Chapter 4: Consumption and economic law – Consumption and Management

4

Consumption and economic law

This chapter aims to study the rule that consumption leads to the circular spiraling development of the economy on a macro level from the angle of consumption itself, including the role played by consumption in the development process of human beings and its inherent overall relation with economic activities. In order to further understand economic law, the way economic law emerges during the developing process of human society should be made clear. That means to clarify the conditions of emergence and the developing process of economic law, its power and relations with the subjective will of human beings must be revealed. It can be generalized as follows:

1. Economic laws concerning natural consumption and free market control are created through three important types of consumption. In other words, the law of natural economy is created through living consumption, social consumption, and production consumption (which together are called consumption, in short). It is created during the spiral development process of the economy, which is driven by increasingly high materialistic, spiritual, and cultural consumption needs of human beings.

2. In human society, it is consumption that creates the economic foundation of private ownership, creates the production combining productivity of a consumption society and production relations, and creates a nation and the superstructure. The country and superstructure represent and act for economic foundation, productivity, and production relations, as well as the interests of citizens. The economic foundation determines the objectives of production which generate basic economic law. It has influences on natural (free) market finance and economic law. Free-market economic law, generated from the exchange process of commodities, has both positive and negative effects.

3. Interventions to mitigate the negative effects of free market control finance and economics from the state superstructure during the process of commodity production, exchange, and consumption of capital are called state dominant macro-control economic laws, which create the market economy rules of macro control. Economic law is objective and independent of man’s will. When people’s subjective will conforms to objective economic law, the economy develops rapidly; when people’s subjective will violates objective economic law, people will be punished, and the economy will experience slow development, stagnation or regression or even economic crises (serious proportional imbalance). When people can understand and master economic law, adapt to it, intervene in it, and control it, there will be sustainable development of the economy. In this way, acting upon the economic law will show people’s subjective initiative.

It can be seen that with people’s understanding, grasping and application of the natural economic law, the law of free market control and the economic law of macro control will play the role of promoting or influencing economic development.

Section 1 Law of three important consumptions leading to the circular spiral development of economy

The law of consumption and the circular spiral development of economy

Consumption pulls the development of scientific research and production. New desire and consumption demand continuously come into being during the whole course of the practice of living consumption, scientific research, and production consumption, and constantly lead scientific research and production to much newer and higher consumption stages. Accordingly, through scientific research, and production, human beings again produce new commodities and markets for consumption and reach new consumption levels. New desires of consumption and demand are the motive for consumption. A corresponding consumption power is required to realize consumption. Consumption is the result, and once the desired result is obtained through consumption, new consumption needs will emerge.

Consumption creates new demand desire, scientific research and production, new consumption markets and the special commodity – currency. Consumption promotes the constant advancement and development of productivity; and it creates the economic base and its superstructures, the whole of social wealth, and the development of culture and civilization of society. While consumption develops itself, it also creates its own rule of economic development – the rule that consumption leads to the circular, spiral development of the economy – ‘consumption – market – demand (desire, knowledge, and inspiration of ever-increasing consumption demand) – scientific research – production – higher level consumption.

Endless development is realized based on the natural law of circular, spiral development, which incurs various laws of economic development as well as the general law and adjustment law related to this development. All these laws ensure the circular, spiral development of the economy and provoke the economy to develop from a low level to a higher level.

Generation of economic law

A more thorough understanding can be gained for the operation of the law of consumption in creating the spiral development of finance and economy by combining the historic process. In his The Origin of the Family, Private Property and the State (1972), Engels discussed the generation and development of family, private ownership and the state, and the relations between the state and private ownership and so on. From that, we can see how human beings live, produce, distribute, and exchange, or in other words, possess and acquire social wealth. From the development of this process, we shall study the generation and development of economic law and how it acts upon the economy.

With the appearance of surplus products, private ownership emerged. Meanwhile, mutual exchange emerged to meet people’s diverse demands. Along with the development of the economy, especially the three divisions of labor in social production, human beings were divided into different classes. In the primary stage, there was only barter exchange. With socialization of production, barter could not meet the demand of social production and different classes. Then currency, a special commodity, was invented, which dominated all other commodities, played an extremely energetic role, and brought everything in society under its control. Since the producers were not capable of great numbers of exchanges, people who were specialized in commodity dealing – merchants – appeared.

Commodities showed great vitality through currency, which promoted widespread and rapid exchange of commodities as well as the expansion of exchange from home to foreign countries.

Originally, the exchange of commodities was an economic activity aimed at meeting the needs of living consumption, production consumption, and social consumption. However, the purpose of merchants’ economic activity is to gain profits. Therefore, they spare no efforts to study types of commodities needed at different times and at different festivals, by the upper and lower classes in each region, departments, and groups, so as to invest maximum capital and energy to seek profits. Merchants keenly look for sales markets from every corner. As a result, and always control production groups.

When certain commodities exceed people’s living, productive, or social demands, or in other words, when supply exceeds demand, commodities will become overstocked, prices will fall, production will halt or fall back, and economic crises will break out. When certain commodities cannot meet people’s needs of living consumption, production consumption or social consumption, supply falls short of demand. Therefore, it is a natural law of economic development in human society that living consumption, production consumption and social consumption drive the development of the economy.

When there were surplus products in clans, prairies, and tribes in a primitive society, private ownership and then classes appeared. With the development of production, human beings have been developing from lower stages to higher stages: the slave trade replaced primitive society; feudal society replaced the slave trade; capitalist society replaced feudal society; socialist society replaced capitalist society. However, the development of the social system is very unbalanced. The superstructure of government can realize great forward development, but not its economic foundation. A superstructure government can enter into a new socialist system within a short period of time, but the economic foundation of capital is insurmountable, and it must undergo a development process; therefore, any new social system must vigorously promote economic development or it will be confronted with crisis.

An economy with capitalistic private ownership as its economic foundation should develop according to the interests and needs of capitalists. Working exclusively for profits is the purpose of the capitalist. They have no social responsibilities. All economic plans of capitalists are aimed at seeking profits. There are positive effects, however, for profits can transform into productive capital and promote social and economic development.

Because capitalists compete for profits, the capital transfers without clear purpose among the departments, which results in anarchy of social production. In an anarchical market economy, when a certain commodity falls short and its price rises, capitalists will quickly invest in the department producing this kind of commodity. Then the commodity originally in short supply quickly becomes a commodity in excessive supply. Free market financing and economic law can regulate the supply relationship, and this is a great contribution; meanwhile, it can also result in financial and economic crisis, which is the negative effect of (free) financial and economic law.

The process in which three important consumptions push the spiral development of the economy creates and generates the free control law on the market of commodity exchange. The economic foundation determines productive objectives and generates basic economic law. The state’s intervention in the free control law on the market of commodity exchange generates the market economy rules of macro control; the intervention of a socialist state-owned economic foundation on the market of commodity exchange generates socialist market economy rules of macro control. The basic economic law is determined by the economic foundation, the level of productivity in a certain historical period and the nature of living consumption needs. The basic economic law is subject to the needs of the economic foundation and superstructure and also acts upon economic law.

If the superstructure is suitable for the economic foundation, the production relations will be suitable for the productivity. The development of three important consumptions acts upon development of the natural economic law.

Circular spiral development law of consumption and market

Consumption and the market follow the circular, spiral development law of consumption and market – demand (desire and knowledge inspire understanding of a new commodity) – research – production – consumption and market.

