This Is the End


Markets, Risk and Human Interaction

February 24, 2012

Foxconn and China's Capitalist Revolution

The promises of reform at Foxconn are the latest of many as China painfully adjusts to the inevitable social realignment that comes with a capitalist economy. What is occurring in China now happened in Europe during the transition from feudal to industrial society. That transition is more germane than it might appear at first blush because over the past two generations China has been emerging not from a Marxist, but from a feudal state. Indeed, if one were to take Marx's view, China could only arrive at communism through capitalism, and only arrive at capitalism through feudalism. For in Marx's view, as Schumpeter writes, “it is essential for the logic of capitalism, and not only a matter of fact, that it grew out of a feudal state of society”. Marx's vision flows from feudalism through capitalism to a post-capitalist society that can only arise once capitalism has run its course, after it has not only provided the necessary social and economic foundation but also has become unsustainable.

European feudal society was governed by what is termed “extra-economic” means, namely by the power of culture to determine and maintain rank, by the social contract between the serfs and the lords – a contract that by its long custom became imbued with the power of law – and, of course, by military might. Economic production was dictated – though obviously in a much simpler economy than today – by the lords, who parceled land to tenants. The serfs put up with their lot because of a small carrot and large stick, a backstop for subsistence and the threat of force.

The uniformity of the feudal classes can be overstated, (though Chinese society can be overstated in a similar way). There was gradation in economic status among the serfs, and enough freedom for some to engage in commercial capitalism and become relatively well off in their station. And there were lords who, though landed and of superior rank, declined economically to the point of life as paupers. There were also times of labor shortages, such as shortly before the ravages of the Black Death in 1348, and of course far more thereafter, when the lords bid for the loyalties of the serfs. And in other times the serfs would threatened mass revolt or burn down structures and fields if the relationship between serf and lord was not respected. (Knights also could vacate oath of allegiance in the case of certain defaults in the social contract).

Early capitalist society spawned by the industrial revolution of the late 18th and early 19th century experienced many of the same social phenomenon as we are now seeing in China. (Note: Although we use the term “capitalist”,  “industrial” may be a better term because capitalism has been around in one form or another since the 12th century). In the early period of the industrial revolution as in China today,  overworked masses toiled mindlessly in hazardous conditions for close to subsistence wages while a politically connected bourgeois seized the reins of the capitalist plant. In England it was largely due to the conscience of those within the political system who recoiled at the human toll that pro-labor reforms and regulations were forced upon the new capitalist class. In the case of China, although there are protests and the simmering of revolt, the internal pressure is far less of a factor than the conscience and economic force of the international community.

If the momentum from Foxconn carries through, it will have effects beyond increases in prices and wages. If it progresses along the lines of the West's transformation, it will also have an effect on social and economic mobility. That change will alter Chinese society from what some have argued is currently a different sort of capitalism from that practiced in the West, but is really much like the loosening of the bounds of feudal society that appeared in pre-industrial Europe. (Which was not such a backwater; there was entrepreneurial commerce, power plants, specialization of labor, large-scale mining and of course a well developed financial sector supported by laws and accounting well before the industrial revolution took off).

Mobility through the ages

There are a lot of metaphors thrown around for economic and social mobility: Schumpeter compared the mobility of economic classes to people shuffling around different quality accommodations in "a hotel or an omnibus, always full, but always of different people". More common is moving up and down the economic ladder, more novelistic, the Horatio Alger stories. Here I will use a topographic metaphor.

Feudal Economy.
The feudal society was a subsistence one for most of the population. Even when the serfs were not at subsistence levels, they were always a poor harvest away. The serfs had little opportunity to improve their prospects. The contrast was great between the serfs and the feudal lords, who lived substantially above subsistence, who could extract extra-economic rents from the serfs, and who were protected by the legal rights and station of being landholders.

