ECOP2012 Social Foundations of Modern Capitalism

Short Essay 2016

Karl Polanyi's seminal work presents a powerful heterodox case for the institutional embeddedness
of the economy, and the need for thoroughgoing empirical analysis of economic outcomes in place
of the more abstract methodology of orthodox economics. Polanyi distinguishes between two
conceptions of the economy a 'formal' definition involving market exchange between rational selfinterested individuals under conditions of scarcity, and a 'substantive' conception instead seeing the
economy as an 'instituted process' arising out of historically and geographically contingent social
and cultural forces. He argues that the formal understanding of economics is only applicable in
market societies, and produces misleading results in the case of places and historical periods
characterised by other forms of economic organisation.
This essay will explore the extent to which Polanyi's argument for the institutionally embedded
nature of the economy is useful in analysing the contemporary economic slowdown in China, a
socialist planned economy which has undergone market reform in recent decades. The importance
of market processes will be investigated, and the activity of market actors placed alongside the role
of the state. I will argue for a broader view of the Chinese political economy than that offered by
mainstream economists working from within the neoclassical tradition, which unlike them considers
long-term political and institutional change in China in developing explanations for economic
outcomes. I will also consider the relationship between political economic institutions and social
conflict in contemporary China.
A recent Guardian editorial (The Guardian, 2016) discusses potential issues for the global economy
which may arise from the reduced rate of economic growth in China, given the country's role as an
engine of global demand. The article takes the position that Deng Xiaoping's market reforms from
the later 1970s have increased the openness of the Chinese economy to the world, and are
responsible for its enormous growth since then. These arguments mirror the stance of orthodox
economic commentators on Chinese economic performance, for whom openness to trade and
market activity are synonymous with economic performance and who regard further market
integration as essential for the future economic prosperity of China. For example, Popescu & Nica
(2014) argue that since Chinese economic growth in recent decades has been substantially driven by
export-oriented private investment enabled by partial trade liberalisation and the relaxation of
foreign capital controls, the Chinese state should continue to liberalise the economy in response to

the contemporary slowdown. They attribute China's relatively poor growth performance since the
GFC to the persistence of collectivist economic arrangements, and argue for further market reform
in response. These policy prescriptions have their conceptual roots in the neoclassical assumption
that progress towards marketisation is inevitable and natural (Polanyi, 1957).
Institutionalist perspectives offer a different account of the recent economic history of China,
instead highlighting the continuing central importance of the Chinese state. Although reform in
recent decades has increased the role and size of the private sector in China, as well as opening the
country to international flows of capital, the state retains a crucial commanding role The particular
institutional character of the Chinese state, and the spatiality of the state-capital nexus, are
highlighted by Lin (2000) as crucial. He argues that there is a tension in China between central state
control and the autonomy of local state institutions. Although the central state has ultimate control
over the political system, there is a high degree of financial autonomy at lower levels. Thus
although since the Deng reforms the share of capital formation attributed to the central state has
declined, this has not been primarily in favour of the private sector; instead, local and regional
governments have increased their share. While private and foreign capital have become highly
significant in the export-oriented regions on the coast, especially the export processing Special
Economic Zones, state capital remains more important for the interior of China. Lin (2000) thus
echoes other institutional political economists of development such as Chang (2007) in elucidating
the crucial role of the state in mediating interactions between domestic and international markets.
Oi (1999) theorises the Chinese political economy as a form of local state corporatism, where the
state functions to provide the conditions for capital accumulation but with the state still the
dominant economic actor.
In addition to the relationship between the state and capital, Friedman & Kuruvilla (2015) also
focus on how these two sets of institutions relate to labor in China. They argue that the
decentralisation and diversification of the economy under market reform causes conflict with the
highly centralised system of labour relations, under which the Communist Party-affiliated All-China
Federation of Trade Unions (ACFTU) is the only legally permitted representative of workers. While
labour militancy has been increasing alongside economic liberalisation as workers are subjected to
greater volatility in employment and conditions given the unpredictability of international markets,
there is limited potential for workers' demands to be incorporated into the political process. State
and ACFTU responses have centred on ensuring political and economic stability, and although some
efforts have been made to address concerns about working conditions, labour unrest has remained
extremely significant. Friedman & Kuruvilla (2015) also place labor unrest in historical context,

arguing that disputes between workers on one hand and capital and the state on the other are
increasingly tense because of an under-supply of labour caused by previous birth control policies.
The exclusion of 270 million migrant workers, who form the majority of the industrial working
class, from social benefits due to the 'hukuo' system also increases their dependence on the market
on one hand and their predisposition to agitate for better conditions on the other (Friedman, 2015).
Further structural change in the Chinese economy resulting from the planned shift from exportdriven growth to domestic consumption-driven growth thus has the potential to further decrease
social stability (Popescu & Nica).
Polanyi's conception of the economy as institutionally embedded is thus highly pertinent to an
analysis of the changing political economy of China. Although the country has been subject to
marketisation, the expansion of the market has not been an inevitable process but has instead been
instigated and mediated by the institutions of the state. State institutions at disparate spatial scales
continue to both support the process of private capital accumulation, and uphold the functioning of
a socialist planned economy. Labour unrest is underpinned by the antagonism of labor and capital,
but also occurs in specific conditions as a result of its social and cultural context, and is also
mediated by the institutions of the state in historically contingent ways. This focus on institutional
embeddedness is better able to articulate the complexities of the contemporary political economy of
China than mainstream, market-focussed approaches.

References
Chang, HJ (2007). Bad Samaritans: Rich Nations, Poor Policies & the Threat to the Developing
World, Random House Business Books, London, pp21-30.
Friedman, E (2015) 'Marketising China.' Jacobin online, 9/9/15. Available at:
https://www.jacobinmag.com/2015/09/china-crash-yuan-devaluation-adidas-foxconn-strike/
(Accessed 27/3/16)
Friedman, E., & Kuruvilla, S. (2015). 'Experimentation and decentralization in Chinas labor
relations'. Human Relations,68(2), pp.181-195.

The Guardian (2016). The Guardian view on the global economy: China sends a shiver
through Davos Editorial, Guardian online 19/1/16. Available at:
http://www.theguardian.com/commentisfree/2016/jan/19/the-guardian-view-on-the-globaleconomy-china-sends-a-shiver-through-davos (Accessed 27/3/16)
Lin, GCS (2000). 'State, capital, and space in china in an age of volatile globalization'. Environment
and Planning A, 32(3), pp.455-471
Oi, JC (1999). Rural China Takes Off: Institutional Foundations of Economic Reform. Berkeley:
University of California Press
Polanyi, K (1957). 'The Economy as Instituted Process', in Polanyi, K, Aresnberg, CM & Pearson,
HW (eds) Trade and Market in the Early Empires: Economies in History and Theory, The
Free Press, New York.
Popescu, GH & Nica, E (2014). 'The Roots of Chinas Economic Slowdown.' Knowledge Horizons
Economics, vol. 6 (1), pp.14-17