The first cycle of the circular law

The first cycle of the circular law starts from consumption and the operative drive toward scientific research, production consumption, and the consumption of market consumers:

1. The objects of science and technology research and experimentation are consumption and market. Before setting up a project, scientific research should in the first place survey the supply and demand information of the three important consumptions and their respective three levels on the market.

2. On the basis of the capacity of the unit, one kind of research project that is proportional to the capacity of the unit should be selected; the product should integrate new and higher technology. After the product is successfully developed, an analysis for its social and enterprise benefits should be conducted and then it should be decided whether to establish the project.

Scientific research

After mastering the large quantity of information on the market consumption, the unit should make objective comparisons and selection according to its labor, material, and financial resources, make decisions to set up projects, organize scientific research staff to jointly solve the key problems, strive to archive new results with the fastest possible speed within the shortest possible time, and carry out pilot tests in time to make good preparation for all the technological experiments for large-scale production. What should be noted from this is that the scientific research institutions of the production units or the professional scientific research units must set up market consumption information departments which are responsible for doing the preparation work for scientific research. Reasonable scientific research projects derive from precise and valuable information. Otherwise, significant waste or even crimes may occur.

Production

These are the principles of production:

1. The capital for production should not be invested unless the new scientific achievements have been demonstrated and the supply of the products indeed has been shown to fall short of demand. The capital for the reform of new technology should not be invested unless the commodity has been demonstrated to meet the market consumption need. Blind investment will cause loss and waste to the enterprise or even to the country, and could be regarded as a sort of crime.

2. Produced commodities should be new-tech or high- and new-tech products – the products with competitive power on the market.

3. Produced commodities should have a certain volume of social consumption demand and strive for the maximum market shares.

4. The produced commodity quality should be in a leading position among the same category of commodities in quality and satisfy consumers in respect of such standards as technological content, modeling, and taste.

The produced commodity quality should be in a leading position among the same category of commodities in quality and meet consumers’ standards for technological content, modeling, and taste.

Now the enterprise should promptly organize labor, material and financial resources to ensure that the new products are promoted in the market. Then the enterprise should accumulate the experience of serving consumers to expand market shares and obtain consumer preferences to the largest extent, striving for big social and enterprise benefits.

The first cycle ends; the second and third cycles circulate forward endlessly

These are the principles of the cycles:

1. If the unit does not work hard to surpass itself, others will surpass it, even if the unit has leading science and technology results or inventions. Therefore, the unit should dare to deny the laggard things of it and confront new things so as to make constant creation and development.

2. In the process of collecting information about the consumption situations of consumers, an enterprise should constantly find out new problems, movements and results, and promptly organize the collecting of information, striving for better commodities.

3. Scientific research should closely follow in the steps of consumers on the market. The development of scientific research should constantly supply new and higher scientific achievements or new-tech achievements for production. Scientific research is the motive for the development and production of the enterprise.

The rule circulates around the consumption market

The cycle starts from the information of the consumption market, and returns to the consumption market. This return is not the end point; rather, it is a circular, spiral development which promotes economic development and the progress of social material civilizations and mental civilizations.

Section 2 Market financial and economic law

Financial monetary rules govern the whole process of capital commodity production, exchange, and consumer consumption; it is essential to study the financial monetary law and general and special economic laws.

Relations between consumption and market

Consumption and demand are contradictory and unified. They are contradictory because the prices of commodities, which consumers buy directly from producers, are generally lower than those they buy from the market. Sometimes this price gap may be large. The use value of this commodity does not increase with the value increase in the circulating process. In contrast, its use value may decease because of the improper storage and damage during circulating process. Therefore, consumption and demand are contradictory.

However, consumption and demand are also unified. First, the exchange of commodities is realized on the market. The supply–demand relation of commodities is displayed through the market. Second, commodities sometimes can be consumed without realizing the exchange values. For commodities with identical use value, this is particularly prominent in the societies and countries whose capital and commodity production is underdeveloped. Besides, the consumption market plays a service role for consumers, which is realized by offering services to consumers. A perfect consumption market guarantees the realization of the rights and interests of consumers, and only a developed consumption market can satisfy the selection demands of consumers. A consumption market can play a certain rule of guidance; it plays an active role in increasing the consumption benefits and validity of consumers. This is the benefit function of the market. With the production and development of commodities, the industry division of labor will be finer, and commodities will be merchandised gradually or completely.

These are the relations between consumption and market:

1. The case that commodities do not enter the field of circulation, when they are consumed by individuals instead of being circulated commodities in the marketplace, happens under self-producing and self-selling conditions. The commodity realization of the capital is realized in the exchange process, so self-producing and self-selling goods do not display themselves as commodities. However, its actual use value does not disappear because it does not participate in commodity exchange. The same consumption value still exists.

2. The exchange of commodities on the market can be realized through various channels such as big-market, small-market or direct exchange between manufacturers and consumers. Under the condition that they have the same use value, their prices may have great difference. Therefore, the simpler the circulations of commodities on the market, the lower their prices are, and the better it is for consumers.

3. Manufacturers can gain big social benefits and enterprise benefits in certain ways. In order to let more commodities meet consumers directly, to decrease the increment price in the exchange process, to increase the production of commodities and to gain big social benefits and enterprise benefits, the manufacturers confront the monopoly of the sellers of commodities, strive for the internalization of production and selling, sell commodities directly to consumers, or to the largest extent, reduce the links of the circulation process and greatly increase the production and market share of their commodities.

4. The commodity exchange between manufacturers. In order to reduce costs, the final product manufacturer realizes the contract commodity exchange with the manufacturer of raw material commodities needed in his production process. This plays a great role in speeding up the capital circulation, reducing the cost of his commodity, and increasing the competitive power of his commodity on the market exchange.

5. The fluctuation of the commodity price. The price of the commodity purchased on the market by the direct consumers is under direct influence of the supply–demand relation. When supply exceeds demand, the price rises; when supply falls short of demand, the price goes down. The birth of the information market and information value will gradually reduce or relieve the blind market monopoly, competition crisis, and repetitive production, which is beneficial for the macro regulation of the country. Meanwhile, the information market and information value greatly assists commodity socialization.

Relations between consumption demand and consumption credit

On the market economy, consumption demand is the only everlasting driving force of economic development. The government emphasizes investment need as well, but ultimately, investment demand is determined by consumption, and mainly determined by social consumption.

The social and economic significance of consumption credit and consumption demand

The needs of consumption are consumers’ current payment capacity for market commodities and the kinds of commodity services in a fixed period. Consumption demand determines consumption credit; the content, nature, and method of consumption need to determine the kind, purpose, and scale of consumption credit. Consumption credit can ensure the realization of the demand for consumption, promote the demand for consumption to realize consumption development, and then consumers’ consumption of developed consumption demand will resort to consumption credit once again, so the two promote each other. The direct purpose of developing consumption credit in commercial banks is to stimulate consumption, expand domestic demand, and promote economic growth.

Law of consumption credit promoting demand for consumption

These are the laws of consumption credit for promoting demand for consumption:

1. When supply generally exceeds demand on the market, and the development of the entire economy is affected, measures such as banks’ increasing low-interest loans to consumers, lowering deposit rates and compressing deposit amounts can be taken so as to raise purchasing power on the market, boost purchasing power, and promote economic development, using the growth in consumption as a driver for production of commodities.

2. When supply falls short of demand, the banks (usually in the case of inflation) can take measures such as raising the deposit ratio, enlarging deposit amounts, reducing current flows on the market, and issuing more loans to commodity production projects, so as to increase the whole production of commodities, promote consumption, and spur the development of the national economy.

