Fictitious Capital and Contracted Social Reproduction Today: China and Permanent Revolution

By Loren Goldner, 5 February 2013


Loren Goldner traces a circuit from permanent crisis to permanent revolution in the long 20th century

Capital is the moving contradiction, (in) that it presses to reduce labour time to a minimum, while it posits labour time, on the other side, as the sole measure and source of wealth. – Karl Marx, Grundrisse

This quote from the Grundrisse identifying the fundamental contradiction of the capitalist mode of production, succinctly describes the situation on a world scale today: once again, as in 1914, capital requires, in order to survive as capital, a vast devalorisation of all existing values, however great the destruction of human beings and means of production which that entails.

This has in fact been the situation since c.1970/73. Global capital has put off the day of reckoning, a full-blown deflation, by a vast pyramiding of debt – fictitious capital – and by a series of ‘countervailing tendencies’ which have supported that debt while contracting social reproduction.


Permanent Crisis

Prior to looking at the specifics of the four decades since 1970/73, let us first sketch the broad shifts which have occurred. The post-World War II Bretton Woods system of fixed exchange rates anchored on the US dollar had just collapsed. At that time, world accumulation was clearly divided into the three zones of 1) advanced capitalist (OECD) countries (the US, Europe and Japan), 2) the ‘socialist’ bloc (the Soviet Union, and Comecon) and 3) the ‘Third World’ of ‘non-aligned’ countries, with China as an outlier. Both the ‘socialist’ bloc and the Third World were deeply indebted to western banks, and would become more so in the course of the 1970’s. The working class in the US and western Europe was in the midst of its biggest strike wave since the immediate post-World War II period. Third World nationalism of the ‘Trikont’ variety, promoted by countries such as Algeria and Cuba, was still a potent force, and would culminate in the mid-1970’s in the US defeat in Indochina, the independence of Portugal’s colonies in Angola, Mozambique and Guinea-Bissau, and pro-Soviet regimes in Somalia and Ethiopia on the Horn of Africa. The anti-apartheid struggle in South Africa had reached a new level in the 1976 Soweto riots. A new independence of the Third World was even echoed in the emergence of OPEC (Organisation of Petroleum Exporting Countries) in the oil price surges of 1973 (and later 1979), however linked most OPEC nations were in reality to the US and US financial markets. At the United Nations, a ‘Group of 77’ of Third World countries aggressively attacked Western economic dominance. ‘Euro-communism’ seemed to be on the march in France, Spain and Italy. The US-backed Shah of Iran aspired to be a regional power in the Middle East. Few in the West had yet heard of Islamic fundamentalism, either of the Shi’ite or Sunni variety, and few yet took seriously the ‘Four Tigers’ in Asia (South Korea- Taiwan- Hong Kong- Singapore), still in the early phase of their industrial emergence. China, still largely autarchic and still in the last convulsive throes of the ‘Cultural Revolution’ was a ‘quantité negligeable’ in the world economy. France and Germany by the late 1970’s were in the first stages of forming a single European currency to stop the whiplashing resulting from fluctuations of the dollar. The southern cone of South America (Argentina, Chile, Brazil, Uruguay) was under vicious military dictatorships propped up by the United States.


A Balance Sheet of Austerity

Forty years later, and thirty-five years into the ‘neoliberal’ era, we see first of all the (relative) decline of the United States. The European Union, conceived as a counter-weight to American hegemony, is endangered by a meltdown of its single currency and, following that, by outright disintegration. In the US, (if not quite as much in Europe), strikes receded, until quite recently to near-invisibility. The Soviet bloc has collapsed, with only Poland and the Czech Republic having, to date, regained a precarious footing. The Third World has fragmented with the full emergence of the ‘four Tigers’, followed by the ‘flying geese’ of aspiring tigers, currently led by ‘socialist’ Vietnam. Islamic fundamentalism has swept aside Third World nationalism in much of the Arab world and in Afghanistan and Pakistan. The small populations of the oil rich Gulf states and Saudi Arabia are in a class by themselves, but their large imported South Asian work force is a potential regional time bomb. One third of the world’s population, in Africa and in parts of Latin America has been trapped in economic stagnation since 1980.

Image: Indian construction workers in Dubai

China, in the meantime, fully in sync with neoliberal global restructuring and, in fact, a key to its success globally, as shall be shown, has become the manufacturing ‘workshop of the world’, in counterpoint to the hollowing out of so many other countries. We will return to the practical implications of this for world revolution after analysing in detail the ‘balance sheet’ of the world austerity aimed at preserving fictitious values. Most of the past four decades have been a period of defeat and recomposition for the working class; in the following, we will (somewhat artificially) bracket class struggle while distilling the ‘economic’ drift of the period, and conclude with a world strategic outlook.

