Notes On: "China and the Twenty-First-Century Crisis" by Minqi Li

This relatively short, statistically dense book, by Marxist economist Minqi Li, lays out a convincing case that both global capitalism in general, and Chinese capitalism in particular, are on the verge of two unavoidable, convergent crises: the economic crisis of falling rates of profit and growth, and the ecological crisis of climate change and environmental destruction. These intertwined economic and ecological crises will make it impossible for either global or Chinese capitalism to continue along their current paths of growth without risking widespread ecological breakdown and the incredibly devastating consequences that would have for our survival. The importance of China’s economy, both in terms of its size and also in terms of the role it plays in the global economy (as the “spatial fix” that allowed capitalism its neoliberal “second wind”, and consequently as the heaviest center of the world industrial proletariat) means that a significant, “terminal” crisis in Chinese capitalism, would be the harbinger of global crisis. A planned, socialist economy will be the only way out of this crisis, both for China and other countries facing the same circumstances.

Li takes much of the theory used in this book from Immanuel Wallerstein and World Systems Analysis, especially his theory of crisis and emphasis on the “semi-periphery” as a crucial point in the world system. He presents a brief history of China’s 20th century development path that is admirable for highlighting some of the objective factors that lead to “reform and opening up”, for example the desire for more advanced technology. But he also emphasizes the political decisions that were made by CPC leadership, seeing the reform turn as a culmination of a decades-long process in which a privileged layer of cadres and bureaucrats moved further and further from the experiences of the masses. He is largely critical of present-day China but not in an entirely one-sided way, highlighting at one point that “at a time when large parts of the world are suffering under the tyranny of neoliberal austerity, China may be the only large country where the working class is making significant gains in their struggle against capitalist exploitation.” His theory is complemented by extensive statistics (and sometimes basic calculations) demonstrating the evidence for his argument - both in examining growth and profit rates from 20th century capitalism and using them to forecast when crisis occurs, as well as statistics demonstrating the impossibility of satisfying current economic growth rates with existing energy resources.

Readers in the U.S., who have been able to observe first-hand the immense ramp-up of imperialist propaganda against China just in the last half-decade, might be surprised by the lack of discussion on U.S.-China relations, or more generally how imperialist powers will approach China in the context of growing global crisis. This book was written before many of the more aggressive anti-China actions of the Trump and Biden administrations, but several years after Obama had announced his “Pivot to Asia”, which already signaled the intention of the U.S. to constrain and contain China geopolitically. Recent measures of economic warfare, for example the “chip war” the U.S. has initiated, are already affecting China’s political economy and national strategy (e.g. through the Dual Circulation strategy and the continued state-led investment in key breakthrough technologies), and this growing imperialist pressure will certainly play a role in any future “crisis” and how it is resolved. Li may see these factors as outside the frame of his analysis - his basic job in this book is to prove the long-term economic and ecological unsustainability of global and Chinese capitalism. But for us, fighting and constraining U.S. and Western imperialism is probably the most important way we can contribute to the possibility of China, and the rest of the world, finding a socialist exit from the coming crisis.

Chapter 1: China and the Twenty-First-Century Crisis

In this first chapter Li lays out his essential points and central theses (already covered above).

Chapter 2: China: Classes and Class Struggle

This chapter lays out Li’s brief sketch of PRC history, both examining the early, Mao-led decades and the basic political economy / “social contract” at that time, as well as some of the objective constraints that would eventually push China towards the reform period. Li, while highly critical of the reform-era leaders like Deng Xiaoping, and the top layers of the post-Mao CPC in general, does not seem to see the reform period as the result of entirely subjective factors or “betrayal” by Deng. As he points out, China under Mao was already responding to some of the same basic factors that would encourage opening-up as a strategy, including a desire for faster technological development. On the other hand, already in the 1950s he sees a system in which CPC cadres and state bureaucrats are starting to gain material privileges over the rest of the Chinese population, which also factors largely in his analysis of why the reform-and-opening-up road was taken. On this question, I’d have to read further into his sources or Chinese history in general, as I have some natural skepticism towards the “party elite” as stand-in-bourgeoisie idea, especially as it is used in some quarters as an easy way of bashing Actually Existing Socialist states (in the example of the USSR, for example, being able to dismiss the country as “state-capitalist” can be a convenient way out of defending a contradictory and flawed, but still progressive and socialist-led experiment).

Summarizing the economic development of the PRC up until the early/mid 70s (note in the last paragraph the emphasis on access to Global North technology as a driver behind diplomatic re-alignment):

The primary task of the new People’s Republic was to achieve rapid industrialization and “catch up” with the western capitalist countries in industrial and military capacity. But this task had to be accomplished under the post-revolutionary historical conditions. The new Chinese state was a “socialist state,” that is to say, it was the historical product of a great popular revolution based on the mobilization of the peasants and the workers. As a result, the socialist state was defined by an implicit social contract between itself and the great majority of the population (the peasants and the workers).
Under the post-1949 social contract, the socialist state would mobilize economic surplus to achieve rapid industrialization and economic growth. In the short run, workers and peasants would make a contribution to “socialist economic construction” by generating economic surplus and accepting low levels of material consumption. In return, the socialist state would provide the workers and the peasants with basic social security, health care, and education. The Communist Party cadres would give up their material privileges and share the material hardship with the masses. In the long run, the socialist state would not only provide high material living standards to everyone but also eliminate all forms of inequality, preparing the material and social conditions for the classless communist society.
The socialist social contract began to be undermined when the material privileges of the Communist Party cadres and intellectual “experts” were expanded and institutionalized during the implementation of the Soviet-style First Five-Year-Plan (1953–1957). The gross mismanagement of the bureaucratic elites led to the failure of the “Great Leap Forward” campaign (a campaign with the intention to accelerate industrialization). This was followed by natural disasters and a major economic crisis from 1960 to 1962.
The crisis of the early 1960s led to a major split of the Communist Party leadership. The Maoists, led by Mao Zedong (the great leader of the Chinese Revolution), argued that the crisis could only be resolved through “continuing revolution under the dictatorship of the proletariat.” The post-1949 social contract had to be honored and the Communist Party would have to uphold its stated objective of “transition to communism” by constantly reducing and eventually eliminating various forms of economic and social inequality.
Against the Maoists, Liu Shaoqi (who was then the President of the People’s Republic) and Deng Xiaoping (who was then in charge of the Party Central Committee’s daily affairs) argued that economic growth and industrialization could only be achieved by providing the Communist Party cadres and the intellectual experts with greater managerial power (unchecked by the workers and the peasants). Moreover, the cadres and the experts would have to be rewarded with more material privileges in accordance with their greater managerial power. For the Maoists, the economic development strategy advocated by Liu Shaoqi and Deng Xiaoping would sooner or later lead to “capitalist restoration” in China.
The battle between the Maoists and the Liu-Deng faction led to the massive political upheaval of the Cultural Revolution (1966–1976). Unable to win the support from the majority of the Party and state bureaucrats, Mao Zedong made one last attempt to save the revolution by directly calling upon the workers and the young students to rebel against the bureaucracy. But the workers and the student rebels were politically inexperienced and divided. The Party and state bureaucrats survived the initial panic and organized counter-attacks. In many cities, the army intervened to support the established bureaucrats. Radical workers and student rebels were brutally repressed. By 1969, the radical phase of the Cultural Revolution came to an end (on the bureaucrats’ counter-attacks and the army’s repression of Maoist rebels, see Lao Tian 2008).
Internationally, China found itself in hostility against both the United States and the Soviet Union, a situation that could not be sustained. To break the geopolitical isolation and have access to western technology, it became necessary for China to improve relations with western capitalist countries. In 1971, the People’s Republic of China was admitted into the United Nations as “the only lawful representative of China.” Richard Nixon visited China the following year, paving the way for the eventual normalization of diplomatic relations between the United States and China. In 1973, China decided to import 4.3 billion dollars of industrial equipment from the western countries and Japan. China began to depend on imports of western technology to accelerate economic growth (Zhang, H. 2008).