3. When supply exceeds demand in a certain industry on the market, measures such as low interest credit or low interest loans can be offered to direct life consumers to promote consumption and commodity production.

4. When supply falls short of demand in a certain industry, measures can be taken such as paying in advance or making down payments, or increasing credit quantity or the number of low-interest loans to this industry, to increase investment in reproduction, and promote consumption and rapid development of economic development.

5. When there is too much social liquidity for consumption, banks can increase the number of enterprises with promising economic benefits to list on the stock market, lead consumption capital to production, increase investment in reproduction, use the form of bank loans and bank bonds, and issue enterprise stocks to society by banks, to adjust consumption and promote the whole national economy. These are the usual types of consumption credit.

Changing the traditional lagged consumption pattern and promoting implementation of credit consumption

For many years, influenced by the traditional culture, Chinese residents’ consumption has mostly been based on self-accumulation. China must rapidly develop consumption credit, and transform the lagged consumption based on people’s self-accumulation into proper advance consumption supported by credit, thus to enable consumption to play an active role in driving economic development.

From the perspective of the bank, credit can advance the operating effectiveness of commercial banks. Presently, competition between banks is fierce. Traditional deposits and loans bring less benefit, which forces banks to find new benefit points. Enlarging consumption credit is one of the most important measures for banks. From the perspective of consumers, credit can promote people’s material and cultural quality of life. Finance is the centre of the modern economy; developing consumption credit can meet the habitants’ consumption demand. Raising people’s quality of life promotes the realization of the purpose of socialist production.

Policies to establish and promote a robust consumption credit market

Restricted by consumption patterns and people’s inadequate purchasing power, the consumption credit market develops slowly. The following measures should be taken:

1. Change the traditional consumption pattern. From the perspective of changing people’s concept of consumption, we must raise people’s consciousness of using various financial offerings of banks, of credit consumption, and all kinds of consumption. We will change people’s traditional consumption pattern of accumulation through various propaganda and education methods, and encourage them to enjoy services provided by the bank.

2. Put forth powerful policies to stimulate consumption. From the perspective of policy, the policies for stimulating consumption should be further strengthened. Positive financial and currency policies should be taken to increase domestic demand, stimulate consumption, and strengthen the policies for stimulating consumption. On the one hand, we must adjust policies on income distribution and increase the urban and rural income level. On the other hand, we must adjust or cancel all policies that restrict consumption.

3. Cultivate new consumption points. From the perspective of benefit, new growth points of economy and consumption should be positively cultivated. We must positively develop service consumption, such as telecommunication, tourism, entertainment, health, and sport; we must rapidly and healthily develop real estate, spurring a large number of people into the commercial house market. Meanwhile we must start the secondary market and have new houses, old houses, and houses of different price levels all enter the consumption domain. We must especially develop higher education, and cultivate specialized talents for the country.

4. Build good financial environment for consumption credit. At present, the government has issued some regulations, rules, and advice on consumption credit, but there is no law fully stipulating the behaviors of parties to acquire and distribute consumption credit, so we must, as quickly as possible, constitute a consumption credit law to regulate market behaviors and ensure the healthy development of the consumption credit market. In addition, the commercial banks must change their management concepts, see the prospects of the consumption market and consumption credit strategically, improve their knowledge of the importance of consumption credit, and take consumption credit as an important method of improving assets structure, improve the quality of assets, cultivating new business growth points and benefit growth points. The emphasis on production credit should be turned to consumption credit, raising the proportion of consumption credit in the credit assets of commercial banks.

The relationship between consumption and currency appreciation and depreciation

The impact of currency appreciation on consumption

Taking China as an example, appreciation of the RMB can make consumers’ money more valuable. Seen from the narrow angle, appreciation benefits consumers, while seen from the angle of the entire state’s economic development; appreciation of the RMB can bring uncertainties for national macro-economic regulation and bring difficulties to employment. Personal income decreases. At the same time, because of appreciation, overseas tourists will find reduced expenses when they visit China, which will also have great impact on our service industry, tourism, and so on, and then employment in these areas of the economy will also be affected.

The appreciation of the RMB will also promote increased import commodities coming into the domestic market, which will allow partial shares of the domestic market to be seized by oversea enterprises. These two aspects can have one result: parts of domestic enterprises need to be readjusted and many people will possibly become unemployed. Moreover, appreciation of the RMB will also have many effects in the domestic professional areas. For instance, it is profitable to aviation, trade, and so on. Part of these professions’ international service is paid through foreign exchange (mainly the US dollar), therefore, appreciation of the RMB will bring exchange gains or losses to these professions. However, the traditional sectors advantageous in export business are directly impacted, which include textile clothing, electrical appliances, machinery, and so on. Cost increases that are brought by appreciation of the RMB can cause the drop of these professions’ profit margin.

The impact of currency depreciation on consumption

These are the possible impacts of currency depreciation on consumption:

1. Depreciation may enhance people’s expectation of inflation, and domestic consumption will be stimulated. In future economic development of China, domestic consumption has the most potential, and the depreciation of currency can actually stimulate consumption and impel economic growth.

2. Depreciation may maintain the competitive power of Chinese commodities in the international market. Meanwhile, if government can promptly promote a policy that cancels or reduces the tax reimbursement for exports, it may not only relax the pressure that foreign countries exert on appreciation of the RMB, but also can achieve the purpose of financial deregulation; however, all these possibilities depend on the overall economic situation.

3. Depreciation can adjust the division of different domestic social stratums’ income structure and increase minority groups’ income. Appreciation of the RMB may improve the competitiveness of Chinese agricultural and labor-intensive products in the international market, increase minority groups’ employment opportunity and income, and withstand the impact that entry to the World Trade Organization brings to Chinese agriculture.

4. Depreciation will open broader operating space to financial policy. Compared with deflation, moderate inflation can not only provide more effective use space for the Central Bank’s monetary policy tools, but may also expand the utilization space of financial policy.

Treating the dual functions of currency appreciation and depreciation seriously

To consumers, both appreciation and depreciation have dual functions: it could truly bring benefit to some consumers; it will also do harm to other consumers. Therefore, when considering appreciation or depreciation, we must certainly analyze dialectically and treat it based on the general national situation, analyze it scientifically and treat it seriously. We should adjust properly according to the situation of Chinese and international economic development. The Chinese government has reiterated that China’s exchange rate reform is mainly a question of time, and the Chinese government will not yield to foreign pressure; I greatly appreciate this kind of national demeanor shown by the Chinese government, but it must be based on the whole economic situation.

Relations between money created by consumption commodities exchanged and amount of money issued

During the course of consumption commodity exchange, original commodity exchange at the primary took the form of commodity barters; the special commodity currency was created during the development, representing equivalent value of commodities for exchange for all types of consumption goods. During the development of currency as a special commodity, the currency trading enterprises were created (the primitive exchange shops, money houses, and then banks). Banks and the financial markets, in turn, invented many financial tools; thereby the financial institutions began to dominate the entire course of the capital exchange, commodity production, and consumption.

The function of currency and characteristics of the amount of issued currency

Currency has five functions: the measure of value, means of circulation, means of hoarding, means of payment, and world currency. Among them, the measure of value and means of circulation are the basic functions.

Currency is issued under the name of the state using the national coercive power. In real life, it is the ratio tool used to weigh ‘the value created by humans’. Private banks are strictly forbidden to issue currency or it will be the delinquency and crime committed by the national superstructure government committed to the people in the country; for the whole process of the production capital commodity, exchange and consumption is ruled by currency finance, which is the most important but not the sole tool of the state’s macro control.

