本文中文版发表于《经济研究》2021年第5期，英文版发表于《政治经济学季刊》2022年第1期。作者李帮喜（清华大学社会科学学院经济学研究所长聘副教授）、赵奕菡（清华大学社会科学学院博士研究生）、冯志轩（武汉大学经济管理学院教授）、赵峰（中国人民大学经济学院教授）。

Value Circulation, Economic Structure, and the New Development Paradigm:

A Theoretical Framework of Political Economy and International Comparison

Abstract：This study constructs a theoretical framework for understanding the new development paradigm based on value circulation and the reproduction theory of Marx. According to these theories, the essence of economic circulation is value circulation, the core of which is mutual matching among the structures of technological, distribution, demand, and production. We adopted a three-sector reproduction model with fixed capital to understand different development paradigms under various combinations of the four aforementioned structures. On this basis, we use the 1957-2017 input-output table to construct the three-sector tables and explain the logic of China’s economic structure change and the characteristics of the resulting circulation patterns. We also compared the economic structures and circulation patterns of the United States and Japan with those of China to shed light on China’s choice of future economic circulation patterns and the new development paradigms.

Keywords：value circulation; economic structure; new development paradigm; political economy

1 Introduction

China’s economy has undergone a long period of rapid growth, which has spawned a large strand of studies exploring the reasons for it. Currently, this topic remains one of the focal points of economic studies. Although there are various complicated discussions on the causes of China’s economic growth, we can see three typical characteristics that accompany this growth from the studies and facts: the first is investment-driven (Wei and Hou, 2007; Lo and  Zhang, 2011; Liu, 2011; Research Group on China’s Economic Growth, 2012); the second is an income distribution structure biased toward accumulation (Liu, 2011; Feng, 2012; Qi, 2020); finally, an export-oriented economy (Pei and  Peng, 2006; Liu and  An, 2011; Zhu and  Kotz, 2011). The capital-accumulation-oriented distribution structure increases the overall surplus in the economy, and with the corresponding accumulation system, this part of the economic surplus is transformed into massive capital accumulation, which promotes the expansion of production and technological progress and leads to economic growth. During this time, foreign demand  provided “value compensation” for domestic products when domestic labor share is low and domestic consumption is insufficient. Meanwhile, foreign supply has provided “material compensation” for technologies and means of production. These three characteristics are interrelated, constituting an important structural feature of China’s economy for a long period, and can even be taken as a “mode” of development.

However, with the changing domestic economy and international condition, this development paradigm is faced with new challenges. Long-term investment-driven development leads to increased organic capital composition and a slowdown in capital turnover, reducing profit margins and potential growth rates (Li et al., 2019b; Marquetti et al., 2020). Furthermore, a biased income distribution structure depresses domestic consumption and enhances investment-driven development patterns. Meanwhile, an export-oriented economy faces the challenge of a complex international environment. On the one hand, due to the contradictions in the world system of the capitalistic economy, the rest of the world has been through a sluggish recovery from the 2008 economic crisis, and the world’s prolonged stagnation might have occurred (Krugman, 2014; Summers, 2014; Kotz and  Basu, 2019; Song et al., 2020). Additionally, the global impact of the COVID-19 pandemic poses a severe threat to export-oriented economies (Baker et al., 2020; Brodeur et al., 2020; Ludvigson et al., 2020). On the other hand, to maintain their dominance in the world system during the crisis of the capitalist economy, some central capitalist countries try to sabotage the international specialization system, which threatens China’s international supply chain (Long et al., 2020).

Under these circumstances, China plans to foster a new development paradigm in which domestic economic cycle plays a leading role while international economic cycle remains its extension and supplement. Building a new development paradigm is important to change the former development mode and actively respond to the new development stage and international situation.

Some scholars have conducted studies on the new development paradigm, and these studies mainly include three aspects: the first is how to understand the background, foundation, and strategic significance of building domestic circulation (Huang, 2020; Institute of Economics, CASS, 2020; Wang, 2020; Ma and  Zhao, 2020). The second is to discuss the policy direction of building domestic circulation (Institute of Economics, CASS, 2020; Liu, 2020; Wang, 2020; Cai et al., 2020). Finally, part of the research discusses the “connotation” of the new development paradigm. The “connotation” of some of the studies emphasizes the understanding of the new development paradigm and the policy orientation derived from it. It is closely related to the discussion of policy direction (Huang, 2020; Ma and  Zhao, 2020). The other part of the study focuses on the relationship between the domestic economy and the world economy, aiming to illustrate the relationship between the two circulations and the historical evolution of this relationship (Jiang and  Meng, 2021;  Institute of Economics, CASS, 2020).

However, in our opinion, when we consider the new development paradigm as a “circulation”, the first question is what the content of this kind of circulation is, or “what is in the circulation”, and what the basic logic of the circulation is. Only after clarifying answers to these questions can we understand how domestic and international circulations are combined, the relationship between total supply and total demand in circulation, and what constitutes different circular patterns on this basis.Furthermore, after understanding these problems, we can better explain how China’s economic circulation pattern evolves and the basic characteristics of China’s future economic circulation pattern.

This study aims to answer these questions. To do so, we adopt the value circulation theory of Marx and build a framework to understand the economic circulation process of the national economy and illustrate that the essence of this circulation is capital circulation (or value circulation) with the movement of value as the core. Combining the theory of total social capital reproduction: this study uses a three-sector model to explain that the interaction between technology, distribution, demand, and production structures in the economy enables capital to circulate smoothly. Different combinations of structures constitute various types of developmental patterns.

