On transitional economics ‑ Why and how China went capitalist (Part One)

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 world economy^[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The Chinese revolution as an historical event is only superseded in importance by the Russian revolution.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 at www.ggdc.net/maddison/). [Editor's Note: due to a slip up in proofreading these figures were 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 to mention 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-colonial and 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 Bonaparte (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 simple quantitative 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 the end 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 the Bolsheviks 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 young Soviet 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 lawyer’s waiting room became a fortress against us. They provided bellicose counter-revolution with a material base, and an organic network of communications.” (Trotsky, 1922)

This was the so-called period of War Communism which involved confiscation of the grain surplus lowering agricultural supply and equal wages in industry lowering labour productivity. Trotsky explains: “War Communism created a bureaucratic surrogate of economic unity. The machine-building factories in the Urals, in the Donets Basin, Moscow, Petrograd and elsewhere were consolidated under a single Central Commissariat, which centralistically allotted them fuel, raw materials, technical equipment and working forces, maintaining the latter through a system of equal rations. It is perfectly self-evident that such a bureaucratic management completely levelled off the peculiarities of each individual enterprise and cancelled out any possibility of verifying its productive capacity and its gainfulness, even if the bookkeeping entries of the Central Commission had been distinguished by a greater or lesser degree of precision, which in reality has been out of the question.” (ibid)

The hope and perspective was that War Communism, which designated production for the sake of the military and communism in consumption through rationing, could be developed into genuine socialism with the aid of the West European working class. War Communism was a political necessity but irrational seen from a purely economic point of view.

The new economic policy (1921-29)

There was a wave of revolutions after the First World War, but only in Russia did this lead to a successful taking of power by the workers. Once the revolutions in the advanced capitalist countries had failed, it was necessary for the workers’ state to retreat. The New Economic Policy was thus introduced by Lenin and Trotsky in 1921. The main points of this policy were:

1. In agriculture: The peasants were allowed to sell their surplus at the market.
2. Industry - Some minor privatizations of small scale production were carried out and some of the light and medium-sized industrial factories were leased to individuals and co-operatives. Differences in wages by, for example, through piece work were allowed.
3. Trade - Private merchants were allowed to operate to some degree.
4. Foreign capitalists were offered concessions.

Or in short: the methods of the market were introduced. The peasants had to have an incentive to improve and expand their crops. Workers had to be rewarded for improving productivity. Foreign know-how had to be attracted. The idea of a complete plan without the use of any markets had to be abandoned due to the low level of the productive forces. Trotsky summed this up in the above mentioned speech in 1922:

“Before each enterprise can function planfully as a component cell if the socialist organism, we shall have to engage in large-scale transitional activities of operating the economy through the market over each enterprise and each set of enterprises must to a greater or lesser degree orient itself independently in the market and test itself through the market. This is precisely the gist of the New Economic Policy” (ibid.)

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 and that 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 business secrets 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 inheritance received 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 unhatched chicken. 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 transitional economy 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. The plan 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 agricultural production 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 too many 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 Soviet Union. 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” were implemented 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 state apparatus. 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)