Because the currency is issued imperatively by the state, ‘the supply’ of currency becomes an important tool for the state to regulate the economy. Generally speaking, there are three characteristics of the amount of issued currency: profitability, balance, and destructiveness. Profit means that the country can increase the ‘available’ amount of money and payout through issuing more currency. Stability is the maintenance of a balanced development of the economy through scientifically maintaining a stable amount of issued currency. Destructiveness means that unscientific and excessive amounts of issued currency will initiate inflation and destroy normal economic development.

The amount of issued currency is determined by the total value of a country’s commodity in circulation; if the amount of issued currency is lower than the total value of commodities in circulation, the market will slump and economic development will slow down. If it is higher than the total value of commodities in circulation, the prices will rise, and there will be inflation. In fact, one cannot estimate the number of commodities in circulation precisely; various commercial banks will deposit a portion of their funds in the People’s Bank of China, to guarantee stable prices and avoid inflation. The People’s Bank of China decides the size of the portion; this is the ratio of deposits.

Determination of the amount of currency to issue

How to determine the amount of currency (paper money) to issue? (New financial instruments may substitute the issuance and circulation of the paper currency.)

What first needs to be explained is that the amount of issued currency in circulation is a matter for the Central Bank; it cannot be achieved by any concrete bank. The amount of issued currency in circulation is decided by three factors: the quantity of commodities that are waiting to be circulated, the price level of commodities, and the velocity of circulation (the volume of alternative financial instruments must also be calculated).

The amount of required currency in a society is decided by many factors. It is mainly determined by the entire society’s overall consumption power. Specifically, it is determined by four factors:

• the supply of social commodities

• the supply that service may provide

• the investment scale of enterprises

• individual consumption power.

In the commodity exchange, currency is the medium of exchange; therefore, the total price of commodities for sale decides the total amount of needed currency. But one unit (Yuan) of currency may serve as the medium of commodity several times; therefore, it is the flow but not the stock of money that is determined by the total price of commodities; in addition, pay attention to deduct the amount settled by the alternative financial instruments instead of paper currency in circulation.

If M stands for the amount of required currency, Q indicates the amount of commodities on sale, P expresses the average price of commodity, V is the velocity of circulation, and then the above formula may be indicated as follows:

This currency requirement formula by Marx has important theoretical significance. However, it is necessary to add the currency in the hands of consumers and the currency in savings, the amount of currency used in circulation by the enterprises, and the overhead provision of supplement currency (expressed by A); in addition, the stock portion of enterprise ownership is a particular commodity generated by increasing the amount of enterprise capital in the stock market; the total amount of exchange transaction in such particular stock market (expressed by B) should also be added to the formula. Thus, the overall currency requirement formula should look as follows:

It reflects the basic principle that circulation of commodities determines the circulation of money. Currency is created to suit the demand of commodity exchange, because commodity exchange must enter circulation and adjust the amount on the market according to the demand of exchange. Whether this kind of change on amount is carried on spontaneously or artificially by the government department, it must enter the circulation domain. This kind of analysis has an important guiding sense for us to understand the developing money credit relations and the inherent relations between the circulation of commodities and money.

Based on the Marx’s amount of required currency formula, using the perspective of the relations between consumption and currency, I propose the following analysis:

• When the general market consumption level (the total price of commodities for sale) surpasses people’s demand, we should expand the issuance of consumption fund and the issuance of construction fund in the case of constant velocity of circulation.

• When the market is inflating, we must correspondingly reduce the amount of issued currency.

• In order to maximize the foreign market, we should reduce the storage of domestic foreign exchange and simultaneously increase the amount of issued currency in the domestic market.

Attention to three relations in issuing currency

China is a developing country and should pay attention to the relations between the amount of issued currency, price, and people’s consumption level and correctly understand Chinese positive monetary policies. It involves three dialectical relations:

• the relationship between the amount of issued currency and price

• the relationship between price and living standards

• the relationship between the amount of issued currency and people’s consumption levels.

We can draw these conclusions:

• Under the premise of an invariable commodity supply, an increased amount of issued currency will cause a rise in prices.

• Under the premise that people’s incomes are static; a rise in prices will inevitably lead to a drop of living standard.

• If the amount of issued currency increases and the incomes of people have not been increased correspondingly, then the drop of money’s purchasing power will lead to a drop in living standards. However, if the additional issued currency turned out to be in people’s real incomes, at this time, to increase purchasing power, the living standard will be improved.

About paper money and credit money

Paper money is the mark of value issued and circulated forcedly by the state. It is the representative of metallic currency. Paper money itself does not have value; it only executes the functions of circulation and payment means by replacing metallic currency. It can be exchanged according to the exchange rate, and it can also be deposited, but it cannot act as a store of value. Paper money is created from currency’s function as a means of circulation. With the increasing development of the banking industry, while paper money serves its widespread function and circulates massively, credit money is created. Credit money has many forms, such as bank notes, checks, promissory notes, bank drafts, and so on. Credit money manifests credit relations between the creditor and debtor.

There are two kinds of phenomena that have direct relations with the amount of issued currency: inflation and deflation. Inflation and deflation harm the normal development of the economy.

The dialectical relations between society’s general consumer power and the amount of issued currency

Here, society’s overall consumption power includes people’s consumption power. This kind of consumption power is a paying capacity and has close dialectical relations with the amount of issued currency.

The amount of currency that the general consumer power of society demands immediately influences the motion of social economy. In the situation of sufficient currency supply, the stronger the currency demand, the more positive its influence on economy and society will be. Because huge currency demand needs huge supply, huge supply needs the acceleration of production, the acceleration of production inevitably brings the growth of output value, the material wealth of society will be richer. Otherwise, in the case of sufficient money supply, the smaller the demand, the more negative the influence on economy and society will be, since the serious insufficiency in currency demand will cause massive backlogs of products, block production, even resort to deceleration of production to maintain its vigor.

Moreover, in the case of an insufficient currency supply, the stronger the demand for currency is, the more negative the influence on economy and society is, since the insufficient supply will affect the growth of economy. Otherwise, under the situation of insufficient currency supply, controlling the corresponding needs of consumption can have a positive influence on social economy, because it can maintain an orderly and accelerated environment.

According to the proportional relations between general consumptions’ paying capacity and currency demand, we can know that if we can control general consumption’s paying capacity, we can control the currency demand. The goal of controlling currency demand is to maintain the balanced and fast development of the social economy. Because paying capacity is expressed by the payment function of currency, the size of the paying capacity is symbolized by the measure value of currency. Therefore, if we can control the amount of currency in circulation, then we can control the paying capacity. Increasing of the amount of issued currency can increase the payment capacity.

Relations between consumption, law of value, and price

The price of all consumer goods on the market is under the control of the law of value; without the law of value, the price of all consumer goods would not exist. Simultaneously, without price, value would not exist. The price of commodities fluctuates around value:

1. The price of consumer goods deviates from their value. If such deviation is bigger, to the enterprise, the profits and taxes it creates will be higher. The higher the accumulation, the higher income the employees will receive.

2. The price of a commodity deviates from its value. If this deviation is low to the enterprise, its surplus value is low. The lower the accumulation, the lower the relative income the staff receives, the development speed of this industry or enterprise will be slow.