Capital had inaugurated a comparable, extended period of devalorisation once before, on the eve of the First World War, when the mere sharp collapse of paper values, the bankruptcy of weaker capitals, general price deflation and a period of extended unemployment for the working class to push down wages were no longer sufficient to achieve the necessary devalorisation, as had been the case through the 19th century. Outright physical destruction of labour power – of workers – and of capital plant became part of the process whereby capital destroyed enough ‘value’ to restart production at an adequate rate of profit. Between 1914 and 1945, two world wars, the 1920’s period of brief reconstruction, the 1930’s decade of depression, fascism and Stalinism were all part of the process which laid the foundations for the 1945-1970/73 postwar boom. The world process of devalorisation, like all shakeouts before it (the decennial crises studied by Marx from 1817 to 1866 and the ‘long deflation’ from 1873 to 1896) moved production and reproduction as a whole to a new ‘standard of value’, or what Marx refers to in Capital as a ‘revolution in value’. Each capitalist phase of boom and bust (from ‘peak to trough’ as the jargon goes) constitutes a ‘manifold’ based on a new such standard, an ‘apples to oranges’ transformation in which a unit of socially necessary labour time is incommensurate with that of the preceding phase, or with the following one. The ‘cluster’ of new modes of transportation in the mid-19th century, from canals to railways to steamships, was one such manifold; the new electronics, chemical and automotive technologies from the 1920’s to the 1940’s was another, or closer to our own time, the revolution in both communications and in the transport of commodities (maritime and airborne) since the 1970’s.

By the late 1960’s, the postwar boom had brought world capital to another moment in which the current cost of reproducing labour power could no longer serve as the systemic ‘numeraire’, the common denominator, for commodity exchange. Capital again, as in 1914 but more diffusely, entered a new period in which physical destruction on a world scale was a necessary part of the movement of devalorisation and potential revalorisation.

Image: The Soweto Uprising, 1976

Every capitalist cycle of boom and bust produces fictitious capital as it is peaking: this consists of paper claims on surplus value which correspond to no actual surplus value from the immediate process of production or sources of loot from primitive accumulation. Rampant speculation aside, as occurred in particular in the past two decades (and also in the run-up to the 1973-1975 world downturn, the biggest of the postwar period up to that time), the initial source of fictitious capital is devalorised fixed capital in the immediate sphere of production itself. This devalorisation results directly from one of the most vital aspects of capital: regular advances in the productivity of labour. But capital appears to capitalists not, as in the first two volumes of Marx’s book, as ‘value valorising itself’ but rather as paper titles to wealth, stocks (profit), bonds (interest) and the various claims on rent from land dealt with in Capital Vol.III. These are claims on future cash flow whose ‘value’ is not immediately determined by the ‘price/value’ conundrum discussed ad nauseam by readers fixated on the first section of Vol.III, but by a capitalisation of that cash flow relative to the generally available rate of profit. As this mass of hot air grows – fictitious relative to the actual surplus value available to valorise it – it is sustained temporarily by anti-deflationary actions of the central bank and by various ‘countervailing tendencies’. The mass of hot air circulates, like any other capital, until it can no longer be valorised through the classic M-C-M’ movement that defines capital. The ensuing bust collapses these titles to wealth, aligning them with the actual underlying available rate of profit, or even below it, in the initial phase of a new expansion. This is the phase we have been in since 2008. But what occurred in 2008 was merely the latest, acute phase, as indicated, of a long process of debt pyramiding concealing (or not, as it were) an extended period of contracted social reproduction on a world scale since the early 1970’s, in contrast to the capitalist recovery from depression of 1945-1970/73.

Let us then look more closely at the history by which these fictitious titles to wealth took on the huge dimensions they had acquired by 2007-8, and which, five years into the crash, they still possess today. The contemporary reader can easily recognise such titles in the activities of hedge funds, as well as in derivatives, ‘securitised finance’, the worldwide ‘asset inflation’ in stock markets and in private and commercial property values, ‘credit default swaps’, ‘collateral loan obligations’, the ballooning of the ‘FIRE’ (finance-insurance-real estate) sector, not to mention the increase of US, government debt from $10 to $15 trillion in four years, and comparable recent increases in the balance sheets of the European Central Bank, the Bank of Japan, and the Bank of China. The contracted social reproduction, under the weight of these paper claims, is most immediately visible on the streets of Greece, Italy and Spain, and the current 50 percent rate of unemployment on a world scale for those under the age of 25.

