Could the rise of China fatally de-stabilize capitalism?

By Pete Dolack

The world is not limitless, yet growth without limits is touted as a permanent economic elixir. But natural resources aren’t infinite, nor can demand be infinite. What happens when the limits of growth are reached?

We aren’t supposed to ask that question about capitalism; the assumption is that economic activity will always grow. The insertion of China into the world capitalist system has created the opportunity for more growth as a country of 1.3 billion people has been thrown open to the world’s markets.

But what if, rather than throwing capitalism a lifeline in the form of a vast pool of consumers who will drive demand, China instead will fatally destabilize an already weakened world economic system?

China will be the final straw that will bring about the downfall of the capitalist system is the provocative conclusion of an interesting book by a Chinese economist, Minqi Li, who now teaches at the University of Utah. Professor Li doesn’t pull any punches in his book; indeed his book’s title is The Rise of China and the Demise of the Capitalist World Economy.* The book’s central thesis is that the huge mass of low-wage Chinese workers will drag down wage levels globally; the increase of industrialization in developing countries will lead to exhaustion of energy sources; and that ecological limits will force a halt to growth, fatal to a system dependent on growth.

Professor Li believes that the combination of these crises will bring an end to the capitalist system by the middle of this century. The Rise of China, however, is not apocalyptic; rather it methodically builds it case piece by piece through a sober examination of economic trends, calculations of the limits to a range of natural resources, analysis of long-term environmental unsustainability, and study of historical trends going back centuries. Nor is this a bleak work; Professor Li writes in the Gramscian spirit: pessimism of the intellect, optimism of the will. What will follow the collapse of capitalism is not pre-ordained but is up to humanity to determine.

The first two of the book’s seven chapters provide an interesting discussion of Chinese history, before and after the 1949 revolution. Pro-capitalist factions within the Chinese Communist Party gained the upper hand soon after Mao Zedong’s death in 1976, with Deng Xiaoping wresting party leadership by the end of the decade. Early reforms granting concessions to workers and peasants cemented political control for the Deng faction, Professor Li writes, enabling the party to then introduce capitalism. A 1988 law granted enterprise managers full control in the workplace (including hiring and firing at will), and the development of market relations enabled privileged bureaucrats to enrich themselves.

Intellectuals on the one hand, and enterprise and bureaucratic elites on the other, sought the growth of market relations and a firm turn toward capitalism. The two groups, however, disagreed on how the spoils would be divided between them, and the party was split three ways on how fast and how far to move toward putting the economy on full market relations. It was Deng who proved to be “the master of Chinese politics,” Professor Li writes, as he was able to implement an intermediate strategy between the party’s poles and use the crackdown in Tianamen Square to reduce the intellectuals to the junior partners of the ruling elites and to break the resistance of urban working people. Thus the stage was set:

“Throughout the 1990s, most of the state and collective-owned enterprises were privatized. Tens of millions of workers were laid off. The urban working class was deprived of their remaining socialist rights. Moreover, the dismantling of the rural collective economy and basic public services had forced hundreds of millions of peasants into the cities where they became ‘migrant workers,’ that is, an enormous, cheap labor force that would work for transnational corporations and Chinese capitalists for the lowest possible wages under the most demanding conditions. The massive influx of foreign capital contributed to a huge export boom.” [pages 64-65]

The “socialist rights” that were revoked included job security, medical insurance, access to housing and guaranteed pensions. The creation of an exodus from the countryside provided a huge pool of surplus labor to keep wages extremely low.

“China’s economic rise has important global implications. First, China’s deeper incorporation into the capitalist world-economy has massively increased the size of the global reserve army of cheap labor. In some industries, this allows capitalists in the core states to directly lower their wages and other costs by directly relocating capital to China. But more important is the ‘threat effect.’ That is, capitalists in the core states force core-state workers to accept lower wages and worse working conditions by threatening to move their factories or offices to cheap labor areas such as China, without actual movement of physical capital. …

“Secondly, China’s low-cost manufacturing exports directly lower the prices of many industrial goods. To the extent that unequal exchange takes place between China and the core states, part of the surplus value produced by Chinese workers is transferred to the core states and helps to raise the profit rate for capitalists in the core states.” [pages 70-71]

Professor Li’s analysis rests on “world systems” theory, which divides the world’s capitalist countries into three general groupings. World systems theory emphasizes that capitalism is a global system that changes and mutates over time and therefore must be analyzed as a single unit rather than as a collection of nation-states. The global division of labor forms the basis for a division of the world’s countries into three broad categories: core, semi-periphery and periphery, with the latter two subordinate to the core countries and the periphery the most exploited.