On this basis, this study uses 18 input-output tables from 1957 to 2017 to construct tables of China’s three major sectors, expounds on the changes in China’s technological, distribution, demand, and production structures, as well as the characteristics of the overall value circulation pattern of the economy in each historical stage, and illustrates the historical changes in China’s development pattern. Meanwhile, we also construct tables of the United States’ three major sectors from 1947 to 2017 and Japan’s tables from 1960 to 2015. The economic development processes of the two countries after World War Ⅱ correspond to different stages of industrialization. This study summarizes the characteristics of the two countries’ economic structures in different phases and compares the structural changes of the two countries with those of China. In the vertical analysis of China’s circulation pattern and the horizontal comparison with the circulation patterns of the United States and Japan, we have discussed how China can break through the existing circulation pattern in the new development phase while avoiding the structural challenges that the United States and Japan have in the corresponding stage. We also explained the basic characteristics and feasible paths that a new circulation pattern needs in the future.

The second part of this paper discusses the theoretical basis, aiming to use the capital circulation theory and total social capital reproduction to understand the economic circulation process and construct a three-sector model to show how different circulation modes are built upon the interrelationship of various economic structures. The third part will first discuss converting the input-output table into a three-sector table corresponding to the three-sector model. Based on this empirical study method, we then discuss the changes in China’s economic structure and circulation patterns at different stages. The fourth section discusses structural changes in the United States and Japan. The fifth part is the conclusion and policy advice of this article. 

2 Theoretical Basis 

2.1The circulation theory of capital

To understand the economy as a circulation process, we should first consider the economic activity as a process that continuously moves and reproduces itself. In this process, the production, distribution, exchange, and consumption form an organic whole.However, this understanding describes the generality of human society and its economic activity. Under the conditions of a market economy, this unity manifests as a circulation process of value (Harvey, 2017). To illustrate this point, we begin with two points: 

The first is the flow and usage of various commodities, currencies, and production factors in the economy. It is the movement of value that unifies the above processes. In other words, the movement of value constitutes the core logic of various factor movements in an economy. Figure 1 presents a brief description of capital circulation. For simplicity, we consider two capitals as the supply and demand sides of each other. The two groups of capital have completed the conversion of forms of capital and value between different forms through the process of production and exchange. However, this conversion process is unobservable. We can only observe the flow of the use-value in the outer circle and currency flow in the inner circle. However, if we do not understand the circulation process of each capital’s value, we can only abstract the economy as a simple relative movement of commodities and currency, and thus, cannot truly understand the logic of the two capital movements (Foley, 1982; Zhao, 2009). As pointed out by Marx, “the law of general commodity circulation is only applicable when a sequence of simple circulation behaviors is formed in the capital circulation process; it is not applicable when the sequence of simple circulation behaviors forms a functionally determined stage of a single industrial capital cycle. ...Individual capital is only a component of the independent execution of functions in the aggregate social capital. How the different components of aggregate social capital compensate for each other in the process of circulation (whether capital or surplus value) cannot be explained by the interlacing of simple morphological changes in commodity circulation. This kind of interlacing is common to the circulation of capital and all other commodities; thus, we need a new research method” (Marx, 1867).

Second, a key point of the circulation is that it illustrates economic activity’s “reproduction” nature. The economy is not a linear flow but a circular flow (Dorfman et al., 1987; Xia and  Zhang, 2013). After the economy has completed one production, distribution, exchange, and consumption process, it needs to reproduce the conditions for the next process. Under the market economy conditions, value movement connects the entire economic reproduction process. In this process, producers who own currency, which is a general expression of value, on the one hand, complete the material compensation for their production by purchasing factors of production and complete the reproduction of their production conditions; on the other hand, they pay currency in this process to make the private labor of other producers recognized by society, realize the value in the commodity, and complete the value compensation for other producers. The fact that value can circulate smoothly among various forms is the basis for the whole economy to complete value compensation and material compensation and realize the reproduction of production conditions (Marx, 1867). 

2.2Capital circulation and economic structure

In the world market, numerous capital circulations constitute the overall circulation of the entire economy. The sum of all capital circulations inside the boarder constitutes the domestic circulation of the economy. The circulation of foreign capital, which is connected with domestic capital circulation but is not included in this summation process, is unified to form the international purchasing process and sales process, which constitutes a country’s international circulation. Domestic and international circulations constitute a relationship similar to that between capital A and B, as shown in Figure 1. However, since the international circulation associated with domestic circulation may not always form a completely closed-loop, it is only represented by the inflow and outflow of money and commodities.

A country’s economy depends on the circulation or reproduction of total social capital. Similar to Marx’s thesis mentioned in the previous part, to understand this kind of reproduction condition, we cannot consider them as the conditions for realizing a general commodity economy. Instead, we need a theory of total social capital reproduction. Marx constructed a classic reproduction model for two sectors to solve this problem. This model expounds on a basic logic for understanding the economic circulation process in an extremely concise way: the macroeconomic circulation process is represented by the material compensation and value compensation of all interconnected capitals. These relationships constitute some key structures in the economy, and their interconnection is the decisive condition for the economy to circulate successfully and smoothly (Marx, 1867). These structures are mainly embodied in four categories: technology, distribution, demand, and production structures. We then explain there relationships among these four factors (Figure 2).

A prominent feature of the cyclical process in a country after aggregation is that, since the purchase and sales processes of different capitals are added together, and some purchase processes and other sales processes are unified in time and space, from the perspective of the whole society, the process of converting money capital into production capital is also the process of converting commodity capital into money capital. The expenditure structure of monetary capital constitutes the basis of the demand structure of the entire economy because, on the one hand, monetary capital expenditure directly creates demand for the means of production; on the other hand, through the purchase of labor, the currency that is used to pay for the variable capital is transferred to workers, creating a demand for consumption materials.

