+1 Recommend
1 collections

      If you have found this article useful and you think it is important that researchers across the world have access, please consider donating, to ensure that this valuable collection remains Open Access.

      Journal of Global Faultlines is published by Pluto Journals, an Open Access publisher. This means that everyone has free and unlimited access to the full-text of all articles from our international collection of social science journalsFurthermore Pluto Journals authors don’t pay article processing charges (APCs).

      • Record: found
      • Abstract: found
      • Article: found
      Is Open Access

      China as a transitional economy to socialism?

      * ,
      Journal of Global Faultlines
      Pluto Journals
      China, socialism, development, value


            What sort of economy and state is China? Is it capitalist or socialist? The answer to those questions must start with Marx’s law of value, which defines the nature of mode of production and social relations under capitalism. It continues with an understanding of the concept of a transitional economy between capitalism and socialism. We can define several criteria for an economy in transition to socialism. Based on those criteria, China is not a capitalist economy; its phenomenal economic success is product of a predominantly state-owned and directed economy clearly distinct from capitalist economies, whether democratic or autocratic. However, it is still far away from achieving socialism or communism. It is an economy in a “trapped transition”. It is trapped because it lacks any meaningful forms of workers’ democracy and it is surrounded by the forces of imperialism which seek to strangle it. Indeed, any transition to socialism requires international coordination and unity to develop the productive forces and sustain workers’ control.

            Main article text

            The law of value and socialism

            In Marxist theory, the law of value would not operate under socialism and the gradual transition to socialism from capitalism requires the reduction of the dominance of the law of value in society towards zero. Commodity production became sufficiently generalized to dominate within capitalist economies over a long period. Engels argued that commodity production was “the result of a past historical development, the product of the extinction of a whole series of older forms of social production.” Only when it was dominant could we talk about a capitalist mode of production.

            In the same way, socialism will not emerge from the overthrow of capitalism overnight, but only gradually. Socialism is not the result of a spontaneous, peaceful, or automatic growth, but rather the outcome of the struggle between capital and labor, as capital will not relinquish power without strenuous and violent opposition. So class subjectivity and struggle plays a pivotal role and this is why socialism is not assured.

            This leads us to the term the “dictatorship of the proletariat” (Marx, 1875):

            The question then arises: What transformation will the state undergo in communist society? In other words, what social functions will remain in existence there that are analogous to present state functions? This question can only be answered scientifically, and one does not get a flea-hop nearer to the problem by a thousand-fold combination of the word “people” with the word “state”. Between capitalist and communist society there lies the period of the revolutionary transformation of the one into the other. Corresponding to this is also a political transition period in which the state can be nothing but the revolutionary dictatorship of the proletariat.

            This term as used now, seems alien to “democracy”, but for Marx and Engels it was simply a description of the takeover of the state and economy by the working class. Capitalism may have the trappings of “democracy” with its somewhat blunted universal suffrage and elected leaders. In reality, this democracy is the dictatorship of capital: the rule of finance capital and big oligopolies controlling the “democratic” institutions. The dictatorship of the proletariat would mean the democratic rule of the majority of working people dictating to capital, not vice versa.

            The term, dictatorship of the proletariat, comes from the communist journalist, Joseph Weydemeyer, who in 1852 published an article titled “Dictatorship of the Proletariat” in the German-language newspaper Turn-Zeitung. In that year, Marx (1852) wrote to him, stating:

            Long before me, bourgeois historians had described the historical development of this struggle between the classes, as had bourgeois economists their economic anatomy. My own contribution was (1) to show that the existence of classes is merely bound up with certain historical phases in the development of production; (2) that the class struggle necessarily leads to the dictatorship of the proletariat; [and] (3) that this dictatorship, itself, constitutes no more than a transition to the abolition of all classes and to a classless society.

            When asked to give an example of the dictatorship of the proletariat, both Marx and Engels replied: the Paris Commune. In the 1891 postscript to The Civil War in France (1872) pamphlet, Engels stated: “Well and good, gentlemen, do you want to know what this dictatorship looks like? Look at the Paris Commune. That was the Dictatorship of the Proletariat.” To avoid bourgeois political corruption, Engels recommended that:

            the Commune made use of two infallible expedients. In this first place, it filled all posts administrative, judicial, and educational by election on the basis of universal suffrage of all concerned, with the right of the same electors to recall their delegate at any time. And, in the second place, all officials, high or low, were paid only the wages received by other workers. The highest salary paid by the Commune to anyone was 6,000 francs. In this way an effective barrier to place-hunting and careerism was set up, even apart from the binding mandates to delegates [and] to representative bodies, which were also added in profusion.

            Lenin wrote that the use of the term dictatorship “does not refer to the Classical Roman concept of the dictatura (the governance of a state by a small group with no democratic process), but instead to the Marxist concept of dictatorship (that an entire societal class holds political and economic control within a democratic system).”

            The dictatorship of the proletariat will begin in individual nation states, but such states cannot progress towards socialism, i.e. the withering of such state machines towards the “administration of things”, unless the dictatorship spreads internationally into the major economies and eventually globally, just as the capitalist mode of production has. Communist production is not simply inherited from capitalism, needing only to be signed into law by a newly elected socialist government. It requires “long struggles, through a series of historic processes, transforming circumstances and men” (Marx, 1871). Among these transformed circumstances will be “not only a change of distribution, but a new organization of production, or rather the delivery (setting free) of the social forms of production … of their present class character, and their harmonious national and international coordination” (my emphasis). That means the ending of imperialism and its replacement by an association of nations based on democratic planning and common ownership.

            We can categorize a transitional economy between capitalism towards socialism. It must involve:

            1. The loss of state power by capital and its “armed bodies of men”.

            2. Capitalist state power is replaced by workers democracy based on Engels’ two principles of democratic right of recall and the wages of officials at the same level as average workers’ wages.

            3. The common ownership of the bulk of the means of production and credit.

            4. The planning of investment and production rather being than left to market forces.

            5. A high and rising level of technology and productivity of labor to reduce working hours and gradually end scarcity in social needs.