Inequality between core and periphery is an “indispensable mechanism” of global capitalism, Professor Li writes, and the existence of a semi-periphery acts as an important buffer because it is exploited to a relatively lesser degree than the periphery and can also, to a lesser degree, exploit the periphery. The semi-periphery historically comprised a small percentage of the world’s population and thus could be “bought off” relatively easily and thus a buffer against any united resistance by the world’s non-core countries. But if the semi-periphery were to become a significant portion of the world’s population, the world system would be destabilized.

The massive size of China is the destabilizing agent, Professor Li argues. He presents four possible scenarios that could arise from the rise of China:

“First, China may fail. China’s great drive toward ‘development’ in the end may turn out to be no more than a great bubble. [In this scenario,] as China sinks back to the status of periphery or poor semi-periphery, China’s existing regime of accumulation will collapse as it can no longer withstand the exploding social pressures the very process of accumulation has generated. This scenario, however, may be the least devastating for the capitalist world-economy.

“For the capitalist world-economy, the problem of China lies with its huge size. China has a labor force that is larger than the total labor force in all the core states, or that in the entire well-to-do semi-periphery. As China competes with the well-to-do semi-peripheral states in a wide range of global commodity chains, the competition eventually would lead to the convergence between China and well-to-do semi-peripheral states in profit rates and wage rates. This convergence may take place in an upward manner or a downward manner.

“In the downward-conversion scenario (the second scenario), China’s competition, with its enormous labor force, will completely undermine the relative monopoly of the historical well-to-do semi-peripheral states in certain commodity chains. As relative monopoly is replaced by intense competition, the value added contained in the traditional semi-peripheral commodity chains will be squeezed, forcing the historical well-to-do semi-peripheral states to accept lower wage rates that are closer to Chinese wage rates.” [pages 109-110]

Professor Li is arguing that, in this second possible scenario, wages rates in industrialized countries not among the “core” states (industrialized countries other than Western and Northern Europe, North America, Japan, arguably South Korea) would collapse under the competitive pressure of China’s low wages, which long hovered at about five percent of U.S. wage rates, and in the mid-2000s were one-quarter to one-fifth of countries such as Argentina and Hungary. A collapse in wages in semi-peripheral countries around the world such as Argentina, Hungary and Turkey would spark unrest and lead to economic depression around the world.

“There is the third scenario, that of upward convergence. China may succeed in its pursuit of ‘modernization’ and become a secured, well-to-do semi-peripheral state. In the meantime, the historical well-to-do semi-peripheral states may succeed in maintaining their relative monopoly in certain commodity chains. As a result, the Chinese wage rates converge upwards towards the semi-peripheral levels. Unfortunately, this scenario is as dangerous for the capitalist world-economy as the second scenario. The problem, again, lies with China’s huge size. Should the Chinese workers generally receive the semi-peripheral levels of wages, given the size of the Chinese population, the total surplus value distributed to the working classes in the entire well-to-do semi-periphery would have to more than double. This will greatly reduce the share of the surplus value available for the rest of the world.” [pages 110-111]

Here, Professor Li is arguing that a multi-fold increase in Chinese wages simultaneous with a maintenance of wages in countries around the world would likely be unsustainable. Multi-national companies based in core countries have moved production to China to take advantage of its low wages and lack of effective labor laws, enabling them to extract more surplus value. “Surplus value” is the sizable difference between the value of what an employee produces and what the employee is paid; some of the surplus value is used by capitalists for investment or to cover other expenses but much of it goes into stratospheric executive pay and financial-market speculation.

An upward convergence of wages around the world in present-day low-wage havens such as China would significantly reduce capitalists’ profits. In this scenario, capitalists would seek to cut wages in core countries to make up the difference, which in turn would trigger reductions in demand. Declining rates of profit, under capitalism, lead to economic downturns. Each of the world’s major economic crises, from 1873 on, have followed declines in the rate of profit.

“If the scenario of upward convergence turns out to be too expensive for the capitalist world-economy, what if China’s upward mobility takes place at the expense of the historical well-to-do semi-periphery? In other words, imagine the scenario (the fourth scenario) in which the rise of China (and India) successfully displaces the historical well-to-do semi-periphery, what are the likely implications for the existing world system? … [A]fter all of the investment is distributed, how much will be left for the other half of the globe?” [page 111]

Were the growth in energy consumption of the Chinese and Indian economies to continue at the same rates, and likewise for the United States and the eurozone, the rest of the world would be left without an energy supply in two decades, Professor Li argues. He writes:

“Given these trends, the rest of the world will have to get by with less and less energy consumption after 2017 and by 2035 there would be virtually no available energy left for the entire world outside China, India, the U.S. and the Eurozone. It is certainly impossible for such a scenario to materialize.” [pages 111-112]

But will there be enough energy to meet even the increasing needs of whatever countries will be in a position to dominate energy resources? Because of the intense competition imposed by the market in capitalism — individuals, businesses and states must all engage in it — a substantial amount of available surplus value must be used toward further capital accumulation to secure and expand market share. Those who do not do so are eliminated in the competition.