In the long run, if the market is to achieve equilibrium, it is necessary to convert production capital into commodity capital. The production structure should adapt to the demand structure brought about by monetary capital expenditure.

The demand structure involves two basic structures: the technical and distribution structures. First, expenditure on monetary capital depends on the proportion between the means of production and labor in the production process. It also depends on the internal proportions of different means of production. These proportions are determined by the technology used in the production process. Simultaneously, the proportion between the means of production and labor, together with the wage rate paid to labor, determines the proportion of constant capital and variable capital transformed by monetary capital, reflecting the distribution structure’s role. The distribution structure between capital and labor also determines the surplus-value rate, and together with the organic composition of capital, which represents the technological structure, determines the profit rate. The profit level further affects the monetary capital expenditure process by affecting the source and motivation for accumulation. Additionally, the distribution structure is proportional to the primary distribution. In a political economy, this primary distribution is an element of the direct production process (Marx, 1885; Harvey, 1999).

The technological and distribution structures further determine the production structure. These two structures within each sector affect the proportional relationship between the means of production, necessary products, and surplus products in the production process. The difference in the technological and distribution structures among different sectors affects the relative relationship of the output of each category.

We can see the interrelationships among structures of technical, distribution, demand and production above. First, the technological and distribution structures determine the demand structure, which is the basis for converting money capital into production capital. Second, the technological and distribution structures determine the production structure, which is the basis for transforming production capital into commodity capital. Finally, the production structure must be adapted to the demand structure. This is the condition for converting commodity capital into currency capital (Marx, 1867; Li and  Fujimori, 2014a, 2014b). 

2.3 Three-sector model

The previous section analyzed how the four types of structures in the economy determine the economy’s circulation. This section uses a more formal model to demonstrate the relationship between these four types of structures. Marx uses a two-sector social capital reproduction model to explain the relationship between these four types of structures. Although this model is concise and suitable for theoretical elaboration, it is too abstract for application to the analysis of realistic macroscopic problems. Two issues are critical here: the first is that technological structure only reflects the relationship between constant and variable capital. However, when describing the circulation of capital, apart from  the relationship between constant capital and variable capital in political economy, it should also include the relationship between fixed capital and circulating capital. The distinction between fixed capital and circulating capital is so important because, on the one hand, fixed capital embodies the most basic technological nature of modern socialized production. On the other hand, the distinction between fixed capital and circulating capital also reflects the key time structure in the economy. Second, traditional analysis of the two major sectors does not reflect the international circulation of the economy. International circulation is important to the demand structure and provides important technical factors for the production process. Therefore, the above model must be expanded to the basic model required in this study.

Assume that the first sector is the fixed capital sector, the second sector is the circulating constant capital sector, and the third sector is the consumption sector. Let K_i, A_i, V_i denote the value of domestically produced fixed capital stock, circulating constant capital, and variable capital of sector i. M_i denotes the value of total surplus of sector i. α_i is the tangible depreciation rate of fixed capital of sector i, and β_i is the total of tangible depreciation rate and intangible depreciation rate of fixed capital of sector i. u_Ki, u_Ai, u_Viare the ratios of imported product over domestic product of fixed capital, circulating constant capital and variable capital in sector i. g_Ki, g_Ai, g_Vi are the growth rates of fixed capital, circulating constant capital and variable capital in sector i. e_K, e_A, e_V are the ratios of exported value over a country’s total value of fixed capital, circulating constant capital and variable capital in sector i.

The reproduction conditions of the three major sectors, including imports and exports, can be expressed as

The above formula yields many parameters and details. When we add (1)~(3), we obtain

With some mainpulation, we can write it as

are tangible depreciation rate of total fixed capital, total depreciation rate of fixed capital, organic composition of capital, ratio of fixed capital to constant capital, and surplus-value rate, respectively. g_K, g_A, g_V represent the three sectors’ growth rates. Moreover ε_K, ε_A, ε_V are the ratios of net export over domestic usage of the three sectors.

From (5), we can clearly see the relationship among the technological structure ϕ, κ, β－α, distribution structure s, external demand structure ε_K, ε_A, ε_V and the change of production structure g_K, g_A, g_V. Several meaningful conclusions can be drawn from this study. 

First,Thus, ceteris paribus, there is a trade-off among the growth rates of the three sectors. Hold social surplus constant; increasing the growth rate of one sector requires sacrificing the growth rate of other sectors. Simultaneously, the higher the proportion of fixed capital in constant capital, the lower the growth rate of the fixed capital sector, which can be obtained by depressing the growth rate of other sectors. The higher the organic composition of capital, the lower the growth rate of fixed and constant capital obtained by reducing the consumption data sector.

Second,An increase in the surplus-value rate positively affects the growth rates of the three sectors. However, as the organic composition of capital increases, the effect of surplus-value rate on the growth rate of the two constant capital production sectors gradually decreases. An increase in the proportion of fixed capital also weakens the effect of the surplus-value rate on the fixed capital sector’s growth rate.

Third,in which δ=β－α+g_K+ε_K－g_A－ε_A. In other words,an increase in the organic composition of capital reduces the growth rate of all the sectors.

Fourth, The effect of the proportion of fixed capital on each sector depends on the relationship between the proportion of the net output of the fixed capital sector in the total output (domestic demand g_K, net export ε_k, and compensation for intangible depreciation β－α)and the proportion of net output of the circulating constant capital sector in total output (domestic demand g_A, net export ε_A). If the net output of the fixed capital sector accounts for a greater proportion of the total output of this sector, increasing the proportion of fixed capital in constant capital will reduce the growth rate of each sector and vice versa.

