enormous success from the point of view of increased production and by1984 99 percent of all peasants were within the new system. The effect on agricultural output

was swift and the annual growth of agricultural increased significantly as seen in Table 1.

Table 1. Annual growth of agricultural output

1957-1978 2.3

1980-1985 8.2

1985-1990 4.7

Source: Sweetman and Zhang, 2009, p. 17.

From 1978 to 1984 alone China‟s annual output of grain increased from less than 300 million

tons to 407 million tons (Liu and Zhang, 2001, p. 6). In total this was very similar to the effect

the NEP had in the Soviet Union in the 1920s.

Based on this success the bureaucracy tried to extend this to industry as well. The socialised

character of industry however reduced the possible effect of these reforms and made them

more difficult to implement. But they were forced through:

“In industry, the main policy innovations increased the autonomy of enterprise managers,

reduced emphasis on planned quotas, allowed enterprises to produce goods outside the plan

for sale on the market, and permitted enterprises to experiment with the use of bonuses to

reward higher productivity. The government also tested a fundamental change in financial

procedures with a limited number of state-owned units: rather than remitting all of their

profits to the state, as was normally done, these enterprises were allowed to pay a tax on their

profits and retain the balance for reinvestment and distribution to workers as bonuses.”

(Wikipedia, Economic history of the People's Republic of China)

To do this, and as a consequence of this, a number of prices was released from the plan and

were instead completely determined by the market, or as Sweetmen and Zhang explain:

“Enterprise managers gradually gained greater control over their units, including the right to

hire and fire, although the process required endless struggles with bureaucrats and party

cadres. The practice of remitting taxes on profits and retaining the balance became universal

by 1985, increasing the incentive for enterprises to maximize profits and substantially adding

to their autonomy.” (Sweetman and Zhang, 2009, p. 19)

It is especially important to remember that this new hiring and firing schema was a big step

away from the previous lifelong guaranteed jobs. In 1983 even contract work in state firmswas introduced.



Another important aspect was the possibility of setting up Town and Village Enterprises.

Many argue that about a third of China‟s output is produced by the TVEs but their character is

typically misunderstood. As Huang explains: “The Chinese definition of TVEs refers to their

locations of establishment and registration (i.e., businesses located in the rural areas), not their

ownership; Western researchers, on the other hand, have come to understand TVEs in terms

of their ownership status.” (Huang, 2008, p. xiv) In 1985 about 40 percent of the TVEs wereprivate (Huang, 2008, p. 79)

Finally the self-sufficiency principle was done away with. Before the reform period, the

combined value of imports and exports had seldom exceeded 10 percent of national income.

In 1980 it was 15 percent, in 1984 it was 21 percent, and in 1986 it reached 35 percent.

(Wikipedia, Economic history of the People's Republic of China).

An effort was also made to attract foreign capital by opening up special economic zones

(SEZs) where foreign investors were invited to enter into joint ventures. Initially nothing

much happened. By 1983 Foreign Direct Investment (FDI) was only 0.31 percent of GDP.

Then the Chinese bureaucracy lowered the regulations on wages and work conditions in theSEZs. In 1986 the access for foreign investors to China was eased even more by lowering

taxes and granting more freedom to hire and fire. In 1987 the limit on the number of workers

in a private firm was removed (Sweetman and Zhang, 2009, p. 24-5). Still the effect was

limited and the ratio of FDI to GDP was only 0.90 percent in 1990 (OECD, 2002, p. 15).

Each economic reform taken separately, the main line of the reforms was not completely

illogical even from a genuine Marxist point of view. The Chinese reforms in the late 1970s

and early 1980s had many things in common with the NEP, advocated by Lenin and Trotsky.

However, if we take them all together in the end they went well beyond the scope of the NEP.

This could at first be seen in the ignoring of the conditions of the workers.

In the end the difference of the NEP and the Chinese reforms were not just of a quantitative

character, but of a qualitative character. On the one hand private capital was accumulated in

the hands of the richest peasants, the bureaucracy in the privatised factories and the foreign

capitalists in the SEZs. On the other labour was “set free” and a traditional labour market was

created with corresponding unemployment or in short what Marx would call a process of

primitive capitalist accumulation.

Primitive capitalist accumulation is unavoidable in a NEP period but as in the 1920s in the

Soviet Union, and as was criticized by the Left Opposition, this was not used sufficiently to

strengthen primitive socialist accumulation. The contradictory character of the reform processwas also characterised by the official term of a “planned commodity economy” which in

Marxist theory (where commodities are products produced for a market) is a very odd term.