3. When the price of some or some kinds of consumer goods is lower than their value, through strengthening the internal management of enterprises and reducing costs, we can try to make up the deficits and get surpluses. From the balance between price and the actual value to the imbalance where the price is somehow higher than the actual value, the enterprises could still survive and develop.

4. If the price of some or some kinds of consumer goods are lower than their value, it is impossible to make their price enhance to the balanced level or higher than the value level; the enterprises should claim bankruptcy immediately, change the line of production, or be annexed by highly efficient enterprises.

5. The price of commodities fluctuates around value.

6. In the process of consumption, the price of commodities is influenced by not only the supply–demand relation but also the season and holiday.

7. In the consumption process of a commodity, certain places will set prices according to seasons in order to stimulate consumers’ psychological desire to purchase.

8. The bargain price of a commodity. In the exchange of commodities in free market, the bargain may happen in various times or places. The fluctuations between the commodity price and its value may be extremely large; therefore, on the market exchange, the bargain is everywhere and intense, and the success of a transaction is often the result that both sides compromise.

9. Agreement price. In the exchange of bulk commodities, in order to ensure benefits for both sides, a price based on agreement is always adopted. The prices of commodities are thus influenced greatly by the supply–demand relation in this kind of transactions.

10. The price of brands. Under ordinary circumstances, the prices of well-known brands are higher than those of similar commodities and form psychological prestige values and psychological desire values of commodities. Therefore, brand commodities appear whose prices are artificially higher than their values.

11. The high-expense consumption in special places of entertainment. In special places of entertainment, the prices of material and spiritual commodities are often higher than their values. Furthermore, the high facility value and high service value enable the formation of high-income, high-profit, and quickly accumulated industries, such as high-quality nightclubs, restaurants, and so on.

Relations between consumption and savings

Keynes’ absolute income theory

The income discussed by Keynes is the absolute actual income of the current period. The ‘current period’ is the present period without considering past and future; ‘absolute’ is the absolute level of income without considering the relative level of income; the ‘actual’ is the income calculated according to the currency’s purchasing power without considering the nominal income calculated according to currency. These restrictions serve as an important distinction between Keynes’ income theory and other income theories.

Duesenberry’s relative income theory

Duesenberry believes that consumption is not decided by the absolute income level of the current period, but by the relative income level – the highest income level compared with others’ income level and personal historical income level. In modern society, highly qualified commodities enter the consumption area, which stimulates consumers’ consumption desire, and at the same time keeps their dignity through consumption. Once the income and consumption level of high-income earners are considered as the symbol of social status and success, their consumption pattern will become the object of others. Then, because of the preference of consumers, high-income earners set an example for low-income earners.

Modiglianli’s life cycle theory

Modiglianli’s research (1970, 1975, 1976) on life cycle mainly focuses on this assumption: everybody arranges their consumption according to all the expected income of their life, namely each family’s decision on consumption and savings at any time more or less shows the family’s attempt at an ideal distribution of consumption in its whole life cycle, while every family’s consumption is restricted by the total income of the family in its entire life cycle.

All economists agree that consumption is decided by disposable income, but they disagree on what disposable income is. Keynes defines disposable income as the level of absolute income; American economist Duesenberry defines it as the level of relative income, and in the permanent income hypothesis it is defined as permanent income (Duesenberry, 1949).

Friedman’s permanent income theory

Friedman holds that the consumer’s income consists of temporary income and permanent income, whose influences on consumption behavior and savings behavior are different. The permanent income hypothesis is put forward in his A Theory of the Consumption Function (1957), and this theory is considered one of Friedman’s significant contributions to economics. He believes that people plan their consumption level according to long-term and permanent income rather than temporary income. Affected by many accidental factors, temporary disposable income varies, but people’s consumption would not go up and down with it.

In order to realize maximization of utility, the consumer actually consumes according to the level of income that can be gained in the long term. Temporary and short-term income affects the consumption level only when its variation affects the expectation of permanent income. Thus, we conclude that people’s income consists of two parts: temporary income and permanent income; only the permanent income affects people’s consumption, so consumption is the steady function of permanent income. Temporary income is the income acquired in a short period; it is accidental income, and can be plus (e.g. an unexpected bonus) or minus (e.g. it is stolen). Friedman believes that only permanent income affects people’s consumption.

Features of Chinese residents’ savings

As a result of the lag in financial system reform in China, the bond and share market is relatively small, so bank savings are the sole important investment type available to most Chinese inhabitants. With the reform of the financial system and the development of banking, especially, the reform and development of currency policy and the capital market, the people’s savings have become more varied. The sole savings deposit has developed into various modes including savings deposit, investment in securities, and establishing private enterprises; the savings of the inhabitants show many new features.

There are several reasons for the great increase in the amount that Chinese people save:

1. Since the reform and opening-up people have had more money; Keynes’ general rule on people’s disposable income applies in China, and growth of income is the key factor determining how much people save.

2. System reform, especially the initiation and implementation of reform measures on medical treatment, housing, employment, and pensions, makes people less confident about their income in future, and this encourages them to save.

3. Changes in interest rates influence the amount people save savings. Deposit interest rates have two effects on people’s savings: an income effect and a substitution effect. When there is inflation, people can correctly anticipate it, so they can make decisions on savings according to changes in the interest rates. The opinion of the classical school is that when interest rates rise, savings grow; when interest rates drop, savings decrease. However, in reality, the effect of interest rates on savings is uncertain; the information is always incomplete or out of date, and when it is impossible to form a correct anticipation on inflation, the level of a nominal interest rate may exert actual effect on savings.

4. The anticipation of inflation affects people’s savings behavior. After the reform, China’s economic system introduced market mechanism, the original fixed price system was broken, the price level kept rising, and inflation occurred. Generally speaking, other things being equal, inflation would reduce people’s actual income, and then savings would decrease. When people anticipate that the inflation rate will rise in the near future, they will consume more before prices rise or advance their consumption that was originally planned for the future, and meanwhile increase their substance savings. These would all decrease people’s savings in the current period, and if consumption is critical, the bank deposit will be used, and the ‘buying spree’ occurs.

The variation in people’s savings

Since the economic system reform in China, the variation in people’s savings has been the result of many factors. There are effects of short-term factors and of long-term factors, and there are effects of non-economic factors like system reform and of economic factors, so it is hard to explain the change in savings based on a single factor. Short-term savings are the result of mutual effects of economic factors including economic growth, interest rates, inflation, and the unemployment rate, and system factors including medical treatment, endowment insurance, education and tax reform, and the government’s macro-control policies.

Savings are connected with people’s income, general prices, and consumption, and have a deep influence on national macro-control policies on currency and investment, so it is of significance to analyze the inner mechanism of savings and their growth law.

In China’s new period, the connotation and function of savings has changed. Since the reform and opening-up, the function of savings has been extended considerably. Savings can absorb various funds besides the individual balance of income and expense, for these reasons:

• Absorbing savings with high interest. Some financial institutions raise the interest rate for savings without official permission or raise it in indirect ways; the rate is thus much higher than the legal interest rate, and consequently various public funds from enterprises, institutions, and government agencies are absorbed into their savings.

• The deposit competition among banks. In order to absorb savings, the financial institutions continuously improve their hard and soft facilities, and take various measures to add new services, improve service attitudes, and streamline service procedures.

• Extending the function of savings. Savings is made to be a comprehensive financial service, and has obvious effects.