Fifth,In other words, when the renewal of fixed capital accelerates and intangible depreciation increases, the growth rate of each sector decreases.

Sixth, international trade. Let G=(g_K,g_A,g_V)′, E=(ε_K,ε_A,ε_V)′, we have

Equation (6) shows a trade-off between domestic use and net exports in each sector. This relationship holds within and among sectors. For the relationship between the net exports of different sectors, we have

Equation (7) shows a trade-off between the net exports of different sectors. This conclusion does not require a balance constraint for international payments. If the balance of international payments is considered, the substitution effect among the net exports of various sectors will be further strengthened.

Additionally, it is important to note that the conclusions about imports and exports obtained in the model are applicable to not only trade in goods, but also trade in services. Capital flows related to trade in goods and services are included in the model. Since there is no constraint on the balance of payments, this model allows for financial and capital account imbalances correlated to current account imbalances. Net imports brought about by foreign capital inflows, and net exports brought about by domestic borrowing are included. 

2.4Circulating pattern in the process of industrialization

From the above conclusions, it can be found that the circulation process of the economy may form different types of development modes, according to the interrelationships between different structures. These combinations may be diverse. The following section describes some of the main possibilities in the history of industrialization in an emerging country.

(1) Initial stage of industrialization. At this time, a country’s capital organic composition and fixed capital proportion are low, and theoretically, the rapid accumulation of various sectors is feasible. However, emerging countries are faced with some major problems. During this period, the industrialization of emerging countries has just begun, and the organic composition will increase rapidly, which requires the proportion of the two sectors that produce constant capital to increase rapidly. However, the organic composition of capital reflects the proportion of materialized labor and active labor, which is also the level of vertical division of the industrial chain in a country or the length of the industrial chain, to a certain extent.The low organic composition of capital is also a sign of imperfect industrial systems in less-developed countries. Therefore, from the perspective of material compensation, one country needs to expand its foreign demand to increase the scale of its constant capital sector (Lu and  Yu, 2012). From the perspective of value compensation, although workers’ labor value during this period is extremely low, due to low labor productivity, the effect of relative surplus-value production is small, and the surplus available in the entire economy is also extremely low.

There are several possible ways to solve this problem, such as directly relying on the input of external capital or using foreign capital to import the means of production. This subordinates domestic capital circulation to international capital circulation and is adopted by many developing countries during their import substitution process. Another way is to achieve industrialization by reducing the domestic use of domestic consumption materials and increasing the export of consumption materials; that is,an export-oriented mode. However, this can only be achieved in conjunction with the increase in the surplus-value rate. Owing to its low-surplus production capacity: this method is challenging and full of contradictions. In industrialization, many emerging countries become dependent on foreign capital or foreign markets and eventually grow into a dependent development mode, which has increased the risk of their economic development. Other countries may be locked into a trap of production structures under low-surplus conditions.

(2) Rapid industrialization stage. During this period, the organic composition of capital and the proportion of fixed capital in the economy increased, which led to increased costs of increasing the growth rates of the first and second sectors. However, the two sectors still need high growth rates, so it is necessary to increase the imbalance in the growth of these three sectors. In this process, as the demand structure further tilts toward the first and second sectors, there are two common ways to meet this demand structure. The first is to reduce the production scale of the third sector and change the distribution structure to further tilt toward capital and accumulation. This is a mode of solving industrialization issues based on domestic circulation. However, with the increase in labor productivity during this period, the entire economy’s ability to produce surplus also increases, and changes in the distribution structure do not necessarily lead to an absolute decline of workers’ living standards. Another way is to rely on the international cycle and have international production to support and facilitate the production process of the first and second sectors. Meanwhile, to maintain the international balance of payments, exports of the third sector should be expanded.

(3) Mature stage of industrialization. The main feature of the entire economy observed at this time is that the demand for the first and second sectors no longer increases rapidly. A relatively straight forward way to deal with this change in demand is to compensate for the decline in demand growth in the two major sectors of the country by increasing exports in the first and second sectors, thereby making the country more dependent on the international market and further subordinate to the international cycle. Under this pattern, since the distribution ratio has not changed and domestic demand is dominated by investment, the economy ends up with a model driven by investment and export. Another way that is more dependent on the domestic cycle is to restore balanced growth, expand the growth rate of the third sector, tilt toward wages in its initial distribution, and realize a mode in which the final demand is dominated by consumption. In these two patterns, the former uses external demand to adapt the demand structure to the production structure without changing the inertia of the production structure, while the latter involves simultaneously changing the production structure and demand structure to achieve the unity of the two. In addition to these two methods, a pattern changes the production structure instead of adjusting the demand structure by changing the distribution structure. Under the conditions that domestic distribution is still highly biased toward profits and domestic investment demand in the first and second sectors is sluggish, the economy can adjust the production structure through capital outflow and deindustrialization.

3 Historical Evolution of 

China’s Circulation Pattern

3.1Construction of the three-sector tables

This section uses the theory of the second part to explain the historical changes in China’s industrialization pattern.

Since there is no ready-to-use statistical data that can be directly applied to the social capital reproduction framework, it is necessary to use the input-output table in values with the most similar structure and data to derive the compatible three-sector tables with the reproduction model. Although Marx’s reproduction diagram has a similar structure to the input-output table, we should note that Marx divides the economy into different sectors based on the position of economic activities in the reproduction process, whereas in the input-output tables, it is based on the nature of products and production processes. The sector’s products in the input-output table can be classified into different sectors according to their use. This difference is the core issue in converting input-output tables to our three-sector table.