Few today remember the US corporate liquidity crisis of 1969-70, or the 35 percent fall of the US stock market in the same year, following the ‘dollar crisis’ of March 1968, or finally the sharp US recession that followed. But these events can arguably be seen as signalling the end of the post-World War II boom, and, despite occasional appearances to the contrary, the world system has been haunted ever since by the spectre of the outright deflation underway today. This credit crunch and ensuing recession was followed by Richard Nixon’s August 1971 suspension of the gold convertibility of the US dollar, and a series of other measures designed to lift the US economy into an inflationary super-boom guaranteeing his re-election in 1972.


Image: A plaque commemorating the Bretton Woods conference of 1944

The breaking of the link between the dollar, then as now the main world reserve currency, and the gold backing established at the Bretton Woods conference of 1944, began the process of levitation of the then-existing fictitious capital bubble into the colossal proportions it has taken on today.

Simultaneous to (and related to) these events in world capital markets was the quadrupling of the world price of oil in 1972-1973.

In 1973-74 as in 2008, the major capitalist governments reflated in classical Keynesian fashion, producing (in the former case) the ‘stagflation’ of low growth plus high inflation, which by 1979 was running at 15 percent in the US and higher in the UK. There were effectively negative interest rates in a period where creditors and all people on fixed incomes were punished and debtors rewarded. European countries and Japan were forced to import American inflation with their chronic balance of payments surpluses in trade with the US. This period ended in 1979 with a second ‘oil crisis’ most immediately associated with the Iranian Revolution, together with the coming to power of Thatcher in Britain and a year later of Reagan in the US, while the US Federal Reserve Bank under Paul Volcker ran up interest rates to 20 percent to stop a run on the dollar and (in order to do so) to choke off US inflation, which was achieved by an even deeper recession (1980-82) than that of the mid-seventies. World capital entered the ‘neoliberal’ era, and by 1985 Reagan, Thatcher, Mitterand, Gorbachev and Deng were in sync in turning their backs on the ‘social’ dimensions of the state that had theretofore characterised the post-1945 era.


Laboratory Neoliberalism

Though most potential readers of this text are all too familiar with the term and its ramifications, rehearsing the latter is still worthwhile to give a sense of neoliberalism’s global impact, which is not yet exhausted today. While marginal in the first years of the crisis of the 1970’s, except in the laboratory test cases of southern South America (Chile, Argentina, Uruguay) neoliberalism dominated the world for 30 years, and its run is not yet over. We might neatly define it as multiple means of destruction of V (variable capital) and C (constant capital) aimed a propping up the ever-growing fictitious bubble of hot air with sufficient S (surplus value). The backdrop to its rise was the post-1968 reversal of the trend to income equality in the West; it dominated ideology during a period in which income inequality in the US, at least, surpassed that of 1929, and the gap between the ‘rich’ and ‘poor’ countries grew far greater than it was in 1973.

Image: Howard Jarvis on the cover of Time Magazine, 1978

Neoliberalism involved a war on the social, by which was meant the post-war welfare state and, in other contexts, ‘communism’; the privatisation of state functions, usually for short-term looting purposes; the casualisation and ‘flexibilisation’ of labour, often with ‘just in time’ techniques originated in Japan; the serious deindustrialisation of both the US and the UK; the great reduction of taxes on the wealthy in the name of ‘trickle down’ economics; the vaunting of the ‘entrepreneurial’ small firm (in many cases, self-exploitation of the formerly employed) and the ascendancy of ‘high tech’; the reduction or outright dismantling of state regulation of banking and stock exchanges as well as of labour conditions, health and safety; the untrammelled outsourcing of production to cheaper labour markets; the dismantling of (some) tariffs and the promotion of regional, supra-national trade agreements at the expense of workers and peasants. Phenomena such as California’s right wing populist tax revolt of 1978, the infamous Proposition 13, was an early manifestation of the ‘opting out’ of wealthy strata into low-tax enclaves with gates visible or invisible, enforced by the new mass industry of private ‘security’. The same wealthy strata drove ordinary working people from urban areas with worldwide gentrification. ‘Free market’ neoliberalism internationally was quickly challenged in the Latin American debt crisis of 1982 (Brazil and Mexico first of all), requiring massive intervention and debt restructuring by the US government, and leading to IMF austerity programs in the dozens of countries weighed down since 1973 by the increased cost of oil imports. In 1980 the biggest employers in Brazil were steel and auto plants; by 2000 they were private security companies and Macdonalds. Neoliberalism led to the Plaza Agreement of 1985, in which the US forced a major revaluation on Japan and Germany (thus devaluing the large dollar holdings they had built up supporting the dollar and Volcker’s high interest rates after 1979). It led to the world stock market crash of 1987. Months before, Alan Greenspan had taken over the Federal Reserve Bank (FRB, or Fed) from Volcker, and during and after the crash inaugurated two decades of the ‘Greenspan put’, the assurance that massive credit infusion from the Fed would create a floor under any financial or stock market downturn. ‘Free market’ ‘small state’ neoliberalism didn’t mind using the state to bail out its follies, something repeated on a far greater scale after 2007. It pioneered the junk-bond, ‘leveraged buyout’ (LBO) era of the Ivan Boeskys and Michael Milkens, in which debt was piled onto corporations for tax purposes, thereby forcing them to asset strip and downsize to their core ‘cash cows’, after which the LBO artists then resold the company, paid off the debt and took a huge profit a few years later. It promoted the ideology of ‘shareholder value’, meaning that the short-term stock price trumped all other considerations in the management of firms, and showed the door to ‘old economy’ long-term investment strategies and R&D. It deregulated the savings and loan (S&L) banks in the US, leading to a real estate credit binge that ended by the late 1980’s in $500 billion in losses, picked up by and added to the US government debt. The ‘junk bond’ era ended at the same time (though it was reborn as ‘private equity’, alive and well today). Between 1990 and 1993, in the ‘mild’ US recession, housing prices fell dramatically and major financial institutions such as Citicorp, holding billions in uncollectible Third World debt, tottered, until their debts in turn, like those of the S&L fraud, were nationalised with little fanfare.