            6. The gradual replacement of commodity production with direct production for use.

            7. The gradual ending of wage labor and money, both as a means of exchange and as a store of value.

            8. The progressive “withering away” of state power (armies, police, officialdom).

            The second point is vital in categorizing any transition to socialism or communism. It must involve two principles. First, all posts must be filled through elections, which may be a combination of direct choice and delegation, but with the vital condition that the elected are subject to recall, if needed. But this is not enough. The fundamental question is the class nature of the positions to be filled through elections. In this connection, Marx makes the essential distinction between those performing the function of capital (control and surveillance) and those who perform the function of labor (coordination and unity of the labor process). Bourgeois sociology obliterates this distinction. Marx makes an analogy with an orchestra, where the music director coordinates the musicians. Those performing the work of coordination and unity of the labor process are not managers in usual meaning. They do not oversee and police, they are not agents of capital who exploit the laborers on behalf of capital. Rather, they are members of the collective laborer. Those performing the work of coordination and unity of the labor process are the opposite of managers in capitalist production relations.

            Engels’ second principle is that the elected should not earn more than the electors. This is not only a potent anti-corruption element; it also means that the principle that skilled workers should earn more than unskilled workers is a residue of archaic capitalist production relations. Workers are skilled either because of their inherent qualities (and there is no reason to reward them for this) or because they have benefitted from the educational system. In either case, there is no reason to reward them for this. Garbage refuse collectors are just as important to society as economics professors, if not more.

            These two principles are the real indicators of a workers’ democracy required for the transition to socialism. Their expansion or withering away indicates whether a society is moving towards or away from socialism. The other features of a transitional economy should be considered in the light of whether they are an expression of these two principles. For example, production in a transitional economy should be increasing the production of use-values, i.e. the goods workers themselves decide to produce in order to satisfy their needs as expressed by themselves, e.g., environmental investments over arms. This requires planning and thus a democratic decision process. It also requires the common ownership of the means of production, democratic decision-making in investments and in the choice of the techniques in the various labor processes that are most suited for a full development of every worker’s potential. The extent to which and the speed at which a society is moving towards socialism is given by the extent and speed at which these categories of a transitional economy replace capitalist social relations and institutions.

            Let us consider these transitional elements with cases from history. In the 21st century, China is the focus of attention. A fundamental question raised is China socialist, capitalist, or in transition between the two systems?

            The Communist Party of China (CPC) took power in 1949 after a long period of war against occupying Japanese armies and then after a civil war with war lord armies and the comprador nationalist government of Chiang Kai Shek. The Communists under Mao supposedly looked to the Soviet model of “socialism” and in the struggle against the Japanese, they adopted the two-stage theory of Russian leadership: of first, an alliance in government with Chiang and only after “democracy” had been achieved, to strike out for socialism. But after the crushing of the Communist workers in the cities by Chiang’s armies, Mao Tse Tung was forced to lead the remnants of his forces into a “long march” across China and build a peasant-based army.

            From here on, this was not going to be a workers’ revolution in the cities as in Russia, but a peasant army occupying the cities. From the beginning, the Chinese revolution excluded and, indeed, repressed, any forms of workers’ councils as emerged in the Paris Commune or early Soviet Russia. And indeed, for several years after taking state power, there was no move by the Chinese government to expropriate capitalist enterprises or nationalize the land. However, most capitalists had fled with Chiang’s defeated army to the island of Formosa, where they set up a new statelet of Taiwan. And what finally drove the CPC to expropriation was the invasion of Korea by the Americans which, if the Americans had won, would have meant the revival of capitalist forces alongside and inside China. So the CPC nationalized what industrial enterprises there were, nationalized the land, and distributed it to the peasantry. And they launched a massive industrialization program based on state planning of the economy. At this point, we could say that the first and third components of a transition from capitalism to socialism had been introduced in China.

            But this was no state with organs of workers’ democracy. The Chinese state was entirely controlled by the People’s Army and the Communist Party officials. Yes, there was mass support for the revolution, especially in the countryside. But there was no possibility of democratic planning and control. Without that, the excesses and disasters of economy policy directed by Mao and his fellow leaders were inevitable and extensive. The Great Leap Forward of 1958–61 aimed at industrializing the economy in basic industries but it was done with great hardship for millions, particularly in the countryside. Then Mao’s “cultural revolution” of 1966–70 destroyed and disrupted economic development, apart from imposing grotesque actions on millions of experts and skilled workers. In both these adventures and zig zags in policy, the Chinese economy took steps back. Nevertheless, the economic power of state investment and planning, supported by massive human labor inputs, enabled the Chinese economy to sprint forward from abject poverty.

            China’s growth success

            Contrary to current views, economic growth in China before 1978, before the so-called major economic reforms, was strong. Official Chinese figures reckoned that from 1949 to 1978, the total “social output value” increased at an average annual increase of 9% and the annual growth rate of industrial production was 11.4%. In 27 years, the population increased by 400m. Life expectancy rose from 35 years in 1949 to 63.8 years in 1975. These official growth figures are disputed by Western analyses. The most pessimistic is that provided in the Penn World Tables, using Conference Board sources, where China’s growth is recorded at just 2.4% a year, putting the pre-Deng period of growth at about that of the G7 growth, higher than India but lower than Japan, East Asia and Brazil (Table 1). 1

            Table 1

            Conference Board estimates.

            However, other sources (Cheremukhin et al., 2015) put the average real GDP growth rate at 6.7% a year, close to the East Asian tigers (Figure 1). The zig zags of policy under Mao are exposed in the graph, with the shocking collapse in GDP during the Great Leap Forward and the slump in the Cultural Revolution. Also, China’s industrial expansion was beginning to be exhausted prior to the change in policy under Deng in 1978.

            Figure 1

            China: real GDP growth rate 1952–78.

            This forced the Chinese leadership under Deng to consider a different path from the Soviet Union to achieve faster economic growth and industrialization. Chinese opened up the economy to domestic capitalist production and foreign investment – but within limits. Indeed, it has been argued that Deng wanted to go the whole hog and privatize the economy but was persuaded to opt for a gradual approach (Weber, 2021). China began to get the investment necessary to expand the economy over and above available agricultural surpluses and domestic household savings. In effect, this was a New Economic Policy (NEP) as in 1924 in Soviet Russia but going much further and longer 2 into what some have called a new socio-economic formation within the transitional economy (Jabbour et al, 2021).