The key to solving this problem is to use the relationship among sectors in the rows of the input-output table and determine the proportion of the sector’s product used to form fixed capital, circulating constant capital, and final consumption. According to different usage ratios, we can split the production process of a sector in the direction of each column and then obtain three sets of production processes that correspond to three sectors for each sector. We then sum the three production processes in all sectors to obtain the production processes of the three sectors in the entire economy and the intermediate and direct input parts in the table of the three major sectors. Finally, we can obtain the final use of the three sectors by summing the final use in the input-output table according to the standard of division of the three sectors mentioned above.

The complete list of the three sectors is shown in Table 1, where Ⅰ, Ⅱ and Ⅲ denote three production sectors for fixed capital, circulating constant capital, and means of consumption, respectively. Similar to the input-output table, each row of the three-sector table represents the product’s destination in the sector, including intermediate consumption and final use, and each column represents the intermediate input and final distribution in the production process of the sector. k, a, m, v, and w denote the depreciation of the fixed capital, intermediate input, profit, wage, and total output, respectively. Where S is the total net investment in fixed capital, I is the total circulating constant capital investment, and C includes the means of consumption used for consumption and additional investment in the current period. nx denotes net export.

The part of direct input in the input-output table also includes indirect tax, which is consolidated into the profit column in this study. There are two reasons for doing so: the first is that the input-output tables in the 1980s do not distinguish between tax and profit. Second, in theory, taxation comes from surplus products and surplus-value of society (Deng, 1990). Additionally, ki in Table 1 denotes the depreciation of fixed capital for department i and not stock. Additionally, we use the fixed capital coefficient method proposed by Fujimori (1992) to measure the fixed capital stock in the three sectors. For more details on the construction of tables for the three sectors, please refer to Li et al. (2019a; 2019b).

The three-sector table corresponds to the model for the three major sectors in the second part. Equations (1)~(3) represent the conditions for the reproduction of the total social capital in the three sectors. The left-hand side of the equations shows the relationship between the inputs in each sector, which can be seen in the columns of each table. The right-hand side reflects the relationship between the sector’s product use and can be seen in the rows of the three-sector table. The total input of the three sectors is equal to the total output shows the equivalence of the two sides.

3.2Dynamics of China’s industrialization and circulating pattern

To understand the mechanism behind the change in China’s circulation pattern during its industrialization, we use the aforementioned method, convert four estimated input-output tables of 1957, 1963, 1968, and 1973^①, and the 14 officially compiled input-output tables from 1981 to 2017 into three-sector tables, estimate the stock of fixed capital of the three sectors, and investigate the structures of technology, distribution, production, and demand of the three sectors.

Figure 3 reflects the changes in the organic composition of capital, which reflects the technological structure; the profit-to-wage ratio, which reflects the distribution structure (also the surplus-value rate measured by the final market price); the ratio of the output of each sector to the total economic output, which reflects the production structure; and the proportion of final domestic demand and net exports in the total output of each sector, which reflects the demand structure.

First, regarding organic composition, only the organic composition of capital in the first sector increased before 1973. This is consistent with China’s industrialization process, which starts from the heavy industry. At this time, industrialization only manifests itself as an extension of roundabout production within the first sector, and its effects have not yet spilled over to other sectors. From 1973 to 2010, the organic compositions of the three sectors improved to a certain extent. After 2010, the organic composition showed a downward trend. This is on the one hand because China has gradually entered a later stage of industrialization, and technological progress has begun to change. On the other hand, this is also because the organic composition is affected by changes in income distribution.

Second, the fluctuations in the profit-to-wage ratio in the three sectors are the same, consistent with the trend of economic growth, especially after the 1992 market reform. This is because the profit-to-wage ratio depends on the distribution of added value. On the one hand, wages are predetermined. The profit-to-wage ratio contains the distribution relationship between wages and profits in the production process and has little to do with the technical characteristics of each sector. On the other hand, profit is post-determined, which includes the realization of value, so the profit-to-wage ratio is consistent with the fluctuation of economic growth.

Third, owing to the different growth rates of the output of the three sectors in the process of rapid industrialization, the proportional structure of the output of the three sectors in the national economy has also changed.  Points of change also appeared at 1973 and 2010, respectively. After 1973, the production structure began to show obvious trends; the proportion of the first and second sectors increased, and the proportion of the third sector decreased. After 2010, the production structure began to show an opposite trend, which further confirmed the conclusion that China has entered the later stage of industrialization.

Fourth, in terms of demand structure, before 1973, although the output of the first sector was slowly increasing, the net investment of fixed capital was always negative, which meant that the product of the first sector was in short supply at that time. After 1981, with the opening of the international market, the situation took a turn for the better. From 1981 to 2007, China’s imports in the first sector had always been greater than exports, but after 2007, this was reversed.

Judging from the changes in the structures of technological, distribution, production, and demand mentioned above, China has undergone two obvious circulation pattern transitions in the process of industrialization. The first was in the late 1970s to the early 1980s. Under the reform and opening-up policy, China gradually integrated into the international market, opening a dual domestic and international circulation pattern. The second transition occurred around 2010. As China entered the later industrialization stage, the accumulation rate gradually slowed, and the circulation model was adjusted accordingly.