Investment is a necessity, and to compete successfully, what is wrung out of labor must rise. Machinery is the route toward greater efficiency. But as machinery and consumer products become more sophisticated, energy and other resources are consumed at greater rates; thus energy inputs rise faster than the population, pushing energy usage beyond sustainability and degrading the environment.

The world is already consuming resources beyond the world’s bio-capacity, Professor Li argues. Not only have the world’s “core” countries already exceeded their regional bio-capacities, but China, India, the Middle East and Central Asia have as well. Using calculations in a 2006 report by the World Wildlife Fund in the USA and Canada, the Zoological Society of London and Global Footprint Network, China and India consume resources and impose domestic environmental damage at a rate twice beyond their ability to be sustainable. Although those countries consume per capita far less than do the U.S. or the European Union, they also have much lower bio-capacities.

Such problems are compounded by an imminent peak in oil and gas, and limits to a variety of metals and other natural resources. If renewable energy sources prove unable to make up for the future shortfall in energy from oil and gas, the world will have much less energy available to it in the latter part of the 21st century than is available now. Professor Li believes that renewable energy will only be able to produce a small percentage of that of non-renewable sources. Even if his pessimism proves unfounded, the unsustainability of present energy consumption remains — as is the damage being done to the environment.

Another looming crisis for the capitalist system is the lack of a successor to the United States as the system’s center. Capitalism has had a succession of dominant centers; each successive center has been bigger to be able to cope with increasingly complex tasks. When London succeeded Amsterdam as the financial center, the financial center became located within a country with a powerful military, not only a large merchant fleet as Amsterdam’s United Provinces possessed. With New York succeeding London, the country at the center is continental in size and possesses a military that can be projected around the world.

Professor Li predicts a rapid decline for the U.S., including an imminent end to the dollar as the world’s central currency. Here I believe the professor’s forecast will prove to be considerably off; although the U.S. has entered a period of decline, its military and financial powers will remain preeminent for some time. And the dollar and U.S. debt instruments remain safe havens.

Declines from the capitalist system’s apex have tended to be gradual and not precipitous; moreover, the former financial center tends to remain powerful in financial markets for some time after the military baton has been passed. And there is no country remotely near being able to mount any challenge to U.S. military supremacy; U.S. military spending is nearly equal to military spending of all the rest of world put together and a significant portion of the Pentagon budget goes to weaponry.

It is a contradiction that the “duties” of the central power contribute to its ultimate decline. For the U.S., that is not only the enormous drain of military spending that starves the rest of its economy of investment and needed social provisions, but that it props up the world system through its deficits.

“After the systemic breakdown of the early twentieth century, the capitalist world-economy can no longer afford another similar breakdown. The hegemonic power has since then assumed the new responsibility to actively manage the global economy. Instead of allowing the system to simply collapse [during the repeated economic crises from the 1980s], the U.S. responded to growing systemic instability by running large and rising current account deficits, in effect pumping ‘liquidity’ into the global economy.” [page 123]

No other country has a big enough economy, nor a big enough military to apply the muscle that underlies the capitalist system, to replace the U.S., yet the capitalist system is unable to function without such a center. The next hegemon must be bigger than the U.S., and there is no country or bloc that fits the bill. Moreover, Professor Li argues, such a hegemon would be so large that it would stifle competition among countries, kicking out one of the crucial legs of the capitalist system.

Crises in economics, the environment, shrinking natural resources and the chaos of global warming are leading to a threat to very survival of humanity, Professor Li argues. Moreover, multiple crises are leading to a point where economic growth is no longer possible, the ultimate contradiction for the capitalist system, the very existence of which is based on endless growth and accumulation. He writes:

“Centuries of relentless capitalist accumulation have set humanity on a course of self-destruction. The very survival of humanity and civilization is at stake. The crisis can not be avoided or overcome within the historical framework of capitalism. To rebuild human society on an ecologically sustainable basis, there must be an economic system that is based on the production for use which is capable of meeting people’s basic needs, rather than one that is oriented towards the endless pursuit of profit and accumulation.” [page 173]

What comes next is up to humanity to decide. Professor Li quotes world-systems theorist Immanuel Wallerstein as predicting the world will enter a post-capitalist era in the second half of the 21st century. But what will that system or systems be? It could well be much worse — an authoritarian feudalism in which survival is a struggle in a time of scarcity is certainly foreseeable. Or it could be a democratic socialist system, in which production is for human necessity rather than an elite’s wealth accumulation and in which the consequences of a changing climate and the limitations on the world’s resources are handled in fully democratic, rational manners without elites to confiscate most of what is produced.