Li then gives Dengism a more thorough treatment, as we move into the late 70s, 80s and beyond.

Returning to more “objective” factors, why the Chinese working class didn’t have a very good shot at preserving the state-socialist system:

However, socialist China remained a part of the capitalist world system and had to follow the basic laws of motion of the system. Within the capitalist world system, states are compelled to compete against one another in economic and military terms. Those who failed the competition would become vulnerable, risking either internal instability or external intervention.
In the 1950s, Soviet technological assistance helped China to lay down the foundation of industrialization. By the 1970s, it became necessary for China to import western technology in order to sustain economic growth. But to import western technology, China had to increase exports and capture a larger share of the world market. China was not able to compete with the western core capitalist countries in term of technology. Nor was China able to compete with some semi-peripheral countries (such as the Middle East oil exporters) in term of natural resources. China had to compete with many peripheral countries with the only significant “comparative advantage” China had – a large supply of cheap labor force. To take full advantage of this “comparative advantage,” the Chinese ruling class decided to renege on the historically established socialist social contract through privatization and the destruction of the “iron rice bowl” in the state sector.
An alternative path of development, advocated by Mao Zedong in the 1960s, was to “continue the revolution under the dictatorship of the proletariat.” Under the Maoist alternative strategy, China would pursue a greater degree of economic and social equality. In return, the workers and the peasants would accept a longer period of material hardship. Socialist China would refuse to play by the rules of game of the capitalist world system with the anticipation that the global rules of game would be fundamentally transformed by the coming world revolution.
By the 1970s, both the Chinese revolution and the world revolution were in retreat. The Chinese Communist Party officially abandoned the Cultural Revolution almost immediately after Mao’s death. The urban working class was politically confused and disoriented. Although the urban working class had strong economic bargaining power in the 1980s, they did not have political leadership and were unable to advance their own interests as a class. It was a class war the Chinese working class could not win.

Here Li introduces a recurrent idea, extending his use of World Systems Analysis, that the semi-periphery countries are most prone to crisis (both “accumulation” and “political” crises) as a result of the growing proletarianization of the labor force:

In the capitalist world system, the core countries tend to have a relatively large urban middle class (the professional and technical workers) and fully proletarianized working class. All types of wage workers often account for more than 90 percent of the total labor force of a core capitalist country. This reflects the fact that the world surplus value is concentrated in the core countries, allowing the capitalists to pay a large amount of “loyalty rent” to co-opt the internal middle class and working class.
By comparison, the peripheral countries tend to have a large number of agricultural petty commodity producers and semi-proletarian workers. The combined bargaining power of the agricultural producers and the semi-proletarian workers tends to be weak, consistent with the fact that the peripheral countries tend to specialize in low value-added activities and receive a relatively small share of the world surplus value.
Under certain historical conditions, some peripheral countries may be able to move upwards in the hierarchy of the capitalist world system. If a peripheral country is transformed into a semi-peripheral country, a large proportion of the labor force would become proletarianized. The proletarianized working class has the capacity to demand more economic and political rights. If a semi-peripheral country fails to meet the working class demands under conditions consistent with effective capital accumulation, the country is likely to suffer from both an accumulation crisis and a political crisis.

Li returns to China to sketch a brief picture of the current class structure and recent important class transformation:

Over the past two decades, China’s social structure has been fundamentally transformed. The total wage-earning labor force (including rural wage workers, urban wage workers, professional and technical workers, and public sector employees, excluding the unemployed) grew from 39 percent of the total labor force in 1990 to 55 percent of the total labor force in 2012. This growth can be entirely accounted for by the growth of the semi-proletarian rural workers.
The intense exploitation of semi-proletarian rural workers has been the foundation of Chinese capitalist prosperity. But experience from other capitalist countries suggests that within one or two generations, many of the semi-proletarian rural workers will evolve into fully proletarianized urban wage workers. During this process, they will learn to get organized and become a powerful political and social force.
According to China’s “National Rural Workers Monitoring and Survey Report,” there are 125 million “new-generation rural workers” defined as rural workers who were born in 1980 or after. New-generation rural workers account for 47 percent of total rural workers.
Compared to traditional rural workers, new-generation rural workers are better educated, concentrated in big cities and coastal provinces, more likely to search for employment outside of their home areas, mainly employed in manufacturing, and have higher consumption expectations.