The End of New Deal Liberalism

By the early 1990’s, the previous New Deal ‘liberalism’ associated in the US with a (very modest) Keynesian welfare state had been won over to the new mantra, and came to power with Bill Clinton in the wake of the 1990-1993 recession. He was followed by Tony Blair, Gordon Brown and Anthony Giddens in Britain in 1997, after the latter trio had cleansed the Labour Party of its gritty, proletarian trade-union image with their ‘Third Way’ to market meltdown. Clinton was immediately informed by his cabinet, led by Treasury Secretary Robert Rubin (a former Goldman Sachs banker), of the paramount need to calm the bond markets by refraining from any socially-minded deficit spending. Clinton pushed through NAFTA, the North American Free Trade Agreement with Canada and Mexico. Clinton introduced a mild income tax increase, but hardly reversing the tax cuts of the previous 12 years. Starting in 1995, the Silicon Valley ‘high tech’ bubble took off, along with general asset inflation. 1995 was also the year of the ‘reverse Plaza’, in which the dollar came off the floor against the German mark and the Japanese yen, to peak 10 years later. The Federal, state and local revenue from asset inflation produced a Federal surplus by 1996, and ‘surpluses as far as the eye could see’ were projected well into the 21st century. The labour market tightened to levels not seen since the early 1960’s.

One must, however, see the brief, ‘fine-tuned’ Clinton conjuncture against its international backdrop. First, the Japanese ‘miracle’ had come to an end in the stock market crash of 1989-1990, with the Nikkei index dropping from 38 thousand to 10 thousand and never recovering, beginning 20 plus years of much slower growth. This was the result of the Plaza Agreement, which had radically revalued the yen. Japanese capital went on a shopping spree, including in the US but also in South-East Asia. The high yen, however, hit Japanese exports hard, and lack of available outlets pushed funds into real estate speculation and other types of asset inflation, leading to the 1990 crash from which Japan has never fully recovered. Many of the Japanese investments in the US went bad. The Japanese, in an atmosphere of constant Japan-bashing by American politicians, industry and some unions, were prohibited from making others. This was accompanied by battles over trade and tariffs, and Japan was pressured by the US to ramp up military spending. All in all, the flow of Japanese capital into the US was one factor easing credit conditions in the 1990’s.

The Clinton years also witnessed the bond market crisis of 1994 when the hawkish Fed back-footed bond dealers with several rapid interest rate increases, causing billions in losses. That year also saw the second Latin American debt crisis, beginning in Mexico and ricocheting through Latin American financial markets. Whereas the Clinton administration had claimed that the NAFTA free-trade agreement would be worth $50 billion in new annual export production in the US, it was instead required to provide a $50 billion US government bailout for American holders of Mexican debt after the peso plummeted.