All social systems are historical, and capitalism is no exception, Professor Li argues. Indeed, all previous systems have reached their limits and been supplanted by newer forms. Ending on an optimistic note, he writes that “if the future socialism is able to make the best use of the human knowledge of nature that has been developed under capitalism and further expand that knowledge” and a sustainable relationship between population and resources can be established, then “humanity will be in a position to resume the great historical march to the realm of freedom.”

The Rise of China rewards the reader with a wealth of information and analysis. It is not necessary to agree with everything in the book to find it a valuable contribution toward understanding the stresses of the present economic crisis and a stimulant to discussion of the viability of continuing on the current economic path. One conclusion that shouldn’t be controversial, however, is that there will be no saviors. We’ll have to save ourselves.

* Minqi Li, The Rise of China and the Demise of the Capitalist World Economy [Monthly Review Press, New York, 2008]

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6 comments on “Could the rise of China fatally de-stabilize capitalism?

  1. Alcuin says:

    “Professor Li is arguing that, in this second possible scenario, wages rates in industrialized countries not among the “core” states (Western and Northern Europe, North America, Japan, arguably South Korea)…”

    Isn’t there a misplaced “not” in there?

    Sounds like a fascinating book – I might have to buy it!

    • Alcuin, thank you as always for a close read. In this case, the “not” is properly there and is not misplaced. Alas, I nonetheless did not write clearly. The places listed in the parentheses are the areas that are considered the “core” and are not among the industrialized countries that would not be subjected to a collapse in wage rates under the scenario. In other words, it is those industrialized countries that form what Professor Li calls the “well-to-do semi-periphery” — countries such as Argentina — where wage rates would collapse. What I was doing in that passage was to let readers know what places constitute the “core” under discussion to differentiate them from the rest of the roster of industrialized countries.

      I have changed the passage to this: “Professor Li is arguing that, in this second possible scenario, wages rates in industrialized countries not among the “core” states (industrialized countries other than Western and Northern Europe, North America, Japan, arguably South Korea)…”

  2. Alcuin says:

    Here’s another article in the same vein. I’ve been exploring the concept of gift economies – I was motivated to do so by reading Ehrenreich’s book. The author of this article contends that the economic vision of what he calls “business optimists” is fatally flawed and goes on to undermine every argument that they present. Interestingly enough, he includes Paul Hawkins, author of Natural Capitalism, and Friends of the Earth in the category of “business optimists”. At the end of the article, after calling for anti-capitalist revolution earlier in the article, the author presents two possible ways that capitalism will end: a gradual move towards a gift economy or “fascist parties [will] preserve the affluence of the rich and the poverty of the developing countries. To maintain environmental goals, the armies of the rich world might attack coal-fired power plants in India and China – with nuclear weapons if necessary.” Either way, capitalism as an economic system doesn’t have a future.

    The article is not as optimistic as Professor Li. I guess we will find out who is correct. Personally, I’d like to think that gift economies will win out. There are some really thought-provoking articles on this and related subjects at the Reality Sandwich website.

    • The author of the article to which you linked at the top of your comment stresses that alternative or “green” energy sources are far more expensive and far less efficient than current energy sources. Professor Li makes the same argument, and both argue that the amount of capital necessary to switch to such energy sources as non-renewable energy sources are depleted would mean a sustained decline in economic output, an impossibility in capitalism, which is dependent on endless growth.

      The author makes a very interesting case, and I’ll second your recommendation that the article should be read. His application of the term “business optimist” to many environmental groups is correct as such groups do indeed argue that investing in renewable energy will provide a boost to the economy. Barack Obama is a proponent of such thinking and could rightly be included among these “business optimists.”

      Where I might disagree is your statement that “The article is not as optimistic as Professor Li.” The (unsigned) article is arguably more optimistic because s/he argues that one possible scenario is that capitalists themselves will divert production toward saving the world and re-distributing income to partially offset the loss of income that would come with falling production. The author notes, correctly, that such behavior would be well outside “the norms of the market economy.” Such an outcome is an impossibility in my opinion. As you noted, the author also presents the scenario of a fascist outcome, the one that would be much preferred by capitalist elites. Professor Li also discusses this possibility. Indeed, such a “solution” is the most likely outcome if a mass, multi-national movement does not develop.

      • Alcuin says:

        I’m going to make the assumption (always dangerous) that the article is by Terry Leahy, whose name appears in the upper left corner of the web page. After a bit of digging, I found that he is a professor at the University of Newcastle, New South Wales. His e-mail address is Terry.Leahy(at)newcastle.edu.au. Perhaps the web page is his way of trying to reach out to the wider world, because I don’t know of any piece published in any academic journal that is accessible to the general public without paying a steep fee. Rentiers, anyone?

        Barack Obama a “business optimist”? But, of course! The classification applies to anyone with his/her head deeply buried in the sand and unwilling to entertain an alternative economic system.

  3. Reblogged this on (Foot)notes and commented:
    Great review of a prophetic book I read last year.

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