On Chinese class struggle in recent years:

In 2010, strike waves swept through China’s automobile, textile, and electronics industries. Millions of workers participated in the strikes. Following the 2010 strikes, local governments began to raise minimum wages. From 2010 to 2014, Shenzhen’s local minimum wage surged from 900 Yuan (about 150 dollars) per month to 1808 Yuan (about 301 dollars) per month; Shanghai’s local minimum wage rose from 960 Yuan (about 160 dollars) per month to 1820 Yuan (about 303 dollars) per month.
From 2011 to 2013, Chinese workers continued to win strike victories. In December 2011, workers of the Japanese-owned Hailiang storage-products company in Shenzhen went on strike for nearly a month and won a pay raise of 30 percent. In October and November 2013, workers of the Taiwanese-owned Xianjin microelectronics company in Shenzhen went on strike for three weeks and won a pay raise of 20 percent (Gong Ping She 2014).
At a time when large parts of the world are suffering under the tyranny of neoliberal austerity, China may be the only large country where the working class is making significant gains in their struggle against capitalist exploitation.
This raises the question whether the economic and political demands of Chinese workers can be accommodated by China’s current capitalist system. If not, can the contradiction between the working class and the capitalist class be contained within a reformed capitalist framework? Or, will the Chinese working class struggle bring about a fundamental social transformation that goes beyond the historical framework of capitalism?

Here an alternate path is laid out (much of it a return in form to the China of the 1950s and 60s), while acknowledging the constraints on China’s choices:

In the historical era of neoliberalism and global counter-revolution, China had to compete effectively in order to consolidate and improve its relative position in the capitalist world system. Even with the industrial foundation built in the Maoist era, China was in no position to compete with the western core capitalist countries on the technology front. China was not able to benefit from any significant monopolistic rent based on high-value natural resources (unlike the Middle East oil exporters, large Latin American economies, or the Russian Federation). The only realistic “comparative advantage” China could rely upon was to combine the Maoist industrial foundation and a large cheap labor force and turn itself into the center of manufacturing exports in the global capitalist economy. China’s pursuit of manufacturing exports coincided with the global capital relocation that took place in the late twentieth century and played a crucial role in changing the global balance of power in favor of the global capitalist classes, helping global capitalism to overcome the system-wide crisis of the 1970s.
The only conceivable alternative would require the Chinese Party and state elites to give up a substantial portion of their material privileges. By sharing material hardships with the working class and continuing to provide workers and peasants with basic social security, the Communist Party leadership might be able to convince the great majority of the population to live within a relatively closed socialist system for a prolonged period of time. If China were to follow this alternative path, it might create a relatively favorable political environment for a new wave of global revolution when neoliberal capitalism enters its own major crisis.
The Cuban experience after 1990 has demonstrated that it is possible for a socialist state surrounded by neoliberal capitalism to maintain the basic socialist framework for several decades, provided that the Communist Party leadership was willing to sacrifice its own material interests. But in the absence of a major socialist revolution in a big country, even Cuba has been under growing pressure to undertake neoliberal-style “economic reform”.

A discussion of the Bo Xilai affair follows - Bo was the CPC party chief in Chongqing, and the figurehead for a more social-democratic, state-development oriented faction of the CPC, before being purged and prosecuted on corruption charges. Li believes this was the final defeat of any organized Left faction in the CPC. Here we should not that this book was published in 2015 - both the intensifying military and economic aggression from the U.S. (already contributing to some visible shifts in Chinese political economy, for example the “Dual Circulation” strategy) as well as recent signals by President Xi (some would call it lip-service) around “Common Prosperity” (a slogan also raised by Bo Xilai) could be brought up as counter-points to Li’s general analysis here, but in any case, CPC internal politics are not a major focus of this book, so we leave that argument for another time.

Li returns again to the thesis of semi-peripheral crisis, this time giving examples of three states which went through this crisis and what this predicts for China:

In the 1980s, non-agricultural employment reached 70–80 percent of the total employment in Brazil, South Korea, and Poland. From 1980 to 2012, China’s non-agricultural employment rose from 31 percent to 66 percent of total employment, with an average growth rate of about 1 percentage point a year. At this rate, China’s non-agricultural employment will approach 75 percent of total employment by 2020 and may exceed 80 percent by 2025. By 2020, China will have a level of proletarianization comparable to that in Brazil, South Korea, and Poland in the 1980s.
Based on the historical experience of Brazil, South Korea, and Poland, when China’s non-agricultural employment reaches the range of 70–80 percent of total employment, the political and economic demands of the Chinese working class and the urban middle class may begin to exceed the capacity of the Chinese regime of capital accumulation to accommodate. This incompatibility will lead to an accumulation crisis and a socio-political crisis.
In the case of Brazil, South Korea, and Poland, their crises happened when global revolution was in retreat and neoliberalism was advancing in every geographic area in the world. The crises were all resolved within the capitalist framework by reestablishing favorable economic and political conditions required for capital accumulation.

Chapter 3: Economic Crisis: Cyclical and Structural

This chapter lays out some more theory on crisis, borrowing heavily from WSA but also traditional Marxism - here we are still in the realm of traditional, “strictly economic” crisis, not having brought in the aspect of ecological crisis (which, as we will see later, Li also sees as a fundamental part of the coming economic crisis).

Briefly, on WSA theory of crisis, and “bifurcation”:

An often-heard argument in favor of capitalism is that capitalism is supposed to be a uniquely flexible and resilient system. From time to time, the capitalist economy would fall into crisis. But capitalism has always found a way to recover from a crisis and rebuild conditions for capital accumulation on increasingly larger scales. In this sense, crisis may be seen as an indispensable mechanism regulating capitalist life processes, eliminating the inefficient and wasteful elements while making the system stronger and healthier.
However, according to Immanuel Wallerstein, the world system theorist, there is nothing unique about capitalist “flexibility” or “resilience.” Every economic, social, or physical system relies upon “cyclical rhythms” to restore “equilibrium.” But in addition to “cyclical rhythms,” there are “secular trends” that over time change the parameters of operation of the system. At some point, the underlying parameters diverge from the equilibrium so much that the equilibrium can no longer be restored. The system starts to undergo wider and more violent fluctuations, forcing the system into “bifurcation”.

Li also summarizes here the typical Marxist view of under- and over-consumption crises.

