Shifting China’s Export towards the Domestic Market

Henry C. K. Liu

Part I: Breaking Free from Dollar Hegemony
Part II: Developing China with Sovereign Credit
Part III: History of Monetary Imperialism
Part IV: Gold, Manipulation and Domination

Part V:  Specific Measures to Restore China’s National Destiny
Different nations profess different destinies at different stages of their history. The United States had its Manifest Destiny of territorial expansion from the War of 1812 to the beginning of the Civil War in 1861. In 1845, influential columnist John L. Sullivan published a piece entitled Annexation in the Democratic Review, in which he urged the young United States to annex the Republic of Texas, composed of all of present-day Texas, plus portions of New Mexico, Oklahoma, Kansas, Wyoming and Colorado, because it was “our manifest destiny to overspread the continent allotted by Providence for the free development of our yearly multiplying millions,” which generally excluded Native Americans, Mexicans and African Americans who were at the time mostly slaves.
In 1837, belligerent American settlers in the Mexican state of Coahuila y Tejas, led by settler Sam Houston, a fugitive from Tennessee, won independence from Mexico in a secessionist war instigated by the US, proposed voluntary annexation to US President Martin Van Buren, who refused the request since the US anticipated that it would lead to war with Mexico. Texas then withdrew the annexation offer in 1838 to declare itself as an independent nation called the Republic of Texas, recognized by the US, Britain, France and the Netherlands. In 1843, Britain opposed US annexation of Texas, but President John Tyler signed the treaty of annexation with the Republic of Texas in April 1844 despite Mexican leader Antonio Lopez de Santa Anna‘s warning that annexation would be “equivalent to a declaration of war.” But the US senate overwhelmingly rejected the annexation on June 8 by a vote of 35 to 16, failing the constitutional requirement of a two-thirds majority in the Senate to confirm a treaty with a foreign state.

James K. Polk, a strong territorial expansionist, won the presidency in November 1844. Tyler, knowing the Senate would not ratify the annexation treaty, changed course and had his allies in Congress submit an annexation bill of Texas as a  territory in a joint resolution in December. With President-elect Polk’s quiet support, Congress approved annexation of Texas as a territory on February 28, 1845, even though the Republic of Texas had been recognized by the US as an independent state since 1843. The March , 1845 vote on the joint resolution in the Senate was passed 27 to 25. Tyler signed the Joint Resolution into law, which called for annexation of Texas to be concluded by the end of December 1845. On December 29, 1845, President Polk approved Texas’s admission to the Union not as a territory but as a state. However, as this was done via a Joint Resolution of Congress, rather than a treaty between states, some scholars believe the annexation is unconstitutional and illegal under international law.

A factor in the Texas annexation discussions in the US the northern states realized that there would be two new slave state Senators after Texas was admitted as a state. Although Mexico had outlawed slavery completely years prior to Texas independence, slavery was allowed to continue in Mexican Texas, and continued to exist in Texas during its years as an independent Republic.
Mexico broke off diplomatic relations with the U.S. in 1845 over the issue, which eventually led to the Mexican-America War the following year. The Treaty of Guadalupe Hidalgo ended the war when the victorious U.S. ratified the treaty on March 10, 1848. The treaty allowed the U.S. to purchase California and other areas from Mexico on the condition that Americans would honor Mexican culture and values, a condition US settler promptly ignored. The annexation of Texas was highly controversial amongst the states and contributed to widening American sectionalism leading up to the Civil War. Later, Manifest Destiny served as moral justification for US imperialist expansion into Central America and the Pacific during the Age of Imperialism.
Nineteenth-century Prussia viewed its destiny as the unification of the German people into a modern nation state to overcome tribal rivalry encouraged by foreign interference. Bismarck exploited German nationalism that had been frustrated by the failure of the Revolutions of 1848 to unify a fragmented Germany in 1871 to build a German Empire to rival that of Britain. British national destiny under Queen Victoria from 1837was to transform an island kingdom into a global empire that would last for more than a century until 1947. The destiny of the France under Louis XIV in 1643 was to forge a powerful nation state out of medieval feudalism. The destiny of Napoleonic France in 1769 was the construction of a multinational continental world order under French cultural and political leadership based on the ideals of the French Revolution.
The destiny of the Ottoman dominion during the 15th and 16th centuries was to maintain peace in a multi-ethnic world under the aegis of Islam. The destiny of the Holy Roman Empire in 962 AD was to establish and maintain a Christian political order in Europe under an elected Holy Roman Emperor. The destiny of Qin dynasty China in 221 BCE was to forge a unified Chinese nation.
The national destiny of modern China since the beginning of the 20th century has been the restoration of China to its rightful historical position in the modern world order. Up until the Age of Western Imperialism which spanned from mid 19th century to mid 20th century, China had been a continuous cultural fountainhead and economic dynamo throughout its recorded history of four millennia without taking on the belligerent hubris of a modern superpower. Today, New China has steadfastly declared that it will never assume the aggressive role of a superpower. New China aims to spread the Chinese vision of an equitable world order not by force of arms, but by example of its commitment to build an equitable harmonious society within its borders and in a world order. The national destiny of New China is inseparable from China’s socialist root to protect and develop the common interest of working people even in feudal dynastic days and from which it has derived invincible strength to defeat Western imperialism. 
Chinese political culture is based on the principle of Great Harmony (Da Tong) in which individualism, both personal and institutional, is subordinate to community as a natural order. This natural order has been derived from four millennia of a living philosophical tradition in a nation with continuously functioning political-cultural institutions, as the geo-cultural, multi-ethnic center of the known world. Western capitalist democracy based on individualism is antithetical to Chinese socio-political culture. Mercantile values have not been highly placed in Chinese culture and society. Historically, over a period of four millennium, every time China deviated from this socialist tradition, the nation ended in decline.
