In How China Became Capitalist, Ronald Coase (the Nobel laureate in economics, who will celebrate his 102nd birthday a few days after this review appears) and Ning Wang (professor in the School of Politics and Global Studies of Arizona State University) chronicle how China realized this incredible feat. For the non-initiated—and perhaps for the student of Chinese affairs, too—their book is full of surprises.
How was the miracle accomplished? The short story is that it was done simply by letting individual incentives work, by allowing people to try and get rich on the market. Deng Xiaoping, one of the main Chinese political leaders from 1978 to the early 1990s, had a mantra: “getting rich is glorious.” “[L]et some people get rich first,” he also famously said. Nian Guangjiu, an illiterate man who had been twice convicted of street peddling, took the idea seriously and, four years after Mao’s death, became one of the first Chinese millionaires, amassing his fortune by selling watermelon seeds. It is fascinating that this simple idea apparently escaped the development economists who spent much of the 20th century devising economic models, foreign assistance proposals, and government schemes to kick-start economic growth in underdeveloped countries.
Central planning | Coase and Wang’s study of institutional change is informed by economic theory, as any empirical or historical research must be:
What we have attempted is mainly a historical narrative of the chain of actions that brought [the market transformation] about. But there is no way to present a coherent narrative of how China became capitalist without certain theoretical perspectives. Facts have to be selected and their significance assessed. Neither can be accomplished without proper guidance from theory.
The Great Helmsman, as Mao was called, had only contempt for academic learning. He rejected the traditional role of Confucian intellectuals who, according to Coase and Wang, provided a check on power. Mao’s successors professed to be influenced by facts (“seeking truth from facts”) and not theories, but their implicit theories must have been better than Mao’s because they correctly identified the reasons for poverty: central planning and the crushing of individual initiative.
À la Hayek, Coase and Wang remind us why central planning does not work. Without market prices, information on relative scarcities cannot circulate and provide the right incentives. Moreover, state minions are motivated to hide problems (and their own failures) from central bureaus. The absence of a free press adds to this wall of silence. Coase and Wang remind us that “the ultimate rationale for the market is human frailty.” The failure of central planning had disastrous consequences in China. During the Great Leap Forward (1958–1961), which created a famine that killed 30 million people, the Chinese government was pushing farmers to produce unusable steel in backyard furnaces. Without prices, who knew that more wheat was needed?
As the market developed, producers started to respond to real consumer demand and the allocation of labor became more efficient. Incomes provided the right incentives. “Self-employed barbers, for example, came to earn higher incomes than surgeons in state hospitals,” write Coase and Wang. “Street vendors who sold noodles and snack foods earned more than nuclear scientists.”
Only after 1981 was a genuine price mechanism established over most of the economy. When Milton Friedman visited China in 1980, an official from the Ministry of Materials Distribution asked him, “Tell us, who in the United States is responsible for the distribution of materials?”
Nurturing capitalism | Opening to the world and to international trade was a crucial ingredient in China’s evolution. As early as 1977, a communist apparatchik had been shocked to discover that villagers in Hong Kong (still an independent territory) earned a hundred times as much as their counterparts just across the Shenzhen River in China. Needless to say, illegal emigration was booming. Soon Chinese leaders were visiting Europe, America (in 1979), Japan, and other market economies, and discovering with astonishment that farmers and workers were earning more than themselves.
In the early 1980s, the first Special Economic Zones were established. Mostly free of government control, they were devoted to foreign trade. Their original purpose was to “appropriate capitalism for the good of socialism.”
Richard Nixon’s visit to China in 1972 had paved the way. Ronald Reagan’s visit in 1984 was very timely. “The United States of America,” note Coase and Wang, “came to replace the Soviet Union as role model for China,” particularly in the minds of young Chinese coming to study in America.
