China, Not Yet Communist Jude Wanniski April 9, 1997

Memo To: Website browsers, clients and fans
From: Jude Wanniski
Re: China Twist

[As promised, the following is a brief essay written in op-ed form by my son Matthew Wanniski, which I found provocative. It has not been published elsewhere.]

In a recent press conference, President Clinton made reference to "two great former Communist powers." One was Russia. The other was China.

China? Obviously a mistake! According to a spokesman for the National Security Council, it was. "The President was just slightly ahead of his time," he said of the remark. But was Mr. Clinton wrong? Is it correct to term China as communist when it has made significant progress in the direction of capitalism?

Yes, the People's Republic of China is run by the Communist Party, but it describes its economic system as "socialism with Chinese characteristics." This sounds more pragmatic than ideological, and to even a casual observer China is well along the capitalist road, leaving all socialist characteristics behind.

What is happening here? How should we think of China? Generally, we tend to regard a system as "communist," "socialist," or "capitalist" by the degree to which the state interferes with market processes.

Under communism, "the people" — i.e., the state — own the means of production. Through central planning, it substitutes the wisdom of experts for the randomness and unpredictability of open markets. The state essentially taxes 100% of all production and then gives back some of the "revenue" to state enterprises to permit them to buy capital goods for continued production. What remains is paid out in free goods — free food, free housing, free clothes, free health care, free education, free entertainment, free transportation, with a small amount of free cash for very small purchases, at prices set by the state. The lofty objective is to maximize collective wealth.

Under pure capitalism, the state owns none of the means of production and has no experts who interfere in the randomness and unpredictability of the market. When "crises" occur, the market is allowed to correct itself. The "invisible hand" that Adam Smith described guides exchanges and the allocation of production to capital and labor transactions, not a centralized authority. Taxes are only high enough to finance the community's national defense and those other community needs that are most efficiently dealt with by one central authority.

Under socialism, the state owns most of the means of production, but permits the markets to determine wages and prices. Taxes are kept high to allow state planners to shift capital from one industry to another, with the stronger helping the weaker. Relative to communism, socialism allows for a greater degree of personal freedom and ownership of private property, but much greater control and interference in the market process than under capitalism. As such, it can be regarded as a midway point between the two ideals of communism and capitalism.

We say "ideals" because both capitalism and communism represent ultimate goals, the height or pinnacle of economic and social development. Both are Utopias, never to be attained. Karl Marx, the communist visionary, believed this, seeing the two as simply phases in human economic development.

In other words, the idea of capitalism is driven by individuals acting with maximum freedom, individual-oriented, while communism is community-oriented. In this manner they can be seen as two sides of the same coin, in constant need of balance. Each needs the other in order to have meaning.

Real problems occur when a state focuses on one to the exclusion of the other. This is what Marx predicted in his analysis of capitalism. The capitalist system would inevitably collapse, he believed, to be replaced by a new, classless society where the state would, in fact, "wither away." The Utopia upon which communists have set their aim is also the aim of the purest capitalists.

China appears to recognize that by allowing a degree of capitalism to co-exist alongside its socialist regime, it can more efficiently and effectively reach its Utopian goal. On its eastern track toward Utopia, we should not expect China to move very far from its community-orientation in the political realm. This is the legacy of Deng Xiaoping. Like Marx, he knew that the purely economic elements of capitalism represent an essential stage along the road to achieving a communist state.

The recent reforms, allowing greater economic freedom for China's citizens, certainly makes it appear to Westerners that China should be pushed to become a political economy that replicates ours. Otherwise, they feel China will harden as a "soft" authoritarian state, the kind that currently seems popular among dictatorial states.

None of the speculation on where Beijing is headed seems satisfactory. The optimistic view is that if we "engage" China, we will be able to persuade it to become like us, to adopt our system of individual political and economic freedoms. Pessimists fret over the growing economic and political might of 1.2 billion people and how they may use their might to subjugate us to their way of life.

Both seem to rest on unvoiced opinions that China has given up on its Marxist ideology and has begun to embrace the lessons of capitalism. It may be more correct to say that China is learning from the mistakes of socialism as it has been practiced in various countries thus far. It has not abandoned Marxism, but is simply evolving its practice.

When President Clinton talked about China as a former Communist power, he may have been trying to justify friendly relations with a country that others are casting as a "bogey man" that should be driven to its knees before it is too late.

It would be easier for him to make China policy, though, if he understood that it is not a "former" Communist power, because it never was. China is becoming capitalist in order to become communist. This is an important distinction and one that unfortunately is overlooked. Before any true understanding can be gained on what is happening in China, this simple idea should be squarely accepted, not ignored or willed away.