• The main trend of savings in China. Under the new circumstances of initial development of a market economy, the variation of people’s income, consumption, and savings has turned out to be complicated. The main trend can be generalized as the growth of income, which spurred the harmonious growth of consumption and savings, and led to corresponding structural changes, such as the rise of consumption level, the growth of disparity, and short-term savings. Also, the savings intentions of people with different income levels vary. The immediate consumption of people on a high income increases and their relative saving is decreased while people on low incomes, with limited purchasing power, decrease consumption and increases the amount they save to some extent.

Analysis of countermeasures to consumption and savings

In recent years, the rapid growth of Chinese residents’ savings has been consistent with the speed of economic growth. The relations between savings rates and economic growth can be explained with Modiglianli’s life cycle theory (1970). However, the change in savings structure and the increase in non-performing loans in banks in recent years also reveal some critical problem to which importance must be attached. Therefore, the following suggestions are proposed to the national and regional financial sectors:

1. Diversify financial services. The main form of Chinese people’s monetary assets is savings deposits; they use fewer other forms such as securities and cash. The habitants should be led to build risk consciousness and strengthen their investment consciousness and risk consciousness. As for the government, when making financial policies, it should reflect the principle of coexistence of risk and profit: the higher the risk, the higher the profit.

2. Increase investment channels and eliminate financial risks. The reform of the financial system in China lags behind its economic growth, and the people’s investment channels are comparatively limited. Under the conditions of having few investment channels, Chinese people have had to put most of their savings into banks in the form of bank deposits. The increasing savings of urban and rural inhabitants must now be moved through direct financing. We must develop a shareholding system, capital funds, and capital markets such as stocks, to guide the savings of urban and rural residents to direct financing, and thus lower the risk to the banking system and ensure the steadiness of the national banking system.

3. Encourage and guide inhabitants to commit to healthy consumption. In order to encourage Chinese people to consume, the government should have a well-integrated consumption policy for them, make in-time adjustment to merchandise tax rates, restrict consumption fund control within government’s behavior, let them consume as per the principle of individual utility maximization, and reduce the prices of high-grade commodities.

4. Lessen citizens’ worry and eliminate psychological obstacles to consumption. At present, many citizens, especially laid-off workers, unemployed personnel, retired employees with low incomes, and so on dare not consume; when they acquire money, they save it, because the social security system is not perfect. Accordingly, the urgent thing to be done now is to solve problems such as the living security of laid-off workers before they get another job, the low income of and medical treatment insurance for retired employees, and so on.

5. Use the regulation of the height of interest ratio to guide and control the trend of savings. When there is an excess of social commodities, the government should lower the interest rate to compress the deposit amount of banks, increase the fund of consumption in market and promote consumption. When social commodity supply falls short of demand, the government should raise the deposit interest rate to absorb social consumption fund, lower social purchasing power, increase fund investment in production consumption, increase reproduction and ensure the rapid development of economy.

Section 3 State intervention in market financial and economic law

In October 1929, the first world economic crisis broke out. The Wall Street Crash is probably the most severe disaster ever suffered by the financial world. Starting with the closing of the first bank, the crisis gradually spread across the whole of Europe. The crisis was caused by the monopoly management of capitalist society. At that time, in his The General Theory of Employment, Interest and Money (1936), Keynes proposed that the country should intervene in the economy and adopt proactive fiscal policies and legal means to regulate it; based on this theory, Roosevelt proposed the National New Deal and promulgated a series of policies and laws that were successful in America. By drawing on this experience, some countries, including European countries, rapidly rectified the negative effects of the market economy (an ‘invisible hand’) and prevented the disasters that had emerged during the development process of capitalist society, enabling the economy to march towards sustainable development. Keynes’s theoretical guidance on state intervention in the economy created new life and progress in capitalist society.

In July 1944, headed by America and England, 44 countries convened a conference in America’s Bretton Woods. It was agreed to establish the World Bank and the International Monetary Fund with the world currencies pegged to US dollars. On December 27th, 1945, the signature content was double pegging – the US dollar being pegged to gold, and world currencies being pegged to the US dollar.

In August 1971, when American gold could no longer sustain the increasingly depreciating US dollars, the Nixon government was compelled to give up the ‘gold standard system’ with the exchange rate at one ounce of gold for $35 dollars. Free floating exchange was implemented.

Since the US dollar was de-linked from gold and the world currencies were de-linked from US dollars, the financial market became a free market. Financial currency enterprises – banks and free financial markets – continuously created derivative products (which are also called new financial tools), which gained rapid development. Large-scale capital operation enterprises emerged, such as financial companies, insurance companies, security companies, investment companies, and trust funds, and they all managed the special product – currency – but the operation did not increase physical wealth for society.

Derivative products in the financial market promoted the production, exchange, and development of industrial goods on one hand and also generated severe false bubbles – economic indexes – on the other. The World Bank and the International Currency Fund already detected the existence of this kind of severe crisis but had not established any supervising organizations or safeguarding measures.

At the end of 1987, the Cook Commission of the Bank of International Settlements brought forward the international standard of appropriate bank capital, which acquired official approval of 12 countries in 1988, the famous Basel Protocol, which was formally implemented in 1990. The purpose was to exert the active effects of the financial market and financial tools to overcome negative risks and crisis.

It is obvious that under the existing financial system it is no longer possible to fully depend on the market to regulate the economy, and that the state will inevitably intervene to regulate the direction of its economic development as well as its decision-making.

The intervention on the market and the financial law in western countries

The primary stage of the capitalist social system

When the economic foundation of capitalist society had just developed out of feudal society, its main part was commodity production and the exchange of private capital (there was little state-owned capital). The primary stage of private capitalist economy was the stage for the primitive accumulation of capital and for the bourgeoisie’s ruthless exploitation of the proletariat.

Monopoly capitalism in capitalist society

This was the stage of commodity production and the exchange of monopolistic capital, and commodity production, and the exchange of private capital developed into commodity production and the exchange of monopolistic capital. The nature of the capitalist social system had changed from an economic foundation of private capital to an economic foundation of monopolistic capital.

The economic foundation of monopolistic capitalism damaged the economic law of free market finance economic law and resulted in global economic crises, such as the global economic crisis which was originated from America in October 1929. This was the revenge of the law of market economy, which was broken by the social economic foundation of monopolism developed from capitalism.

The growth stage of capital as economic foundation in capitalist society

In capitalist society, as the productivity of consumption society rapidly developed, capitalists’ capital accumulated at a faster speed in the primary stage of private capitalism as economic foundation. Such capital accumulation was soon converted into social reproduction. In order to expand and raise capital for reproduction, capitalists appraise their fixed assets (including intangible assets) and transform a small or large part of them into a special commodity of capital for transactions in a specific capital market – the stock market. The price of the stock always fluctuates with the enterprise’s operating profits and is also affected by the supply–demand relation. Conversion to this special commodity rapidly increases the value of business capital. It is a two-edged sword: it actively accelerates the development of the national economy and promotes productivity of a consumption society inspired by consumption, while the economic base monopolizes the pricing of market commodities, the market, and the prices of raw materials, resulting in a monopoly in economic industries. On one hand, it benefits the enterprise with high profits. On the other, it seriously breaks the natural law – regulation law in the free market; the three important consumptions drive economic development. In consequence, severe economic crises will take place.

Every coin has two sides. The superstructure of capitalist countries intervenes in the economy with national power, for instance, in establishing antimonopoly and other laws and rules, which is economic intervention by administration. In this way, the economic foundation is converted from capitalists’ monopoly capital into social capital. For example, GM in America and Siemens in Germany are enterprises whose capital has become social capital. The economic base of capitalist society changes from private capitalists’ capital to capitalists’ monopoly capital, and finally to social capital, which can also be called a social system based on social capitalism.