Today, China is a modern nation state with one fifth of the world’s population and the longest continuous civilization and history. This is why China continues to refer to herself culturally as Zhong Hua, which means Centric Civilization of Opulence, and politically as Zhong Guo, meaning Centric Nation State. Modern China, organized politically as a communist nation in the hay day of Western capitalism, is a fusion of traditional Chinese communal political culture and Western dialectic materialism.
Mao Zedong, the greatest revolutionary leader in modern Chinese history, wrote in his 1937 essay On Contradiction:
      According to materialist dialectics, changes in nature are due chiefly to the development of internal contradictions. Changes in society are due chiefly to the development of the internal contradictions in society, that is, contradiction between productive forces and the relations of production, contradiction between classes and contradiction between old and new. It is the development of these contradictions that pushes society forward and gives the impetus for the supersedure of old society by new.
      Does materialist dialectics exclude external causes? Not at all. It holds that external causes are the condition of change and internal causes are the basis of change, and that external causes become operative through internal causes. In a suitable temperature an egg changes into a chicken, but no temperature can change a stone into a chicken, because each has a different basis.
      There is constant interaction between the people of different countries. In the era of capitalism, and especially in the era of imperialism and proletarian revolution, the interaction and mutual impact of different countries in the political, economic and cultural spheres are extremely great.
      The October Socialist Revolution ushered in a new epoch in world history as well as in Russian history. It exerted influence on internal changes in the other countries in the world and, similarly and in a particularly profound way, on internal changes in China. These changes, however, were effected through the inner laws of development of these countries, China included.
      In battle, one army is victorious and the other is defeated; both the victory and the defeat are determined by internal causes. The one is victorious either because it is strong or because of its competent generalship, the other is vanquished either because it is weak or be cause of its incompetent generalship; it is through internal causes that external causes become operative.
      In China in 1927, the defeat of the proletariat by the big bourgeoisie came about through the opportunism then to be found within the Chinese proletariat itself (inside the Chinese Communist Party). When we liquidated this opportunism, the Chinese revolution resumed its advance. Later, the Chinese revolution again suffered severe setbacks at the hands of the enemy, because adventurism had risen within our Party. When we liquidated this adventurism, our cause advanced once again. Thus it can be seen that to lead the revolution to victory, a political party must depend on the correctness of its own political line and the solidity of its own organization.
Mao correctly predicted the fall of the Soviet Union as the inevitable outcome of the revisionism of Communist Party of the Soviet Union.
The current global financial crisis that began in August 2007 is a manifestation of the internal contradiction of the dysfunctional globalized capitalist free market fundamentalism. On this “external cause” of global financial crisis, the Chinese Communist Party will be well advised to heed Chairman Mao’s warning about the importance of the correctness of its own political line to respond to China’s “inner laws of development” in the context of external structural changes in the rest of the world.
Mao continued on the history of dialectics:  
       The dialectical world outlook emerged in ancient times both in China and in Europe. Ancient dialectics, however, had a somewhat spontaneous and naive character; in the social and historical conditions then prevailing, it was not yet able to form a theoretical system, hence it could not fully explain the world and was supplanted by metaphysics.
      The celebrated German philosopher Hegel, who lived in the late 18th and early 19th centuries, made important contributions to dialectics, but his dialectics was idealist. It was not until Marx and Engels, the great protagonists of the proletarian movement, had synthesized the positive achievements in the history of human knowledge and, in particular, critically absorbed the rational elements of Hegelian dialectics and created the great theory of dialectical and historical materialism that an unprecedented revolution occurred in the history of human knowledge. This theory was further developed by Lenin and Stalin. As soon as it spread to China, it wrought tremendous changes in the world of Chinese thought.
Modern Chinese thought has been impacted by Marxism because, as Mao observed, external causes in the form of Western imperialism in China are the “conditions of change” and internal causes of China’s own decay are the “basis of change”. The external causes have become operative through internal causes.  Marxism, which insightfully identifies the causes of Western imperialism, is the world view with which China struggles against Western imperialism. Classical Chinese thought did not deal with Western imperialism because Western imperialism did not exist before the mid 19th century in China, and had been out of the realm of discourse in Chinese thought.
On contradiction, Mao wrote:
      The fundamental contradiction in the process of development of a thing and the essence of the process determined by this fundamental contradiction will not disappear until the process is completed; but in a lengthy process the conditions usually differ at each stage. The reason is that, although the nature of the fundamental contradiction in the process of development of a thing and the essence of the process remain unchanged, the fundamental contradiction becomes more and more intensified as it passes from one stage to another in the lengthy process.
      In addition, among the numerous major and minor contradictions which are determined or influenced by the fundamental contradiction, some become intensified, some are temporarily or partially resolved or mitigated, and some new ones emerge; hence the process is marked by stages. If people do not pay attention to the stages in the process of development of a thing, they cannot deal with its contradictions properly.
The conditions in the lengthy process of “fundamental contradiction between productive forces and the relations of production, contradiction between classes and contradiction between old and new” have irreversibly changed since August 2007. Market capitalism has at long last undeniably revealed its structural internal contradiction. The world is at the threshold of a new economic order based on constructive cooperation rather than the senseless competition promoted by neoliberal capitalistic market fundamentalism. Unless China pays attention to this “stage” in the process of development of its national destiny and national interest, it cannot deal with the contradictions properly.
Joseph Schumpeter (1883- 1950), whose “creative destruction” notion was tirelessly misquoted by Alan Greenspan, the US central banker primarily responsible for the global debt bubble, to support the myth of perpetually self-renewal capitalism through financial manipulation, wrote about the inevitable end of capitalism in his History of Economic Analysis. Capitalism, Socialism and Democracy, first published during World War II in 1942. In Chapter 11: The civilization of capitalism, Schumpeter observed that capitalism grew out of a social trend to rationalize economic activity, the acceptance of which reinforced amoral rationalism by condoning, as legitimate natural instinct, the single-minded seeking of individual self-interest through empirical “scientific” modeling, such as simplistic quantification of quality, single-dimensional efficiency calculation, disconnected cost-benefit analysis, synthetic trade-off decision-making, and shallow positivism in place of profound metaphysics.
