At once, China’s roots in Maoism and its desire for the official status of a market economy may seem like a contradiction, especially when compared to the situation in several ostensibly capitalist democratic European countries, such as Spain, France, Britain and Italy, which have all become more suspicious of international market forces. But, when put into the context of the effect of capital and labor on national development, and the increasing mobility of capital through the international monetary system, this confusion is easily dispelled. The necessity for new markets to deal with an overabundance of commodities, and an overaccumulation of capital, have been a part of capitalism from the very beginning, and intimately color the relations and desires of countries today with different levels of capital, labor and rent.
The history of development is one, like all of capitalist history, driven by the need to produce commodities for the purpose of profit. The relationship between Britain and the American Colonies, and then United States of America, can shed some light on exactly how/why countries change their attitudes towards freedom of trade and capital mobility, including in a contemporary context. In the birthplace of capitalism, David Ricardo wrote about the benefits of free trade and commerce between countries, “Under a system of perfectly free commerce, each country naturally devotes its capital and labour to such employments as are most beneficial to each,” something I think isn’t a coincidence regarding Britain’s place in the international trade system at the time. Britain did use the teachings of Ricardo and Adam Smith to defend their foreign policy, including, most illustriously in Ireland, where the utter faith in free market principles was center court, to the extent of refusing to provide any significant aid to Ireland during the famine which would kill 1/8 of its population. However, Alexander Hamilton, the chief founder of the American School of economic development, regarded the British position of proponents of free trade with doubt, believing instead that economic dependence on British manufacturing would put the United States under her control. And perhaps for good reason, the previous development model of Britain had depended at least to a large extent on imperialism. The scheme was simple, Britain had a great deal of capital, of industrial capacity, but lacked the natural resources, labor and market in its homeland to use these capacities to its fullest and generate the greatest amount of profit. The solution, create colonies which at once could provide the natural resources to British manufacturers as well as a market for finished goods, as was the case with the American colonies. When the American Revolution made this impossible, British capital still required a way to deal with a lack of labor and natural resources, and so this was remedied with the use of foreign direct investment of financial capital into the former colonies. As Luxemburg outlines in her theory of capital accumulation, “During the nineteenth century there had been a huge outflow of capital from England to the United States. ‘English industrial cartels establish branch factories in the North American Union to avoid the high tariff walls, or they bring American enterprises under their control by buying up stock and eliminating competition on the world market.’ As the United States becomes industrialised it is gradually transformed from a net capital- importing to a net capital-exporting country, with capital flowing to the countries where industry is still in its infancy,” as such, the United States was able to reap the full rewards of the first international trade system without having to relinquish significant autonomy over its industrial policy.
An analogous situation can be at least somewhat found today in China and the previously developed countries of southern Europe. That is, at once China wishes to be granted the full benefits of being a country full of cheap labor, a stable government, and decent infrastructure being in the international trade system, while retaining significant autonomy over its industrial policy and capital controls. At the same time, southern Europe, and the United Kingdom, ironically enough, are seeing an increase in suspicion towards free international trade because they have now comparatively little manufacturing capacity, no control over their own capital, and are often forced to be the markets for imported finished consumer goods, often resulting in trade deficits over the past few decades. This suspicion has revealed itself through increasing support for populist political ideas, movements and parties, as well as resistance to the European Union and free trade agreements. The reasons why this became the case are complex, but the history of capital, labor and development in these countries gives us some insight. The key differences in the situation between China and some European countries in our current world trade system, and the situation between the United States and Britain in the first world trade system, is the much greater freedom of capital mobility, increase in competition among developed and developing countries, an increase in ‘rent’ in the way of states to their citizens, and a trend towards global supply chains.
This freedom of capital mobility, where one can almost instantaneously move financial assets around the globe, to the effect of skirting many regulations and tariffs, was a trend that began in the 1980’s. The reason for this trend is very simple, when a country has an abundance of capital and savings, the marginal rate of return for increasing investment in that country will go down, as per the law of diminishing returns. The savings and financial capital naturally want to be invested abroad where they can receive greater returns on investment. By the same token, countries with a great deal of labor but little capital would like to receive foreign direct investment. Just like with Britain and the United States, eventually this will lead to the country receiving the investment to go from a capital-importing country to a capital-exporting country. In the context of China wanting to be labeled a market economy, a status that would decrease barriers to the United States and other trading partners under WTO rules, this is highly relevant, considering that what goods get produced in China with its new capital must be sold somewhere. Keynes rightly pointed out that supply does not necessarily create its own demand, and in China this means that it did not immediately have the needed internal demand for these goods and needed to use an export oriented strategy.
According to Alexander Gerschenkron’s theory of development, it takes increasing effort on the part of the state to industrialize a country as time goes on and more and more countries become industrialized, as it takes more and more investment in capital and infrastructure to compete with already established countries. This may help explain why Britain was not so suspicious of market forces in the 19th century, as the country first to industrialize they had very little competition in capital intensive goods for quite a while, especially compared to the situation today. But as international trade has opened up in the second world trade system, it has permitted labor in Europe to compete with labor in East Asia, while since the liberalization of financial market in the 80’s, capital simply goes to wherever it can make the most profit. In terms of factor conflicts, this means that where labor is cheap there is a great desire to engage in international markets, and where labor is expansive we see a desire for a lack of competition, lest the capital move from its original country to a country with cheaper labor. In many industrialized countries we see many minimum wage laws, taxes, and regulations which drive up the cost of labor. The existence of the laws, brought about through the social democratic reforms of the 20th century, can be seen as a form of rent between the citizens and their state, “welfare benefits share with economic rents the property that they are payments for possession of the right to the payment, in the same manner as owner- ship of land gives the owner the right to the rent from it.” And it operates with similar logic, the greater the income of the tenants, the more the landowner will ask for rent, thus, the greater amount of income going into the country, whether to capital or anything else, the more the citizens of a country can benefit. This is in addition to the increase in regular wages seen as labor productivity and bargaining power increases with industrialization. Thus, global supply chains and capital mobility put at risk both the rent from southern European state welfare and the wages of its workers.