He then lays out various reasons for why a low-to-no-growth economy is coming:

Firstly, “technology isn’t what it used to be!”:

However, in a recent research paper, Robert Gordon, a prestigious neoclassical economist specializing in economic growth, questioned this neoclassical assumption with some powerful historical evidence. Gordon argues that the rapid economic progress made over the past two and a half centuries may turn out to be “a unique episode in human history.”
Gordon observes that there have been three industrial revolutions since 1750. The first industrial revolution, which invented steam engines and railroads, lasted from 1750 to 1830. The second industrial revolution, which invented electricity and internal combustion engines, lasted from 1870 to 1900 and had many spin-off inventions (such as airplanes, air conditioning, and interstate highways) that drove economic growth for much of the twentieth century. The third industrial revolution, which invented computers, the web, and mobile phones, lasted from 1960 to the present.
Gordon argues that the second industrial revolution was far more important than either the first or the third. The third industrial revolution has nearly run its course but has produced only a short-lived growth revival from 1996 to 2004. Many of the important inventions that took place in the second and third industrial revolution could only happen once in history.
In the future, we will have to face a world with fewer and less important innovations. Improvement in living standards will be further hampered by “six headwinds”: the declining share of labor force in the population, the stagnation of educational attainment, rising inequality, competition from foreign workers (depressing wages of American workers), energy and environmental constraints, and heavily indebted households and government. Economic growth will slow down and eventually approach zero.
Since 1983, the long-term tendency towards accelerating economic growth has been reversed and the US long-term average economic growth rates have trended downwards. Based on the current trend, the US long-term average economic growth rate will decline to 0.3 percent by the second half of the twenty-first century, returning to the growth rates in the eighteenth century. For all practical purposes, this would be the end of modern economic growth.

Why does low-growth matter? Because:

Capitalism is an economic system based on accumulation of capital on increasingly larger scales. If the economic growth rate approaches zero but the capitalists continue to invest in new capital, then the output–capital ratio would collapse. For example, if productive net investment is 4 percent of economic output but economic growth rate is only 0.5 percent, then the output–capital ratio would fall to 0.125. If output– capital ratio collapses, the profit rate would also collapse. If capitalists stop making investments in response to the collapse of the profit rate, the capitalist economy would cease to operate as a viable economic system

Another factor contributing to a low-growth regime is generalized "profit squeeze":

Wallerstein argues that as capitalism develops, there has been a tendency for the wage cost, the material cost, and the taxation cost to rise relative to the value of economic output. As the population moves from rural areas to the cities and as a growing proportion of the labor force becomes proletarianized working class, the workers demand higher living standards and more extensive political and social rights. The expansion of the global capitalist economy has depleted natural resources and degraded the environment, raising the costs of material inputs. Both workers and capitalists demand state interventions that would help to improve their conditions relative to the workers and the capitalists in other states. The state is also under pressure to cover some of the rising wage cost and material cost through government spending.
As the rising wage, material, and taxation costs reach their respective asymptotes, capitalist profits will be squeezed and capital accumulation becomes increasingly unfeasible. The system will enter into a structural crisis that can no longer be resolved within its own institutional framework.

Chapter 4: The Capitalist World System: The Limit to Spatial Fix

How capitalism escaped low-growth before (the “spatial fix”) - and why it was able to (lack of effective self-centered development of the periphery = abundant natural resources and no hard ecological constraints for the core).

More WSA-influenced explanation:

In the sixteenth and the seventeenth century, the periphery mainly consisted of geographic areas with relatively low population density and abundant natural resources. Natural resources (precious metals and raw materials) were extracted from the periphery to supply the core. Since the nineteenth century, the periphery has included the great majority of the world population. The periphery specializes in highly competitive, low value-added economic activities. Economic surplus is extracted from the periphery and transferred to the core through “unequal exchange” (commodities exported by the periphery embodying greater amount of labor are exchanged for commodities imported from the core embodying smaller amount of labor).
The periphery has functioned as the strategic reserve for the capitalist world system. The great majority of the peripheral population lives in rural areas, providing a potentially large cheap labor force that can be drawn into the dynamics of global capital accumulation when it is called upon. Historically, effective capital accumulation (rapid economic growth at exponential rates) was largely limited to the core and the semi-periphery. The absence of effective capital accumulation in the periphery meant that the peripheral regions (with between two-thirds and three-quarters of the world population) had comparatively low levels of resource consumption and environmental impact. As a result, up to the mid-twentieth century, global capitalism had been able to expand without much concern over resources and environmental constraints.
The semi-periphery plays an indispensable role for the operation of the capitalist world system. Politically, the semi-periphery acts as the “middle stratum” that helps to prevent unified resistance by the oppressed great majority against the system’s privileged few. Economically, the semi-periphery is equally important for the stability of the capitalist world system.

Returns to the idea of China becoming semi-periphery and moving toward crisis (and why this matters globally, as the last “spatial fix” disappears):

However, within about a decade, China’s average labor term of trade is likely to approach or exceed one. China’s labor terms of trade are likely to turn favorable against not only all the peripheral economies but also most of the semi-peripheral economies. By then, China will become a semi-peripheral state. Given China’s enormous economic and demographic size, China’s entry into the semi-periphery will have fundamental implications for the operations of the capitalist world system and may suggest that the successive “spatial fixes” as a historical strategy to revive the capitalist world system has reached its limit.

Chapter 5: The Next Economic Crisis

This chapter focuses on the specific factors leading to capitalist crisis within China. It takes the concepts laid out in the previous two chapters, specifically about the tendency towards profit squeeze and the dangers of falling profits and growth rates, and applies them to an analysis of China’s economy.

On profit squeeze due to increased class struggle:

As the Chinese working class begins to get organized, the capitalist class increases its demands on the state, and the state has to pay for the growing environmental cost, both the wage cost and the taxation cost are set to rise in the future. The capital cost may resume rising as China’s output–capital ratio keeps falling (if the ratio of capital stock to economic output rises and the depreciation rate stays constant, depreciation as a share of economic output will rise). Chinese capitalism has entered into the era of profit squeeze.

