Milanovic, B. 2019. Capitalism, Alone: The Future of the System That Rules the World. Harvard University Press.

Chapter 3

Summary by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida

Chapter 1 | Chapter 2 | Chapter 4 | Chapter 5

Chapter 3: Political Capitalism

Milanovic argues that political capitalism is a product of communist revolutions in societies that were colonized such as China. This chapter includes a discussion of the global history of communism, its effects on colonized societies, the definition of political capitalism and its features and contradictions, and its global role using the example of China.

The Place of Communism in History - Inability of Marxist and Liberal Views of the World to Explain the Place of Communism in History

Note: Communism as defined by Karl Marx has never existed. Marx used the term communism to represent the highest stage in the evolution of socialism where the state withers away when antagonistic classes disappear. Milanovic explains this, but indicates that he uses the term communism to refer to the societies that are ruled by the communist party. However, the economic system of communist countries like China was socialism before it evolved into political capitalism.

There are different views on the history of communism including the Marxist view, and the liberal capitalist view. Both views are based on the idea that societies evolve from less-developed states to higher-developed states, i.e., they evolve into something better. The problem for Marxism is to explain why socialism suddenly disappeared and transformed into capitalism. From the liberal capitalist perspective democracy and laissez-fair capitalism represent a movement toward the end point of human evolution that is liberal capitalism. The liberal view places communism with fascism as detours in the wrong direction. However, the liberal capitalist view cannot explain the development of fascism, or communism, or more importantly World War I. This presents a problem for claiming that a system that might end up involved in worldwide wars represents the pinnacle of human existence.

The Place of Communism in History - How to Situate Communism within Twentieth-Century History

According to Milanovic "communism is a social system that enabled backward and colonized societies to abolish feudalism, regain economic and political independence, and build indigenous capitalism." The conditions were fundamentally different from those in Western societies that lead from feudalism to capitalism. The transition from Third World feudalism to capitalism required communist revolutions that played the same role as the domestic capitalist business class (bourgeoisies) played in the West. Communist revolutions eventually transformed less-developed countries into capitalist economies.

The Place of Communism in History - Why Were Communist Revolutions Needed to Bring Capitalism to (Some Parts) of the Third World?

The Role of Communist Revolution in the Third World

The position of Third World countries in the 1920s included underdevelopment compared to the West, feudal relations of production, and foreign domination. This is why they could not develop along the same path as the West. They needed to transform the domestic economy, dispose of the stifling power of the landlords, and to overthrow foreign rule. The only organized forces that could effect these changes were communist parties and other left-wing and nationalist organizations. According to Mao Zedong, imperialism and feudalism were dead weight on the Chinese people. The Chinese Communist Party implemented comprehensive land reform, the abolition of quasi-feudal relations in rural areas, and weakened the clan-based social relations. These were replaced by a more modern family structure and gender equality. These reforms also included promoting widespread literacy and education, overturning historical hierarchical relationships, and rejecting Confucianism. Mao ignored the Stalinists view and built his ideological foundation on the Chinese classics, and an acquired knowledge of European thought, particularly Marxism-Leninism. This was a very different process from what happened in Europe and North America, and it explains why capitalism in China, Vietnam and many other countries is often an autocracy rather than a democracy.

Where Was Communism Successful?

Communism was more successful in less developed countries like China and Vietnam, and less successful in developed countries like East Germany. The relative failure of communism in more developed countries is attributed to its inability to substitute capital for labor because it entirely missed the technological revolution and could not adapt to flexible production technology during the 1980s. Recent evidence confirms that the more sophisticated the economy, the less efficient the socialist economic system performed. Countries that were more developed in 1950 had lower average growth rates in the subsequent thirty-nine year period. Socialist countries, at any income level performed worse than capitalist countries. However, looking at growth rates of communist countries that transformed into political capitalist countries shows a widened advantage of communism for less developed countries. Over the period from 1990 through 2016 China's average growth in GDP was about 8 percent, Vietnam's was 6 percent, while the U.S. grew at a rate of only 2 percent.

Is China Capitalist?

China's economic system clearly qualifies as capitalist from several different perspectives. Production in China is conducted using profit seeking privately owned means of production, most workers are wage-laborers, and most decisions regarding production and pricing are decentralized. Before 1978 most industrial production in China was performed by state-owned enterprises. By 1998 the state's share of industrial output has decreased to a little over 50 percent, and had dropped to slightly over 20 percent by 1915. In addition, the share of workers employed by state owned enterprises had declined from nearly 80 percent in 1978 to about 16 percent in 2015.

Key Features of Political Capitalism - Three Systemic Characteristics and Two Systemic Contradictions

Political capitalism, especially in China includes a one-party system, and an efficient and technocratically savvy bureaucracy that manages the system to produce high economic growth. The selection of its members is merit based, that is an important requirement since the system excludes the rule of law. The state, i.e., the bureaucracy has a dual role of guiding the national interests and controlling the private sector. This requires the state to be independent of legal constraints. Countries with political capitalist systems do have laws, but they are applied selectively, or not when it is inconvenient for the bureaucratic elite. This of course is a contradiction, i.e., rules and laws that are followed in an arbitrary manner. A second contradiction is the conflict between the inequality-increasing corruption that this discretionary power produces, and the need to keep inequality in check.

Key Features of Political Capitalism - Which Countries Have Systems of Political Capitalism?

Milanovic provides a table showing 11 countries that have a system of political capitalism including China, Vietnam, Malaysia, Laos, Singapore, Algeria, Tanzania, Angola, Botswana, Ethiopia, and Rwanda. To be included there must be a single party system or where one party has stayed in power for several decades. In 1990 this group's share of the world output was 5.5 percent. By 2016 this had increased to 21 percent.