All this combined means that international market forces allow southern European to bleed production and capital to countries with cheaper labor, forcing them to lose income in the form of wages and rent in the form of state welfare. For China, however, the international market has given vast amounts of capital to them, massive foreign direct investment, and a place to sell all the goods they make with this new capital and their labor. It is then no wonder why Southern European countries may not be a fan of international markets, and China, despite its history of Communist leadership, has grown quite fond of them.
This export-led model of development is of course not unique to China. South Korea, Mexico, Japan, India, Ethiopia, and Taiwan are all excellent examples, attempting and sometimes succeeding to develop their economy by integrating themselves into global supply chains. One thing that all of these countries have in common, to various extents, is a powerful central government (Mexico, which was formerly a one party state, may be suffering in this regard lately as it’s federal states gain power). This is in line with Gerschenkron’s theory, as modern states interested in development must be capable of making large investments and protect important industries. However, just as important to this equation, is foreign capital, we must assume, after all, that the colonial model of development is out of the question for most third world states. Luxemburg correctly pointed out that capitalism needed foreign, pre-capitalist, and more primitively developed nations. But so too did the more primitive nations need the excess capital from the industrialized ones, as the United States did.
What are the implications for socialism? Well, it means that even if the entirety of the third world was to experience a revolution, and establish dictatorships of the proletariat, they would still remain in relative poverty compared to the capitalist first world should the first world cut off trade with them, which they almost certainly would if they were not permitted the profit off capital investments. What’s more, it would present a near insurmountable collective action problem, as the first country to open trade with the capitalist world would receive a vast amount of investment, trade and growth. The most famous case study of this issue would by the 1982 Latin American financial crisis. After defaulting on their debt, the big 7 of Latin American countries failed to put together a united front to confront developed countries on the negotiating table, despite developed countries and the big banks banding together. Fidel Castro led the effort to put together this front, knowing that if they could do so, and refuse to pay back the debt, the big banks, including Citicorp, Wells Fargo and Bank of America, would instantly collapse. However, it never materialized, despite the material gains such a position could afford them. The developed countries had the IMF and the United States to coordinate them as central leaders, capable of disciplining the actors involved into alignment. Castro had no such central or military power as the United States and IMF. But, even beyond this, what would happen if they succeeded? Yes, the banks would have failed, but as we know from more recent history, the United States government would simply bail them out in such an occasion, and capitalism would chug along all the stronger, meanwhile the Latin American countries would have been deprived of the capital they desperately needed to develop.
There is a credible case to be made that socialism needs capitalism to come about first, to create an overabundance of commodities, to begin the process of universalizing private property. The problem this creates for socialists with third world development is that the forces which at once permit third world countries such as China to develop at once also create powerful domestic capitalist interests, even among what were once Communist parties. For all Xi Jinping’s posturing on boosting Marxist curriculum in Chinese universities, China has sped ahead on neo-liberal reforms, often cutting social safety nets for workers of state owned enterprises, lowering taxes on businesses, all while inviting real estate speculation and, up until recently, corporate and municipal debt. The situation actually strikes similarities to Yugoslavia, whereby local democracy, then in the factories and now in the municipal governments, rack up massive amounts of debt for popular, lucrative, class-collaborationist purposes, which the central government will eventually be held responsible for. At the same time, the Chinese Central Party with its small clique of princelings and bureaucrats running the show is more and more being held accountable to the forces of capital, forced to take every action to stabilize their stock market, to keep liquidity high enough to prevent crisis, and forced to lose autonomy over their exchange rates, all while inequality goes higher and higher, even higher than the very heart of global capitalism, the United States. Indeed, I suspect that China could institute a highly energetic and authentic socialist program if not now then in only a few years, but it’s new responsibilities to domestic and global capital will prevent it from doing so.
I doubt we have the patience to wait until capitalism causes the third world to converge with the first for socialism, as it is much more likely to kill us all through either environmental catastrophe or large scale war. I admit, we may see revolutions in the third world in areas mostly dominated by production of a more feudal or primitive communist characteristic, as was the case in southern Mexico with the Zapitistas and in northern Syria with the Rojavan Revolution. However, if socialism is to succeed on a global scale, it will require revolution in the first world. And for this, despite the pessimism of third worldists, I think there is still some promise. Compared to workers in the third world, workers in the first may live in comfort. But, as Slavoj Zizek often points out, revolutions occur not because of an absolute level of poverty, but a relative loss in standards of living. There are many crises of capitalism ahead of us yet, now not only ones of overproduction, but overaccumulation, as the bourgeoisie begin to handle so much capital it cannot all be effectively used to return a profit, even in overseas markets. The populist movements in Europe and North America are promising signs that these crises as well as the erosion of social democratic reforms and middle income jobs/wages are increasing the revolutionary potential of the first world working class. It is then up to us in the first world to become organized and present a meaningful alternative to capitalism, without which, our comrades in the third world would be doomed in the prospect of bringing about a global establishment of socialism.