            However, a key World Bank report in 2013 (World Bank, 2013) concluded that the capitalist mode of production still did not dominate in China – indeed that was the problem according to the World Bank. Commodity production for profit, based on spontaneous market relations, governs capitalism. The rate of profit determines its investment cycles and generates periodic economic crises. This does not apply in China. The regular and recurring crises of investment and production experienced in the major capitalist economies since 1949 have not been mirrored in China; the only impact being any reductions in trade as the G7 economies suffer slumps. Unlike the major capitalist economies, China has not experienced a slump in national output in any year since 1973. Only South Korea can compare with that record, while other so-called emerging economies have been hit sharp slowdowns in growth and even outright contractions (Table 2).

            Table 2

            Real GDP growth in various economies during global recessions.

            The World Bank grudgingly recognized that China’s incredible economic success over the last 30 years was based on an economy where growth was achieved through bureaucratic state planning and government control of investment. Its rate of economic growth may have been matched by emerging capitalist economies for a while back in the 19th century when they were “taking off”. But no country has ever grown so fast for so long and been so large (with 22% of the world’s population). This is an achievement without precedent, even if China’s growth slows down over the medium-term future. Over the period since 1978, China has had an average growth rate double that of India. Indeed, India has been left behind (Figure 2).

            Figure 2

            Share of global GDP: China and India (\(market prices).

            China has raised 850 million people out of internationally defined poverty, while the majority of Indians remains deep in poverty.

            So far China’s state-owned sector has not been dominated by the market; or by investment decisions based on profitability alone; or by capitalist companies and bosses; or by foreign investors. Its economy is still mainly under state control, led by state investment, state banks, and controlled by Communist apparatchiks who run the big companies and plan the economy (often inefficiently as there is no accountability to China’s working people).

            Are these elements of socialist relations? They are possible conditions for the re-emergence of those relations if embedded in the expansion of the socialist production relations. For example, the rolling back or even the abolition of poverty is vital for labor, but in and of itself it is not an indicator of a socialist strategy. The reduction of poverty is necessary for the CPC’s legitimization as holder of power and to increase the internal market. But also, the reduction of poverty has been an element of the CPC’s policies and can reacquire their original socialist substance.

            Although the state sector controls the “commanding heights” of the Chinese economy, capitalist accumulation competes with “socialist accumulation”, producing a zig-zag development. In the first half of the reform era to the early 1990s, there was an explosive growth of the mechanical and electronics industry and rises in wages. However, financial liberalization, large-scale privatization and the downsizing of state-owned and collective enterprises started to tip the balance away from state-led accumulation, leading to rising debts and surging unemployment. But the 1997–98 Asian financial crisis forced the Chinese leadership to make a fundamental policy reversal from the liberalization tack with the launch of several state-led packages to expand investment; the reversal of stagnant consumption through a range of welfare policies; the revitalization of state enterprises and banks; and putting the liberalization of country’s capital account on hold.

            China: productivity versus profitability

            For Marxist theory, it is the productivity of labor that is key. In so far as there is a capitalist sector in a developing economy and world markets, then profitability is the other key indicator. The Marxist model is that the level of productivity will decide economic growth because it reduces the cost of production in labor time and enables a developing nation to compete in world markets. But in the capitalist mode of production, there is a contradiction.

            There is also the law of profitability. There is a long-term inverse relationship between productivity and profitability (as workers can only be squeezed so much before they can no longer work), given that the introduction of technology to replace or reduce labor becomes subject to the law of the tendency of the rate of profit to fall. It is this diminishing factor (surplus value relative to the capital invested) that Marx highlighted as one of the ultimate contradictions of capitalism. This results in regular occurrences of crises in production. In the Marxist model of capitalist development, productivity growth must be weighed against the contradiction of the tendency of the rate of profit to fall as capital is accumulated. In so far as China’s private capitalist sector expands its contribution to the overall economy and the public sector is reduced, then the profitability of that sector becomes relatively more important and the contradiction between productivity growth and profitability intensifies. In so far as it does, profitability becomes relevant to investment and growth.

            There have been various attempts to estimate the rate of profit in China. 3 Data on profitability before 1978 are dubious, given that the capitalist sector was very small before then. After 1978 there have been two cycles of profitability (Figure 3). Between 1978 and 1997, there was an upswing in profitability as capitalist production expanded through the Deng reforms and the opening-up of foreign trade. But from 1997 onwards, there has been a decline as investment gathered pace and the capitalist economy globally also suffered a decline in profitability. The falling rate of profit then was accompanied by a slowing in the rate of GDP growth. There was a limited recovery after China entered the World Trade Organization in 2000, which also saw a significant rise in the rate of economic growth (as the world too expanded at a credit-fueled pace). After 2007, the slump in world capitalism drove down Chinese profitability. Rising wages were not matched by increased sales abroad, so the rate of surplus value slumped, while investment in fixed capital remained high. Profitability fell. This also had a deleterious effect on GDP growth in the recent period.

            Does this mean that China is heading for major slump along classic capitalist lines some time in this decade? Marquetti et al. (2018) seem to suggest that: “The larger profit rate explained the robust mechanization in the early stages of the process. Fast capital accumulation diminishes capital productivity and the profit rate. Then the success in catching up must hinge on raising the saving and investment rates. It may further reduce capital productivity and the profit rate, putting the process at risk, which seems to be the case in China and India.” And they quote Minqi Li (2021) that “if China were to follow essentially the same economic laws as in other capitalist countries (such as the United States and Japan), a decline in the profit rate would be followed by a deceleration of capital accumulation, culminating in a major economic crisis.” But the question is whether the Chinese economy is dominated by those same economic laws – yet. The evidence of its economic success to date is that it is not. Its economy is not yet dominated by the market, by investment decisions based on profitability; or by capitalist companies and bosses; or by foreign investors. Its economy is still dominated by state control, state investment, state banks, and by Communist apparatchiks who control the big companies and plan the economy (often inefficiently as there is no accountability to China’s working people).

            There has been minimal positive correlation between the profitability of Chinese capital stock and real GDP growth for most of the period since the formation of the People’s Republic. This suggests that China has directed its investments towards the more productive sectors, even if they were not its more profitable ones. The profitability of capital did not decide the level of investment in productive assets and economic growth during the Chinese growth miracle. However, after Deng’s reforms in the 1980s, the correlation did turn positive, although less positively correlated than in the rest of the G20 economies or the G7. However, after China privatized sections of its state sector in the 1990s and joined the World Trade Organization in 2000, there was a significant increase in the positive correlation between the profitability of Chinese capital and real GDP growth. This suggests that the Chinese economy has become increasingly vulnerable to a crisis in its capitalist sector and to developments in international capital and their profitability. 4

            Figure 3

            Correlation ratios between rate of profit and real GDP growth.