(1) The accumulation dilemma during early industrialization: from the 1950s to the 1970s

In the early days after the founding of the People’s Republic of China, the country’s industrial base was fragile and fragmented, especially in industries producing means of production, and the entire economy was at a technological level, where the fixed capital ratio and organic composition were low. This corresponds to the initial stage of industrialization discussed in the theoretical section of this study. At this stage, to achieve rapid economic growth, one can only improve production efficiency and extend the industrial chain through industrialization, which brings about the double challenges discussed in the previous section. The first challenge is the low capacity to produce surplus values and the lack of high accumulation and investment required for rapid industrialization. Before 1973, although wage income was always extremely low, the profit-to-wage ratio was not high enough. This is not because the income distribution policy is biased toward wages but because of the low productivity level at that time. After compensating for the depreciated production materials and the consumption materials necessary for people’s living, the economic surplus is extremely low. Faced with the reality of insufficient surplus production capacity in the economy, China hopes to achieve relatively high accumulation in the first and second sectors through national deployment, improve production efficiency, and quickly overcome the dilemma of low output and low accumulation. From our previous analysis, this strategy can be seen because the organic composition grows first in the first sector. From the data point of view, although the growth of the third sector was sacrificed, the output of the first and second sectors before 1981 still did not meet the requirements of the accumulation and expansion of reproduction. This stems from the second dilemma, the challenge of material compensation. Compared with industrialization in the West, which has been going for hundreds of years, China’s industrialization will inevitably meet the issue that the adjustment of the material structure cannot keep up with the adjustment of the value structure, and the production structure does not match the demand structure if the government wants to realize industrialization quickly in a shorter time. An insufficient supply of the first sector will cause a shortage of equipment and technology, and transferring the surplus of the third sector to the first sector will not solve the problem.

(2) The dual-circulation pattern in the accelerated industrialization period: 30 years since reform and opening-up

Implementing the reform and opening-up policy has allowed China to solve the accumulation dilemma in the early stage of industrialization while starting domestic and international circulation. The second part of this study mentions that from the beginning of industrialization to the stage of rapid industrialization, there are two ways to solve the structural challenges in the process of industrialization: the first is to rely on international circulation, and the second is to utilize domestic surplus to adjust the production structure through unbalanced development. Based on the data, what China did is a combination of the two. On the one hand, in the early 1970s, China gradually began to import technology to solve the problem of insufficient means of production, especially fixed capital. Reforming and opening up greatly accelerated this process. By importing fixed capital, the insufficient supply of the first sector in the country was reversed, and the material structure of accumulation was adjusted. In the context of integration into the world market, relying on international circulation to adjust and accumulate the material structure needs to consider the international trade balance of income and expenditure. When the products of the first and second sectors are dependent on imports, the only way to achieve a balance of international payments is to rely on the export of products of the third sector, which fills the trade deficit caused by the import of the first and second sectors. On the other hand, with the increase in the organic composition and production capacity of the three sectors, the economic surplus also increased significantly. During accelerated industrialization, China’s income distribution system was inclined toward profit. Under this income distribution structure, the growth rate of consumer demand is suppressed, whereas investment demand is strong, and accumulation flows further to the first and second sectors to adapt to the domestic demand structure of low consumption and high investment. While the proportions of the first and second sectors rise, the proportion of the third sector falls sharply, and domestic production forms a pattern of preferential growth in the means of production.

Combining the two paths has its important advantages: on the one hand, it can use the international capital circulation to achieve technological structural changes. On the other hand, it can also achieve a balance of income and expenditure, reduce the dependence of domestic circulation on foreign circulation, and reduce the “dependency” of the development pattern.

(3) Circulation pattern adjustment in the late industrialization period: 2010 to present

Around 2010, China entered a late stage of industrialization. The organic composition of capital and the proportion of fixed capital no longer grew rapidly but gradually stabilized and slightly decreased. Due to rising wages and product realization changes, the profit-to-wage ratio also showed a downward trend. In the later stages of industrialization, the motivation for accumulation and investment is insufficient, and the new demand and production structures left over from the rapid industrialization period are misaligned. In the short term, it is difficult to achieve rapid adjustments in the production structure; thus, it is difficult to realize some products. In this case, the only way to achieve sustained growth is to seek external circulation. In 2010, China’s exports exceeded imports in the fixed capital sector. By 2017, China’s net exports from the fixed capital sector exceeded that in the consumption material sector.

Maintaining the balance of domestic circulation through foreign circulation involves considerable risks owing to the inherent instability of foreign circulation. For example, under the influence of the 2008 global economic crisis, the net exports of the three sectors in 2010 decreased by over 50% compared to 2007. The anti-globalization trend and Sino-US trade disputes that have emerged in the past two years have further increased the uncertainty of the international market and the risk of excessive reliance on the external cycle. Additionally, according to our model, maintaining a long-term surplus in international trade will reduce the economy’s overall growth rate because it means exports of domestic surplus. Therefore, in the long run, to achieve stable growth in the new stage, we must rely on domestic circulation and adjust the distribution and production structures to adapt to the technological and demand structures. 

4 Changes in the Circulation Pattern: 

The Experience of 

the United States and Japan

This section explores the possible directions of China’s future circulation patterns. To do so, we examine the evolution of the circulation patterns of two advanced economies, the United States and Japan, hoping to find the generality that may be contained therein and possible experiences and lessons in the evolution of the circulation patterns of these economies. These two economies are similar in size to the Chinese economy and have also undergone a circulation pattern change after the mature period of industrialization. More importantly, the two countries have different paths to complete the transformation of their circulation patterns. This difference can provide lessons of different aspects to China, which is faced with very complicated situations during the period. We need to see the huge differences of social systems between the United States/Japan and China. However, the circulation pattern in this study is based on a general analysis of the reproduction of total social capital. As pointed out by Stalin: “Marx’s reproduction formula is by no means limited to reflecting the characteristics of capitalist production. It also contains many basic principles of reproduction that are valid for all social forms, especially for the socialist social form” (Stalin, 1952). The purpose of this study is to provide a general summary of the economic structure of the process of industrialization. Therefore, these analyses can provide useful insights into China’s future circulation patterns.