Rationality naturally challenges traditional feudal values and institutions and would eventually undermine also bourgeois values and institutions of capitalism. Rationality will destabilize the intellectual legitimacy of capitalism itself by making entrepreneurship superfluous, replacing it with corporate planning, organized research and monopolistic predation. Corporatism thrives on giantism at the expense of individual entrepreneurship. Successful entrepreneurs will inevitably be incorporated or be acquired by corporations through consolidation inherent in finance capitalism. To curb this tendency, anti-trust regulatory regimes are necessary.
Schumpeter observes further that progress of capitalism reduces the importance of small producers and traders, the so-called small and medium enterprises, and thereby erodes the fundamental meaning of “property” and the sanctity of “contract”, since property belonging to a giant corporation and contracts entered into with such a corporation are collective undertakings. “This evaporation of what we may term the material substance of property - its visible and touchable reality - affects not only the attitude of holders but also that of the workmen and of the public in general. Dematerialized, de-functionalized and absentee ownership does not impress and call forth moral allegiance as the vital form of property did,” Schumpeter wrote. Company assets are not viewed with the same proprietary interest by society as personal assets by individuals. Corporatism is a special exclusionary form of collectivism. To purge corporatism of its socialist content, market capitalism creates a legal regime to treat corporations as legal individuals.
Schumpeter saw intellectuals as constituting a group “whose interest it is to work up and organize [social] resentment, to nurse it, to voice it and to lead it” against bourgeois institutions weakened by collective developments. To Schumpeter, intellectuals are “people who wield the power of the spoken and the written word” in the “absence of direct responsibility for practical affairs.”  Intellectuals assert themselves by their “actual or potential nuisance value.” Intellectuals are true revolutionaries. Those in the employ of government or business cease to be intellectuals to become policy strategists for specific missions. This revolutionary function of intellectual should not be confused with the army of opportunist dissidents promoted and supported by Western bourgeois interests to destabilized socialist governments.
Capitalism encouraged the growth and activity of the intellectual class by providing it with support from the collective patron, the bourgeois public. The bourgeoisie will try to curb intellectual criticism of capitalism, but is prevented from effective persecution of this effort. If a bourgeois government tries to curb criticism from intellectuals, “the bourgeois stratum, however strongly disapproving some of their doings, will rally behind them because the freedom it disapproves cannot be crushed without also crushing the freedom it approves... In defending the intellectuals as a group - not of course every individual - the bourgeoisie defends itself and its scheme of life.” The bourgeois social atmosphere will drive public policy more and more hostile towards capitalism.
Schumpeter concluded that the capitalist process not only destroys its own institutional framework but it also creates the conditions for its eventual replacement. The outcome of the process is that individual hearts and minds are transformed to become increasingly amenable to the collective form of life, what sociologist and Fortune Magazine editor William H. Whyte (1917-1999) called the Organization Man.
Whyte explained that “the corporation man is the most conspicuous example, but he is only one, for the collectivization so visible in the corporation has affected almost every field of work. Blood brother to the business trainee off to join Du Pont is the seminary student who win end up in the church hierarchy, the doctor headed for the corporate clinic, the physics Ph.D. in a government laboratory, the intellectual on the foundation-sponsored team project, the engineering graduate in the huge drafting room at Lockheed, the young apprentice in a Wall Street law factory.”
The organizations these organization men perpetuate are so interconnected that they are all “too big to fail” which is the point when corporate capitalism transforms into corporate socialism with the help of the state. To Schumpeter, Marx’s vision of socialism replacing capitalism was correct. Reaching his personal maturity in the 1930s, Schumpeter saw with apprehension that capitalism would use national socialism as a antibiotic against proletariat socialism.
Schumpeter outlined the “socialist blueprint” in which central planning can use markets as a mechanism for feed back to validate profit-oriented publicly-owned means of production for the benefit of society. Since profit depends of consumer power, there would be structural incentive on the part of management to raise wages to increase sales. A market economy can exist whether the means of production are privately or collectively owned, but only under socialism will profit be socialized to support consumer power, rather than be corporatized to profit shareholders.
Mao wrote further:
      For instance, when the capitalism of the era of free competition developed into imperialism, there was no change in the class nature of the two classes in fundamental contradiction, namely, the proletariat and the bourgeoisie, or in the capitalist essence of society; however, the contradiction between these two classes became intensified, the contradiction between monopoly and non-monopoly capital emerged, the contradiction between the colonial powers and the colonies became intensified, the contradiction among the capitalist countries resulting from their uneven development manifested itself with particular sharpness, and thus there arose the special stage of capitalism, the stage of imperialism.
      Leninism is the Marxism of the era of imperialism and proletarian revolution precisely because Lenin and Stalin have correctly explained these contradictions and correctly formulated the theory and tactics of the proletarian revolution for their resolution.
      Take the process of China’s bourgeois-democratic revolution, which began with the Revolution of 1911; it, too, has several distinct stages. In particular, the revolution in its period of bourgeois leadership and the revolution in its period of proletarian leadership represent two vastly different historical stages. In other words, proletarian leadership has fundamentally changed the whole face of the revolution, has brought about a new alignment of classes, given rise to a tremendous upsurge in the peasant revolution, imparted thoroughness to the revolution against imperialism and feudalism, created the possibility of the transition from the democratic revolution to the socialist revolution, and so on.