            In the end, in a capitalist economy profitability comes into conflict with productivity growth. In so far as China’s private capitalist sector expands its contribution to the overall economy and the public sector is reduced, then the profitability of the private sector becomes relatively more important and the contradiction between productivity growth and profitability intensifies.

            China’s state control

            The effects of foreign investment have a double content. On the one hand, in the absence of foreign investment, China would have had a structural trade deficit and foreign debt – or an import level restricted to the level supportable by a reduced export sector. So foreign investment was an agency of modernization from the outside. However, the risk is that large-scale domestic industry would become dominated by foreign capital, side by side with backward industries in which local capital predominates. This might help the trade balance but would accelerate the devastation of local (capitalist and non-capitalist) production and act as a powerful blocking mechanism against the development of the indigenous forces of production. The destruction of native industry would displace more workers than can be newly employed in the relatively new hi-tech industries. This was the story of many new capitalist economies in the late 19th century onwards as imposed by imperialist economies. It remains the story of most of Africa, much of Latin America, and parts of Asia with some exceptions.

            China remains the glaring exception, because the law of value operating in markets and foreign investment was at first totally blocked and later curbed and controlled by a large state-owned sector, central planning, and state policy, as well as by restricting foreign ownership of new industries and imposing controls on the flow of capital in and out of the country. As leading Chinese economist Yu Yongding put it (2013): “China has to maintain its capital controls in the foreseeable future. If China were to lose control over its cross-border capital flows, it could lead to panic and so capital outflows would turn into an avalanche and eventually bring down the whole financial system.” It was these very restrictions that enabled China to expand investment and technology, employ swathes of labor and generally avoid control of its destiny by multinational combines, up to now.

            The law of value operates in the Chinese economy. But the impact is distorted, curbed, and blocked by bureaucratic interference from the state and the party structure to the point that capitalists cannot yet fully dominate and direct the trajectory of the Chinese economy. China’s “socialism with Chinese characteristics” is a weird beast. It is not socialism by any Marxist definition or by the benchmark of workers’ democracy in a transitional economy as defined above. And there has been a significant expansion of privately owned companies, both foreign and domestic, over the last 30 years, with the establishment of a stock market and other financial institutions. But the vast majority of employment and investment is still undertaken by publicly owned companies or by institutions that are under the direction and control of the Communist party. The biggest part of China‘s world-beating industry is not foreign-owned multinationals, but Chinese state-owned enterprises. The major banks are state-owned and their lending and deposit policies are directed by the government (much to the chagrin of China’s central bank and other pro-capitalist elements). There is no free flow of foreign capital into and out of China. Capital controls are imposed and enforced and the currency’s value is manipulated to set economic targets (much to the annoyance of the US Congress).

            In 2019 (latest data available), total assets of Chinese SOEs stood at 167% of GDP – several orders of magnitude larger than in any other country (IMF Public Sector Database). Every other major capitalist economy has less than 60% of GDP in public assets (Figure 4). Every year, China’s annual public investment to GDP is around 17% compared to 3–4% in the US and the UK. And the stock of public productive assets to private capitalist sector assets in China is more than twice the ratio in the US and the UK or in “mixed economy” India or Japan. This shows that in China public ownership in the means of production is dominant to a degree unlike any other major economy.

            Figure 4

            Public stock to GDP ratio; public/private assets ratio; public investment to GDP %.

            A report by the US-China Economic and Security Review Commission (Szamosszegi & Kyle, 2011: 1) found that:

            The state-owned and controlled portion of the Chinese economy is large. Based on reasonable assumptions, it appears that the visible state sector – SOEs and entities directly controlled by SOEs, accounted for more than 40% of China’s non-agricultural GDP. If the contributions of indirectly controlled entities, urban collectives and public TVEs are considered, the share of GDP owned and controlled by the state is approximately 50%.

            The major banks are state-owned and their lending and deposit policies are directed by the government (much to the chagrin of China’s central bank and other pro-capitalist elements).

            At the same time, the Communist party/state machine infiltrates all levels of industry and activity in China. According to a report by Joseph Fan and others (Fan & Morck, 2013), there are party organizations within every corporation that employs more than three communist party members. Each party organization elects a party secretary. It is the party secretary who is the lynchpin of the alternative management system of each enterprise. This extends party control beyond the SOEs, partly privatized corporations, and village or local government-owned enterprises into the private sector or “new economic organizations” as these are called. In 1999, only 3% of these had party cells. Now the figure is nearly 13%. The reality is that almost all Chinese companies employing more than 100 people have an internal party cell-based control system. This is no relic of the Maoist era. It is the current structure set up specifically to maintain party control of the economy.

            China’s Communist party is now writing itself into the articles of association of many of the country’s biggest companies, describing the party as playing a core role in “an organized, institutionalized and concrete way” and “providing direction [and] managing the overall situation”. There are 102 key state enterprises with assets of 50 trillion yuan that include state oil companies, telecom operators, power generatorsm and weapons manufacturers. These 102 big conglomerates contributed 60% of China’s outbound investments by the end of 2016. Communist Party committees have been installed at many tech firms, reviewing everything from operations to compliance with national goals. Regulators have been discussing taking a 1% stake in some giants, including Alibaba and Tencent, along with a board seat. Tech companies have been widely encouraged to invest in state-owned firms, in the hopes of making them more productive. The common denominator of all these efforts is that the government wants more control. One recent report found that 60% of Chinese unicorns have either direct or indirect investment from the state. China’s venture-capital sector is dominated not by traditional tech dealmakers but by the state. There are more than 1,000 government-owned VC firms in China, controlling more than \)750 billion.

            State-owned enterprises have assimilated Western technologies – sometimes with cooperation and sometimes not – and are now engaged in projects in Argentina, Kenya, Pakistan, and the UK. And the “one belt one road” project for central Asia is not aimed to make profit. It is all to expand China’s economic influence globally and extract natural and other technological resources for the domestic economy. China is not investing abroad through its state companies because of “excess capital” or even because the rate of profit in state and capitalist enterprises has been falling.