Although this is not part of Coase and Wang’s topic, today’s China-bashing (by both the Republican and the Democratic presidential candidates in the recent election) is a big step backward. If trade with China were to be substantially affected, American consumers would be hit with large increases in the low prices of manufactured goods they now take for granted. And the Chinese might conclude that the free market is not what they thought it was. “[T]he charge that the Chinese economy poses a threat to the global market order is based more on fear and misapprehension than on reason,” write Coase and Wang.
In a typical Coasian perspective, the book reminds us that the market depends on a broader institutional background that includes the rule of law and property rights. After Mao’s death, the Chinese legal system started to be rebuilt. Interestingly, Coase and Wang note that in China, “[t]he delineation and transfer of [property] rights took place in one step” as the authorities released controls on resources in favor of specific private individuals or businesses. After three decades of reform, most of the Chinese economy had thus been privatized, with the exception of some state corporations.
A fascinating aspect of the story told by Coase and Wang is how change occurred in an unplanned and unexpected way, despite—as much as because of—what the authorities were doing. They identify four “marginal revolutions” or “marginal forces” that developed largely outside the central government’s control. Private farming spread, and demonstrated its efficiency, before the government approved it. Self-employment in cities grew briskly after the government approved it to fight unemployment. The Special Economic Zones also emerged outside the central government’s control. Besides these grassroots movements, corporations belonging to local governments fueled competition and often hosted private businesses.
While the Communist Party takes credit for these reforms, they were more like “crossing the river by groping for stones.” “The story of China,” write Coase and Wang, “is the quintessence of what Adam Ferguson called ‘the product of human action but not of human design’…. [A] reform intended to save socialism has inadvertently turned China into a market economy.”
The march toward the market was helped by the diversity and decentralization of China, with distinct governments in its 32 provinces, 282 cities, 2,862 counties, 19,522 towns, and 14,677 villages. Even if local governments are nominally subordinated to Beijing’s rule, their initiatives, experiments, and competition often undermined the central planner’s goals. As the Chinese saying goes, “The mountain is high and the emperor far away.”
Strange Marxists | After Mao’s death, the gradual development of markets proceeded by leaps and bounds against a background of communist reaction and sometimes strong ideological opposition. The late 1980s and early 1990s—the epoch of Tiananmen Square—marked a pause. Surprisingly, most of the time, the advocates of liberalization hid their activities behind double-talk, from “socialist modernization” (already a big improvement over “class struggle”), to “socialism with Chinese characteristics,” “a commerce economy with plan,” and a “new political economy of Marxism.” It was not until the 1990s that the market was recognized as the main foundation of the “socialist market economy.” Deng Xiaoping, one of the main artisans of the reform, always claimed he was a Marxist: “Marxism,” he said in 1992, “is the irrefutable truth. … Marxism is not abstruse. It is a plain thing, a very plain truth.”
As time passed, the chasm between the Newspeak and the reality became more obvious. People called “putting on a red hat” the practice, in the early 1980s, of purchasing a nominal affiliation with a state enterprise in order to conduct a private business. In 1992, vice premier Tian Jiyun suggested that the opponents of liberalization should go and live in a “special leftist zone” with planning, shortages, and rationing. (This would be a good idea in the West, too!)
This long disconnect between official Newspeak and the reality of reform raises the issue of the role of ideas, if any. For Coase and Wang, ideas played a paramount role in Chinese institutional change. Paraphrasing Hume, they claim that “interests are the slaves of ideas.” They report that Wen Jibao, the Chinese premier until very recently, was an outspoken fan of Adam Smith’s The Theory of Moral Sentiments. The cover page of many Chinese editions of the book says in big red letters: “A Classic by a Master, Highly Recommended Five Times by Premier Wen.” The progression of classical liberal ideas under the double-talk of communist ideology is fascinating. Recent articles in The Economist and the Wall Street Journal suggest that, instead of Keynes, Hayek is having much influence on economic policy in China.
The Chinese reform was made gradually and without any grand ideological design. Is it possible that liberal revolutions can be more easily achieved this way than by the Thatchers and Reagans of the world? Coase and Wang don’t formally raise this question, but they provide much food for thought.