      None of these was possible in the period when the revolution was under bourgeois leadership. Although no change has taken place in the nature of the fundamental contradiction in the process as a whole, i.e., in the anti-imperialist, anti-feudal, democratic-revolutionary nature of the process (the opposite of which is its semi-colonial and semi-feudal nature), nonetheless this process has passed through several stages of development in the course of more than twenty years.
      During this time many great events have taken place -- the failure of the Revolution of 1911 and the establishment of the regime of the Northern warlords, the formation of the first national united front and the revolution of 1924-27, the break-up of the united front and the desertion of the bourgeoisie to the side of the counter revolution, the wars among the new warlords, the Agrarian Revolutionary War, the establishment of the second national united front and the War of Resistance Against Japanese Imperialism.
      These stages are marked by particular features such as the intensification of certain contradictions (e.g., the Agrarian Revolutionary War and the Japanese invasion of the four northeastern provinces), the partial or temporary resolution of other contradictions (e.g., the destruction of the Northern warlords and our confiscation of the land of the landlords), and the emergence of yet other contradictions (e.g., the conflicts among the new warlords, and the landlords' recapture of the land after the loss of our revolutionary base areas in the south).
Today, when capitalist market fundamentalism is facing a structural crisis from the adverse effect of debt preempting capital, a fundamental issue is whether socialist China, whose national destiny is inseparably tied to socio-economic revolution towards an equitable society and a just world order, should allow itself to be lured into the role of a “stakeholder” in the collapsing neo-liberal capitalist world order of financial neo-imperialism.
National Destiny and National Interest
A nation’s destiny determines its national interest at a specific time in history. China’s national interest in the 21st century is focused on national resurgence through socio-economic redevelopment along the path of its historical socio-cultural tradition of harmonious socialism. The purpose of redevelopment is to maintain socio-economic growth by increasing the national wealth to support the continuing advancement of Chinese civilization which in turn contributes to the advancement of world civilization.
National Wealth
The national wealth is the sum total of all wealth within a nation. All economic systems, feudal, capitalist or socialist, strive to increase national wealth. The national wealth is affected by a nation’s system and pattern of ownership and its distributional configuration, defined by the ratio between collective ownership of the means of production and the private sector based on individual private property rights.
Wealth is defined by Webster’s Dictionary as a large aggregate of real and personal property; an abundance of those material or worldly things that people desire to possess; riches; also the state of being rich. That state is derived from abundance. The national wealth includes state property and individual property. The net benefits of wealth lie in its consumption. Security is provided by surplus wealth that can be consumed at a future date. However, a surplus of wealth is not synonymous with a wealth of surplus; it is in fact the opposite. The former is economically unproductive while the latter can facilitate qualitative growth. Surplus wealth is by definition economically inert. A wealth of surplus can advance civilization to a higher plane.
In measuring a civilization, focus is placed on wealth of tradition, of culture, of creativity, of morality, of social justice, of knowledge, of expertise, of spirit, of compassion, and so on. Value placed on non-material assets is indicative of the state of advancement in a civilization. Highly developed civilizations move from high valuation of materialistic wellbeing to higher valuation of spiritual wellbeing.
The Greeks glorified beauty and the Romans worshiped power. Greek civilization enriched humanity with a wealth of philosophy based on aesthetics while Roman civilization gave the Western world a wealth of laws based on order. Christ taught the Christian world to love the poor and the weak and to celebrate only the spiritual wealth of the meek. Early Christians were the first socialists. Chinese civilization is built around the family of men as brothers. Chinese political culture operates on the vision of community from which the individual cannot detach without damaging his/her humanity. It does not recognize the Western notion of the economic man operating out of self interest which Chinese culture views as deviant behavior.
In classical economics, wealth is an abundance of all material objects which have economic utility in a world of natural scarcity.  Wealth then presupposes inequality. Neoclassical economics introduces the concept that scarcity enhances the marginal utility of wealth. In neoclassical economics, scarcity of a commodity enhances its exchange value while aggregate scarcity depresses wealth. Scarcity is a necessary condition for a functioning market. Abundance denies the necessity for trade.
In a knowledge scarce economy, knowledge is wealth and in an information scarce economy, information is wealth, even though knowledge overkill and information overload are frequent problems that can cause economic stagnation. Thus abundance alone does not solve the problem of scarcity, the solution for which can only come from fair distribution. Scarcity cannot be eliminated by wealth creation alone since wealth is a function of selective scarcity. Scarcity can only be eliminated by equitable wealth distribution.  Therein lies the structural dilemma of capitalism which depends on scarcity to create wealth.
Currency hegemony distorts distributional equity in trade. Under dollar hegemony, the distribution of the benefits of trade is distorted mainly because dollar is scarce in all trading economies except the US which can produce dollars at will by fiat. Dollar hegemony emerges when the US discover how to transfer the cost of fiat dollar creation to her trading partners. This dollar-based international finance architecture allows the US to become the world’s largest debtor nation by assuming debts denominated in dollar that the US can produce endlessly at no cost to itself. The cost of dollar depreciation from oversupply is transferred to foreign holders of dollars. The question is seldom asked why a country that can produces dollars at will needs to borrow dollars from its trade partners. The answer is of course that the US borrows not out of its need for dollars, but to reinforce the need for dollars on the part of her trading partners. This dollar-denominated debt owed by the US to her trade partners is a debt the US never has to pay back, or if forced to do so, the US can pay this debt with more dollars she can print at will.
In economics, annual gross national product (GNP), a measure of goods and services in the nation in a year, adjusted by foreign factor income, has been the generally accepted indicator of the economic potential of a nation. GNP is not a measure of the national wealth, which is the sum total of net assets of a nation. But GNP is only a measure of the monetized wealth derived from the national asset for a given time frame, not the asset itself. A low GNP can result form a large national asset, which is the definition of underdevelopment. All developing national economies, including that of China, can raise their GNP by fulfilling the productive potential of their national assets.