Why the U.S. can tolerate a lower-profit-rate regime better than China:

During the postwar economic boom (from the mid-1950s to the mid-1960s), the US profit growth rates exceeded 5 percent. By the mid-1970s, American capitalism was in deep crisis and the profit growth collapsed. Under the Reagan administration, US profit growth experienced a strong recovery. Since then, American capitalism has struggled with declining economic growth rates. Under neoliberalism, profit share has increased. But the increase of profit share has not been sufficient to offset the negative effects of declining economic growth rates. The US ten-year average profit growth rate decelerated from 5.5 percent for the period 1974–1984 to only 0.1 percent for the period 1998–2008. For the period 2003–2013, the ten-year average profit growth rate recovered to 2.1 percent.
Despite the slow pace of profit growth, American capitalism has ironically benefited from low ratios of accumulation. Given a certain profit growth rate, a lower ratio of accumulation implies higher marginal profit rate and in the long run, higher average profit rate. In the 1960s and the 1970s, when American capitalism focused on “material expansion,” the US ratio of accumulation averaged about 30 percent. By the 1990s, the US ratio of accumulation declined to about 20 percent. For the period 2004–2013, on average only 13 percent of US capitalist profit was spent on capital accumulation. The decline of the US ratio of accumulation reflects the financialization of American capitalism and the relocation of industrial capital from the United States to the peripheral regions.
Figure 5.7 shows that Chinese capitalism has behaved very differently from American capitalism. While American capitalism has focused on financial accumulation, Chinese capitalism has become the center of global industrial production and depends on heavy investment in industrial equipment and infrastructure to sustain capital accumulation.
From 1991 to 1996, China’s profit growth rates and marginal profit rates were very high. Profit growth rates fluctuated around 20 percent and marginal profit rates fluctuated around 50 percent. In the late 1990s, profit growth decelerated sharply as massive privatization reduced the working class purchasing power and depressed domestic demand. Staring with 2001, when China entered into the World Trade Organization, China’s profit growth accelerated. By 2007, the profit growth rate reached 18 percent and the marginal profit rate reached 37 percent.
However, after 2007, both profit’s growth rate and marginal profit rate fell sharply. In 2012, profit’s growth rate fell to 1 percent and the marginal profit rate fell to 1.5 percent. The sharp decline of profit’s growth rate and marginal profit rate raises serious questions regarding the future of Chinese capitalism.

Li also goes into China’s demographic challenges (tight labor market, aging population) as compounding the growth rate and profit rate problems.

Based on falling profit we can expect crisis:

Based on the historical experience of American capitalism, when the profit rate fell to the range of 10–12 percent, private investment was likely to collapse, sending the economy into a deep recession. Using US historical experience as a guide, the Chinese economy is likely to enter into a major crisis in the 2020s when China’s profit rate falls to 10–12 percent.

Chapter 6: Climate Change, Peak Oil, and the Global Crisis

Finally turning his attention to the other elephant in the room, this chapter examines, in great detail (much of the chapter is simple presentation of statistical tables and comparisons between different countries’ energy mixes), the coming energy and climate crisis. The argument here is two-fold. First, that our energy and other ecological resources cannot keep pace with “healthy” capitalist economic growth in the coming decades. Oil and fossil fuels are rapidly approaching or have already passed their peak of output, and all alternative energy sources are constrained by a variety of other factors, so that no one particular source offers a “silver bullet” replacement for fossil fuels. The second prong of the argument is that on our current path, even if our energy use could keep pace with and not constrain economic growth, the rate of emissions reductions we achieve will be dwarfed by that same economic growth, leading to ecological collapse in some shape or form. So if the world takes steps to avoid the economic crisis of peak oil (for example by exploiting to the maximum available oil deposits, including with more locally destructive methods like fracking), the ecological crisis will be even more catastrophic. And if the world takes more proactive steps to avoid the ecological crisis, then the further limiting of economic growth will only serve to hasten the arrival of the economic crisis (the low-to-zero growth regime that Li sees as terminal for capitalism). But again, these aren’t either-or crises: instead, we will see some mixture of the two over the next decades: both immense suffering, displacement, and destruction of nature from the climate crisis, and similarly agonizing effects from the economic crisis. If we are to survive and make it through this century, we should hope to see more economic crisis than ecological crisis - for while the economic crisis has a way out, in the form of moving beyond capitalism, the ecological crisis presents us with the possibility of severe and irreversible damage to our ability to survive on Earth.

On the impossibility of lofty emission intensity reduction goals:

The above reasoning suggests that it is basically impossible for the global economy to achieve an annual reduction rate of emission intensity of 6 percent over a multi-decade long period. Thus, under conditions of unlimited economic growth, it is not possible for the world to achieve the emissions reduction required to limit global warming to no more than 2°C relative to the pre-industrial era. In fact, even if the world immediately commits to zero economic growth, it would be nearly impossible for the world to achieve an annual emissions reduction rate of 3 percent each year between now and the end of the twenty-first century.

But what about electric cars?

The world’s current car fleet is about 800 million (Oak Ridge National Laboratory 2014). Assuming that the lithium requirement for electric vehicles will be 10 kilograms per battery, it would take 8 million tonnes of lithium to replace the world’s current car fleet with electric vehicles. The world lithium production in 2013 was 35,000 tonnes. Currently, about 30 percent of the world lithium consumption is used for batteries and only a fraction of the lithium consumption for batteries is used for electric vehicles (USGS 2014). If the entire world’s annual lithium production (at the rate of 2013 production) is used to make batteries for electric vehicles, it will take about 230 years just to replace the world’s current car fleet with electric vehicles.

Here on the economic crisis of peak oil:

The section on “Oil and Economic Growth” argues that peak oil may have a devastating impact on global economic growth. In Figure 6.20, it is implicitly assumed that other forms of energy can substitute for oil without much difficulty. This assumption may prove to be too optimistic. Nevertheless, global economic growth rate is projected to fall below 2 percent by 2030, fall below 1 percent by 2040, and approach 0.7 percent by 2050. By comparison, during the period 1913–1950, a period of major crisis of global capitalism that included the Great Depression and two world wars, the average annual growth rate of the global economy was 1.8 percent. After World War II, the world economic growth rate fell below 2 percent on several occasions: in 1975, 1981–1982, 1991–1993, and 2009.
Based on historical experience, a prolonged period during which the global average economic growth rate stays below 2 percent may be considered a period of major crisis of global capitalism. As the world economic growth rate falls below 2 percent, the global capitalist system is likely to suffer from persistent economic and political instabilities. By this definition, the projections shown in Figure 6.20 imply that global capitalism will enter into a new major crisis after about 2030.
To the extent that the coming major crisis can no longer be resolved within the basic institutional framework of capitalism, it will prove to be the structural or the terminal crisis of global capitalism.

