Sara Hsu — China, Piketty, and Patrimonial Capitalism

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

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

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

Piketty, without intending a policy prescription specific to China, provides a middle way between these two extremes [of Mao and Deng] that is eminently applicable to China today.

 Unfortunately, she is out of paradigm, although technically China is not a currency sovereign in that it pegs its currency to the dollar, albeit it increasing amounts of float as the economy becomes less export dependent.

An increase in taxes on the wealthy would increase government funds used to finance social programs.

Enforcing tax laws and curtailing the use of loopholes in wealth holdings would provide the state with more funds, which it should use to expand social services as it grows. 

The Dipolmat
China, Piketty, and Patrimonial Capitalism
Sara Hsu | Assistant Professor of Economics at the State University of New York at New Paltz, specializing in Chinese economic development, informal finance, and shadow banking