Some of the reforms also went too far for the bureaucracy in the sense that rising

unemployment and inflation led to social stability. This was the economic basis to the

uprising at Tiananmen Square and of the pause in reform of 1989-1992. However, as the

bureaucracy were aware of the fact that it was still firmly in power and after they saw the

tragic fate of their counterparts in the Soviet Union, the reform process was actually speededup after 1992 when “socialist market economy with Chinese characteristics” became the

official term for the economy of the People's Republic of China.

1992-2001: The second reform period downsizing and restructuring of the plan



There is a pretty clear consensus among bourgeois commentators as well as Marxists on the

developments in the 1980s as described above. The following period, however, is much more

debated. One example of this is Huang who in Capitalism with Chinese Characteristics

writes:

“When and where rural China has the upper hand, Chinese capitalism is entrepreneurial,politically independent, and vibrantly competitive in tis conduct and virtuous in its effects.

When and where urban China has the upper hand, Chinese capitalism tends toward political

dependency on the state and is corrupt. (…) While decadal differences in China‟s GDP

growth are fairly small, the economic and social implications of a more entrepreneurial

version of capitalism in the 1980s and the one closer to state-led capitalism in 1990s in factdiffered enormously.” (Huang, 2008, p. xvii)

On the same lines some have even argued that the 1990s saw a move away from capitalism.

For Huang it is just a question of different kinds of capitalism. There is some truth in this.

While the focus in the 1980s was on agricultural reforms and on the creation of private capital

from the bottom (“entrepreneurial” capital) in the form of TVEs, the focus in the 1990s wason reforming the state industries. As Table 2 shows the high point of the TVEs measured in

employment was in 1996 and no major reforms were seen for agriculture.

Table 2. Town and Village Enterprises

Employed (millions) Private share

1985 69.8 41

1996 135.1 56

2002 132.9 71

Source: Huang, 2008, p. 79.

Some of the basic processes from the 1980s continued. The limits for foreign investment were

removed even further and in 1993 there were 2000 “special” economic zones. FDI as a

percentage of GDP reached a high point of 5.36 percent in 1995 compared to 0.9 percent just

five years earlier or about 13 percent of all investments in China. By 1999 the ratio was downto 4.07 percent but still very high and over 10 percent of all investments (OECD, 2002, p. 15).

By the end of the 1990s 450 out of the 500 largest multinational corporations had operations

in China and now produce about 20-25 percent of China‟s GDP.

The most important reforms however were related to the state sector. In the course of the first

half of the 1990s 2,500 local and 100 centrally managed firms were privatised. In 1993 it was

decided that the Chinese state would only remain in control of the 1,000 largest corporations

and of these only 100 located in important branches such as telecommunications,

transportation and petroleum should be centrally controlled (Sweetman and Zhang, p. 19).

Some have interpreted this as a strengthening of the plan. The logic is that the state hasprivatised the smallest, weakest and loss making firms and has kept the big profiting ones.



There is some truth in this. But what it actually resembles is a shift of strategy by the Chinese

bureaucracy. They saw what happened in Russia and realised that the only way they would be

able to compete on the world market was by starting with what they already had and

strengthen it. Had they really tried to build capitalism from below, imperialism would have

taken over completely.

However, to say that this policy strengthened the plan and represented a move away from

capitalism is pretty farfetched, to say the least. Table 3 shows that the private share of output

in the industrial sector was rising rapidly at the end of this period.

Table 3. Private sector shares for industrial firms with sales above 5 million yuan

OECD-method

1998 2001 2005

Indigenous 17.2 27.8 50.5

Foreign 11.7 16.9 20.7

Total 28.9 44.7 71.2

Guangdong-method

1998 2001 2005

Indigenous 7.9 9.7 22.0

Foreign 23.9 29.1 28.8

Total 31.8 38.8 50.8

Source: Huang, 2008, p. 14-19.

There are different ways of measuring how big the private sector is and the discussion about

which is the correct policy is endless. In the data there are typically five different possible

types of owners: (1) State (direct or indirect), (2) collective (i.e., local government), (3)

domestic legal persons, (4) individuals and (5) foreign companies. (1) and (2) clearly means

state ownership, (4) and (5) obviously means private ownership. The problem is that“domestic legal persons” can be either state companies, funds or just other private companies.

