This week on Economic Update, Professor Wolff follows up with part two of his in-depth analyses of the USSR and anti-capitalist governments by providing (1) an overview of China's economic development mostly over the last 25 years (GDP, real wages, etc.), and (2) its economic strategy: learning but also differing from Soviet strategy along with some relevant, and interesting, historical context.
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Transcript edited for clarity.
This program is a follow-up on an earlier program we did. That program was devoted to the Soviet Union, that first example in the modern period of history of an attempt to build a socialist society. I built that program and the one today around the following assumption; that in many conversations about capitalism and socialism as alternative systems mention is made, particularly by the older generations, of the Soviet Union and today about the People's Republic of China. These are looked at as examples (good, bad or mixed) of what socialism is. They certainly are examples of what some of the early efforts at building socialism look like and because they're spoken about so often, referred to and thought about, it seemed a reasonable time for me to devote some attention to analyzing them. We did that with the Soviet Union in the earlier program and today we're going to do it with the People's Republic of China.
Before I jump into it let me be really clear about how we are going to do it. This is not an exercise in “we're good. They're bad. '' Either way that comes from the Cold War which was supposed to have ended in 1989-90 but clearly hasn't, or at least the Cold War is alive and kicking in the minds of some of our fellow citizens. This is too bad because it prevents the kind of balanced approach of looking at the pros and the cons that a mature and intelligent conversation ought to be about. Capitalism has strengths and weaknesses. Socialism is an alternative and it has strengths and weaknesses. We'd all be better off if we were able to talk about all of that without resorting to childish invocations of how “we're good and they're bad”. You really ought to get over that at a certain point in your life or else something's wrong. We’re not going to go there so let's go.
Let me begin by talking about what economists often talk about when comparing different kinds of societies and comparing different countries. You might remember that Adam Smith's great work “The Wealth of Nations” published back in 1776 was about explaining why some way nations are wealthy and some nations are not and to account for that, to understand it. Part of that was a very generous impulse Mr. Smith understood that poor countries would like to not be poor and wanted to learn what the rich countries might be able to teach them about how to get to that situation.
China was one of the poor countries at the time Adam Smith wrote and it got poorer after that. By the 20th century (the last hundred years or so) the Chinese people were not only the most numerous people of any country on earth (they remain today the most populous country on this planet by far) but also very poor. The capitalist part of the world had grown much richer in the intervening couple of centuries so they were even further behind as well as being absolutely poor. So, they were focused, like most of the people in the world are, on overcoming poverty. So that's been their major goal and it's a reasonable place to start to assess how well they've done.
If these numbers trouble you then please understand it's because you did not know about them before, not because there's anything wrong with the numbers. Over the last 20 years the People's Republic of China has increased its output of goods and services faster than any other country on this planet. In the case of the comparison between the People's Republic of China on the one hand and the United States of America on the other they're not even close. Let me explain with some numbers.
The rate of growth of output of goods and services (the productivity of the economy, if you like) [for China] in 2005 was 11%. In 2017 it was 15%. In 2010 it was 12% and it has slowed down since then. Over the last year it was a mere 6.4%. If you wanted to average it out it was probably in the neighborhood of 10-11% over the last 10, 15, 20 years. By comparison, let me give you the numbers for the United States of America. Its average growth rate in the 1950s and 60s was 4%. In the 70s and 80s it fell to 3% and in the last 10 years it has averaged 2%. In the latest year it was 3.2%; half of what it was in China, but for most of the last 20 years the rate of growth of China has been 2 to 3 to 4 times that of the United States. That, in a simple way, tells us something.
Number one it explains why we're reading and hearing so much about China; because they have become the second most important economy in the world because they have achieved these extraordinary rates of economic growth. Number two it will help you understand something else about the people of China: they are not about to be pushed around, neither by Mr. Trump nor anybody else because they have the economic strength to resist. Number three, if you're the government of the People's Republic of China (and that is a government in which the Communist Party of China is dominant) you are hardly about to change the way you organize your economy given how well it has been doing.
Governments change either willingly or under pressure when they're doing badly for their people. It makes people bitter, angry, critical, and liable to push for change. This is something Americans no doubt understands since it's a situation we face here in American capitalism, or in Europe with their capitalism that's not doing really well for an enormous number of people. As a consequence, criticisms are rising. You see a rediscovery of socialism, for example, here in the United States, you see the yellow vest movement demanding fundamental changes in France and you see all kinds of other movements we don't have the time, today, to go into. I like to deal with them occasionally, at least, in other programs.
This is already enough to explain to you why the People's Republic of China is the economic phenomena of our time.
Let me turn next to the second most typical statistic to look at if you're comparing countries and you're trying to understand what's going on with the development or not, of wealth and poverty. This number is called the “real wage”. Here's what it means: how much can people afford to buy with the average wages they get. To understand that we look at two numbers. First, how much money is given to people per hour for the work they do and on the other hand what are the prices of the things they buy with the wages they get. In other words, if your wage goes up by 10 percent but so do all the prices you face, you're not one bit better off. You got 10 percent more money but it doesn't buy you anything but the same quantity of things it bought you before. When we adjust the wages workers get for the prices they have to pay, we get what's called the “average real wage”. What you can afford with the money you get.