The Mexican crisis of 1994-95, however, paled in comparison to the Asian crisis of 1997-98. Whereas months before, the new Asian ‘tigers’ had been touted as the success story of the 1980’s and 1990’s, what began in July 1997 as a run on the Thai currency snowballed into a panicked flight of short-term capital from precisely those countries who had responded to the neoliberal siren song and liberalised their exchanges, and spared those countries (China, Malaysia, India) which had resisted it. By early 1998, South Korea, Indonesia and Thailand were prostrate and under IMF control. To qualify for IMF and other loans, countries such as South Korea had to agree to massive layoffs of state employees, to scrap controls on foreign acquisitions of key industries, while Western vulture capitalists rushed in to buy them up at bargain-basement prices, a massive global leveraged buyout. Clinton ideologue Lawrence Summers, then Under Secretary of the US Treasury, rushed to Asia to oversee this process, and stopped in its tracks a Japanese attempt to form an Asian Monetary Fund to staunch the crisis. Capital fleeing the collapsing Asian economies returned to the US, again strengthening capital markets there.

In the eastern bloc, which had collapsed in 1989/1991, there was no ‘new Marshall Plan’ (nor did the capital exist for one). The US abetted the takeover of the Russian economy by the oligarchs, who were taking US and IMF money and stashing it abroad. Top US advisers oversaw the privatisation of the Russian economy, which quickly culminated in its takeover by criminal elements, many of them former officers of the Soviet KGB. This looting of Russian industry and natural resources was momentarily interrupted by the 1998 collapse of the ruble. Throughout these years, more than half the Russian population was forced into poverty. By the late 1990’s, living standards in some of the former Soviet Central Asian republics were at 30 percent of their previous level.

1998 also saw the Long Term Capital Management (LTCM) crisis of fall 1998. LTCM was a top hedge fund, founded and headed by Wall Street stars and having two Nobel Prize winning economists on its board of directors. LTCM as well was wrong-footed by the Russian default and the potential impact of its bankruptcy on world financial markets was estimated at $1.4 trillion. The New York Federal Reserve convened an emergency weekend meeting of the involved Wall Streets banks, who jointly provided a $13 billion bailout for damage control, as a small dress rehearsal for the events of 2007-8 and beyond.

The Latin American, Asian and Russian financial crises rebounded onto the US economy itself, which was in the midst of the stock market frenzy of 1995-2000 associated with the high-tech ‘’ ‘New Economy’. Capital fleeing from collapsing markets abroad saw a haven in the rising US dollar (following the 1995 ‘reverse Plaza’ agreement) and the ascent of the stock market into the stratosphere, totally out of sync with underlying profits. Federal, state and local governments were buoyed by tax revenue based on this fictitious asset inflation, and Clinton left office, just in time, more popular than when he was first elected. In spring 2000, the ‘New Economy’ tanked in the meltdown. The NASDAQ (the stock exchange for high tech firms) fell from 5,000 to 2,000 and never recovered.

This was the era in which Walmart replaced General Motors as the largest US employer, and the brief ‘Goldilocks’ economy achieved in the US, while crisis after crisis erupted abroad, is unthinkable without the ‘China price’, the ever-increasing low-cost exports, primarily from foreign firms operating in China, which kept consumer price inflation low during a tight labour market and soaring asset inflation in stocks and real estate.

The post-1989/1991 developments in the former Soviet bloc, once again, also fed into the brief halcyon days of the ‘New Economy’. The most important aspect was a whole new dimension of investment for Western capital, with cheap educated labour and attractive urban real estate (Prague, Budapest, Kracow, Riga) to be gentrified. The people, particularly old people, of eastern Europe and Russia underwent tremendous austerity and worse. There was massive emigration of educated youth to the west, as well as of whole new networks of criminality. Entire industrial regions were shut down or downsized as the oligarchs took the family jewels. There was the expense of the unification of Germany, which was allowed as a trade-off for its integration into the European Union. The trillions of marks spent on reunification pushed German interest rates up, deepening recession in the rest of western Europe. German capital surged into eastern Europe as well, and French and German firms relocated to Poland. In Poland, old urban industrial areas outside Warsaw were devastated.


From Dot Com Crash to Housing Bubble

The consequences of the 2000 crash were localised to some extent, though the ‘rational allocation of resources by free markets’ resulted in the wiping out of $3 trillion in paper value, and 98 percent of all fiber optic cable laid during the euphoria would never be used. The US went into recession from 2000 to 2003. This was the era of Enron and, further fallout of the ‘New Economy’. The ‘dividend’ from the high tech boom was over.

Image: bubble, 2000

It was at this point that the housing bubble took over from the high tech bubble, promoted by the Fed as a new source of consumer spending. American workers with inadequate wages went deep into debt and began using their homes as collateral for more debt. ‘Securitised finance’ –the packaging of income streams from mortgages and other assets and sold off to the unsuspecting with AAA ratings from obliging agencies—came into its own, culminating in the sub-prime mortgage frenzy, construction and housing sales of the last years of the boom. Until 2008 it was the era of the ‘maxed-out American consumer’, buying goods from Asia (increasingly from China).