Based on data availability, we look at the input-output table for the 1947-2017 calendar year published by the United States Bureau of Economic Analysis and the input-output table from 1960 to 2015 by the Statistics Bureau of the Ministry of Internal Affairs and Communications in Japan. We only use tables of those years that end up with “0” or “5” and convert them into three-sector tables for empirical analysis.

Figure 4 shows the changes in structures of technology, distribution, production and demand in the United States from 1947 to 2017. Overall, the United States circulation pattern underwent a significant change in the early 1980s: the organic composition of the first category of capital began to decline. Net imports increased rapidly, and the reliance of the reproduction process on international circulation began to increase substantially. The proportion of the third category increased, exceeding the decline in the second sector. Additionally, because the early American input-output tables did not distinguish between wages and profit income, the United States’ distribution structure description can only begin in 1997, as shown in Figure 4. However, according to existing studies (Shaikh, 2016), changes in the income distribution structure in the United States also occurred in the 1980s, and the profit-to-wage ratio changed from a decline to an increase. After the 1990s, its profit-to-wage ratio was relatively high compared with that of China and later Japan.

From the above changes, we can see that neoliberalism in the 1980s reshaped American circulation patterns. In the 1970s, the economic recovery of other capitalist countries increased international competition pressure. After the “golden age”, the wages of American workers accounted for a high proportion of the value-added. Consequently, the profit rate fell, slow growth, and the economy went into “Stagflation” (Armstrong et al., 1984). Domestic investment demand was sluggish, and industry outflow increased. In the 1980s, Reagan implemented a neoliberal policy to crack down on the labor force, lower workers’ wages, and increase profitability. However, the domestic investment did not recover. Additionally, at this time, the technological structure “turned from heavy to light”, which led to a further increase in domestic accumulation pressure and the expansion of profits and investment outflows, which further boosted the outflow of industries, especially in the first and second sectors. The changes in organic composition and production structure partially reflect this. The outflow of the industry has reduced manufacturing jobs, further depressing wages and eventually leading to the deindustrialization of the economy. With the gradual shortage of production capacity, the supply of means of production and consumption is increasingly dependent on international circulation under the hegemony of the U.S. dollar.

Figure 5 shows structures change  of technology, distribution, production, and demand of Japan from 1960 to 2015. Like the United States, Japan’s organic composition of capital has experienced a relatively significant decline, especially in the first sector. Meanwhile, Japan’s profit-to-wage ratio showed a similar downward trend. This made the technological and income distribution structures coordinate with each other, and the production structure did not appear to be de-industrialized. Although there was a decline in the proportion of output in the first and second sectors, the absolute output level was still relatively high, and the first sector maintained a high export level.

However, Japan’s circulation pattern has another form of excessive dependence on external circulation. Due to the constraints of Japan’s resources and the influence of Japan’s early post-war “tilted production mode” strategy on the support of heavy and chemical industries and the idea of “building a country by trade”, the second sector of the economy relies on imports, whereas the first sector relies on exports. Owing to its heavy dependence on external circulation, the two oil crises that broke out in the 1970s led to a structural depression in Japan. To overcome the resource constraints of the country, around 1980, the Japanese government put forward the strategy of “building the country by technology” and implemented a series of industrial policies to support the development of technology-intensive industries. After 2000, with the extension of roundabout production, the net imports of the second and third sectors increased, while exports of the first sector decreased under international competition, which increased the risk of trade imbalance.

Summarizing the changes in the circulation patterns of the United States and Japan after the war, the core lies in solving the structural changes in the late industrialization period. The core includes three aspects: how to guide the changes in technological structure and production structure after the rising process of the organic composition of capital brought about by traditional industrialization, how to adjust the distribution structure to change the demand structure, and how to deal with the relationship between internal and external circulation. The problem of the adjustment of the distribution structure in the United States in the adjustment process has increased the pressure of accumulation, and the passive adjustment of the production structure has caused deindustrialization of the economy and reliance on external supply, which has exacerbated the structural contradictions of the economy. Japan’s distribution structure has been adjusted along with its technological structure to avoid the problems of the United States, but it still cannot avoid the risks brought about by its over-reliance on international circulation.

Therefore, there are three points for China to pay attention to when facing structural changes in the later stages of industrialization. The first is to change the distribution structure to build a reasonable demand structure. We should not try to offset the decline in profitability by biasing the distribution toward profit, as in the United States. The second is to guide technological and production structures changes through technology and industrial policies so that the production structure matches the demand structure. The third is to avoid excessive reliance on foreign circulation and instead rely on a circulation pattern dominated by domestic circulation to maintain the stability and security of development. 

5 Conclusions and Policy Advice

This study uses the theories of capital circulation and total social capital reproduction in the political economy to provide a theoretical framework for understanding the domestic and international circulation of the economy. We believe that the circulation of the economy is essentially that of value. The economic movement’s core logic is the continuous value conversion between currency, factors of production and commodities. Only when the value  circulates successfully and smoothly can the economy operate effectively. The condition for realizing value circulation is coordination among the structures of  technology, distribution, demand, and production of the economy. Different combinations of structures exhibit different circulation patterns.

