Part One: What were we thinking?
Capitalism’s advocates claim that it fosters rapid scientific and technological growth, increases overall prosperity, and creates a more secure and democratic world for everyone, and China is proving them right. Chinese corporations now dominate Fortune’s Global 500 while the US dominates the the world’s corporate zombie list. Why?
The Mongol Trade
Sending armies to fight highly mobile, mounted steppe warriors who devastated China’s borderlands in summer, was ruinously expensive–until a palace official’s cost-benefit analysis of raiding, and found it to be a high-risk, low margin business. He recommended offering the barbarians a thousand bolts of silk and four tons of gold and silver–half the cost of a Chinese Imperial military campaign each year–to leave China in peace. Win-win.
The Palace imposed just three conditions: the barbarians would bring token gifts and acknowledge the emperor as their lord; they would keep warrior bands fifty miles from the border; and, lest they corrupt them, barbarians would refrain from trading with the Emperor’s subjects.
When the barbarians indignantly rejected the no-trading rule the emperor, feigning reluctance, agreed to permit trading, but only at four Imperial border trading posts.
Within weeks of receiving the first annual payments, the warriors’ wives arrived at the trading posts bringing their husbands’ gold, the furs they had trapped and gems they had unearthed. There they exchanged them for exquisite mirrors, tortoiseshell combs, enameled brooches, rich embroidery, bronzes, porcelains, and paintings.
The Emperor quickly recouped his gold–the trading posts were SOEs–which he would re-present to the barbarians the following Spring. His profit from onselling the furs to his nobles paid for the silks his subjects produced and would gift the following Spring. And so the Great Cycle of Chinese Trading began. Says F.W. Mote:
“Midway in the sixteenth century China began to be the great repository of the early modern world’s newly discovered wealth in silver. Long a participant in international maritime trade, China experienced the consequences of the greatly enlarged patterns in world trade. In that commerce China was essentially a seller of high-quality craft manufactures, with which other countries could not compete, in either quality or price. The colonies of the New World and the entire Mediterranean sphere of trade, from Portugal and Spain to the Ottoman Empire, began to complain that the influx of Chinese goods undermined their economies”. Imperial China.
Nor did capitalism ‘save’ China’s economy. Despite massive embargoes on foreign capital, technology, diplomacy and intellectual property, Mao grew China’s GDP 6.3% from 1952-1978 and his successors managed 9.% though 2015–a sixty-seven year average of 8.2 percent:
If we exclude the very first years of the People’s Republic from 1952 to 1962–between the completion of the unification of the continental territory and the break with the Soviet Union—then Mao managed a recorded average of 8.2 percent GDP growth rate in the period from 1963–78, reflecting very rapid growth even during the Cultural Revolution.
The average growth rates of “productive” capital stock (equipment, machinery, tools, industrial buildings, and facilities, but not residential buildings and their land value) showed very little difference over the two subperiods of 1952–78 and 1979–2015: 9.7 percent for the first subperiod and 10.9 percent for the second.
If we retain a larger productive capital stock, including the inventories, which are important for calculating the rotation rate of circulating capital, we see that the average rhythm of accumulation of such stock was slightly higher between 1952 and 1978 (10.41 percent) than between 1979 and 2015 (10.39 percent). Moreover, if we select an even larger capital stock to also include the constructed residential buildings and their land, not directly productive components, the growth rate of this very large capital stock continued to be high, averaging 9.1 percent from 1952 to 1978 compared to 10.9 percent from 1979 to 2015. It is, therefore, quite clear that the capital accumulation effort is not a recent phenomenon, but that it has been continuously decided and planned by the Chinese authorities over the past six decades.
It is this sustained effort of accumulation, enabled in particular by surplus transfers from rural areas, that explains the success of industrialization and, to a large extent, the robust rate of GDP growth.
Chinese characteristics
China’s version of capitalism lifted 800 million people out of poverty, while our version immiserated millions, yet The Economist predicted 56 Chinese crashes and regularly scoffs at China’s GDP figures, though observers of China’s physical development consider them to be conservative. Those who were paying attention, for example, recently saw China launch three nuclear submarines and, on the same day, begin delivery of Yangtze River water to the country’s parched North–a feat of engineering
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that dwarfs the Three Gorges dam.
Chinese capitalism was tailored for China’s 4,000 year culture using an eclectic set of tools. Strategic assets–like banks and utilities–remained State-owned and the Communist Party proposed to coordinate private enterprises by placing Party members in every sizable enterprise.
Mine was a typical merchant family. We have been capitalist from the beginning of our civilization it just was organized around the clan. I had to learn calligraphy as soon as I could hold the brush, master the abacus and hold the ‘twin swords’. As soon as my father could teach his sons, we learned to keep a green-covered thick ledger of the daily gain and loss in our business. Rain or shine, It did not matter: we kept that ledger 24/7. If we did not save 50% of our income monthly we were in trouble and had to figure out why we couldn’t.
When Mao set up the country before 1949, we already knew where we were headed, we just needed direction. We were so poor there was no money, just Government Store Coupons to get the most raw survival items, cooking oil, rice, salt, sugar, cotton fabric, sewing thread, yarn, shoes. There was pork sausage but nothing else. Everyone was required to work in the factory, field or special assignment. Everyone pulled their weight for years and years at least 12 hours a day saving our coupons or 40–50% of our yuan eventually. And these savings of the population created our capital. People in the West do not understand this.
We reverted to our production ways of the 1700s, when we were the richest country in the world. But we trust the government banks now rather than accumulate gold and silver in our houses as in the past.
There is no magic to China, just solid hard hard work. Never again to be hungry or see our old people perish of hunger or the young, like me in those days, going barefooted in the winter counting every one of my skinny bones.
Mao, Zhou, Deng provided the leadership and we went to work, we know from our civilization what single purpose hard work can accomplish. I remember the chanting we had before classes started, we were told there was nothing to eat and to tighten our rags around the bellies, we were told that the US devil had rejected our buying of grain… so we sang: hit, hit the USA…. Máo zhǔ xí wàn wàn suì. Silly as it now sounds and looks, we survived the hunger and worked harder than ever. When Kissinger came in 1971 to offer us slave labor wages, we were ready to work harder than before. I was there, the fellows writing the article are correct. Kissinger and Nixon just made it easier, with the US wages we saved more every month. Deng’s wisdom made things easier for us to follow, we got rich in a hurry and invest the savings more and more.