The predominant asset of a nation is its population.  All secular wealth is derived from human life.  Even on a personal level, when life ends, all else secular, including wealth, ends for that individual, even hope, which is the wealth of future potential. Material wealth is a poor compensation for poor health.  From this one can logically deduce that national wealth is based fundamentally on a healthy and fulfilled population.  Without population, there is no nation, let alone national wealth.  When the population of a nation increases, so does its national asset and potential national wealth, unless the economic system is dysfunctional, in which case the fault is not with population growth, but with the economic system.  The physical, mental, intellectual, cultural and spiritual health of the population in a social context has a direct and fundamental impact on the national wealth.
Cēterīs paribus (all else equal), China with one fifth of the world’s population should have a GNP equaling to one fifth of world 2007 GDP of $54.6 trillion, or $11 trillion instead of $3.3 trillion. China’s 2007 GDP was below its asset potential by a factor of three by world average standard. By advanced economy standard, China’s GDP should be five time that of the US ($14.5 trillion in 2008), or $72,5 trillion. Yet China holds a foreign exchange reserve of $2 trillion, about 60% of which is in the form of US sovereign and agency debt. The US, with the world largest GDP economy, and the world largest debtor nation, has no foreign debt denominated in foreign currency. All debts owed by the US to foreigners are US sovereign debts denominated in dollars, not foreign debts denominated in foreign currencies.
If China, with a population five times that of the US, had the same productivity as the US, its population would produce five times the US 2007 GDP of $13.8 trillion. China would have a GDP of $59 trillion instead of $3.3 trillion in 2007. China’s 2007 GDP would have been bigger than world GDP in stead of one third of it. China ranked 100th in world per capita GDP in 2007 ($ 5,400 - half of world per capita GDP of $10,038), behind Swaziland (99th) and Samoa (98th).
The Scarcity Dogma
Neoclassical economics subscribes religiously to the dogma of scarcity as a natural law of economic science to underpin the law of supply and demand.  The dogma states that given an amount of demand, scarcity causes prices to rise. Thus there is structural incentive to maintain or even increase scarcity. Prices are allowed to fall only if aggregate sale increases. Scarcity, however, is never allowed to disappear entirely, at which point markets would stop functioning.
When clean air and water were abundant, instead of constructing an economic theory from these happy natural gifts of nature, economists reject them as non-commodities, external to the concern of economics, until of course clean air and water became scarce through pollution or simply abusive use, then and only then would scarcity make clean air and water legitimate economic issues. 
Scarcity Theory and Population Control
Similarly, population growth in a world of scarcity is considered a rising burden to the economic system.  These economists, of whom Thomas Robert Malthus being the spokesman, argue for the need of population control based on the dogma of scarcity.
Malthus (1766-1834), British economist, sociologist and pioneer in population theory, in his An Essay on the Principle of Population (1798), contends that poverty is unavoidable without population control since scarcity is a condition that naturally increases with population growth.  Famine and disease are natural constraints on population growth and war is a socio-political constraint.  In 1803, Malthus conceded the preventive check of “moral restraint”, paving the way for neo-Malthusian birth control theories which influenced classical economists, especially David Ricardo (1772-1823).  Birth control is then viewed as a moral alternative to famine and war.
But as history has since borne out, global food production growth has long outstripped global population growth. The biggest problem in modern agricultural economics is not excessive demand but falling prices caused by over-production.  As to the causes of war, advanced countries of low birth rate frequently invade developing countries with high birth rate all through history.  Many advanced economies, such as those of France and Japan, have found it necessary to adopt incentive policies to stimulate population growth in order to maintain economic growth and national power.
Ricardo’s interest in economics was sparked by Adam Smith's Wealth of Nations (1776).  Smith's thesis was that the division of labor (specialization) improves economic growth to generate wealth for all nations.  Smith also saw advancements in machination and international trade as engines of growth through the facilitation of further specialization. Because savings by the rich is what provides investment and hence economic growth, Ricardo saw unequal income distribution as being one of the most important determinants of national economic growth. However, Ricardo posited that savings is in part determined by the profits of stock: as the capital stock of a competition between capitalists for workers will bid wages up to reduce profit. So lowering the living standards of workers was another way to maintain or accelerate economic growth.  Free markets cannot include free labor markets that enhance worker market power if economic growth is to be maintained. 
Ricardo provided the “scientific” rationale for the anti-labor mentality of capitalism.  Capital is deployed to enhance labor productivity not to raise the standard of living of workers, but to increase return on capital. Wage increases tie to increased labor productivity directly decease the productivity of capital. Mechanization is a process to shrink labor input per unit of capital investment, not to raise the cost of labor.

Wage increase can be tolerated only if aggregate wage falls. Lay off one hundred workers and use the wages of 20 displaced workers to fund wage increases of the remaining workers who are expected to cover the productivity of the hundred laid-off workers. Most of the growth of the industrial age came from robbing labor of it fair share by keeping demand for labor shrinking with investment in capital goods. Surplus labor reduces the market power of labor while it magnifies the market power of capital. Capitalists fear full employment more than they fear the plague.
This is why economies operating under market capitalism, including that of China, will be structurally prevented from achieving full employment with high wages. For an economy that depends of foreign investment, even surplus profits do not stay within the economy.
Ricardo’s law of rent was seminally influenced by Malthusian concepts on population.  Malthus claimed that population growth is not easily checked and would quickly outstrip economic growth and cause increasing misery all around.  Accepting that, Ricardo modified Smith’s theory of economic growth by including diminishing returns on land. Output growth requires growth of factor inputs, which are goods and services used in the process of production, such as land, labor, capital and enterprise.  But unlike labor, land is “variable in quality and fixed in supply”.  This means that as economic growth proceeds, more land must be brought into use. But land cannot be increased without conquest, which led economic growth inevitably to the age of imperialism and empire.  Prior to that imperialist stage, there were two self-neutralizing effects from economic growth: firstly, rising landowner rents over time cut into the profits of capitalists from above; secondly, rising price of wage goods over time cuts into profits from below as workers need higher wages for subsistence. This introduces a quicker limit to economic growth than Smith allowed, but Ricardo also claimed that this decline can be happily checked by technological improvements in machinery and the specialization brought by trade. Wage arbitrage has always been a key factor in international trade.
