Is China Capitalist?

The question — ‘Is China capitalist?’ — is surprisingly hard to answer for many reasons, not the least of which is that one could disagree on what the words ‘capitalist’ and ‘capitalism’ precisely mean. They get used in ordinary conversation, not just in academic writings, frequently enough that it misleads us into a false sense of certainty about their meaning. Much confusion ensues from differing semantic priors.

Douglass North (1993 Prize recipient of the Nobel Memorial Prize in economics) said, “I don’t know what the word capitalism means and therefore I have never used the term.” Well, he could afford that luxury because he did not have to enter into discussions with non-economists.

We will use the word after defining it for the purpose of our discussion. Trying to define the terms used in a serious discussion is not just academic hair-splitting; it helps us clarify our own understanding of the subject.

So let’s take a few moments to define the word first and then get on with the discussion. The definition does not have to be definitive or universally acceptable. It just has to serve the purposes of the discussion. If you don’t accept that definition, it’s not the end of the world; it’s just the end of this discussion.

Capitalism is a combination of (1) private property, (2) free markets, (3) voluntary trade, & (4) institutions which legally enforce contracts.

The above two bits are from an October 2019 post on my blog, “What is Capitalism?

Now regarding China. I am not a China expert. I am not even an amateur observer of China. I am just a student of the fundamental principles of economics — and I claim that I know them well simply because I have been studying them for three decades.

What this allows me to do is to quickly assess experts on economic matters.

I am not an expert on China, as I said above. But I am better equipped than the average non-economist to figure out which of the various experts on China are to be believed.

One of the most important economists of the last century was Ronald Coase. He was born in London, England, in 1910. Made immense, innovative, brilliant contributions to economic theory (they even named a theorem “the Coase Theorem.”) He was the first to ask and answer the question, “why do firms exist?” and how public goods are often financed by the private sector. Read his Nobel acceptance lecture to get a sense of this genius.

I write the above to state that I trust Coase’s opinion on economies and economics.

Coase published a book, co-authored with Ning Wang, “How China Became Capitalist.” It was published in 2012, when Coase was 101 years old. (Most of us will be lucky to have the mental acuity to write a book at 71 years of age never mind after 100.) I have a February 2019 post about the book.

Another reference I have on the question of whether China is capitalist is Branko Milanovic. His book “Capitalism, Alone: The Future of the System That Rules the World” (2019) says “yes” to the question. To get the gist of his argument, simply listen to this excellent EconTalk podcast which was published on 11th May 2020 (but was recorded a few months earlier.)

Here’s a bit from the transcript of the conversation between Russ Roberts (host) and Branko Milanovic:

Russ Roberts: Now, your book talks about two different kinds of capitalism. On the one hand, liberal and meritocratic, and the other is, you call, political capitalism. Talk about the difference between those two systems and which countries embody them that you focus on in the book.

Branko Milanovic: Yeah. The countries that embody them and actually the data that I use to illustrate the two systems come, first I’m going to say, for meritocratic and liberal capitalism from the United States, where we actually have probably, in the area that I work on, which is inequality, probably the best data or most detailed data.

And, the country which illustrates political capitalism is China, where of course I use quite a lot of Chinese data, and I make sort of the structure of the two chapters that deal with the United States on the one hand and China on the other hand, relatively similar. Because, the objective of the two chapters is to look at the forces of inequality–be it inequality in wealth, or opportunity, or income–which might lead to the creation of a self-sustained upper class in both systems. So, that’s the structure of the book.

Now, the two systems differ–I mean, first, they are similar in the sense they are both capitalist. That’s my argument. And, actually, as you said, even the title of the book is kind of makes this obvious because it says Capitalism, Alone, meaning that capitalism is the only economic system which exists today.

But, they are also different, obviously, in the political space because the political space of a liberal or meritocratic capitalism as essentially democratic. The political space of Chinese-type or political capitalism is not democratic. It’s a one party system where the state has much more of a preponderant political role, and, to a large extent also, more preponderant economic role.

Russ Roberts: And, your description of capitalism, I’ll try to remember it first. You can correct me and then add to it. It’s decentralized, in terms of economic decisions. Labor is hired at wage rates in a somewhat open market. Prices are somewhat free to adjust and steer resources. Investment is made privately. And, so, if I left anything out, tell me. And, how do you reconcile that with China, where a lot of investment is clearly not private? And, I also wonder about how decentralized economic decision-making is there. I simply don’t know. Something I think about a lot.

Branko Milanovic: Yeah. Actually the way that you define it is, I think, almost fully correct. But, let me say first that the definition is not mine. It’s actually the definition is sort of a standard definition that was used by Marx. It was used by Max Weber afterwards.

And, I think it’s a very economical definition of capitalism. It includes, as you said, first, decentralized coordination. Secondly, legally free labor. That’s very important because, in the past, labor was not legally free very often. But, that labor is hired labor. Now, the term ‘hired labor’ is also important because it means that labor is not exercising entrepreneurial function–which, in other words, it’s not workers who decide we are going to produce this and that gadget. It is–and that’s the third sort of definitional part–it is capitalists who decide on that, who have entrepreneurial function. And, economic life is conducted using privately-owned capital and profit principle. So, this is the definition.

Now, you ask and many people ask: Now, how does it apply to China? It’s more or less clear it applies to the United States because actually all the three elements are, I think, very clear in the case of liberal capitalism.

My argument–and it’s based on facts, so it’s not really what I think China does or what I don’t think–but they simply look, first, what percentage of labor force is working as self-employed, because in agriculture in China is mostly self-employed, and in the private sector. And, there you actually find that in 1978 for example, when you had still the commune system in China, in agriculture, you had about 85% I think of labor that was state–I mean, working the state-owned or commune system in agriculture.

Well, that percentage now is less than 10%. So, you really have had a tremendous change of first, privatization, be it privatization in the sense that there are large private companies, or middle-sized private companies, or finally private individuals, mostly peasants, farmers producing on their own land.

Then I look at percentage of private fixed investments. Now, that percentage also has changed. There is a very nice graph in the book which basically shows it’s like an X, like a cross. So, you basically start with, like, 80:20 ratio between public and private and you end up–nowadays it is about 60:40 in favor of private.

And, finally, I look at the value added produced in the private sector in China. There was a recent study–because that number was not actually quite well known and it’s very murky in the Chinese statistics. I’ve actually spent lots of time looking at statistical yearbooks of China, but there are so many different types of enterprises. So, I’ll just mention downshift in village enterprises, joint companies with foreign ownership, but joint companies with foreign ownership and state ownership, whether it is a local level, township level, city level, municipal level, central level, whatever.

Anyway, the World Bank did recently a very nice study which tried to disentangle basically all of that. And, they came down with an estimate, which–the range, I think, is between 21 and 28% of the value added being produced in the state sector. So, that, of course, leaves more than 75% or about 75% of value added in the private.

This is a long answer, but I think basically, if you look at the numbers, it’s very difficult to argue that China is not a capitalist country. [End excerpt of transcript.]

The highlighted bit above is the response to the claim Swatantra made in this comment that “China is not a capitalist system.”

Author: Atanu Dey

Economist.

One thought on “Is China Capitalist?”

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