            Similarly, the great expansion of infrastructure investment after 2008 to counteract the impact of collapsing world trade from the global financial crisis and Great Recession hitting the major capitalist economies was no Keynesian-style government spending/borrowing, as mainstream and (some) Marxist economists argue. It was a state-directed and planned program of investments by state corporations and funded by state-owned banks. This was proper “socialized investment” as mooted by Keynes, but never implemented in capitalist economies during the Great Depression, because to do so would be to replace capitalism.

            State capitalism or a transitional economy?

            There are some analyses of the transitional economy which argue that there was no transition at all from capitalism to socialism in the Soviet Union, China, and other states like Cuba, Vietnam, or North Korea. These states remained capitalist or are “state capitalist”. Let us consider the latter formulation in relation to the law of value.

            One leading proponent of “state capitalism” argues that “state capitalism and a workers’ state are two stages in the transitional period from capitalism to socialism” (Cliff, 1964). This flies in the face of Marx and Engels’ components for the transitional economy. Now we have a new stage in the transition, “state capitalism” which is also apparently “diametrically opposed” to socialism. According to this version of state capitalism, the Soviet Union or China cannot be transitional economies because wage labor and the law of value exist in both and that should disappear under socialism. But what Marx and Engels argue that, after the take-over of power by the proletariat and the establishment of the “dictatorship”, the law of value does not disappear, indeed it is still present in the transitional economy, particularly in the market for labor power. This would only disappear under socialism. A transitional economy is precisely where the law of value is in competition with the planning mechanism and collective production – the economy is in transition. There is no need to create a new stage called state capitalism.

            In the early years of the Soviet Union, Lenin did apply the term “state capitalism” but not to the Soviet economy as a whole, only to a certain section of it: the foreign concessions, the mixed industrial and commercial companies and, in part, the peasant and largely kulak (rich peasant) cooperatives under state control. All these are indubitable elements of capitalism, but since they are controlled by the state and even function as mixed companies through its direct participation, Lenin conditionally, or, according to his own expression, “in quotes”, called these economic forms “state capitalism”. The conditioning of this term depended upon the fact that a proletarian, not a bourgeois, state was involved; so the quotation marks were intended to stress just this difference of no little importance. However, insofar as the proletarian state allowed private capital and permitted it within definite restrictions to exploit the workers, it shielded value relations under one of its wings. In this strictly limited sense, one could speak of “state capitalism” (Trotsky, 1933).

            Moreover, the view that the likes of China or Vietnam are a new form of capitalism, “state capitalism”, suggests that world capitalism is now today stronger than it ever was before in history. Alongside, the decline of the imperialist powers, state capitalism has apparently ushered in a new and sensational phase of the development of the productive forces, in a backward country like China, and thus much more impressive even than anything Marx described for 19th-century capitalism.

            What is wrong with the theory of state capitalism is that it is based on formal logic not on a dialectical analysis. Formally, there is capitalism and socialism. With formal logic, if the features of socialism in an economy do not exist, i.e. collective production by producers in association for direct consumption without markets or monetary exchange, then an economy must be capitalist. An economy is either black or it is white. But this is not a dialectical analysis. Everything is in motion and in transition from one thing to another; and from one mode of production to another. In a transitional economy, there are elements of old mode of production and there are elements of a potentially new mode of production – side by side. Just as the duck-billed platypus has elements of mammalia (it suckles its young), it also has elements of reptilia (it lays eggs). The transition from capitalism to socialism does not happen overnight; black and white are thus both present.

            However, a dialectical approach in this context also means recognizing when a qualitative change has taken place, opening up the potential for a new economy. The duck-billed platypus has made a qualitative transition to mammalia (because it suckles its young and is warm-blooded). A transitional economy from capitalism to socialism is defined from its start by the revolutionary overthrow of the capitalist state machine and its replacement by a proletarian state and that state can only survive if the means of production and resources are expropriated from the capitalist class, atomizing that class as a ruling class. With state planning as the next step, the laws of motion of the transitional economy are qualitatively different from a capitalist economy. This is not socialism, but no longer is it capitalism. There is no need to invent another stage in the transition called “state capitalism”.

            For Marx, “capital” could only exist in the form of different capitals; otherwise, there was no more compulsion to accumulate. Consequently, capital could only exist in the form of “different capitalists”, i.e., a social class constituted so that each part of it was, by compelling economic interest, tied to the survival of “its” own unit of production or circulation. Consequently, the “thirst for profit” of each part of that class, and the “drive to capital accumulation”, are identical, the second being only realizable through the first (the attempt at profit maximization of each unit or firm). If there is no competition, and the allocation of resources are not left to the decisions of individual capitals and the “invisible hand of the market”, then there is no capitalism. Capitalism cannot exist as one capital, the state. 5

            The empirical proof that transitional economies are qualitatively different from capitalist economies is in the success of planned economies, where the law of value is controlled, curbed, and regulated so it does not dominate. In neither the Soviet Union before 1990 nor in China since 1949 have there been regular and recurring slumps in investment and production caused by a collapse in the profitability and profits of the capitalist sector. 6 The capitalist sector and the capitalists as a class do not control the economy or the state power. History has shown that does not mean transitional economies must have democratic workers’ control of the state or they must be categorized as capitalist or state capitalist. Workers’ democracy did not exist for long in Russia, after the early beginnings of the Soviets; and it was never the case in China, Cuba, Vietnam, North Korea, or in the states of Eastern Europe under Soviet control.

            It is true that the inequality of wealth and income under China’s “socialism with Chinese characteristics” is very high. There are growing numbers of billionaires (many of whom are related to the Communist leaders). China’s gini coefficient, an index of income inequality, has risen from 0.30 in 1978 when the Communist Party began to open the economy to market forces to a peak of 0.49 just before the global recession. Indeed, China’s gini coefficient has risen more than any other Asian economy in the last two decades. China has a high level of inequality of incomes by international standards (although it is still lower than many other “emerging” economies like Brazil, Mexico, or South Africa) – but the gini inequality ratio peaked just before the Great Recession and has been falling since. This rise was partly the result of the urbanization of the economy as rural peasants move to the cities. Urban wages in the sweatshops and factories are increasingly leaving peasant incomes behind (not that those urban wages are anything to write home about when workers assembling Apple iPads are paid under $2 an hour).