This basic triangle of Asian exports to the US, drawing on raw materials from throughout the world and funded by increased domestic leveraging (as exemplified by the housing boom) in the US and made possible by foreign lending, began to unravel in 2007. It was the final phase of the US as the ‘consumer of last resort’ supporting the rest of the world economy, in exchange for its ever-increasing foreign indebtedness, going back to at least the 1970’s. This should not, however, distract attention from the deeper problem of structural crisis, the need for a massive devalorisation of the 1914-1945 variety (however different in specifics, which the entire history outlined here has attempted to sketch out). The ‘neoliberal’ era, as stated at the beginning, has amounted to four decades of pulverising real living standards (V) and real fixed assets (C) on a world scale to shift value to surplus value (S), to prevent the massive ‘de-leveraging’ whose possibility has haunted states since the early 1970’s.

The preceding overview would hardly be complete, to put it mildly, without some consideration of the rise of China.


The Rise of China

Some sceptical analysts, stepping back from the euphoria around China’s undisputed emergence, have pointed to the parallels with the similar euphoria around ‘Japan as No. 1’, ‘Japan in the passing lane’ of the 1980’s. There are indeed important parallels: China’s amassing of $1.4 trillion in dollars from trade with the US recycled into US Treasury bills; the constant skirmishing by US politicians about China’s supposedly overvalued currency; the flooding of the US market with Chinese goods (as mentioned earlier); a huge buildup of unsold real estate, paralleling Japan’s 1980’s real estate asset inflation; the ‘zombie banks’, carrying countless billions in non-performing loans to the state enterprise sector; China’s serious dependency on imports of food, oil and raw materials; the progressive ageing of the population. While not as dramatic as Japan’s 75 percent stock market fall in 1990, the Chinese stock market has been drifting downward for the past four years.

In 1960 East Asia accounted for 5 percent of world GDP; today it accounts for 35 percent. Most of this growth took place in the post-1970/73 crisis period. How does this undeniable shift in world economic dynamism square with the broad analysis presented here, of forty years of crisis and devalorisation? Although South Korea and Taiwan, two of the first ‘tigers’ emerged and still exist under the US military umbrella, China has long since surpassed the US as their major trading partner and, as also with Japan, as a target for investment. Forty years ago, most Latin American countries were under the tutelage of the United States; today, they are increasingly look to China, much as some Third World countries played off east and west during the Cold War. China is feeling the pressure of even lower-cost production in Vietnam, Cambodia and Bangladesh, but its overseas investments and ‘soft loans’ are offering some Third World countries, especially in Africa, a certain alternative to the rigors of the IMF and the World Bank.

In the midst of this, and alongside its ‘G-2’ relationship with the US, China has established a special relationship with Germany, as a gateway to the EU. This meshes with a certain (classical) German geopolitical orientation to Russia and China, as a counterweight to US influence in Europe. German engineers and technicians are hired on a large scale by Chinese firms. German trade unionists fly to Beijing to advise the Chinese government on a facelift of its repressive, state-controlled All-China Federation of Trade Unions. After its export model of growth hit a wall in 2008, China reflated, looking for a model of domestic consumption to replace it, and the German model of corporatism and a new integration of the working class may well fit the bill. Chinese think tanks study the rise of Germany as an ‘outlier’ in the pre-1914 European balance of power, assuming that China occupies a similar position relative to the current US-dominated world system.

But the analogy is false. Germany’s rise took place in the ascendant period of capitalism, and even then, it had to be absorbed into a ‘North Atlantic bourgeoisie’ through two world wars.

We conclude, then, with a brief analysis of the geopolitical confrontation of the 21st century: the US, and secondarily the West as a whole, with China and the new Asian capitalism, a confrontation which has the same potential to unleash the permanent revolution ‘crossover’ of 1848 and 1917 as theorised by Marx for 1848 and by Parvus- Trotsky for 1905-1917: a working class revolution in the ‘mature’ (in fact, overripe) capitalist heartland linking up with the emerging working class in the rising ‘peripheral’ ‘weak link’ power: Germany in 1848, Russia in 1917, China in some (hopefully) not too distant future. The US-China imbroglio in East Asia is one in which we move from ‘economics’ to the political in the critique of political economy.