A Review of Inequality in China - Rising Inequality Throughout

Although knowledge about income and wealth inequality in China is more limited than in the U.S. and other rich countries, the available data shows that rural inequality in China is typically higher than urban inequality, and that rural inequality has stayed at nearly the same level since 1980 while urban inequality has substantially increased. The all-China inequality was around 50 Gini points in 2009,  significantly higher than inequality in the United States. This increase in inequality was caused by a transfer of the labor force from low-income agriculture to higher-income manufacturing, and from rural areas to cities. Private wealth has also increased due to the large-scale privatization of housing and the increase in private equity. Between 1988 and 2013 the number of business owners and professionals increased significantly to form a new capitalist class in China although they lack political importance because of the power and autonomy of the state bureaucracy. The capitalist class is expected to continue enriching itself without exercising any political power.

A Review of Inequality in China - Corruption and Inequality

Corruption in political capitalism is systemic and widespread. Globalization facilitated worldwide corruption because it made hiding stolen assets easier and this together with the usual characteristics of political capitalism produced a level of corruption in China that is extraordinary by global standards. To limit this problem China could strengthen the rule of law, but this is unlikely to occur. Instead, China has used anticorruption campaigns that provide stiff penalties for those engaged in corruption. The objective is simply to keep corruption at an acceptable level.

The Durability and Global Attractiveness of Political Capitalism - Will the Bourgeoisie Ever Rule the Chinese State?

There are two paths in the development of capitalism. The Smithian natural path and the Marxian unnatural path. Smith's natural path begins with a market economy of small producers that grows through the division of labor from agriculture into manufacturing, to domestic trade and eventually to foreign trade. The state lets the market economy and capitalist develop, protects property, and imposes taxes, and maintains its autonomy for economic and foreign policy. It is a gradual process that involves the division of labor, the expansion of education, the subordination of capitalist interest to the national interest, and the encouragement of competition. The Marxian path differs from the Smithian path in that there is no state autonomy. European capitalist thrived based on conquest, slavery, and colonialism and used the state for protection abroad.

China's development started from a strong central government that was able to check the power of capitalist merchants. In present day China, the Communist Party government is helpful to the bourgeoisie (capitalist class), but only when their interests do not conflict with the interests of the state, or the elite who run the state. The property ownership arrangements in China are complicated and combined with the uneven application of the rule of law are a basic condition for the existence of political capitalism and the creation of the politico-capitalist class. The question is whether the Chinese capitalist will become stronger and perhaps organize to influence the state and finally take over? An additional question is whether they will use representative democracy as their tool?

The Durability and Global Attractiveness of Political Capitalism - Will China "Export" Political Capitalism?

The advantages of political capitalism include autonomy for the rulers, the ability to deliver faster economic growth by avoiding red tape and partisan politics, and the widespread moderate corruption that is consistent with some people's preferences. Its attractiveness depends on its economic success and it has been the most economically successful country in the past half century. It appears that China's economic success would allow it to export its system to other countries. But historically China has been self-centered and aloof, and it has failed to create a group of allies. The characteristics of political capitalism (technocratic bureaucracy, absence of the rule of law, and endemic corruption) are found in other countries, but there are some elements that are specific to China that are difficult to transplant elsewhere. There are two essential features of the system that include centralization (authoritarianism), and regional decentralization. This apparent paradox occurred because the privatization of state owned enterprises started at the lower levels of government. This came about because the centralized organization (Chinese Communist Party) provided incentives to local leaders for economic development in their regions. The Chinese model of simultaneous centralization and decentralization would be difficult to implement in other countries.

China is much more successful and integrated into the world economy than ever before, and most  successful countries tend to be emulated by others. In addition, based on recent initiatives in Africa, China appears to be ready to take on a more active international role. An example is the Belt and Road Initiative that is supposed to link several continents through improved Chinese-financed infrastructure. However, their development emphasis is on infrastructure vs. the institution-building emphasis of liberal capitalism. China is likely to exercise increasing influence on world institutions that have previously been built by Western states reflecting Western interest and Western history. However, the export potential of political capitalism is limited because of the difficulty of insulating politics from economics, and in maintaining a relatively uncorrupt centralized government.

_________________________________________

Got to the next Chapter. Chapter 4: The Interaction of Capitalism and Globalization

Related summaries:

Buchanan, M. 2002. Wealth happens. Harvard Business Review (April): 49-54. (Buchanan describes a universal law of wealth based on a network effect that appears to have some important implications for economic policy). (Note).

Graham, J. L. and N. M. Lam. 2003. The Chinese negotiation. Harvard Business Review (October): 82-91. (How to deal with China. Understand the cultural context of Chinese business style). (Summary).

Ignatius, A. 2021. "Americans don't know how capitalist China is." Harvard Business Review (May/June): 61-63. (Summary).

Martin, J. R. Not dated. A note on comparative economic systems and where our system should be headed. (Note).

Mitter, R. and E. Johnson. 2021. What the West gets wrong about China: The fundamental misconceptions. Harvard Business Review (May/June): 42-48. (Summary).

Oser, J. 1963. The Evolution of Economic Thought. Harcourt, Brace & World, Inc. (Summary).

Piketty, T. 2014. Capital in the Twenty-First Century. Belknap Press. (Note and Some Reviews).

Porter, M. E. and M. R. Kramer. 2006. Strategy and society: The link between competitive advantage and corporate social responsibility. Harvard Business Review (December): 78-92. (Summary).

Porter, M. E. and M. R. Kramer. 2011. Creating shared value: How to reinvent capitalism and unleash a wave of innovation and growth. Harvard Business Review (January/February): 62-77. (Summary).

Thurow, L. C. 1996. The Future of Capitalism: How Today's Economic Forces Shape Tomorrow's World. William Morrow and Company. (Summary).