            But it is also partly the result of the elite controlling the levers of power and making themselves fat, while allowing some Chinese billionaires to flourish. Urbanization has slowed since the Great Recession and so has economic growth – along with that, the gini inequality index has fallen back a little. The main reason for the high inequality ratio is the disparity of incomes between urban and rural workers and between the wages in coastal and inland cities, as well as educational qualifications. Much is made of the number of billionaires in China, but given the size of the population and GDP, the per capita ratio compared to the US and other major economies is relatively low. Despite the large expansion in the number of millionaires, millionaires in China remain relatively rare. Millionaires account for 3% of adults in Italy and Spain; in France, Austria, or Germany about 4%; around 6% in social democratic Scandinavia; above 8% in the US and Australia; and highest of all in Switzerland (15%) (Credit Suisse, 2021). And the inequality of wealth in China is centered on property, not financial assets (so far), unlike the main capitalist economies of the G7. And that is because finance has not been fully opened up to the capitalist sector.

            And when it comes to inequality of personal wealth, China is not so unequal as many of its economic peers. The gini inequality of wealth ratio is much higher in Brazil, Russia, and India, and higher in the US and Germany. According to the latest estimates, the top 1% of wealth holders in China take 31% of all personal wealth compared to 58% in Russia, 50% in Brazil, 41% in India, and 35% in the US. This is a good measure of the economic power of the top elite and oligarchs in these countries. But the threat of the “capitalist road” remains. Indeed, the IMF data show that, while public sector assets in China are still nearly twice the size of capitalist sector assets, the gap is closing.

            Many “experts” on China claim that it is imperialist in the same way as the Western advanced capitalist economies. But in so far as imperialist economies can be defined as those that suck surplus value out of the rest of “emerging” world, on that definition, China is also “dominated” by imperialism (Carchedi & Roberts, 2021). It’s true that China has been expanding its investments abroad (although the size of foreign direct investment is still small), particularly under the Belt and Road Initiative (BRI). Many authors claim that these investments and loans to poorer countries are exploitive and designed to put weaker countries into a “debt trap”. Yet the evidence of the most detailed studies shows no such thing and that the terms of China’s loan and investment deals are not iniquitous and are not draconian as they often are with loans from the imperialist bloc (Malik et al., 2021).

            The contradictions of China’s state-controlled economy alongside a large and growing capitalist sector intensified during the COVID pandemic. And that was expressed by the factions in the Chinese leadership. Officials in the financial and banking sector want to open up the economy to foreign capital and allow the renminbi to become an international currency. They argue that the economy is too biased towards investment and exports over consumption. Chinese economists trained in America and Europe, backed by resident foreign economists in Chinese universities and the World Bank, press continually for a “switch from investment to consumption”.

            Ironically, in the G7 capitalist economies consumption has failed to drive economic growth and wages have stagnated in real terms over the last ten years (2010–19), while real wages in China have shot up (Figure 5).

            Figure 5

            Percentage change in productivity and real wages since end of Great Recession (2010–19).

            Indeed, consumption is rising much faster in China than in the G7 because investment is higher. One follows the other; it is not a zero-sum game. And not all consumption has to be “personal”; more important is “social consumption”, i.e., public services like health, education, transport, communications, housing; not just motor cars and gadgets. Increased personal consumption of basic social services is what is necessary. And it is here that China needs to act.

            Much is also made of China’s rising debt levels. Mainstream economists have been forecasting for decades that China is heading for a debt crash of mega proportions. It is true that according to the Institute of International Finance (IFF), China’s total debt hit 317% of gross domestic product (GDP) in the first quarter of 2020. But most of the domestic debt is owed by one state entity to another: from local government to state banks, from state banks to central government. When that is all netted off, the debt owed by households (54% of GDP) and corporations is not so high, while central government debt is low by global standards. Moreover, external dollar debt to GDP is very low (15%) and indeed the rest of the world owes China way more: 6% of global debt. China is a huge creditor to the world and has massive dollar and euro reserves, 50% larger than its dollar debt.

            A financial crisis is ruled out as long as the state controls the banking system, so that credit support and state bailouts are easily organized, backed by state funding and reserves. But there are dangers because of the recent attempts to loosen it up for private and foreign institutions to enter the arena (e.g., there are a growing number of bankruptcies in speculative financial entities). Chinese leaders want to curb the debt level. Controlling the debt level can come in two ways; through high growth from productive sector investment to keep the debt ratio under control and/or by reducing credit binges in unproductive areas like speculative property. Japan’s secular stagnation was the result of the lack of applying these two factors in its capitalist economy. But given the power of state control over the levers of investment, China can avoid the Japanese outcome.

            Nevertheless, the growing size and influence of the capitalist sector in China is weakening the performance of the economy and widening the inequalities exposed during the pandemic. Indeed, it has been the state sector that has helped the Chinese economy climb out of the pandemic slump, not its capitalist sector. The debate within the leadership will continue about which way to take China: towards a full market economy open to the winds of global capital flows or to stay as they are. So far, there has been no change in the general philosophy of “socialism with Chinese characteristics” and thus the maintenance of the dominance of the state sector. But there is no move towards “democracy” either; or allowing control of even local legal systems and decisions by the people. On the contrary, the leadership is setting up even more repressive state security services to monitor and control the population and curb any dissidence.

            The size of the state sector is not decisive in characterizing the class nature of the Chinese state, but it is an indicator of the process of transition. In the state sector, workers generate surplus labor. And a bureaucratic elite control that surplus. In this sense, the state sector is capitalist in character. Workers are exploited and the law of value operates here. But the state sector produces goods and services primarily according to planning targets and not for individual profits. So in this sense they are not capitalist as state enterprises are in the capitalist countries. The bureaucracy and the CPC want to pursue policies to strengthen their grip on power, but in so doing they must defend the “socialist” aspects of the transition. In this sense, to invoke the “socialist nature” of the Chinese economy is an ideological move.

            The class struggle remains in China. Since the late 1970s, millions of peasants have entered the cities in pursuit of waged employment. Migrant workers, particularly in the capitalist sector, who make up a third of China’s total workforce, are brutally exploited (Ching Kwan Lee, 2007):

            One study conducted by the Communist Party Youth League in six cities in Guangdong polled 1,800 migrant workers in December 2001. It found that 80 percent worked more than ten hours per day. Most worked twelve to fourteen hours per day, and 47.2 percent said they rarely had any holidays or rest on weekends.

            The CPC often faces reaction from an increasingly self-confident working class. The China Labor Bulletin (2022) recorded more than 10,000 strikes between 2015 and 2020, including more than a thousand in Guangdong province where private companies are centered.