In the period that the economy in capitalist society was mainly based on social and national capital, the democratic political system (separation of powers) was implemented, and the state compulsively regulated reallocation of social wealth according to the taxation law so as to solve the class contradiction between the poor and the rich. This reflects the socialist nature in the capitalist regime and is a great progress in the development of capitalist society.

In the economy of developed capitalist countries such as Germany, the state-owned capital plus social capital is the major economic base, while in America, France, Britain, and Japan social capital is the main basis of the economy.

Under the social system in which the economy is mainly based on state-owned capital and social capital, the government scientifically intervenes in the law that the three important consumptions drive the development of the economy. That can be referred to as the economic law of ‘state intervention’ or ‘state intervention in economic law’, by which the ‘law of macro adjustment of the market economy’ is generated to control the world economy to develop continuously in a relatively good condition. If the law is violated, the economy will surely be punished.

The phase of state intervention in the economic law of free market regulation in capitalist society

The economy in capitalist society was mainly based on social and national capital; the democratic political system (separation of powers) was implemented, and the state compulsively regulated reallocation of social wealth according to taxation law so as to solve the class contradiction between the poor and the rich. This reflects the socialist nature in the capitalist regime and is a great progress in the development of capitalist society. It will be noticed that the ‘invisible hand’ of free economic adjustment has always been playing a significant role. Keynes’s theory has important realistic significance and has received excellent results; however, he does not recognize the precondition for the generation of free financial and economic law or its functions – the essence of positive and negative effects; nor does he realize that free market adjustment law is also a ‘visible hand’, which has both general law and special law. He tried to solve the problem objectively and the measures he adopted could only solve the extremely urgent problems and could hardly solve the fundamental problems that occurred during the changing process of the economy. Therefore, financial and economic negative effects are inevitable; the occurrence cycle can be prolonged, but the occurrence is unpreventable, and the problem is not solved fundamentally. For example, in 2007, a worldwide financial and economic crisis broke out again.

The economic base of the former Soviet Union is national capital monopoly

In the former Soviet Union most economic bases of agriculture and private capitalism were converted into national capital through revolution. In the economic recovery period, Lenin carried out production and exchange on the basis of national capital. Planned economy was implemented in the former Soviet Union, and state-led economy comprehensively intervened in natural economic law and made great achievements in economic development. Meanwhile, the former Soviet Union attached such importance to culture and education that it allocated a large sum of funds from its limited financial expenditure to invest in education.

During the economic construction led by Stalin, the economic base was completely national capital. As for the production and exchange of means of production, capital commodities did not exchange inside the country but transferred among internal enterprises. Only consumer goods exercised exchange, and the government set the prices. At that time the former Soviet Union was short of funds for economic construction, so where did the money come from? The answer was people’s accumulation. The prices of industrial consumer goods were relatively higher while that of grain was lower, and workers’ incomes were lower, too. As production was totally planned, farmers’ motivation could not be made best use of for a long time.

At the beginning of the first five-year plan of the former Soviet Union, according to the national economic plan, priority was given to heavy industry and light industry was delayed. Thus consumer goods were deficient for a long time. Despite the high GNP, people’s living consumption level was very low. The fundamental economic law in socialist countries was: ‘Socialist production should be increased and perfected with the help of high-technology, so as to meet the growing material and cultural demands of the whole social economy.’ This is the integration of the law of planned economy with the law of natural economy – the government employed plans to intervene with the natural law and financial and economic laws of free market, which governed the three important consumptions. Plans were hardly realized, partly because of the state monopoly and intervention in natural economic law, partly because of the complexity and diversity of the development and the increase of demands on the three important consumptions, especially on consumer goods. The former Soviet Union’s state-led economy was not centered on living consumption, but on social consumption. Though the national economy kept developing at a high speed, the ratio of the three important consumptions was seriously unbalanced. The long period of imbalance reflected the economic base of national capital. As the superstructure failed to meet the needs of economic development, serious contradictions arose.

On the positive side, the Soviet Union was very successful as national power dominated economic development. It was in favor of the development of natural economic law, but was influenced by the three important consumptions. Principal leaders in the Soviet Union held to the way of thinking that subjective initiative was omnipotent, which badly destroyed the positive effects of the financial and economic laws of a free market. Thus contradictions could not be solved for a long time and a national political crisis was doomed to break out. Therefore, the overall disintegration of the Soviet Union was inevitable because the superstructure was no longer adaptable to the economic base, and the related production was not adaptable to the productivity of consumption society for a long time; the superstructure and production relation violated the basic economic law of a socialist country and violated the internal law of economic development applicable to various societies, which led to a serious economic crisis and ultimately the disintegration of the Soviet Union.

The economic law of market finance under the adjustment of a planned economy and the economic law of market finance under the adjustment of high macro control

The economic law of a consumption market under planned economy regulation

In the days when productivity was very low, the national economy lagged behind, and there was difficulty for the national income to meet the minimum standard of living, or when the economy was blockaded by special foreign economy, performing the planned economic regulation of a consumption market could help to ensure the existence and development of the nation, and at the same time, the financial resources and the physical resources could be maximally planned and centralized to put in the project which is crucial for fast development of the national economy to promote the improvement and development of the whole national economy. It is also critical to establish the distribution policy and consumption ratios of the gross national income and gross national expense in a planned way and in reasonable proportions.

Shortly after the establishment of the People’s Republic of China, the population of China increased quickly, but the development of production could not meet the consumption needs of the increasing population. Under a planned economy, the country carried out a state monopoly on purchasing and marketing of grains and supplied commodities such as clothing to the population. At the time, the country implemented the distribution principle of low income and more employment, thus guaranteeing certain capital accumulation in the country. With further development of the economy, the original planned equalitarianism of distribution and consumption policies hampered the development of productivity. The policies had to be adjusted to adapt production relations to the change of the economic base. In 1984, the Central Committee of CPC decided that the socialist economy was the planned commodity economy on the basis of public ownership; reforms with market orientation began. The implementation of the new policy dramatically promoted the development of Chinese productivity and increased the living standard and consumption power of people.

According to Marxism Leninism, in the advanced stage and the communist stage, agaon the market economy will inevitably turn to consumption market economic rules under planned regulation.

Consumption market economic law under a high degree of macro regulation

Since the 1990s, the leadership level of China has decided to implement a market economy – to develop the economy according to the market economy rules. This decision accorded with the overall national economic base and system constituted by many economic factors in the primary stage, the constant and fast development of the standard of productivity. These are the main features of the market economy in China:

1. The economic sectors of the primary stage of market economy – the dominant economic sectors of the state-owned economy and national economy, collective economic sector (basically belonging to local state-owned sector), private joint stock economic sector, social economic sector (stock market enterprises), individual economic sector, and foreign and single proprietorship and joint economic sectors – constitute the economic base of the primary stage of market economy in China.

2. The competitive developments of a market economy under planned economy and market economy are both identical and different. They are identical in that:

• the competitive development of the market economy is to follow the most basic natural economic law

• both participate in the production, operation or services of society, either as independent institutions or as individuals, and both strive for good social and economic benefits according to consumers

• both strive to collect the information about consumption development to better use it

• both apply new or high and new technologies to improve their productivity level in order to increase their powers in market competition

• both strive to increase the quality and decrease the costs of their products to the utmost extent so as to strengthen their competitive powers

• both enforce, to the utmost extent, the interior planning, regulation, division, system, and control management of the enterprise, the dynamic competitive management, and the diagnosis and decision management in order to obtain the best operation benefits. The interior planning and management of an enterprise organizes production in full correspondence with the consumption demand of the market.