Rose-tinted analyses of the ‘rise of Asia’, of the ‘shift of power from west to east’, overlook a few inconvenient realities. First, perhaps foremost, Japan succeeded in establishing itself as an industrial (and imperialist) power before the first mass devalorisation period of 1914-1945, or the ‘decadent’ phase of capitalism on a world scale. Its statist development after 1868 has been the model for all subsequent ‘tigers’, and now for China. While it has been an imperialist power in its own right since its 1895 military defeat of China, it has never since 1945 freed itself from the tutelage of the United States, and with the recent rise of China, still less so. South Korea and Taiwan are the sole former Third World countries to have crossed the threshold to mature industrial capitalism since 1914. They did so first, as Japanese colonies before 1945, bringing a certain industrialisation and second, under US auspices since 1945, where agrarian reform, essential to industrial ‘take-off’, was permitted and encouraged by the US as a ‘showcase’ counter-weight to North Korea and to China after the revolution in 1949 (the US opposed serious agrarian reform virtually everywhere else in the Third World). However embroiled in the Chinese economy today, neither Taiwan nor South Korea are in a position to escape from US political and military dominance; indeed, South Korea in September 2012 finalised a Free Trade Agreement with the US which will do to Korean agriculture what NAFTA did to Mexico. The case of the ‘red hereditary monarchy’ North Korea, which directly involves South Korea, the US, Japan, Russia and China, threatening the latter five countries with a reunification which none of them (for different reasons) want, constitutes, along with the unresolved status of Taiwan, two levers with which the US can keep East Asia off balance. Finally, the depth of nationalism in East Asia, a problem Europe overcame, provisionally, through two world wars, to date precludes any serious regional economic integration that could pose a more unified threat to US dominance.

Image: Jin Shanji, The great proletarian cultural revolution must be waged to the end, 1973

It is the timing of the crisis in the West in the 1970’s with the takeoff of the ‘tigers’ and then, after 1978, of China, which shows the tremendous growth in East Asia as an expression of one single world crisis. The flood of cheap consumer goods from Asia, first from South Korea and Taiwan, and then from China, softened the decline of V (variable capital) in the US and Europe: wage austerity in the latter was partially compensated by cheapened production in the former. The needs of the Chinese state bureaucracy, exhausted by a decade of ‘Cultural Revolution’, meshed perfectly with the needs of a Western capitalism having exhausted the accumulation pattern, based on relative surplus value, of the postwar boom.


Permanent Revolution

Let us then look more closely at how the dynamic of permanent revolution applies China today. Is China today a ‘weak link’ in world accumulation, in the way that Germany was in 1848 and Russia was in 1905-1917?

The theory of permanent revolution was first of all, as indicated, the problematic whereby the attempt of the bourgeoisie in an ‘emerging’ country to undertake or complete the bourgeois revolution necessarily sets in motion the attempt of the working class to fight for its own demands, and ultimately for the socialist revolution. The completion of the bourgeois revolution in the full sense of the term is also the solution to the agrarian question, meaning the destruction of pre-capitalist social relationships in the countryside, land to the peasants, and ultimately, in the conditions of the real domination of capital, the radical reduction of the percentage of the population working in agriculture by the emergence of modernised agriculture, as occurred in the US and Europe after World War II. This must be seen as a global problematic, with the world’s rural population having only recently dropped below 50 percent.

It is no secret that China, since 2008, is at a crossroads, where its ruling class can no longer rule as before, and to survive must take the leap in the dark of a major reform and restructuring of the economy and with it, of society more generally. The export model, as sketched above, which served it so well for three decades, is broken, in the context of the world crisis. The legitimacy of the regime has depended on steady 8-10 percent annual growth and the jobs and rising incomes such growth provided, whatever the social costs in infernal working hours and conditions, and the environmental destruction, it entailed. The Western powers as well, through their NGOs and the Hong Kong-based labour scene, know quite as well as the regime that the latter must, if not exactly ‘change everything so everything can remain the same’, embark on a major gamble that can staunch the rising tide of opposition, above all represented by an increasingly militant working class, whose centrality to the social ‘equation’ has now became a banality in mainstream opinion in China itself. (The American New Deal of the 1930’s, not in programmatic content but as a template, was one example of such a gamble; Russia under Gorbachev was another such gamble, albeit one that failed.) One is reminded of Tocqueville’s remark that the most dangerous moment for an oppressive government is when it attempts to reform itself. Already the recent events in Wukan rank as an important, and apparently successful experiment in integrating deep democratic discontent into a reformed status quo. Along with its unprecedented growth rates over three decades, China has developed a significant ‘middle class’ which has till now been content to accept the ‘contract’ of apolitical quietism in exchange for higher levels of consumption and upward mobility (however much such mobility is linked to a dog-eat-dog level of competition for jobs among the millions of technically-trained students emerging from China’s universities every year). This ‘middle class’ is the basis of a growing would-be ‘civil society’ and a space of criticism through the new social media that the regime never before had to confront. Environmental disasters, corruption at every level, the regime’s attempts to finesse such high-level scandals as the fall of Bo Ji Lai or the 2011 wreck of China’s high speed train and subsequent attempts at cover-up, are all objects of the scrutiny and commentary of ‘netizens’ who cannot be simply crushed or ignored, however much the older methods are still in use. As was the case in, for example, Egypt in 2011, this electronically-savvy ‘middle class’ can potentially play a role in any coming ‘regime change’, even if (as in Egypt) is can hardly come to power on its own.