            The current Xi leadership has launched not only yet another drive against “corruption”, but also revived the earlier CPC concept of “common prosperity” that aims to reduce inequalities and increase the value of public services over private consumption. Xi wants to avoid another Tiananmen Square protest in 1989 after a huge rise in inequality and inflation under Deng’s “social market” reforms. 7

            As our components of a transitional economy from capitalism to socialism reveal, there is no guarantee that China and the other states will progress towards socialism, as the experience of the 70 years of the Soviet Union confirms. Of our eight criteria for a transitional economy, only numbers one and three are in operation in China, while the fourth depends on a continual struggle between the planning mechanism and the law of value within the country. The last four components of the transition to socialism are far away from being achieved. Indeed, the forces of imperialism from without and of the law of value within from domestic capitalist sectors suggest that China is in a “trapped transition” which could eventually be reversed, as it proved for the Soviet Union. To avoid that, China must raise its productivity levels to that of the imperialist core to reduce working hours and scarcity in social needs and then end wage labor and monetary exchange. But that is impossible without working-class revolutions in the imperialist core that can establish transitional economies there and then allow the democratic planning of production and distribution globally for social need not profit.

            Workers’ democracy is crucial to the transition from capitalism to socialism. The seizure of political power makes possible the emergence of workers’ democracy. The transition cannot be completed without it. China’s great achievements in the reduction of poverty and in the provision of social facilities (like education) and its vastly superior economic performance in terms of GDP do not indicate that China is socialist. But they do indicate that possible conditions for socialism are present. However, without workers democracy, China will remain in a “trapped transition”; as will other transitional economies like Vietnam and Laos, which have followed the Chinese model.



            A large body of analysis that argues that conceptual and statistical frailties in China’s statistical work has led to an exaggeration of China’s real GDP growth since the 1949 revolution and especially since the “market reform” period initiated by Deng started after 1978. The main source of this view comes the US Conference Board, a mine of statistical information on the GDP, GDP per head, productivity, and employment for most countries of the world. The Conference Board has adjusted China’s real GDP growth rate going back to the 1950s to produce a much lower rate of growth than the official data. The CB finds that, while the official data reckon that real GDP growth in China from 1949 to 2019 was 8.5% a year, it was really only 5.9% a year, some 30% slower. The gap is even greater in the post-Mao period up to 2000, with China’s official real GDP growing at 9.7% a year while the CB finds it grew at 6.3% a year or 35% slower. After that, the gap between the two measures narrows somewhat. With real GDP per capita growth (taking into account population growth), the gap between the official data and the CB data is even greater.


            In 1921 Lenin had been forced to introduce the New Economic Policy (NEP), which imposed a capitalist superstructure on the USSR. Lenin called this stage “state capitalism”. Che Guevara argued that Lenin would have reversed the NEP had he lived longer. However, Lenin’s followers (Yaffe, 2012) “did not see the danger and it remained as the great Trojan horse of socialism, according to Guevara. A capitalist superstructure became entrenched, influencing the relations of production and creating a ‘hybrid system of socialism with capitalist elements’ that inevitably provoked conflicts and contradictions that were increasingly resolved in favour of the superstructure. In short, capitalism was returning to the Soviet bloc.”


            In our measure, we use the internal rate of return (IRR) on net capital as provided by the Penn World Tables. The IRR is GDP less employee compensation divided by the net stock of fixed assets. So it is a proxy for the Marxian rate of profit measure.


            Zhiming Long et al. (2018), using the Penn World Tables database, find ten periods of negative profit rate growth but there were not ten periods of negative real GDP growth, which suggests that the profitability of the capitalist sector was not decisive. However, the authors adopt a “broader concept of crisis” to include “structural difficulties even though the appearance of a strong GDP growth suggests that all is going well” to justify their conclusion that movements in the rate of profit in the economy drive movements in China’s real GDP. This broadening of the Marxist concept of crisis beyond slumps in investment and production as used for capitalist economies seems dubious.


            Sometimes it is argued that Engels did consider that a capitalist state could exist with just one capital where competition among capitals has disappeared. In Engels, 1970: “The modern state, no matter what its form, is essentially a capitalist machine – the state of the capitalists, the ideal personification of the total national capital. The more it proceeds to the taking over of productive forces, the more does it actually become the national capitalist, the more citizens does it exploit. The workers remain wage-workers – proletarians. The capitalist relation is not done away with.” This seems to suggest that you could have a state form of capitalism – state capitalism. But read on: “The capitalist relation is not done away with. It is, rather, brought to a head. But, brought to a head, it topples over. State-ownership of the productive forces is not the solution of the conflict, but concealed within it are the technical conditions that form the elements of that solution.” So state ownership does not get rid of capitalist property relations, e.g., wage labor, but there is a qualitative change (a “toppling over”) from the capitalist mode of production with many capitals competing on a market. Engels continues: “The proletariat seizes political power and turns the means of production into State property. The first act by virtue of which the State really constitutes itself the representative of the whole of society – the taking possession of the means of production in the name of society – this is, at the same time, its last independent act as a State. State interference in social relations becomes, in one domain after another, superfluous, and then dies out of itself; the government of persons is replaced by the administration of things, and by the conduct of processes of production. The State is not ‘abolished’. It dies out.” Workers seize political power, expropriate the capitalists, and then there is a period of transition that eventually removes the remaining capitalist property relations, i.e., wage labor, money, and the (capitalist) state machine itself. So there is a transition period where the state exists (but is supposedly withering away); and where wage labor continues but is supposedly being gradually eliminated as “the technical conditions” deliver the “solution”. This is not “state capitalism” but the state in a transitional economy.


            Trotsky (1932): “The Soviet economy was supposed to obey the normal laws of capitalism, and so forth. However, such an argument immediately found itself entangled in a host of contradictions. To look no further, we must point out that, if the Soviet Union was capitalist (or state capitalist, it makes no real difference to the substance of the argument), then it had to have the same law of motion as capitalism – i.e., booms and slumps. However much you twist and turn, you will not find any such phenomenon. Thus, the adoption of a false theory necessarily leads to the abandonment of the basic standpoint of Marxism. Here we have a kind of capitalism which has succeeded in eliminating the fundamental contradiction of a market economy – a capitalism without unemployment, capable of developing the means of production at unheard-of rates of growth, uninterrupted by crises of overproduction.”


