He Dexu and Tan Hongbo: Regulate Capital Development and Promote Common Prosperity
General Secretary Xi Jinping, during the 38th collective study session of the Political Bureau of the CPC Central Committee, systematically expounded upon the important role of capital in the development of our country’s socialist market economy and provided comprehensive guiding principles on how to regulate the development of capital. Currently, our country is in a historical stage of development characterized by the accelerated promotion of common prosperity. An accurate understanding of the relationship between the development of capital and common prosperity is not only conducive to the smooth realization of common prosperity but also beneficial to the healthy development of capital itself. Therefore, this article specifically discusses the logical relationship between capital development and common prosperity and provides policy recommendations for regulating capital development from the perspective of common prosperity.
The logical relationship between capital development and common prosperity
First, capital is a necessary factor of production for "making the cake bigger." [1] The foundation of common prosperity is prosperity—that is, making the cake bigger. Whether at the macroeconomic or microeconomic level, capital is an important factor of production and must participate in the process of making the cake bigger. More importantly, capital serves as an essential bond connecting factors of production such as labor, land, technology, and data, acting as an important banner that guides the flow and concentration of various production factors. After the founding of New China, our country was in a state of capital scarcity for a long time, and the lack of capital seriously restricted economic and social development. To change this situation, our country actively introduced foreign capital and gradually allowed, encouraged, and supported non-public capital to enter numerous industries and fields to participate in fair competition. Consequently, while various types of capital obtained high returns, they also drove the rapid development of our country's economy, laying a solid material foundation for the realization of the goal of common prosperity.
Second, a healthy and developed capital market is an important way for residents' property to be transformed into social productive capital, thereby allowing them to share in the achievements of economic development. As the primary factors of production in the macroeconomy, the supply and demand for both capital and labor involve residents and enterprises acting as micro-entities, with both parties connected through various intermediaries. Specifically regarding capital, banks and non-bank financial intermediaries—represented by insurance, securities, and funds—are needed to connect the supply and demand sides of capital. Resident savings only become capital when they are transformed into production factors through financial intermediaries; the returns obtained from these capitals' participation in production are then returned to the hands of residents through these same intermediaries. Furthermore, various types of pension insurance funds, acting as residents' intertemporal property allocations, conduct long-term investments through the capital market. On the one hand, this can provide a stable long-term supply of capital for economic development; on the other hand, it can increase residents' income after retirement. It is thus evident that, in addition to its important function of financing various market entities, the capital market serves as an important channel for every resident to participate equally in capital gains and share the fruits of economic development.
Third, common prosperity is conducive to the preservation and appreciation of the value of capital over the long term. From a micro perspective, the preservation and appreciation of capital value require capital operation managers to possess professional investment knowledge and the ability to accurately judge domestic and international economic trends. From a macro perspective, only if the macroeconomy maintains healthy and prosperous development can capital, as a factor of production, obtain substantial returns. If the macroeconomy is sluggish or even in recession, it is difficult to achieve the preservation and appreciation of capital value even if capital managers possess professional knowledge and rich experience. Consumption is the most important driving force for sustained macroeconomic growth; especially for a major economic and populous country like ours, consumption is the "ballast stone" and "stabilizer" of sustained growth. According to the law of diminishing marginal propensity to consume, when the income gap is too large, it is difficult for low-income groups to drive macro-consumption growth even if they spend all their income on consumption. Conversely, the marginal propensity to consume among high-income groups is too low, and the vast majority of their wealth and income becomes "precipitated" as savings. Thus, at such a time, macro-consumption demand finds it difficult to shoulder the heavy responsibility of driving economic growth. The weakening of total demand caused by sluggish consumption further dampens investor confidence, leading to a decline in both the rate of return on capital and the value of capital. On the contrary, under the condition that total social wealth remains constant, if the income gap is significantly narrowed, total social consumer demand will significantly increase, allowing capital to obtain returns and increasing its value.
Although a logical relationship of mutual promotion exists between capital and common prosperity, capital also has aspects that are unfavorable to or even damaging to common prosperity, manifested primarily in the following ways.
First, capital can reshape market structures through a "subsidies first, returns later" approach, quickly forming monopolies and thereby redistributing market returns. Specifically, a certain enterprise, relying on the support of large-scale capital, can defeat numerous original suppliers in a given industry through low-price dumping or consumer subsidies to rapidly occupy the entire market. Subsequently, by leveraging its monopoly advantage, it can not only recover the previously incurred costs of dumping or subsidies by raising the prices of products and services but also further capture more consumer and producer surplus through price discrimination and bundled sales. This leads to the concentration of wealth in a few monopolistic enterprises, and the capital behind them eventually obtains the bulk of the monopoly profits. In today's era of the digital economy, it is easier for capital to implement such operations with the help of digital technology. Since this model often occurs in existing mature markets, it represents a zero-sum game for society as a whole. That is to say, the role of capital in this process is merely to reconstruct the structure of an existing market and concentrate wealth in the hands of a few enterprises, without breaking new ground in terms of new products or technologies.
