Common Prosperity and Reshaping China’s Economic Cycle: Theoretical Logic and Empirical Evidence from a Political Economic Perspective

Abstract Fostering a new development dynamic is in nature about reshaping the relations between domestic and international economic cycles to achieve self-reliance and self-strengthening at higher levels. Economic cycle is the integration of various links such as production, distribution, exchange and consumption. This paper attempts to study the influence on economic cycle from income distribution based on the principles of political economy and therefore link common prosperity with the new development dynamic. It finds that labor income share is central to income distribution. On the supply side, income distribution affects choice of technology and production efficiency through changing wages; on the demand side, it influences size of demand and level of capacity utilization both directly and indirectly. Specifically, changing wages lead to changing size of reproduction and consumption by laborers in the direct way and cause changing profit margins and thus affect accumulation in the indirect way. The two channels produce effects simultaneously, yet in opposite directions, which justifies the categorization of economies into “profit-oriented” and “wage-oriented” ones according to the different influence of changing wages on the level of capacity utilization. In this theoretical logic, the paper comprehensively analyzes China’s income distribution, wages, all labor productivity, organic composition of capital, profit margins, accumulation rates, level of capacity utilization and relations between domestic and international economic cycles, and finds that Chinese economy has turned from “profit-oriented” to “wage-oriented” since the turning point of 2010. It signals both necessity and feasibility of promoting common prosperity and fostering a new development dynamic. This paper also proposes some policy suggestions on promoting common prosperity from the perspectives of ownership, distribution, government-market relations and spatial structure.