            As Xi put it in a long speech in July 2021 to party members (Xi Jinping, 2021, my emphasis): “Realizing common prosperity is more than an economic goal. It is a major political issue that bears on our Party’s governance foundation. We cannot allow the gap between the rich and the poor to continue growing – for the poor to keep getting poorer while the rich continue growing richer. We cannot permit the wealth gap to become an unbridgeable gulf. Of course, common prosperity should be realized in a gradual way that gives full consideration to what is necessary and what is possible and adheres to the laws governing social and economic development. At the same time, however, we cannot afford to just sit around and wait. We must be proactive about narrowing the gaps between regions, between urban and rural areas, and between rich and poor people. We should promote all-around social progress and well-rounded personal development, and advocate social fairness and justice, so that our people enjoy the fruits of development in a fairer way. We should see that people have a stronger sense of fulfilment, happiness, and security and make them feel that common prosperity is not an empty slogan but a concrete fact that they can see and feel for themselves.” And, on the demise of the Soviet Union, Xi perceptively admitted in this speech: “The Soviet Union was the world’s first socialist country and once enjoyed spectacular success. Ultimately however, it collapsed, mainly because the Communist Party of the Soviet Union became detached from the people and turned into a group of privileged bureaucrats concerned only with protecting their own interests. Even in a modernized country, if a governing party turns its back on the people, it will imperil the fruits of modernization.”


            1. (2021) “The Economics of Modern Imperialism,” Historical Materialism, 29(4): 23–69.

            2. (2015) The Economy of People’s Republic of China from 1953. National Bureau of Economic Research, Working Paper 21397. http://www.nber.org/papers/w21397.

            3. China Labour Bulletin (2022) Reimagining Workers’ Rights in China. Available at: https://clb.org.hk/sites/default/files/CLB_Reimagining_Workers_Rights_in_China_March_2022.pdf.

            4. (2007) Against the Law: Labor Protests in China’s Rustbelt and Sunbelt. Berkeley: University of California Press.

            5. (1964) Russia: A Marxist Analysis. https://www.marxists.org/archive/cliff/works/1964/russia/index.htm.

            6. Credit Suisse (2021) Global Wealth Report. https://www.credit-suisse.com/about-us/en/reports-research/global-wealth-report.html.

            7. (1970) [1880] “Socialism: Utopian and Scientific,” in , Selected Works, vol. 3. Moscow: Progress Publishers, 1970, 95–151.

            8. (1891) Postscript to The Civil War in France (1871). https://www.marxists.org/archive/marx/works/1871/civil-war-france/postscript.htm.

            9. (eds.) (2013) Capitalizing China. Chicago: University of Chicago Press.

            10. (2021) China and Market Socialism: A New Socioeconomic Formation. International Critical Thought, 11(1): 20–36, DOI: [Cross Ref]

            11. (2018) “On the Nature of the Chinese Economic System,” Monthly Review, 70(5). https://monthlyreview.org/2018/10/01/on-the-nature-of-the-chinese-economic-system.

            12. et al. (2021) Banking on the Belt and Road. AidData, September. https://www.aiddata.org/publications/banking-on-the-belt-and-road.

            13. (2018) “Rate of Profit in the United States and in China (2007–2014): Introductory Comparison of Two Trajectories,” Textos para Discussão Cedeplar-UFMG 577, Cedeplar, Universidade Federal de Minas Gerais. https://ideas.repec.org/p/cdp/texdis/td577.html.

            14. (1852) Letter to Weydemeyer. https://wikirouge.net/texts/en/Letter_to_Joseph_Weydemeyer,_March_5,_1852.

            15. (1871) The Civil War in France. https://www.marxists.org/archive/marx/works/1871/civil-war-france/index.htm.

            16. (1875) Critique of the Gotha Programme. https://www.marxists.org/archive/marx/works/1875/gotha/.

            17. Minqi Li (2021) “China: Imperialism or Semi-Periphery?” Monthly Review, 73(3). https://monthlyreview.org/2021/07/01/china-imperialism-or-semi-periphery/.

            18. (2011) An Analysis of State-Owned Enterprises and State Capitalism in China. U.S.-China Economic and Security Review Commission. Available at: https://www.uscc.gov/research/analysis-state-owned-enterprises-and-state-capitalism-china.

            19. (1932) “The Soviet Economy in Danger”. Available at: https://www.marxists.org/archive/trotsky/1932/10/sovecon.htm.

            20. (2021) How China Escaped Shock Therapy: The Market Reform Debate. https://thenextrecession.files.wordpress.com/2021/01/howchinaescapedshocktherapy_themar_preview-2.pdf.

            21. World Bank (2013) China 2030: Building a Modern, Harmonious, and Creative Society. Available at: https://www.worldbank.org/content/dam/Worldbank/document/China-2030-complete.pdf.

            22. (2021) “Placing Greater Emphasis on Promoting Common Prosperity for All,” Qiushi, CPC Central Committee bi-monthly, No. 19, November–December 2021. http://en.qstheory.cn/2022-01/18/c_699050.htm.

            23. (2012) “Che Guevara and the Great Debate, Past and Present,” Science & Society, 76(1): 11–40.

            24. (2013) Is Mercantilism Doomed to Fail? China, Germany, and Japan and The Exhaustion of Debtor Countries. Institute for New Economic Thinking, Available at: https://www.ineteconomics.org/research/research-papers/is-mercantilism-doomed-to-fail-china-germany-and-japan-and-the-exhaustion-of-debtor-countries.

            Author and article information

            Journal of Global Faultlines
            Pluto Journals
            13 February 2023
            : 9
            : 2
            : 180-197
            Author notes
            [* ]Michael Roberts is an economist and author who worked for various financial institutions in the City of London. He is author of several books: The Great Recession – a Marxist view (2009); The Long Depression (2016); World in Crisis (ed 2018); Marx 200 (2018); and Engels 200 (2020). He blogs regularly at https://thenextrecession.wordpress.com/.

            All content is freely available without charge to users or their institutions. Users are allowed to read, download, copy, distribute, print, search, or link to the full texts of the articles in this journal without asking prior permission of the publisher or the author. Articles published in the journal are distributed under a http://creativecommons.org/licenses/by/4.0/.

            Page count
            Pages: 18

            Social & Behavioral Sciences


            Comment on this article