Let's compare the last 20 years in the United States that is this century so far in the United States with that in China. In the United States real wages (the average wage of the American worker) has stagnated. It has gone nowhere. That's true not only for the 20 years we're talking about of this century, it's true for the last 25 years of the 20th century. Here's a statistic for you to think about as an American if you're watching this program from the United States or listening to it on the radio here. In 1973 the wage of the United States, the average wage of an American, was able to buy (here we go now) MORE things than it was in 2018. The real wage in the United States is less today than it was then. It's not less by a lot but it means that over the last 40 to 45 years Americans who have worked harder than ever, who have been more productive than they ever were across that time, have not shared in their greater productivity. Their real income, their real wages have not gone up. The real hourly wage in the United States is lower today than it was in 1973 and that is something to think about.
But now comes the Chinese story. Over the same period of time, the last 20-25 years, real wages in the People's Republic of China have quadrupled. Let me tell you that again. The basket of goods and services that an average worker gets in China for an average hour of his or her work is four times greater today than it was 25 years ago. Yes, Chinese wages remain below the average in the United States because they were and they still are a poor country when you divide their total economy by the enormous number of people that live in that country. But if you want to understand why the people of China support their government here's a clue: their real wages went up four times over the last 25 years in a society led by a government in which the Communist Party is the dominant political force.
Let me pause to let all of this sink in. This is not about whether you like these numbers or don't this is not about whether you're critical of many aspects of Chinese society or you're not. I myself find things in China I admire and things in China I would like to avoid. I try to look at the strengths and weaknesses. But when it comes to the economics of their socialist system and I compare its performance over decades to this moment, there is no contest about which system has served its people better in terms of economic growth of output.
The economy as a whole and the real wages of the average worker in that society. Is China an example of equality? No. It has a great deal of inequality. There the United States and China have something in common; high inequality that's actually getting worse.
We will continue after the mid program break to talk about what's going on in China so that we understand what the internal mechanisms are that explain this performance. Before breaking let me remind you, please, to make use of our websites: rdwolff.com and democracyatwork.info. Please subscribe to our YouTube channel. Just go to youtube.com/democracyatwork. And finally I want to thank our Patreon community for the support it continues to provide. We are grateful and appreciative. We'll be right back.
Welcome back friends to the second half of today's economic update. We've been talking about the People's Republic of China. In the first half today we spoke particularly about its performance as an economy: its rate of growth in production of goods and services on the one hand and the rate of growth of the average real wage of a Chinese working person on the other. Having shown the remarkable success of their economic growth program in both those ways I want to turn now to how they did that.
How do they organize their economy and particularly in what ways differently from that of the United States or Western Europe that might help us account for their extraordinary performance? First, and perhaps most important for many of you that are watching and listening, is to understand that the Chinese economy for quite some time now has had a mixture of privately-owned enterprises and state-owned enterprises. wYou might think of it as a mixed economy between private and state. It is also true over the last 2025 years that the role of the private sector has been enlarged, relative to the role of the state sector. However, that has to be made a little more complicated by noting that the Chinese, in managing this balance between the state and the private, give the dominance to the state. They say that the state-owned enterprises will always be the leading sectors, the main industrial groups within the Chinese economy. There's plenty of room for private enterprises but the leading part of the economy will be the state.
Why are the Chinese doing that? First and foremost, they are doing it because it's their way of learning from the experience of the Soviet Union. When the Soviet Union's kind of socialism (in which the state was overwhelmingly dominant and the private sector was really quite restricted), when the Soviet Union collapsed in on itself in 1989 it went through an extremely quick transition from an overwhelmingly state industrial sector to an overwhelmingly private one. This was pushed by the folks in Russia who wanted these changes, it was pushed by foreign advisers led by Jeffrey Sachs now of Columbia University. It was called a kind of “cold shower treatment” or sometimes “shock therapy” as a way of fixing what was understood to be wrong. The Chinese analysis is that the suffering of the Russian people in the 30 years since then (the failures of the Russian economy in the 30 years since then) had largely to do with the excessive speed and the excessive extent of what happened in the Soviet Union. They have been determined not to repeat that mistake. In other words, their communist party's plan is to make the transition slow and limited. Yes, foreign enterprises can come in if they're private capitalist enterprises, and many have. Yes, Chinese people can set up private enterprises as many have. But the leading sectors of the economy will remain state-owned enterprises running the program of economic development that the state organizes under the leadership of the Chinese Communist Party.
It's important to understand that the Chinese kind of socialism is itself a learning process in which what happened to the Soviet system is playing a major role, in this case of what not to do in the way that happened in the Soviet Union. But it is not the only factor that's involved. To continue the comparison with the Soviet Union, because the Soviet Union was the first socialist country and completely isolated after the 1920s, surrounded by a world that hated what they were doing, they couldn't and didn't find a way to build their economy by exporting. They could not produce for the rest of the world, make a lot of money that way and use it to develop their own economy. They had to do it pretty much on their own. The Chinese have taken a different path there as well.