Second, the speculative behavior of capital and the economic bubbles it spawns invisibly redistribute social wealth. The wealth redistribution effect of capital shares both similarities and differences with the market structure reconstruction effect mentioned above. The similarity is that large-scale capital has the ability to alter the original equilibrium price of a given industry in the short term. The difference is that speculative capital generally does not participate in production or operations; it is primarily a short-term behavior. Capital drives up the price of an underlying asset in the short term to attract numerous small and medium investors into the market, and then quietly exits at a high price point to reap rich speculative gains. Not only does the speculative behavior of capital fail to increase total social wealth, but it also causes the prices of inputs and outputs in the real economy to fluctuate violently, increasing uncertainty for the real economy and inducing imitation by related capital, thereby squeezing out the productive capital of the real economy.
Third, capital and labor often exhibit a trend of income divergence in production. In his Capital in the Twenty-First Century, French economist Thomas Piketty examined the income distribution status of more than 20 European and American countries over nearly two centuries. He found that the rate of return on capital has long been higher than the rate of economic growth and the rate of return on labor income over the same period, arguing that this is the primary reason for the widening gap between the rich and the poor in developed economies. Piketty believes that capital holders only need to use a small portion of their capital income for consumption to maintain a good standard of living while using the majority for reinvestment; therefore, the income gap between capital owners and laborers will continue to expand, further causing a high concentration of capital. Additionally, the history of market economy development both domestically and abroad shows that technical progress driven by capital is often a process of substituting and saving labor, taking the substitution and saving of labor as a basically constant goal. This is also an important reason for the continuous expansion of the income gap between capital and labor.
Policy recommendations for regulating capital development from the perspective of common prosperity
In order to leverage the positive role of capital in promoting common prosperity, more proactive measures need to be taken in the areas of distribution and regulation.
In the realm of primary distribution, institutional reforms should be used to allow more urban and rural residents to have property income. This is an effective way to overcome the contradiction in income distribution between capital and labor. Specifically, work can proceed in the following areas. First, actively explore and promote the capitalization of rural land and the integrated reform of urban and rural land markets. For a long time, an important reason for the urban-rural income gap in our country has been the lack of property income for farmers. By promoting the capitalization of rural land and the integration of urban and rural land markets, we can not only effectively increase farmers' property income but also significantly enhance their willingness to leave the land and enter cities, thereby promoting urbanization and large-scale agricultural operations. Second, promote the capitalization of intellectual property rights, actively establish and prosper various intellectual property trading markets, vigorously develop the intellectual property service industry, and revitalize various types of intangible assets to provide institutional protection for mass entrepreneurship and innovation. Third, accelerate the confirmation of rights for data as a production factor, clarifying the relationship between data factors and capital factors from the perspective of property rights. This will, on the one hand, prevent capital from obtaining data returns beyond its scope and, on the other hand, ensure the rights and interests of data-related stakeholders. Fourth, further reform the social security fund investment and financing system, broadening the investment scale and scope of various social security funds under the premise of prudence, encouraging social security funds to support the development of the real economy while allowing laborers to share in more capital gains.
In the realm of secondary distribution, accelerate the formulation and improvement of the capital gains adjustment tax system. In the process of formulating and improving the capital gains tax system, we should adhere to principles such as adjusting income distribution, supporting the real economy, suppressing speculative behavior, and attracting high-quality international capital. This specifically includes the following aspects. First, formulate a progressive capital gains tax to play a positive role in regulating the income distribution gap. Second, set different capital gains tax rates for different industries, sectors, products, and stages to regulate the flow and scale of capital. Third, formulate a capital gains tax rate that decreases as the investment period lengthens, thereby encouraging long-term investment and value investment, and guiding more capital toward the real economy. Fourth, study and draw lessons from the capital gains tax practices of developed countries and regions to attract the inflow of high-quality international capital while improving the relationship between labor and capital income.
Strengthen the ex-ante guidance, ex-interim prevention, and ex-post supervision of the capital field in accordance with the law. First, clarify the capital supervision principles, industry access standards, and lists for common prosperity based on new problems arising in the process of capital development. Improve laws and regulations for capital supervision so there is a legal basis for it; simultaneously, strengthen regulatory enforcement to increase the (expected) cost of capital violations and illegal acts. Second, comprehensively utilize industrial policy, anti-monopoly policy, competition policy, fiscal policy, monetary policy, and environmental protection policy to guide the behavior and flow of capital. Restrict capital from utilizing its own advantages to conduct unfair distribution of social wealth, limit capital from entering industries with a high degree of "involution" [2], and actively guide and encourage capital to enter more into the links of total social wealth creation and fields like scientific and technological innovation. This will leverage the positive role of capital in making the cake bigger and promoting common prosperity.
(Authors: He Dexu and Tan Hongbo are both researchers at the CASS Research Center for Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era; they are respectively the Director and Associate Researcher of the National Academy of Economic Strategy, CASS)