However, in the third edition of his Principles, Ricardo modified his position on mechanization, observing that when mechanization displaces labor, the labor thus “set free” may not be reabsorbed elsewhere in the economy because capital is not simultaneously “set free”.  This creates downward pressure on wages and lowers aggregate labor income, with the difference absorbed by the high investment cost of capital goods.  It is true that capital goods also require labor to produce, but the productive lifespan of capital goods after their initial labor input is very long, which brings about the need for finance.  Capital goods need decades of reduced labor cost to pay for them and their financing cost, i.e. interest, requires additional reduced labor cost to service over the life span of the financing. 
In order to reabsorb labor displaced by mechanization, the rate of capital accumulation must continuously increase.  But there is no obvious mechanism for this to happen -- particularly given the tendency for profits and thus savings to decline over time from over investment.  In a high tech economy, which Ricardo did not have the opportunity to observe in his life time, technological obsolescence tends to require an even higher and more frequently recurring level of mental labor input, rescuing high-tech workers from Ricardo’s Iron Law of Wages.  The wage differential then fall even more heavily on production workers.
Ricardo did not deal with the problem of uneven market demand on different grades of labor created by mechanization, between educated scientists/engineers creative workers and factory production workers.  Until the introduction of universal education, a non-market social program, unskilled or low-skilled labor simply could not afford education for their children, thus condemning them to the ranks of the unemployable for life generation after generation. This created a shortage of educated workers and an oversupply of unskilled labor, resulting in drastic income disparity.  As income rise comes to depend on education level, the cost of education also requires financing over longer periods of schooling and more sophisticated teaching and research facilities and institutions, limiting access by the poor.  The unequal access to education is the fundamental factor behind the rise of a class society.
To Ricardo, rent is a result and not a cause of price.  Rent has two different meanings for economists. The first is the commonplace definition: the income from hiring out an asset, such as money, land or other durable goods. The second, known as economic rent, is a measure of market power: the difference between what a factor of production costs and how much it would need to be paid to remain in its current use. A star entertainer may be paid $10 million a year when he/she would be willing to perform for only $1 million under different circumstances, so his economic rent is $9 million a year. In perfect competition, there are no economic rents, as new entertainers are attracted by a high rent market and compete until economic rent falls to near zero. Reducing rent does not change production decisions, so economic rent can be taxed to reduce income disparity without any adverse impact on the real economy.
Upon these concepts, Ricardo propounded his iron law of wages and a labor theory of value.  The iron law of wages asserts that wages naturally drift towards minimum levels and cannot rise above subsistence levels.  The theory of value maintains that in exchange, the value, though not the market price, of goods is measured by the amount of labor expended in their production.  When the market price differs from value, it causes either inflation or deflation, producing drags on economic growth. Central banking was then invented to maintain price stability via monetary elasticity and to control wage rises through unemployment.
The national wealth of China is dragged down by low wages. All economic and development policies should be focused on raising wages as a primary objective. On recent decades, foreign direct investment has reinforced the Ricardo Iron Law of Wages on the Chinese economy through its dependence of export. The Chinese export sector competes on its advantage in cross-border wage arbitrage. This strategy depresses Chinese national wealth. Until China realizes that export based on low wages is a self-diminishing strategy, Chinese national wealth will remain underdeveloped no matter how much foreign exchange reserves in holds. National income denominated in a nation’s own currency is the only way to increase national wealth. And for a large population country such as China, wages are the main source of national income.  
On interest, Ricardo had little to say. He observed that money, by which he meant gold-back specie money, not fiat money, “is subject to incessant variations from its being a commodity obtained from a foreign country, from its being the general medium of exchange between all civilized countries, and from its being also distributed among those countries in proportions which are ever changing with every improvement in commerce and machinery, and with every increasing difficulty of obtaining food and necessaries for an increasing population. In stating the principles which regulate exchangeable value and price, we should carefully distinguish between those variations which belong to the commodity itself, and those which are occasioned by a variation in the medium in which value is estimated, or price expressed.”
Ricardo asserted that a rise in wages due to inflation produces no real effect on profits, known in modern times as cost of living increases or indexation, as prices of products also rise.  A rise in real wages ahead of inflation has a direct effect in lowering profits. Labor, when purchased and sold as a commodity, may increase or diminish quantitatively in supply and has a natural price and a market price. The natural price of labor is that price which is necessary to enable laborers to subsist and “to perpetuate their race without either increase or diminution.” 
But there is nothing “natural” about Ricardo’s natural price of labor. What Ricardo called natural was actually an artificial socio-political regime.  In that regime, as then existed in England, population grew naturally without intervention and the growth tended to be concentrated on the laboring poor who had the least capacity to intervene on their fate in society.  Ricardo’s natural price of labor depends on the price of the food, necessaries, and conveniences required for the subsistent support of the laborer and his family. Ricardo’s iron law of wages is derived from his view that population is a liability rather than an asset to the economy. The lower wages fall without starving workers to death, the higher the profit capital can realize to produce a rich economy.
Yet over-investment will lead to overcapacity unless wages rise to sustain more consumption. To solve this problem of insufficient demand, neoclassical economics resorted to foreign trade to earn gold to enrich the nation. In the 21st century, emerging economies, led by China, have been seduced into dependence on export. But under dollar hegemony, the exporting economies do not earn gold or even gold-backed money. The earn dollars which cannot be used in the domestic economies without first converting the dollars back into local currencies. This however will cause inflation because the wealth behind this local currency has been shipped to foreign markets for dollars. The emerging economies cannot shift towards domestic consumption because domestic wages have been kept too low and the profit from low wages has gone to foreign capital denominated in dollars.       