Early on the Chinese decided (at the end of the last century the beginning of this one) to hitch their economic wagon to the world market, to become the producer of goods and services for sale around the world. In order to do that they had to build industries that produced what the rest of the world did either at a higher quality or at a lower price or both. Basically, they've done that which is why Chinese automobiles join Chinese appliances, Chinese clothing, Chinese you-fill-in-the-blank is everywhere. Most of what you will see in an average Walmart is made in China and there's a reason why Walmart stocks up on Chinese goods, and they're not the only company of course. So, they hitched their wagon to the world market and they've done very, very well because of it. The Russians couldn't do that and the Chinese could and they did.
Here's another thing: private capitalists didn't go into Russia hardly at all but they have been rushing, stumbling all over themselves to get into China. The Chinese understand that and they offered Western capitalist enterprises the following deal. We need your technology, the Chinese said. We need your money, your capital to be invested. So here's the deal. We offer you, we will provide you with well disciplined, efficient, hard-working workers at a very low wage (the one that we have here in our poor country) and we will build the roads and provide the supports for you to be able to make a lot of money producing here in China more cheaply than you could ever produce in America, or Western Europe, or Japan etc. All we ask in exchange is that you share your advanced technology because that's why we're doing this with you. You will have access to our workers and you will have access to our customers to sell your product, but we want your technology and your capital.
Nobody put a gun to any capitalist enterprises’ head. They made the decision to accept the offer of the Chinese because it was profitable them for them to do so. If it meant that they laid off workers in their home countries, these capitalist enterprises, they could care less. They did that. They abandon whole industries. They abandon whole communities. That's how capitalism has always worked only this time, with this destruction of working people in the West there was a boon to the workers of China, which is why I gave you the numbers about the average real wage.
So, the Chinese used the world market. The deal they struck with private capitalists and the lessons they learned from the Soviet Union to organize what they call a special Chinese kind of socialism that allows for private enterprise (a considerable amount), allows for market dealings (a considerable amount), but controls from the top through the state-owned enterprises the leading or dominant sectors of the Chinese economy.
The last part of the show for today is to give a little historical context China is an old civilization and a quite homogeneous civilization. The Han people are the dominant ethnic group and other ethnicities are small and scattered. The Chinese are a proud people with a long history of a pretty well-developed civilization which at various times over the last couple of thousand years was much more developed than civilizations in the West were. So for them it was doubly embarrassing, humiliating is the word they used, to fall under the control of foreign colonialists in the 17th, 18th, 19th century from Britain, from France, from Germany, from the United States. It culminated in a horrible moment of rebellion called the Boxer Rebellion at the end of the 19th century when a futile effort by the Chinese authorities to push back against the Western imperialists was defeated.
China was never made into a colony. They're very proud of that. But they had to give away Hong Kong and parts of their country to the foreigner who controlled them, who settled their merchants and other companies in these special territories where they didn't find themselves subject to Chinese Authority or Chinese law. The Chinese, as a people, made a commitment to find their own way, to break, led by Sun Yat-sen at the beginning of the 20th century. And when that wasn't sufficient and when they were added the humiliation of the invasion of their country by the Japanese in the 1930s a revolt of a much deeper sort took place in China.
They were successful. At first it was an alliance between the nationalists, who wanted to build up a capitalist China. and the Communists, who wanted to build up a socialist China. But they worked together to push the Japanese out. By 1945 they had done so, together with the fight of the United States and its allies against Japan. As soon as World War II was over the alliance between the capitalist / nationalist Chinese under their leader Chiang Kai-shek ended up in a civil war with the Communists, their former allies, led by Mao Zedong. A civil war broke out from 1945 to 1949 ending with the decisive and complete victory of the Communist Red Army. The Chiang Kai-shek people left the mainland of China and went to Taiwan where their descendants still live and still imagine that they, on the little island, are China whereas the vast mass of people on the mainland are something else. No one hardly is left in the world who shares this delusion.
From 1949 to now, 70 years, is historically not a long time. But from a decimated, poor, colonialized country China is now the number two economy in the world. It is an incredible achievement. Not to understand that, not to understand what this means in the minds in the feelings and in the pocketbooks of the Chinese people, not to understand that it has involved moving four to five hundred million people off of the poverty-stricken countryside into the urban industrial jobs along the coast of China, these are misunderstandings that make no sense. You are not helped in understanding, let alone fixing the problems of the world, by living in the delusion that the things I've tried to get across today are not the case, don't have to be taken into account and somehow don't matter.
Unfortunately, in the mainstream media of the United States, and in other parts of the West, most of this is simply not reported on, not covered, evaded. That doesn't do anyone a service unless it's the people who run the kinds of society China isn't, who are afraid of the model and the example China offers. For my part it is our effort, here at economic update, to provide the kind of information on the basis of which rational decisions can be made about making the world a better place. I hope you have found these in-depth analyses of the Soviet Union and China a useful part of the ongoing debate about capitalism and its alternatives, the number one of which is varieties of socialism. Thank you for your attention and I look forward to speaking with you again next week.
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