Chapter 7: The Unsustainability of Chinese Capitalism

What are the options for dealing with the crisis of Chinese capitalism? There aren’t many good ones.

Just like global capitalism, Chinese capital faces both economic and ecological crisis, with no easy exit:

Theoretically, Chinese capitalism can adapt to lower economic growth rates by lowering the ratio of accumulation. But a lower ratio of accumulation would undermine the capacity of Chinese capitalism to deliver industrial goods to the global capitalist market. With a lower ratio of accumulation, labor productivity will grow less rapidly. If the Chinese workers’ wages continue to grow more rapidly than labor productivity, the competitiveness of Chinese capitalism in the global market will be undermined. In addition, a lower ratio of accumulation implies a smaller share of investment in China’s gross domestic product (GDP). To compensate for the lower investment share, household consumption needs to rise relative to China’s GDP. But a higher household consumption share cannot be achieved without a major redistribution of national income from the capitalists to the workers. Such redistribution will accelerate the decline of the profit rate.
Given these dilemmas, in the short- and the medium-term, Chinese capitalism will struggle to lower the ratio of accumulation. Assuming that the Chinese capitalism can lower the ratio of accumulation to about 50 percent, the Chinese economy needs to grow at least 5 percent a year in order to keep the long-term profit rate above 10 percent (assuming a constant profit share).
All economic activities (including the so-called service sectors) involve some forms of physical and chemical transformations of the physical world. Rapid economic growth cannot happen without massive consumption of material resources and degradation of ecological systems. This raises the question of how long Chinese capitalism can maintain rapid economic growth without irreparably damaging China’s and the global ecological systems.

Low growth is both necessary and inevitable due to aforementioned reasoning (profit squeeze, future collapse in capitalist investment, etc):

To meet the requirements of RCP 4.5 and assuming that China is entitled to 19 percent of the global carbon dioxide emissions budget, China’s economic growth rate will have to fall below 5 percent after 2020. To the extent that the Chinese capitalist economy will probably need to have a more than 5 percent economic growth rate to maintain economic stability, climate stabilization requirement is incompatible with the normal operation of Chinese capitalism.
After 2030, to meet the climate stabilization requirement, China’s economic growth rate will need to fall below 2 percent. After 2035, the Chinese capitalist economy will have to contract in absolute terms to stay on the emissions reduction path required by RCP 4.5. No capitalist economy can operate with negative economic growth rates for a prolonged period of time.
The above analysis makes it clear that neither Chinese capitalism nor global capitalism can be made compatible with the basic requirements of climate stabilization under conditions that will promote the long-term sustainability of human civilization. If the global capitalist system continues to operate under its own laws of motion through the rest of the twenty-first century, there is the real possibility that the material foundation of human civilization will be irremediably damaged.

Chapter 8: The Transition

What is the way out of these interlocking and global crises? This is the question Li tries to answer in this chapter. One notable piece is lacking in his analysis of the ways China’s crisis could be resolved - imperialism! Nowhere does the U.S. factor in the discussion of how Chinese internal crisis would play out, even in the third scenario where total societal collapse leads to a “balkanization” of China. Certainly Li understands economic imperialism, and uses it in his analysis of the world system in other parts of the book, but he overlooks what many people most closely associate with imperialism - war! With how quickly the U.S. has ramped up pressure on China in the past 5 years, and it’s extensive military preparation for confrontation, does the possibility of war not deserve attention? Especially with the “hot” war ongoing in Ukraine, in which the U.S. military and NATO have found new “reason for being” while still shying from direct confrontation, great-power competition, in both the economic and military sphere, is very much back. Without speculating on how the U.S. would respond to significant internal crisis in China, we can assume that they would respond to it. And from what we saw with the dissolution of the USSR, the U.S. would try to shape that crisis in the direction of a total destruction of Chinese international power, a destruction of any semblance of planning or state-owned enterprises, and the general immiseration of the Chinese working population. With that understanding, Li’s three scenarios laid out here take on much different lights, because only in the first scenario is centralized, continuous Chinese state power preserved throughout the crisis.

Li first summarizes his argument again:

Capitalist accumulation has fundamentally transformed China’s social structure. As a growing proportion of China’s labor force becomes proletarianized wage workers, a new generation of the Chinese working class begins to get organized. Squeezed between rising living costs and declining income expectations, many Chinese urban youth have seen their “middle class dream” smashed. A new anti-capitalist alliance that includes the working class and the progressive sections of the urban middle class begins to take shape. As China’s non-agricultural employment rises above 70 percent of the total labor force, it will be increasingly difficult for Chinese capitalism to accommodate the urban population’s rising demands. By the 2020s, China is likely to be confronted by both an accumulation crisis and a political crisis (see Chapter 2).
To maintain economic and political stability, it is necessary for the Chinese capitalist economy to grow rapidly. But if the Chinese economy continues to grow rapidly, China’s rising demand for oil, natural gas, and coal is likely to impose an unbearable burden on world energy markets by the 2020s or the 2030s. China’s ecological systems will continue to deteriorate in the coming decades. Beyond the 2030s, climate stabilization consistent with the long-term sustainability of human civilization may require negative growth of the Chinese economy (see Chapter 7).
The previous chapters of this book have argued that by the 2020s, economic, social, and ecological contradictions are likely to converge in China, leading to a major crisis of the Chinese capitalist system.
China has been at the center of global capital accumulation in the early twenty-first century. As economic, social, and ecological contradictions begin to overwhelm Chinese capitalism, the global capitalist system is entering into a structural crisis that can no longer be resolved within its own institutional framework. The age of transition has arrived.

On the last spatial fix and the contradictions it was unable to resolve for good, and what Li sees as a crucial leadership void in global capitalism (”exactly when the system enters into its structural crisis”!!!):

The “spatial fix” in the late twentieth century helped the capitalist system to win the global class war by partially dismantling the post-1945 global “New Deal.” However, the victory of global neoliberalism was purchased at a very high price, at the expense of the long-term sustainability of the global capitalist system.
The relocation of industrial production to the peripheral areas with a large cheap labor force helped to increase the production of global surplus value and revive the worldwide profit rate. However, the de-industrialization of the core countries and especially the financialization of the United States—the incumbent hegemonic power—led to new economic and social contradictions. Rising inequality undermined the political legitimacy of the core capitalist states. Financial liberalization greatly increased the instability of the global capitalist system. In the short term, financial expansion helped to revive American imperialism. In the long term, the deepening economic and social contradictions have accelerated the decline of the American hegemonic power, depriving the global capitalist system of effective leadership exactly when the system enters into its structural crisis (on the decline of the American hegemonic power, see Arrighi 2007).