Let us take an example. If a car producer is owned for example 40 percent by private

investors and 60 by a State Owned Company, the OECD defines this as private, while the

Guangdong method defines this as stated owned, because the state owns more than 50

percent. In this way it is justifiable to regard the OECD method as an upper limit and the

Guangdong method as a lower limit. (In the Guangdong method there is a looser definition of



foreign ownership, so a higher degree of output is form foreign companies here.) (Huang,

2008, p. 14-19)

However, whichever criteria one uses, more than half of the industrial output in China is now

produced by the private sector. Therefore it is clear that China today has gone well beyond the

NEP policy and there is no comparison between the China of today and the Soviet Union inthe 1920s. The matter is, however, not solved by ownership shares alone. If all the private

firms are delivering components to state firms and these are functioning according to a state

plan then it can be argued that the planning principle is still more important than the profit

motive, i.e. that capitalism is not yet the dominant mode of production. Therefore we have to

study the state sector a bit more.

The profit motive and the state sector

When Marx in the German Ideology explains the basics of historical materialism he starts

from a very basic point:

“[T]he first premise of all human existence and, therefore, of all history, the premise, namely,

that men must be in a position to live in order to be able to „make history.‟ But life involves

before everything else eating and drinking, a habitation, clothing and many other things. The

first historical act is thus the production of the means to satisfy these needs, the production of

material life itself. And indeed this is an historical act, a fundamental condition of all history,

which today, as thousands of years ago, must daily and hourly be fulfilled merely in order to

sustain human life.” (Marx, 1845)

To grasp the laws of motion of a specific society we have to know how the basic needs of

humanity – food, clothing, shelter etc. – are satisfied, i.e. the relations of production, who

decides what, when and how much is produced. In the foreword to A Contribution to the

Critique of Political Economy Marx explains that the relations of production normally

correspond to the property relations (i.e. the ownership relations) which is just the legal terms

of the former. But it is important to remember that the property relations are only the

expression of relations of production. In a concrete specific historic situation expression need

not correspond to content. Of course, it has to do this sooner or later, but sooner or later is not

now. When we investigate who decides the “what, when and how much” in the state

enterprises it is not enough just to look at ownership. Otherwise state run companies in the

advanced capitalist countries should also be considered small islands of socialism and of a

planned economy. But an economic plan is only a plan if it covers the entire economy or at

least a considerable part of it.

Preobrazhensky made some very interesting comments on this subject in his The New

Economics. He explained that every social system of social production with a division of

labour requires proportionality between the different branches of production. Under

capitalism this is achieved by the law of value which determines prices and profits and

therefore also the flow of capital between different branches:

“The category of price has three aspects: first, as a production-relation which summarizes

both the level of productivity of labour within each branch of production and the distribution

of labour power among the different branches; secondly, as a relation of distribution, in so far

as the price level determines the level of that stream of values which flows from the hands of one group of people into the hands of others; thirdly, as a production-relation once more, in



that through the mechanism of the deviation of prices from values, redistribution of

productive forces takes place between the different branches of the economy”

(Preobrazhensky, 1926, p. 149)

In the transitional economy as with the NEP the law of value also plays a role, but it is

countered by the planning principle which is given strength by the workers‟ state (or thedictatorship of the proletariat as Preobrazhensky would have called it). The planning principle

limits the law of value, but it is also itself limited by the law of value. If grain prices are too

low in the plan the peasants stop their supply. The point of primitive socialist accumulation is

exactly to strengthen the plan in relation to the law of value. This becomes more and more

economically variable as the productive forces are developed. A perfect planned economy in

the advanced economies today would leave much less room for the law of value than the NEP

did in Russia in the 1920s.

But primitive socialist accumulation was not taking place in China in the 1990s. Instead what

was happening was an expansion of the role of the law of value within the state sector – i.e.

the expansion of the profit motive. Some bourgeois commentators say that this processalready began with the profit retention in the middle of the 1980s:

“Further, as a result of this move toward market economy, SOEs had to shift their strategies

and attitudes in order to stay alive in the economy. Thus, the main focus of the state sector

shifted from meeting goals to actually making profits.” (Sweetman and Zhang, 2009, p. 19)

Table 4 shows that the degree of management autonomy was very big in 1996. Almost half of

the state enterprises for example had complete autonomy of investment. The same point is

seen by the fact that an increasing share of top Chinese managers today have been educated in

capitalist universities in the West (Cheng, 2007, p. 143).