Based on this theoretical basis, this study uses data to analyze the logic of China’s economic structural changes and the resulting changes in its development pattern. Before the 1970s, China’s industrialization process encountered a double dilemma: insufficient surplus production capacity and challenges in material compensation. This constituted a structural issue in the early stages of industrialization in China. On the one hand, after the early 1970s, China joined international circulation to solve the challenges of material compensation and used the  export of consumer’s materials to maintain the balance of international payments. On the other hand, it increased the profit-to-wage ratio under the premise of increased labor productivity, improved the accumulation level, and realized rapid industrialization. This means that after China’s reform and opening-up, the development of light-industry exports and the growth of heavy industries are mutually compatible. The former cannot be understood as a return to comparative advantage, and the latter cannot be understood as a “distortion” of the natural structure of economic development. After 2010, with the gradual advancement of industrialization, the increase in the organic composition of capital slowed down, the demand for the first and second sectors decreased, and the original pattern of relying on investment and the growth of the first and second sectors began to change. However, because the distribution and production structures have not adapted to this phase transformation of the demand structure, China’s first and second sectors have become increasingly reliant on the international market. China is becoming more involved in international circulation.

This study also shows the changes in the circulation patterns of the United States and Japan after the war. Generally, both patterns are constructed to solve the contradictions caused by structural changes in the post-industrialization period. Since the distribution structure of the United States has long been biased toward profits under neoliberalism, the pressure of accumulation has led to capital outflows and industrial structure adjustments, resulting in deindustrialization. In the case of insufficient production capacity of the real domestic economy, internal circulation is maintained through long-term, large-scale imports under the hegemony of the U.S. dollar. The adjustment of Japan’s distribution structure has avoided the above situation, but it still cannot eliminate its dependence on external circulation due to its circulation pattern.

From the analysis in this study, we can see how supply and demand are unified in circulation. These two factors are not independent. If the production structure is regarded as the main result of the supply side, then we find that supply and demand structures are determined by the technological and distribution structures in the production process, and they affect supply and demand in different ways. In this sense, we can better understand why it is necessary to pay attention to supply-side structural reforms and demand-side reforms to ensure sound dynamics among production, distribution, circulation, and consumption and to achieve a dynamic balance of total supply and total demand at a higher level.

Based on the above analysis, this study provides the following policy implications:

First, we must achieve a high-level dynamic balance between supply and demand. Building a new development pattern depends fundamentally on supply-side structural reforms. The technical and distribution structures are the most basic structural features of the economy, as reflected in the production process. Therefore, the problem of the organic unity of the structure can only be solved on the production side. This is also the embodiment of production priority in the political economy theory.

Second, it is necessary to adapt the distribution structure to adjust the technological structure so that the two can construct a reasonable demand structure. With the transformation of China’s industrialization stage and the fact that domestic demand formeans of production no longer increases significantly because of the lack of adjustments to the distribution structure and excessive dependence on foreign demand, China’s three sectors have deepened their dependence on the international cycle for a long time. Therefore, in the new historical period, it is necessary to improve the income distribution structure, increase the labor share, and create demand that matches domestic circulation.

The third is to build a production structure that adapts to new development patterns. Specifically, in the construction of the dominant domestic circulation context, increasing the means of production stage and the organic composition of capital by lowering the proportion of the consumption material sector has become a thing of the past. The overall law in the late industrialization period is to change from unbalanced development of sectors to balanced development. Therefore, we cannot continue past production structures by changing the other structures. Instead, the production structure should be rebalanced.

Finally, learning from the experience and lessons of the United States and Japan: on the one hand, as the international economic environment is becoming increasingly complex, China should focus on preventing excessive dependence on international circulation caused by the mismatch between the domestic demand structure and the production structure. Additionally, in the adjustment process, we should pay attention to the conversion between domestic and international circulation so that the transition from international circulation to domestic circulation can be realized smoothly and avoid a hard landing for the economy. On the other hand, we should also try to avoid the problem that the adjustment of distribution structure might be slow after the accumulation of the sector of the means of production slows down, which would result in the inability to adjust the demand and production structures simultaneously. The accumulated pressure and contradiction between production and demand will lead to deindustrialization if this happens. The experience of the United States of America has shown that this pattern is self-reinforcing, and once it embarks on this path, it causes a series of structural challenges that are challenging to resolve. 

Acknowledgements

This study was supported by the National Social Science Foundation of China (No.17BJL020) and Tsinghua University Initiative Scientific Research Program (No.2019THZWLJ30). This article is a selected paper of the 20th China Young Economists’ Forum. We thank all anonymous reviewers for their valuable comments. We take full responsibility for this study. 

Endnote

①Four input-output tables of 1957-1973 are estimated by scholars based on official statistic materials, including “Compilation of Statistical Data of China’s Industrial Transportation and Energy for 50 Years” and “Fifty Years of China’s Iron and Steel Industry”, and estimations on coefficients of intermediate input and total direct input. Missing intermediate input coefficients are filled by estimations based on firm-level data and data from Ecoinvest Database (with the assumption on some coefficients on production technologies). This estimation is based on the national accounts (SNA) system and considers the official input-output table of the following years. There is a high degree of consistency in methods, data,and calibers, so these four input-output tables are highly comparable with other officially complied input-output tables. For more details on the aforementioned methods and estimations, please refer to Lin and  Chen (2018).

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Cite this article

LI B X, ZHAO Y H, FENG Z X, et al. 2022. Value circulation, economic structure, and the new development paradigm: A theoretical framework of political economy and international comparison[J]. Political Economy Quarterly,  1（1）：169-202.

《政治经济学季刊》（Political Economy Quarterly）是清华大学社会科学学院经济学研究所于2018年创办的学术出版物。2021年11月国家新闻出版署批复创刊（CN10-1809/F），2022年12月出版第1卷第1期。本刊坚持马克思主义政治经济学的基本原理和方法，密切跟踪国际上政治经济学研究的前沿进展，关注中国特色社会主义市场经济建设中的重大理论与现实问题，突出中国道路和中国模式经验总结的研究重点，为构建中国特色社会主义政治经济学体系提供学术交流与整合平台。

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