Why India and other regions cannot provide new spatial fixes:

In the coming years, China is likely to advance into the semi-periphery (when China’s per capita GDP rises above the world average and China’s gains from unequal exchange begin to exceed the losses). The peripheral share of the world population will decline to about 50 percent. This raises the question whether the remaining labor force in the periphery can generate sufficiently large economic surplus to be transferred to the core. If world wealth is no longer concentrated in the core, could the core capitalist countries still manage to maintain economic and social stability?
In the late twentieth century, China’s participation in the global capitalist division of labor helped to lower the global labor cost and revive the global profit rate. In the future, when Chinese workers demand more economic and social rights, could another large geographical area be mobilized to contain the rising labor cost in China and the rest of world?
For a new geographical area to replace China as the new center of global industrial production, the new area needs to meet several requirements. The new geographical area needs to provide a sufficiently large cheap labor force that is at least comparable to China’s in size. The labor force needs to be equipped with adequate infrastructure and the necessary qualities and skills required for capitalist industrial production. The geographical area needs to be ruled by an effective capitalist state that can provide various political and social conditions required for capitalist accumulation. Finally, capitalist accumulation in this newly developed geographical area will not be constrained by resources depletion and ecological crisis.
Excluding China, the periphery of the capitalist world system now includes mainly Southeast Asia, South Asia, and Sub-Saharan Africa. Many countries in these geographical areas currently suffer from political instability and do not have the adequate physical infrastructure required for capitalist industrialization. India is probably the only country that can potentially supply an industrial labor force that is comparable to China’s in size.
Thus, at best, it will take India another 20 years to supply an industrial labor force that is as large as China’s. However, in terms of physical health and basic literacy, the quality of India’s labor force is likely to fall behind China’s in the foreseeable future. The insufficient quality of labor force will be a serious constraint on India’s future industrialization.
To function as the center of global industrial production, a country needs not only a large cheap labor force with adequate skills and physical health, but also massive investment in capital infrastructure and abundant energy supply. In this respect, Indian capitalism faces insurmountable obstacles.

Li proceeds to talk about Indian energy resources, and other factors that disqualify it as a new spatial fix / save for capitalism.

Returning to China, Li lays out three rough scenarios for the internal outcomes of crisis:

Overall, it is unlikely that the coming major crisis can be resolved within the existing framework of Chinese capitalism. China’s political future may follow one of the following three scenarios.

On this first scenario, he is not very optimistic about its likelihood. Again, one wonders if any of the developments in China since the publication of this book would affect his analysis:

Under the first scenario, pressured by the growing popular protests, the Communist Party leadership may begin to undertake serious economic and social reforms to accommodate the interests of the working class and the urban middle class. The Communist Party leadership may decide to abandon the neoliberal policy of “reform and openness,” implement some form of wealth redistribution, and tax the capitalists to pay for the social and environmental costs. However, with rising wage, taxation, and resources costs, the capitalists will reduce investment, leading to growing unemployment and economic crisis. At this stage, to sustain the progressive economic and social policies, the Communist Party leadership may be persuaded to pursue a more socialist-oriented model of development. To offset the decline of capitalist investment, the Communist Party leadership may decide to revive state-owned enterprises. As public investment gradually replaces private investment, the economic foundation for a new socialist economy may be established. Under such a scenario, China will be able to revive the socialist model of development with comparatively less political turbulence.
However, back to the 1990s, the Communist Party ruling elites were already committed to the transition to capitalism. Since then, the political and economic interests of the Communist Party leadership have converged with the interests of the transnational and domestic capitalist classes. After the Bo Xilai incident, the Communist Party leadership purged from its own ranks the last significant faction that was in opposition to neoliberal capitalism. Given these developments, it is highly unlikely that the Communist Partly ruling elites will give up their power and wealth without a major fight.

In the second scenario, popular revolution without a political direction leads to a liberal (presumably pro-West?) regime - scary thought.

Under the second scenario, the coming crisis of Chinese capitalism will lead to the disintegration of the Communist Party dictatorship. Throughout the country, “mass incidents” will explode, leading to a popular revolution overwhelming the Party state. At the national level, formal liberal democracy may be established. But the capitalist class may retain substantial influence through their control over the army, the police, and the tax revenue. Because there is not a nationally recognized, unified leftist political party, the revolutionary socialist left may initially have difficulty in taking over national political power.
However, China is a big country. There will be many places where the working class has a relative advantage over the capitalist class. In many cities and provinces, the political rule of the capitalist class may be sufficiently weakened so that local political power falls into the hands of the workers and revolutionary socialists. By taking advantage of the weakness of the newly established “liberal democratic” national government, leftist local governments may survive and become consolidated. By undertaking preliminary progressive policies that meet the local population’s immediate needs, such as housing, health care, education, improvement of working conditions, pollution cleaning, and the elimination of local mafias, local leftist governments will begin to gain popular support.
On the other hand, the capitalist economic, social, and ecological crisis will continue to deepen. Unable to solve these crises, the national capitalist government and the various local governments under the control of local capitalists will be further weakened. The working class and the urban middle class will continue to make economic and political demands that the national and local capitalist governments are unable to accommodate. As the legitimacy of capitalist national and local governments declines and the popular support for local leftist governments grows, the nation-wide balance of power will be gradually turned in favor of revolutionary socialist forces, laying down the foundation for nation-wide socialist transformation.

The third, most dire scenario, although probably less likely than number two, sees a breakup a la USSR early 90s. It’s hard to share Li’s relative optimism here (and in scenario two above) on the possibility of socialist forces being able to organize and take power in the aftermath of such a collapse - instead, would the principal effect not be a total crisis of legitimacy and depoliticization of much of the population, similar to what happened in the former socialist states after 1991? Or is the comparison wrong?