Table 4. Degree of management autonomy in the SOEs in 1996

% of enterprises declaring complete

autonomy on decision making

Selling 97

Production 96

Purchase 94

Use of retained earnings 78

Right to decide on organization structure 78

Pricing 73

Wages and bonuses 65

Right to hire workers 58



Right to manage personnel 55

Investment 47

Establishment of JV or mergers and acquistions 40

Import and export 39

Right to dispose of assets 37

Right to refuse non-regulated government charges 21

Source: OECD, 2002, p. 15.

Joining the WTO (2001)

Quantity turned into quality when China joined the World Trade Organisation in 2001 and

thus had to abide by its rules.

“The current WTO-inspired wave of reform, which will probably continue for five to ten

more years, has resulted in intense efforts to revise laws and regulations on trade, technology

transfer, investments, banking, insurance, securities, taxation, customs, intellectual property,

telecommunications, health, professional services and other subjects to bring them into

compliance with the WTO regime and to make the adjustments required by market access

commitments.” (OECD, 2002, p. 365)

In the OECD‟s latest report on China 2009 OECD Reviews of regulatory reform China,

defining the boundary between the market and the state it is clear that the bourgeois

economists at the OECD consider that the SOEs have been turned into “corporate legal

entities operating as profit maximizing commercial businesses”:

“The new property law adopted in 2007 defines and codifies the rights to pr ivate property and

establishes equal protection of property rights of state-owned, collective and private

businesses and individuals. The law defines each type of property; specifies means to enforce

property rights; provides for the establishment of property registers; and broadens the range of

property recognised as collateral to include inventories and business receivables. The law

does not fundamentally alter the property rights regime for land but it does mark a beginningin defining use-rights to land as property rights, which in principle could allow their transfer.

It also explicitly prohibits unilateral alterations of land use contracts by the legal owner for the

life of the contract.” (OECD, 2009, p. 54)

And further:

“The corporatisation process is approaching completion, with more than 80% of all SOEs, and

virtually all those controlled by the central government, incorporated under the company law

by the end of 2006 (…) These reforms are fostering (and indeed are essential to) the

transformation of SOEs away from their earlier role as agents of the plan into competitive

profit-oriented businesses.” (ibid., p. 58)



And the conclusion is that capitalism is now the dominant force in China and that the time of

major reforms is in the past:

“With many of the fundamental steps having been taken, future reforms are likely to focus on

completing the established frameworks and on strengthening implementation; the emphasis is

likely to be on judicial, competition, and other policies applying to the economy as a wholerather than to individual sectors.” (ibid., p. 65)

The planning principle has lost all of its power. Of course the Chinese state is still very strong

and probably it is the strongest state ever seen in a capitalist economy. In none of the

situations of state capitalism or in the fascist regimes has state control been greater. But the

control is not based on a plan. It is mostly based on typical capitalist methods such as taxes

and credit while direct force also plays a role.

This is also supported by the fact that “market capitalization, as a percent of GDP, soared

from 37 percent in 2005 to over 100 percent in 2007” (Sweetman and Zhang, 2009, p. 24). Up

till now we have not discussed the role of credit at all. Before 1978 there was just the People‟sBank of China (PBOC), however, during the 1980s and the beginning of the 1990s it was

divided into different semi-autonomous parts. But further steps have now been taken:

“Foreign banks were not allowed to enter Chinese markets until the late 1990s. Initially they

were subject to many restrictions. After joining the WTO in 2001, China removed most of

these restrictions (…) The next step in reforming China‟s banking system was to make state

banks more responsible for their financial gains and losses through profit retention and a

profit loss contract system.” (Sweetman and Zhang, p. 23)

Conclusion

In 1937 in an attack on the idea that the Soviet Union was state capitalist Trotsky said that:

“The class nature of the state is, consequently, determined not only by its political forms but

by its social content; i.e., by the character of the forms of property and productive relations

which the given state guards and defends” (Trotsky, 1937). Remembering how the OECD

explains the entry of China into the WTO and the reforms that followed, it is clear that the

Chinese state today defends capitalist property relations in a form where the state is very

powerful. In The Revolution Betrayed Trotsky estimated how the capitalist counter-revolution

would appear in the Soviet Union. The process he outlined as a perspective is actually very

similar to what we have actually seen in China:

“The chief task of the new power would be to restore private property in the means of

production. First of all, it would be necessary to create conditions for the development of

strong farmers from the weak collective farms, and for converting the strong collectives into

producers‟ cooperatives of the bourgeois type into agricultural stock companies. In the sphere

of industry, denationalization would begin with the light industries and those producing food.