In a functioning economy, the natural price of labor should be based workers being able to purchase the goods their labor produces. It should also be based on society’s concept of a good life, which includes good provision for family, ample leisure to cultivate the body and spirit, occupational safety, health care, continuing education, affordable housing and dignified retirement benefits.  Subsistence has taken on different, more equitable and humane meanings since the early days of the Industrial Revolution.  Ricardo granted that with technological and social progress, the natural price of labor always has a tendency to rise, while the natural price of commodities, excepting raw material and labor, has a tendency to fall because of innovation that improves productivity. 
When the market price of labor is determined by supply and demand, unemployment is needed to depress the market price of labor. This can only be achieved by increasing labor supply to saturate labor demand.  When the market price of labor exceeds its natural price, the condition of the laborer is flourishing and happy. By the encouragement which high wages give to the increase of population, the number of laborers will increase and wages will again fall to their natural price level, and indeed from a overshoot reaction sometimes fall below it.  So goes the argument for population control for the good of the laboring class, or as Ricardo put it, “the laboring race.”  The Christian Church, having for most of its history allied itself with establishment interests, opposes birth control in modern time for more than religious and moral reasons.
When the market price of labor is below its natural price, the condition of the laborers is wretched and poverty results.  It is only after their privations have reduced population increase, or the demand for labor has increased through economic growth, that the market price of labor can be raised to its natural price, and that the laborer will have the moderate comforts which the natural rate of wages will afford.  Notwithstanding the tendency of wages to conform to their natural rate, their market rate may be constantly above it in an improving and progressive society for an indefinite period.  Thus, with every improvement of society, with every increase in capital, the market wages of labor will rise; but the permanence of their rise will depend on whether the natural price of labor has also risen; and this again will depend on the rise in the natural price of those necessaries on which the wages of labor are expended. 
As population increases, these necessaries will be constantly rising in price, because more labor will be necessary to produce them and more people are consuming them.  If the money wages of labor should fall, while every commodity on which the wages of labor were expended rose, workers would be doubly affected, and would be soon totally deprived of subsistence.  Instead of the money wages of labor falling, they would rise; but they would not rise sufficiently to enable the laborer to purchase as many comforts and necessaries as he did before the rise in the price of those commodities.  Ricardo concluded that these are the iron laws by which wages are regulated, and by which the happiness of far the greatest part of every community is governed. Labor then has a self interest in assuring the profitability of employers.  This has been a self-regulating attitude since adopted by the labor union movement, putting labor at a constant disadvantage in contract negotiations.
Thus according to Ricardo, emerging economies with an underdeveloped labor force such as China can not expect to escape incomes disparity because capital formation depends on keeping workers poor.
Unless and until policymakers in China realize that labor is not a commodity and that a labor market should not exist any more than a slave market should exist, China will not achieve its destiny of restoring its proper place in the world. To fulfill China’s national destiny, population must be viewed as asset, not a liability, and labor must not be viewed as a commodity and that capital exists to enhance labor productivity, not to buy labor at the cheaper possible price.
The real natural law is that capital needs labor more than labor needs capital.  Without capital, labor can still produce, albeit less efficiently, but without labor, capital cannot exist and remains idle assets.  The market price of labor should always be such as to eliminate excess profit for capital; and labor has the power to command it, for capital has nowhere else to go.  This is the point when government, controlled by capital, steps in to break up strikes, to make capitalists richer at the expense of labor and at a lower level of national wealth. 
Ricardo argued that like all other contracts, wages should be left to the fair and free competition of the market, and should never be interfered with by government.  He saw the clear and direct tendency of the welfare laws and labor regulations as in direct opposition to these obvious principles: it is not, as social legislation benevolently intended, to amend the condition of the poor, but to deteriorate the condition of both poor and rich; instead of making the poor rich, they are calculated to make the rich poor, thus forfeiting savings and investment needed for economic growth.  And while the welfare laws are in force, the maintenance of the poor would progressively increase till it has absorbed all the net revenue of the nation.  “This pernicious tendency of these laws is no longer a mystery, since it has been fully developed by the able hand of Mr. Malthus; and every friend to the poor must ardently wish for their abolition,” Ricardo wrote.  While this is rational observation, Ricardo did not emphasize that the way to get out of the welfare trap is through full employment with living wages.  In Ricardo’s view, poverty is not the result of the rich getting more than the poor, but the result of economic underdevelopment due to lack of savings.  This has been the position adopted by most market neoliberals.
Adam Smith (1723 - 1790), having come in contact with the Physiocrats in France led by a physician to Louis XV, Francois Quesnay (1694-1774), who believed that all wealth originates from land, wrote An Inquery into the Nature and Causes of the Wealth of Nations in 1776, in which he postulated the theory of division of labor and observed that value, not price, arises from labor expended in the process of production. 
The Physiocrat maxim states that only abundance combined with high prices could create prosperity, a rejection of the theory of price as being set by the intersection of supply and demand in a free market.  To the Pysiocrats, price theory based on supply and demand causes abundance to drive down prices and leads to producer bankruptcies and economic depressions, preventing the sustenance of abundance, which is a requirement for prosperity. 
This notion is behind the Keynesian idea of demand management through high wages and full employment, even at the cost of moderate inflation.  The most cited of Smith’s ideas is the belief that in a laissez-faire economy, the impulse of self interest would bring about the public welfare. Yet data have shown that unit maximization invariably leads to systemic inefficiency. Individual interest unrestraint by societal values tends to be satisfied at the expense of community interests.