In terms of mobility, the serfs inhabited the land in the marshes of bare subsistence while in the distance, above impassible cliffs sat the lords' manors. The stability (or stagnation) of this feudal society was rooted in the fragility of life and fear of famine. In such an environment the strict oversight of the lord could be justified, though no such justification was necessary nor put forward. Still, serfdom was not slavery, and the lords control was limited. The potential for famine also formed the basis of restrictions on free trade and capitalist enterprise for the most basic of commodities. These restrictions were not only justifiable out of concern about the masses welfare, but also out of concern for the revolts that could be precipitated by scarcity, especially if perceived as coming from mismanagement or corruption. Because of this, the growing and marketing of grain was a sociopolitical rather than economic endeavor.

Sales were consummated based not on a notion of the best price, but rather the just price, which was often determined by the Church. As early as the 12th century English law dealt harshly with free market acts, especially for foodstuffs. Engrossing, (cornering the market by buying up large quantities of goods and holding them off the market); forestalling, (buying up goods before they reached the market, i.e. before they reached the market stall); and regrating, (buying up goods in a market only to then resell them in that market at a higher price), were all felonies. The farmer, whether serf or tenant or yeoman, did not have unfettered ownership of his crop. He could not store it, nor could he sell it to a distant market or to a middleman. He sold it to the local market for the just price. And further up the production chain the same held true. The miller and the baker were similarly constrained to sell their product at the just price, and could not enrage in any market activities that might distort that price. 

In terms of China, this should ring a bell for those with memories of the sixties. 

Industrial Economy.
The feudal relationships loosened to allow more economic and social mobility. A financial system developed to support the merchants and international trade, and land that had been locked up by primogeniture was freed to become the collateral for loans or to be sold to finance new enterprises. With the industrial revolution came a degree of production and efficiency in agriculture that lifted most people above subsistence. In fact, having a large population above subsistence was an essential condition for industrialization. No one could man the factories if they were just scraping by on their plot of land. And, conveniently for the labor needs of the factory system, the efficient methods of agriculture came with the policy of enclosures, which brought the land into fewer and fewer hands. It is ironic that one of the conditions for the oppression of labor at the start of the industrial revolution was for them first to be freed from the shackles of feudal subsistence.

But once early industrial society took root through the early part of the industrial revolution, the landscape for the serfs-turned-proletariat was not much different than it was for feudal society. The factory workers still occupied a plain below the cliff, but now above that cliff was the manor of the bourgeoisie rather than of the lords. Then, over time, the industrial revolution gave way to increased economic and social mobility, as well as more variation in income and ability to consume. The class distinctions of serf and lord, and then of worker and capitalist began to blur as the factory system gave rise to the company, and as the steam engine gave way to the less centralized electric motor, allowing smaller units of production. It also created more equality as uniform, mass produced goods were consumed across society. As Mumford has pointed out, there is no difference between the light bulb of the very rich and the very poor; more than any political system, it is the industrial process that is a communist.

The cliff began to erode into a hill which most of the population could ascend or descend. This is the world where there is an expectation of one's children doing better, not just because the economy grows, but because the slope is easily traversed. And it remains the world of today, though the topography is beginning to shift again.

Post-industrial Economy.
The time is coming when we will meet ourselves standing at the door, China's masses entering into the more socially conscious industrial society that we came to with the "second" industrial revolution in the late 19th century. And as that time comes we will then be heading out the back, into a virtual society.

We are seeing a world that is qualitatively different from the past. Many product that we consume in our everyday lives were not in the realm of imagination even a generation ago. We may not know what the virtual, post-industrial society will become anymore than someone living during the first glimmers of the industrial revolution could envision the world of today, it may be a world that is still relegated to science fiction. But thinking back to the difference between the feudal and the industrial, the long time of that transition and the dislocations that lay in store for society, what we have seen in the last twenty years has the same feel.

I have already discussed my view of the implications of this world for income distribution and for economic mobility.  In a nutshell, the more we move into caring about the virtual, the more the hill will turn into a plain, at least for the large subset of the population that is secure in the essential needs of life.