The planning principle would be converted for the transitional period into a series of

compromises between state power and individual “corporations” – potential proprietors, that

is, among the Soviet captains of industry, the émigré former proprietors and foreign

capitalists. Notwithstanding that the Soviet bureaucracy has gone far toward preparing a

bourgeois restoration, the new regime would have to introduce in the matter of forms of

property and methods of industry not a reform, but a social revolution.” (Trotsky, 1936)



To sum up the differences between what we have seen in China since the beginning of the

1990s and the original NEP we can look at the market. Trotsky said, as quoted above, that the

plan should be “checked and, to a considerable degree, realized through the market”. Now it

is the other way around; the market is checked by the “plan” – or simply “regulation”. In a

planned economy markets can be used to determine supply and demand which can then be

manipulated using taxes and credit, etc. Some firms can be run with deficits by subsidies, etc.If instead the market and therefore the profit motive becomes the prime determinant of

production and investment, then quantity has turned into quality.

1. Under the NEP the state was controlled by a party of and for the working class – this

is not the case in China today.

2. Under the NEP the state remained in control of all the most important productive

forces – this is only the case to a very limited degree in China today.

3. Under the NEP the state was in complete control of credit – in China today the state

still owns the majority in the biggest banks, but these are now driven in a capitalist-

like manner.

4. Under the NEP the state held an absolute monopoly of foreign trade – this is not thecase in China today.

The transition to capitalism in China today is no longer in the realm of possibility as generalMarxist theory states for any workers‟ state. It is not just a probability as is the case in any

NEP-like period. Capitalism is a concrete reality in China today as the dominating mode of

production even though the Chinese state plays an enormous role compared with almost any

other capitalist country in history.

The basics tasks for the Chinese Marxists are therefore not just those of a political revolution

but also a social revolution where the state enterprises and the credit system are reintegrated

into the plan, the largest private firms are nationalised and the foreign firms are put under

strict supervision and the state monopoly of foreign trade is re-established. Common welfare

demands known in the West, such as free and better health care, education and social security

will also gain in importance.

China was relative mildly hit by the world economic crisis in 2009 and still managed to grow

by 7.7 percent. However, the fundamentals do not seem to be that sound. Overcapacity is

lurking in many branches of production and bubbles in house prices and stocks are evident

with prices rising faster than incomes and profits. The growth of the last few years has been

increasingly capital intensive leading to weak employment growth. Now a survey by the

Chinese Academy of Social Sciences argues that the figure for urban unemployment is above9 percent. Struggles against privatisations and lay-offs have been rising. The Honda strike in

June was only one of the first shots in a long struggle, an indication of what is to come. When

the Chinese working class really starts to move nothing will be able to stop it.

How the Marxists connect with this enormous working class is of critical importance for the

world revolution. The aim of this article has been to achieve a more clear understanding of the

economic processes leading up to the present situation. The real task now is to develop the

demands briefly mentioned above so that they connect with the present day conditions of the

Chinese workers and points in the direct of a socialist planned economy.

Copenhagen, July 2010



Literature

Cheng, L., 2007, China's Changing Political Landscape: Prospects for Democracy

Huang, Y., 2008, Capitalism with Chinese Characteristics

IMT, 2006, China‟s Long March to Capitalism

Liu, X. and Zhang, W., 2010, China‟s Three Decades of Economic Reforms

Marx, K., 1845, The German Ideology

Marx, K., 1852, The Eighteenth Brumaire of Louis Bonaparte:

Marx, K., 1852, Prefact to Contribution to Critique of Political Economy

OECD, 2002, China in the World Economy, The Domestic Policy Challenges

OECD, 2009, OECD Reviews of regulatory reform China, defining the boundary between the

market and the state

Preobrazhensky, E., 1926 (1965), The New Economics

Sweetman, A. and Zhang, J., 2009, Economic Transitions with Chinese Characteristics –

Thirty years of reform and opening up

Trotsky L., 1923, The New Economic Policy of Soviet Russia and the Perspectives of the

World Revolution

Trotsky, L., 1929, The Permanent Revolution & Results and Prospects

Trotsky, L., 1932, The Soviet Economy Danger

Trotsky, L., 1936, The Revolution Betrayed

Trotsky, L., 1936, Not a Worker‟ and Not a Bourgeois State?

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China on Transitional Economics

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