Under the third scenario, the coming crisis of Chinese capitalism may lead to a general political and social collapse. Effective central government may not be restored for a prolonged period of time. In the worst case, China may fall into a civil war. Certain areas where ethnic minorities are concentrated, such as Southern Xinjiang and Tibet, may begin to split away from China. Under such a scenario, there will still be certain geographical areas where the conditions are relatively favorable for the working class. In some cities and provinces, workers may be able to take over local political power and the revolutionary socialist left may be able to provide political leadership. Whether the local workers’ governments can survive depends on whether they can defend themselves with an effective armed force (such as workers’ militia), whether they can establish a secured base of economic revenue, and whether they can skillfully take advantage of the internal contradictions of the capitalist class.
If local workers’ governments can survive the initial phase of collapse and gain popular support, their political influence is likely to consolidate and expand. As the political powers under capitalist control fail to resolve the on-going economic, political, and ecological crises, revolutionary socialist forces will have the opportunity to gradually gain the upper hand in the struggle for national political supremacy.

Li’s quick and dirty appraisal of 20th century AES and why it failed:

Twentieth-century socialist states remained a part of the capitalist world system and had to compete against the capitalist states economically and militarily. Political and economic power was concentrated in the hands of privileged bureaucrats and technocrats, who over time evolved into a new exploitative ruling class.
Initially, socialist states were generally successful in achieving both effective capital accumulation and improvement of people’s living standards. By eliminating the traditional ruling classes, socialist states were able to mobilize economic surplus to achieve rapid industrialization. However, by the 1970s and the 1980s, socialist states were squeezed between rising labor and resources costs and their inability to compete with the core capitalist countries on the technology frontier. The Communist Party’s ruling elites took advantage of the economic crisis to dismantle the socialist social contract and complete the capitalist transition. The former socialist economies were restructured to become suppliers of cheap labor force or raw materials in the capitalist world system.

Li ends the book with a short sketch of how he thinks 21st century AES will need to work, in the context of “hard” ecological limits. Compared to the simultaneous-global-revolution-that-immediately-abolishes-commodity-production fantasy presented in many Western Marxist tracts, this actually seems refreshingly hard-headed and realistic, in acknowledging the initial focus on state-directed, ecologically-minded investment, the problem of capital flight, and the initial necessity of "Socialism in One Country". The prospect of “delinking” is also interesting here, but Li only really name-checks it, so I would be happy to see a more detailed explanation of what role he sees it playing in future socialist states.

To achieve zero economic growth or a sufficiently low economic growth rate compatible with ecological sustainability, the socially necessary condition is that society as a whole has control over the surplus product so that society can democratically decide how to use the surplus product and to limit the pace of capital accumulation to a level that is consistent with ecological sustainability. For example, society can collectively decide to use most of the surplus product for public consumption and environmental cleaning and to use only a small portion of the surplus product for capital accumulation, or not to use any surplus product for capital accumulation at all.
As the global capitalist system begins to collapse, the immediate concern for future socialist governments will be how to organize the economy to meet people’s basic needs without worsening the ecological crisis. To meet the immediate demands of the great majority of the population (for food, housing, health care, education, and other basic needs) and to reduce environmental degradation, socialist governments should pursue economic policies that would help to slow down the pace of capital accumulation as soon as possible. This can be achieved by imposing taxes on capitalists, forcing capitalists to pay for the social and environmental costs of capitalist production, and by effectively enforcing labor and environmental regulations.
Socialist economic policies will inevitably lead to lower profit rates, discouraging capitalist investment. Capitalists may respond by attempting to move capital abroad or by undertaking investment strikes (withdrawal of capital from productive investment). The threat of capital flight can be defeated through strict control over financial capital flows across national borders. To fight back against capitalist investment strikes, socialist governments should increase public investment rapidly. In addition to investing in social infrastructure, socialist governments should build and expand productive state-owned enterprises on a massive scale so that socialist governments can count on the productive state-owned enterprises to provide most of their tax revenue. In countries where much of the capitalist wealth is politically illegitimate (for example, in former socialist countries, much of the current capitalist wealth originated from illegitimate privatization), the socialization of the economy can be accelerated through confiscation of illegitimate capitalist wealth.
With the above policies, socialist governments can achieve socialization of the economy within a reasonably short period of time. However, future socialist governments will have to confront the classical challenge of how to build “socialism in one country” in a capitalist world system. Although the future socialist revolutions will take place in an environment in which the global capitalist system has entered into structural crisis, at least initially, socialist economies will still be partially constrained by the laws of motion of the capitalist world system. Socialist economies will remain a part of the global capitalist division of labor and will be under pressure from global market competition, which may force the socialist economies to pursue “competitiveness” thorough exploitation of cheap labor and resources.
To reduce and temporarily remove such pressure from the global capitalist market, future socialist governments may learn from the experience of twentieth-century socialist economies by pursuing the strategy of “delinking.” That is, the socialist economies can try to delink from the global capitalist economy by imposing strong protectionist policies and drastically reducing the size of foreign trade. In countries that heavily depend on imports of fossil fuels (such as China and India), the strategy of “delinking” can be pursued in combination with the de-carbonization of the economy (that is, reducing the total consumption of fossil fuels).
In the short run, the strategy of “delinking” would help socialist governments to establish a state monopoly over domestic markets and greatly reduce the pressure of global market competition. This would provide the maneuvering space for socialist governments to socialize the economy and to implement socially and environmentally progressive policies (which tend to increase labor and resources costs).
The experience of twentieth-century socialism demonstrates that in the long run, if global capitalism manages to survive major crisis (as happened in the twentieth century), socialist economies would have great difficulty in surviving the pressure of global market competition. However, in the twenty-first century, global capitalism most likely will enter into a structural crisis that can no longer be resolved within its own institutional framework. In such a world-historical context, the strategy of “delinking” pursued by individual socialist countries will help to accelerate the breakup of the global capitalist system. For example, if China undergoes a socialist revolution, given China’s central position in the current global capitalist division of labor, the entire global capitalist commodity chain will begin to fall apart. The disintegration of the global capitalist division of labor will further destabilize the rest of the global capitalist system, leading to more socialist revolutions.
By 2050, much of the world will begin to live under one or several economic and social systems that are fundamentally different from the current global capitalist system. Future generations will face the urgent world-historical task of cleaning up the global environment and searching for a new socio-economic path that will lead to long-term sustainability.
As capitalism ceases to be a viable economic and social system, humanity will have to ask if there is any economic and social alternative to socialism, however socialism will come to be defined in the twenty-first century.