News flash in China: capitalism requires servitude

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Pic via the world’s mainstream newspaper of record. (The Guardian, of course.)

I was just reading this column by Paul Krugman (warning: consumes NYT token) about China’s apparent impending crash. This part of his explanation struck me:

How is that even possible? What keeps consumption so low, and how have the Chinese been able to invest so much without (until now) running into sharply diminishing returns? The answers are the subject of intense controversy. The story that makes the most sense to me, however, rests on an old insight by the economist W. Arthur Lewis, who argued that countries in the early stages of economic development typically have a small modern sector alongside a large traditional sector containing huge amounts of “surplus labor” — underemployed peasants making at best a marginal contribution to overall economic output.

The existence of this surplus labor, in turn, has two effects. First, for a while such countries can invest heavily in new factories, construction, and so on without running into diminishing returns, because they can keep drawing in new labor from the countryside. Second, competition from this reserve army of surplus labor keeps wages low even as the economy grows richer. Indeed, the main thing holding down Chinese consumption seems to be that Chinese families never see much of the income being generated by the country’s economic growth. Some of that income flows to a politically connected elite; but much of it simply stays bottled up in businesses, many of them state-owned enterprises.

It’s all very peculiar by our standards, but it worked for several decades. Now, however, China has hit the “Lewis point” — to put it crudely, it’s running out of surplus peasants.

Hmm, this all sounds so strangely familiar. His commenter izucco (same NYT token warning applies) remarks: If what you write turns out to be true the real story here is capitalism does not work without slave labor. The system is in constant need to find cheap labor. Yup yup.

(Now: before someone jumps down my throat to tell me what wonders have so far been accomplished in China, they should be so lucky, second world problems, and all that…well, be that as it may. Let’s take all of that at face value, for the sake of argument. The point is that there are social limits, that any gains that have been made are tenuous and conditional upon finding a way around those limits, something which the world has been, painfully obviously for five years, failing to do. Why?)

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This page contains a single entry by Mandos published on July 19, 2013 7:14 AM.

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