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China, Piketty, and Patrimonial Capitalism

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China, Piketty, and Patrimonial Capitalism

A popular new book offers a useful prescription for China’s growing inequality problem.

China, Piketty, and Patrimonial Capitalism
Credit: China shopping mall via dailin /

Thomas Piketty’s new book on inequality, Capital in the Twenty-First Century, has stirred renewed and widespread interest in growing global inequality. Although the title of Piketty’s book is provocatively similar to Marx’s magnum opus, Das Kapital, Piketty openly rejects Marx’s work because it fails to incorporate empirical evidence (he also reveals in an interview that he hasn’t read it all). By contrast, using copious empirical data based on surveys and tax records, Piketty points out that capitalism fundamentally leads to inequality, since the profit rate grows faster than income and output. Piketty’s work revives the debate over the “social state” versus pure capitalism and, as we discuss in this article, can be used to highlight the enormous change of course in China’s political economy and the predicament of growing inequality in the country today.

As is known, China under Mao was strictly anti-capitalist and, in some crucial ways, egalitarian. Within work units and communes, families received equal amounts of income. Despite the fact that there were some differences between incomes in rural and urban areas (as has been pointed out by scholars like Martin Whyte), no citizens were allowed to accrue wealth. Capital accumulation by individuals and capitalism itself were strictly verboten and viewed as “feudalist” and “imperialist,” while revolution from the bottom classes was encouraged. The idea was that capitalism was inherently unequal, and the answer to this inequality was a Chinese strain of socialism.

Unfortunately, this ideology, as implemented under Mao’s leadership, resulted in a cycle of poverty, since no one had access to capital. As a result, China’s economic stagnation under Mao was used in the West to illustrate the failure of anti-capitalist economics, and after Mao’s death, it appeared that promotion of a market economy was the only way out of poverty.

Indeed, Deng Xiaoping saw the growth of markets as a way out of economic torpor. Even so, China’s leadership faced a strong debate over whether it should become capitalist or retain control over its economy in the eighties. Following the Third Plenum of the Twelfth Central Committee in 1984 through the Tiananmen debacle in April 1989, two schools emerged regarding economic modernization. One feared reform and continued to revile capitalism, while the other greatly desired an opportunity to enrich itself. Over time, those in the latter camp won out, despite Deng’s firm commitment to rout out “bourgeois liberalization.”

China chose its own form of (dare-we-call-it) capitalism, a socialist market economy, which incorporated both government intervention and market movements. This form of state capitalism has ultimately rejected the target of economic equality, which was an important component of Maoist ideology (however muddled the latter became over time). In a perverse display of economic modernization, “the people” – that is, the lower classes and particularly the peasantry – have been entirely stripped of economic and social power, while those with capital have gained power in multiple avenues: economic, social and political. The economic “feudalism,” which Mao strenuously opposed, has regrettably taken root.

In China, the socialist market economy has, as in other nations, developed into a “patrimonial capitalism” (Piketty’s term for unequal capitalism in the West), in which wealth is handed down from one generation to the next. Although millions of Chinese were pulled out of poverty by growing wages attributable to sheer economic growth, a searing inequality has now arisen. This can be attributed to the uneven growth of returns to capital versus output (i.e., profit versus wages) that Piketty underscores in his book. The horror of rampant poverty, in which individuals were forced to “eat bitterness” in the name of egalitarianism has, in China, given way to the devil of pervasive capitalism, in which the poor remain underfed while the wealthy fatten themselves in luxury. It appears that, after all of this time, neither Mao nor Deng had the whole answer when it came to economic dogma. So what is the solution to China’s problems associated with equality versus growth?

Piketty, without intending a policy prescription specific to China, provides a middle way between these two extremes that is eminently applicable to China today. Piketty resurrects the idea of a “social state” that redistributes wealth, via taxation, from the rich to the poor via the state, which would provide public services and replacement incomes to boost access to health, education, and pensions. An increase in taxes on the wealthy would increase government funds used to finance social programs.

This is a strong solution for China’s growing income gap, which has fuelled social unrest and generated immense disparities between the elite and the economically disenfranchised. While Piketty himself lauds progressive taxation in China, he neglects the nature of wealth holdings by China’s elite within corporate and/or state entities. This, coupled with insufficient enforcement of tax laws, has dampened the benefits that a progressive tax might offer and has resulted in deepening inequality.

Enforcing tax laws and curtailing the use of loopholes in wealth holdings would provide the state with more funds, which it should use to expand social services as it grows. These policies would require substantial state support, but only in this way can China’s capitalist trajectory be checked and a meaningful compromise between egalitarianism and growth be struck. Perhaps then, capital can take on a gentler, less inflammatory meaning in China.

Follow Sara Hsu on Twitter @SaraHsuChina.