The most misunderstood of Smith’s ideas is the belief that the term laissez-faire, which in French means to leave alone, means the absence of government interference in a free market economy.  But Smith’s idea of a free domestic market is one without monopolies, which he opposed as destroyers of free markets. He also opposed mercantilism in international trade, which aims to accumulate gold through monopolistic trade by active government policy.  Smith advocated strong government action to restrict the inevitable emergence of monopolies in unregulated markets domestically and mercantilism internationally.  Smith admitted restriction to free trade, such as the Navigation Act of 1651, forbidding the importation of foreign goods and commodities from overseas colonies except in English-owned ships, as necessary national economic defense measures.  In 1778, Smith was appointed commissioner of customs for Scotland, an ironic post for a free trader.

Smith in the Introduction to his Wealth of Nations identifiedreal wealth as the annual produce of the land and labor of the society.  Henry George (1839-97) virtually repeated the single tax on land argument of Victor de Mirabeau, Quesnay’s ardent disciple and father to Honore Mirabeau, popular revolutionary and statesman, spokesman for the Third Estate. 
“We must make land common property,” George declared.  Georgists identify three basic types of property: common, government and private. Common property belongs to all people in common; it is that which all have an equal right to use and enjoy, such as public parks. Government property belongs to the state and is subject to the direction of the government. Private property is that which individuals (or corporations as legal persons) have the exclusive right to own, profit from and dispose of as they see fit, subject to government regulations. Common property is not the same as government property. Common property in the ocean is generally recognized; the oceans do not belong to any one government beyond its costal economic zones.  Common property is different from private property in that common property permits private use, but implies an obligation to the community since the rights of others must be recognized.  By its very nature, land is common property and our laws and traditions already go far toward recognizing it as such. The principle of eminent domain asserts the superior claim of society to land. The New York State Constitution states: “The people of the State, in their right of sovereignty, possess the original and ultimate property in and to all lands within the jurisdiction of the State.” English and US laws generally recognize absolute ownership of goods - but not of land. The law deals with the land “owner” as a land holder - land is held under the sovereignty of the people and is subject to their conditions.
To preserve common property in land, George proposed that the rent of land should be paid to the community. This payment expresses the exact amount that would satisfy the equal rights of all other members of the community. Individuals would retain title to land, fixity of tenure and undisturbed possession. This method of making land “common property” may also be called “conditional private property in land” (payment of rent to the community) as opposed to “absolute private property in land” (private collection of rent).
Adam Smith (1723 - 1790) said: “Ground rents are a species of revenue which the owner, in many cases, enjoys without any care or attention of his own. Ground rents are, therefore, perhaps a species of revenue which can best bear to have a peculiar tax imposed upon them.”  Tom Paine (1737 - 1809) said: “Men did not make the earth.... It is the value of the improvement only, and not the earth itself, that is individual property.... Every proprietor owes to the community a ground rent for the land which he holds.” Thomas Jefferson (1743 - 1826) said: “The earth is given as a common stock for men to labor and live on.”  Half a century later, Karl Marx (1818 - 1883) said: “Assuming the capitalist mode of production, then the capitalist is not only a necessary functionary but the dominating functionary in production. The landowner on the other hand is superfluous in this mode of production. If landed property became people’s property the whole basis of capitalist production would go.”  John Stuart Mill (1806 - 1873) said: “Landlords grow richer in their sleep without working, risking, or economizing. The increase in the value of land, arising as it does from the efforts of an entire community, should belong to the community and not to the individual who might hold title.”  Abraham Lincoln (1809 - 1865) said: “The land, the earth God gave man for his home, sustenance, and support, should never be the possession of any man, corporation, society, or unfriendly government, any more than the air or water....”  Sun Yat-Sen (1866 - 1925) said: “The land tax as the only means of supporting the government is an infinitely just, reasonable, and equitably distributed tax, and on it we will found our new system.”
Wealth is a derivative of land value which in turn is a derivative of the productivity of labor on it. Land value is a function of population density on land. Scarcely inhabited land has very low value, except for the value of the mineral or oil and gas under it. 

Mao Zedong said that every person is capable of producing more than he/she consumes.  When that does not happen, it is the fault of the system, not the people. Mao Zedong said: “people were the most precious of all things.” Mao disputed the Malthusian argument that food producers (capital) and consumers (population) burgeoning at opposite poles of one and the same process as a phenomenon only in a capitalist society. No explicit measures toward controlling population expansion would be necessary in a communist society because overpopulation was a result, not a cause, of poverty. Mao also believed that China’s population should expand in controlled fashion in accordance with a planned economy. Furthermore, prior to communist party rule, the population had been kept largely in check by a very high mortality rate. At times in China’s history, increased reproduction was encouraged to provide an adequate army and tax base for the emperors.

The Chinese Communist Party (CCP) when it came into power in 1949 inherited this high mortality rate and a population level fluctuating under the scourge of disease and malnutrition. A primary goal of the CCP since its founding was to improve the condition of the population, over 80% of which are rural peasants. Population is the most valuable national asset. Economic policy must aim at maximizing the full potential of this national asset by ensuring the provision of food, housing, health care, education and employment for all. A socialist nation should not permit poverty anywhere within its borders, more so if income disparity contributes to the existence of poverty. China’s poverty eradication record is not impressive in relation to its high GDP growth.

Today, China has an export bubble, a real estate bubble, and a financial stock market bubble, but not an economic bubble.  These sector bubbles are the result of mal-distribution of resources directed by flawed development policy. An economy that still has large pockets of poverty cannot have an overall bubble.

There is urgent need for reform in China’s three-decades-old economic reform and “open to the outside” policy. Chinese policymakers need to ask why consumers outside of China can afford to buy Chinese goods while its own rural population cannot afford to do the same. The answer will show that poverty is always the result of economic policy. Any policy that fails to eliminate poverty within five year deserves to be reexamined.
December 10, 2008

Next: Chinese Agriculture at a Crossroad