3. There are two main differences between a planned economy and a market economy:

• under a planned economy, the laborers are all masters of the country; the relations between individuals and the country, between individuals and the collectivity, and between collectivities and the country were those of infinite liability

• under a planned economy, a contest system was implemented; the initiatives of the people were mobilized through labor contests, while they were organized through competition under a market economy; contests and competitions appear identical, but have essential differences.

4. The planned economy and market economy are different in that the socialist economic base determines the products that meet people’s ever-increasing material and mental needs. This is also the production purpose of planned economy. The national capital of planned economy is the capital of the whole people, the main body of the economic base. The representative who masters the capital is the communist party. However, enterprises are also entities of the market economy, the entities that assume independent calculation and sole responsibility for their own profits or losses. They are in fierce competition with any enterprises of other economic factors. Therefore, the Party and government’s control of state-owned enterprises must be direct control. For enterprise entities of other economic factors, the control methods are different. For national economic basic factors, the smaller the private capitals are, the bigger the socialized factors will be, and the more intense macro regulation will be needed to regulate the economic development using banks, tax levers, distribution policy, the price rule of value, and the adjustment of investment orientation, and to interfere and support the economic development by using all administrative means, laws, and regulations.

China and the market economy under national macro control of the economy

To adhere to healthy economic development, China must uphold the market economy law under macro control. We must study earnestly and learn how to manipulate the movement law of the six economic patterns:

• The circular and spiral law of economic development is stimulated by the three important consumptions. That is the natural law of economic development.

• The economic law of free-market regulation (an ‘invisible hand’, but modern research has found that it is not only visible but also operable and controllable), which comes from the sale process when consumers’ needs are looked into in the commodity exchange.

• The basic economic law. This arises from the rule that economic bases decide the purpose of producing.

• Monopolistic economic basis seriously interferes with the natural law of economic development, and breaks the law of free-market regulation.

• The state interferes with the economy, and this produces the law of a macro-control market economy.

• At the early stage of the reform and opening-up, China was changing from a planned economy to a socialist economy; as there was no available experience, we had to adopt the method of ‘fumbling through the river’ to explore a suitable road of development. Through the 30-year development process of the reform and opening-up, rich experience and great lessons have been obtained concerning the socialist market economy and it gradually marches towards sophistication.

The Chinese government begins to lead the economy and intervene in finance and the economy: ‘financial and economic law that is centered on living consumption under the macro control of state-led economy’. This law is gradually being recognized by the state superstructure, and meanwhile, this kind of macro-control law creates the economic development pattern of China.

The practice of China featured construction powerfully proves the demand that the basic economic law needs to be realized. Chinese economic construction has achieved a lot and gradually set up an independent and more complete industrial system and national economic system according to the economic laws adopted by our economic operation mechanism at that time, which takes the planned economy as primary and the market economy as auxiliary (different from the overall planned economy implemented by Russia). But it should also be realized that economic law was often violated because of a lack of understanding of the economic law. Especially because of the lack of an understanding of the auxiliary role played by the market finance and economy and of its action, national economic development was damaged and stagnated, even fell back. So at a certain historical stage, the market economy must exist; it is the objective reality.

On the other hand, people’s needs are the most complicated and fragmentary objective reality. People’s cognition always falls behind the objective reality. Under the current conditions of science and technology it is impossible to completely satisfy the needs of people only by depending on the unified plan. This is because the planned economy is made according to the needs of objective conditions and reality, and people’s subjective cognition of problems cannot be 100% correct, which violates the economic law, the socialist economic development will be affected.

Some people still believe that China is economically backward, with low socialization of production, so there are not the conditions to carry out a planned economy. The planned economy could only be carried out after productivity had achieved full development. Some people even think that carrying out a planned economy is a fantasy in China, and it is man-made enforcement, which is against the objective law.

That argument doesn’t hold water. First, these people don’t know where the economic law comes from, whether the law comes into existence automatically or is imagined by people without any facts as its basis, whether the law comes from an economic basis or from the needs of life consumption, production consumption, and social consumption. Second, they don’t know the nature of a market economy. What they have seen is that the market economy has developed highly and freely in the capitalist world and made the capitalist economy develop accordingly. They have seen the extravagant feast and revelry and market prosperity of the capitalist world, so they are eager to implement capitalism in China. There are still many people who don’t know that capitalist countries have adopted the measures of market economy that involve macro control and regulation by the state, nor do they study economics, progress, and changes in the developed countries. Third, if it is correct that after the economy is in an advanced state and the level of socialization of production is high, the planned economy could inevitably be realized, the first economically advanced country, Great Britain, and subsequently the United States and Japan, would have become socialist. This did not conform to Marxism-Leninism.

Some would argue that the former Yugoslavia once abolished the planned economy for a period of time, and its national economy had developed quickly. Though the former Yugoslavia adopted a market economy, it created a system of socialist autonomy union and made production relations adapt better to the development of productivity. At the same time social plans were carried out harmoniously throughout society, and made up for the passive aspect of the market economy. Despite all these measures, inflation still could not be totally avoided. China should learn from its successes and from its failures.

To sum up, important consumptions are the natural law of economic development, and the economic basis determines the basic law of the economy. The state interferes with the law of free-market regulation of economic spiral development, which is the requirement of the needs of three important consumptions, and thus brings the law of macro-controlled market finance and economy into existence. The economic basis of the state-owned capital of the socialist Soviet Union belongs to the economic basis of state-monopoly, which was an overall planned economy, using planned economy to interfere with the regulation law of natural market economy upon which the three important consumptions rely. The problems it could not solve were the complicated preferences and needs of people’s living consumption and the increasingly complicated varieties and needs of people’s consumptions. As the conditions lasted for a long time, it was inevitable to that people would complain and there would be a political crisis.

The economic basis of socialist China basically belongs to the economic basis of national capitalism, and also belongs to the natural economic law of the state-monopoly interfering with the three important consumptions. But unlike the Soviet Union, China insists on carrying on the law of a developing economy, which makes the planned economy primary and the market economy supplementary at the beginning of the reform and opening-up. The measures make use of the natural economic law of the three important consumptions, and enable the superstructure to adapt to the economic basis and the production relations adapt to the growth of productivity. But it is not perfect. So it is necessary to free our thinking and carry out opening up and reform and the natural economic law of the three important consumptions interfered with by the state. It would be macro control to interfere with the law of economic development to develop the economy. This is objective and will not be subject to people’s will.

The economic basis of advanced capitalist countries has moved into the stage of an economic basis of social and national capital. The state superstructure has improved from democracy based on the capitalist economy to the democracy representing the social capital and partially national capital. The economic laws which emerged on the basis of social capital and partially national capital and intervene with natural economic law must be the market economic rules as the state macro control.

The natural law of economic development stimulated by the three important consumptions is independent and not subject to people’s will. The market financial and economic law of macro control or macro regulation does not mean the end of the crisis and contradictions between supply and demand. The relations between supply and demand are a unity of opposites. Just because the process of supply and demand is a unity of opposites, its law needs to be regulated, which is a law, too. Just because it is a law of a unity of opposites, it is important for the state to interfere with the economy and regulate the development of the law of a free market economy in order to better satisfy the development needs of the three important consumptions, and the consumption needs of people’s increasing material and spiritual civilization.