I cite: Deng and capitalism (excerpt from Daily Kos: Owners of the world, unite)

Even if it's the enterprise zones and the Coke factories that we remember, what Deng instituted between 1976 and his death in 1997 was not an abolition of central planning – it was better central planning. It was central planning backed up by solid analysis, careful study, and computer models. It was the replacement of Mao's cult of personality with a cult of competence. Deng's economic reform was not an abandonment of his long held beliefs in favor of an embrace of free market capitalism. It was an attack, an open exploitation of the weakness in the system.

He started with a gamble. Deng bet that, despite grand talk, what mattered most to western nations was the establishment of economic ties, not as a means to an end, but as an end in themselves. So long as he was willing to open the nation to trade, everything else would fall by the wayside. It was a gamble he won. The stark truth of this can be read in the western reaction to the massacre in Tiananmen Square. By 1989, just a decade after Deng shoved open the doors, the US was already so dependent on trade with China and so committed to the idea that the foundation of freedom was free trade, that the response to the Chinese crackdown was extremely muted. Sanctions against China were limited to military sales. Even a bill to allow Chinese students to remain in the US until China's human rights abuses ended was vetoed by President Bush. The first action of the US government wasn't to withdraw from China, but to work toward "improved relations."

That the west would tolerate any level of political suppression for access to China was only one of Deng's insights. It was what opened the door. Though his understanding of communism was different from that of Mao and other leaders, Deng still followed the labor theory of value. It was on that point that Deng launched his attack.

Going back to Adam Smith and David Ricardo, economists had recognized that the first value of any item was the value of the labor that it took to create it. In a capitalist system, the price also included the compensation awarded to those who controlled the means of production. So if factory workers were paid $100 to make a TV, but the sales price of that TV was $200, the factory owner pocketed the difference. Under capitalism, the price of an item no longer reflected just the labor cost, but both labor and the premium to the owners. Because of this difference between labor value and ultimate price, the goals of employers could be very different than the goals of employees. It was this disconnect between the value of goods and the reward to workers that Marx saw as the intrinsic exploitation of the capitalist system. It was in this difference that Deng saw opportunity.

At the time Deng opened China for business, western societies had enjoyed decades of economic growth. Even though there had been periods of recession and surges of inflation, overall economies had expanded rapidly. Incomes at the top had risen, but so had incomes at the middle, and the bottom. The value of items was not completely tied to the value of labor, but the value of labor was still a big enough component in the cost of goods that workers in America and elsewhere could afford to buy the things they made. Labor cost and goods costs were still tightly coupled.

Deng offered corporations a chance to break that connection. By moving the source of production to China, they could sharply reduce the cost of labor. At the time, labor's value was increased by years of training and skill acquisition and Chinese workers lacked the experience of American workers, but Deng's assault was well timed. Manufacturing was becoming increasingly automated, and the value of long periods of training diminishing. Besides, the number of available Chinese workers was such that manufacturers could sort and sift to find those who learned fast and were most productive.

Far more than at any point in the
past, the cost of goods and the cost of labor was suddenly and irrevocably severed. The goals of manufacturing workers in the US were no longer a concern to employers, because those workers were now ex-employees. Even as prices fell, the reduced cost of labor made it possible for corporations to extract higher profit margins.
By opening China as a manufacturing hub for the west, Deng punched a hole in the tub. He destroyed the value of labor, convinced corporate management that they could separate their customer base from their worker base, and broke the back of western manufacturing. He decoupled labor value from product value and wrecked the system that had made the US and other western nations wealthy. The result was a flood of inexpensive goods flowing in, a flood of money pouring out, enormous disparity in incomes between those who owned the factories and those who used to man them, and a rapidly approaching point where even cheap isn't cheap enough.

It's become popular to view American workers in the decades after World War II as "highly paid." The truth is they were "rightly paid," with incomes that tracked well against the value of the products they produced. This was only possible because of the tight alignment between workers salaries and the price of goods.

via www.dailykos.com