This is where the dynamic of ‘permanent revolution’ comes into play. The Chinese ruling class – apparently the entire new (October 2012) central committee of the CCP consists of billionaires – carefully studied the collapse of the Soviet bloc. The prospect of a Chinese ‘Solidarnosc’ is widely held up as a model in the underground labour milieu (although only Solidarnosc of the early, 1980-81 period, with little consideration of what happened after 1989), and as a model to be avoided at all costs in ruling circles. The 1989 events in Tien An Minh more than anything alerted the regime to the fact that it was ‘riding the tiger’, and recently 73 professors warned that the regime must reform or face ‘violent revolution’. Nevertheless, it confronts a dilemma not unlike the one which the Soviet and East European Stalinists failed to finesse: it wishes to complete the transition to full membership in the capitalist world market, but at the same time its own bureaucratic form of rule is the main obstacle to such a transition. It knows full well that it could be swept away in the torrent just as Gorbachev et al. were. Unlike the post-1985 Soviet Union, however, China for decades after 1978 could offer world capital a decently educated, skilled and very cheap work force, still very much in the process of moving from agriculture to industry and urban life.

A fundamental reason for the CCP’s divided outlook is that many aspects of the old system are still in place. Shanghai may long to join, or even supplant, New York and London as a world financial center, but has none of the depth required to be one. The renminbi is nowhere near being able to play the role of an international reserve currency. Capital flows in and out of the country are still regulated, a regulation that served China well during the 1997-98 Asian meltdown, when countries (South Korea, Thailand, Indonesia) which had dispensed with capital controls were devastated while China was untouched. The state still can maintain the ‘zombie banks’, with huge balance sheets of uncollectible debt, by government fiat. Corruption is endemic and reaches the highest levels. The state-controlled All-China Federation of Trade Unions (ACFTU), on the other hand, must be converted to something along Western lines to retain credibility.

The rise of China has been and will continue to be a useful alibi for Western and above all US capital as it goes into the next phase of the post-2008 crisis. Different eruptions of xenophobia and calls for protectionism from both government and union officials appear with every electoral cycle in the US Japan has claimed the Diaoyu Islands, setting off a wave of anti-Japanese riots in China; nine powers lay claims to potential oil discoveries under the South China Sea, and Vietnam has given the US navy the use of Da Nang harbor, built by the US during the Vietnam war. Even while the US defence budget is eight times larger than that of the next ten powers combined, the Pentagon denounces every sign of increased Chinese military prowess, such as the recent launching of its first aircraft carrier. The announced American ‘pivot to Asia’ is a further realignment of priorities.

Image: Occupation of a government building during protest against a waste pipeline in Qidong, 2012

Yet China, with 100 thousand plus ‘incidents’ – a year of riots, land disputes between peasants and party officials, not to mention the impressive strikes of 2010 – is a powder keg. The regime’s legitimacy ever since 1978 has rested on delivering 8-10 percent annual economic growth and the resulting jobs and rising incomes. It may attempt to implement an updated, ‘German’ corporatist model of free unions and enterprise committees, combined with increased domestic consumption to substitute for declining exports, but the obstacles and risks are great.

Meanwhile, in the depth of the crisis in the West has, after decades of rollback, increasingly the proletariat in Greece, Italy, Spain, Portugal, France and even the US is doing what ‘it is compelled to do’ (Marx) by crisis conditions.

When this deepening ferment in the West meets a similar ferment in China, the link-ups that failed in 1848 and 1917 (the latter being the turning point of history when history didn’t turn, as C.L.R. James put it) may ‘turn the world upside down’ far more than the ‘bourgeois revolution with red flags’ of 1949 ever did.



The following article has been reduced by some 30 percent, and the footnotes removed, for considerations of space. The full article, with all footnotes will appear in a forthcoming issue of Insurgent Notes,


Loren Goldner is a writer, editor of Insurgent Notes and activist based in New York City. His book Herman Melville (2006) is available through Amazon. Most of his work is available on the Break Their Haughty Power website: