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 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 Chinas 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 Peoples 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 The Chinese revolution as an historical event is only superseded in importance by the Russian revolution.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 Chinas 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 Marxs 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. Trotskys 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 Trotskys 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. Marxs 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). Trotskys 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 Trotskys 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

lawyers waiting room became a fortress against us. They provided bellicose counterrevolution 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 countrys 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 cooperatives. 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 Stalins 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 interreactions 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 Marxs 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. 2. 3. 4. 5. The self-sufficiency policy was aborted. Foreign investors were invited on strict conditions. The peasants were given the possibility of leasing the land individually for 30 years. Markets started playing a bigger role in determining prices. 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)

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 the situation. The result was a collapse and chaotic backsliding into capitalism.

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 procapitalist 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 they stayed 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 Peoples 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 policies were 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 Chinas 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 by 1984 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 1980-1985 1985-1990 2.3 8.2 4.7

Source: Sweetman and Zhang, 2009, p. 17. From 1978 to 1984 alone Chinas 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 firms was introduced.

Another important aspect was the possibility of setting up Town and Village Enterprises. Many argue that about a third of Chinas 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 were private (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 the SEZs. 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 process was 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 speeded up 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 Chinas 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 fact differed 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 was on 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) 1985 1996 2002 69.8 135.1 132.9 Private share 41 56 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 down to 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 Chinas 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 has privatised 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 Indigenous Foreign Total 17.2 11.7 28.9 2001 27.8 16.9 44.7 2005 50.5 20.7 71.2

Guangdong-method 1998 Indigenous Foreign Total 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 7.9 23.9 31.8 2001 9.7 29.1 38.8 2005 22.0 28.8 50.8

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 in the 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 the dictatorship 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 process already 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 Production Purchase Use of retained earnings Right to decide on organization structure Pricing Wages and bonuses Right to hire workers 97 96 94 78 78 73 65 58

Right to manage personnel Investment Establishment of JV or mergers and acquistions Import and export Right to dispose of assets Right to refuse non-regulated government charges Source: OECD, 2002, p. 15. Joining the WTO (2001)

55 47 40 39 37 21

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 OECDs 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 private 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 beginning in 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 whole rather 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 Peoples Bank 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 Chinas 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 migr 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 capitalistlike manner. 4. Under the NEP the state held an absolute monopoly of foreign trade this is not the case in China today. The transition to capitalism in China today is no longer in the realm of possibility as general Marxist 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 above 9 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, Chinas Long March to Capitalism Liu, X. and Zhang, W., 2010, Chinas 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? Wikipedia