Chinese traditions helped the reformers. The country has a long commercial and entrepreneurial history. During more than a thousand years, the Silk Road symbolized trade between China and the rest of the world. Many inventions were first made in China, although they were often better exploited in the West. When Marco Polo visited China in the 13th century, he was impressed by the country’s industry and commerce. Coase and Wang argue that free market elements were present in Taoism, one of the main threads in China’s intellectual history. “So long as I [the ruler] do not attend to anything, the people will of themselves get prosperous,” said Lao-tzu 1,500 years ago. “In its attempt to build a market economy with Chinese characteristics at the end of the twentieth century,” write Coase and Wang, “China … has come full circle to embrace its own cultural roots by way of capitalism.”
How China Became Capitalist is somewhat equivocal on the role of government. On the one hand, China’s market revolution was done without a grand central design; it was a bottom-up affair. Sometimes, central government’s dictates were simply ignored. The first stock exchange opened in Shenzhen at the end of the 1980s despite Beijing’s refusal to grant permission. This sort of practice was referred to as “get on the bus first, buy the ticket later.” So we might think that enforcing property rights would suffice for the role of government. On the other hand, Coase and Wang suggest that government may be useful as a provider of “organizing services” and a social insurer. In China, the central and local governments acted as organizers when they established Special Economic Zones and, later, thousands of local industrial parks. The central government played the role of a social insurer by creating unemployment insurance, state pensions, and health insurance, thereby freeing government employees from their public jobs perks. Yet, “it is misleading,” the authors write, “to suggest that Chinese economic reform represents the triumph of state interference over market forces.”
East and West | Is this “capitalism with Chinese characteristics” really capitalism? Coase and Wang think so. Some of these “Chinese characteristics” represent purely cultural factors. The questionable ones relate to the privileges retained by large state corporations, the role of local governments in competition, the absence of brand names (who knows the name of a single large Chinese company beyond Lenovo and Foxconn?), the poor state of government-controlled higher education, the absence of democracy, and the strangulation of the market for ideas by a suspicious central government. Coase and Wang note that the lack of a free market for ideas, including political ideas, (a deep weakness compared to the West) is harming China much more than the absence of formal democracy.
What is capitalism anyway? Even in the West, many don’t agree on the answer. Here, we can go farther than Coase and Wang. For libertarians, several components are necessary: private property of capital, no central planning, free markets and prices, individual rights, and a minimal role for the state. If we use this gauge, China has not yet become capitalist. Mind you, no Western country is either. If one is willing to make exceptions for state corporations, some regulation of markets, some organizing and insurance role for the state, and individual rights, then China may be nearly as capitalist as Western countries.
In other words, the Chinese system is “capitalist” if and only if the term refers to the mixed economy we now have in the West. Wang Zhen, a high-level apparatchik who visited Britain in 1978, wrote that “Britain would simply be our model of a communist society if it were ruled by a communist party.” Meant as laudatory for Britain, this comment is very incriminating. China and the West have converged much over the past half-century, the first becoming more capitalist, the latter much less so—and even a bit communist if we are to believe Wang Zhen. How China Became Capitalist reveals, perhaps unwittingly, the weaknesses of the West as much as its strengths.
One major difference is that individual rights are much better protected in Western countries—even if the situation has not been improving, including during the very years when the Chinese discovered the benefits of freedom. The Chinese state’s birth control policy has been both a tyrannical enterprise and an economic disaster. The lack of a free market for ideas in China is closely related to the absence of formalized individual liberty. The Economist recently wrote that “[t]o get rich is not always glorious,” as many of the richest Chinese seem to be targeted by government authorities. Can capitalism survive without freedom being also recognized in other fields? Coase and Wang seem to agree that real capitalism and individual liberty are inseparable: “Without a free and open market for ideas, China cannot sustain its economic growth.”
A less charitable interpretation of the Chinese model would identify it with crony capitalism. Many large Chinese corporations still belong to the state, hold monopolies over some sectors, and get privileged treatment in their financing. Of Fortune’s 500 largest global corporations in 2010, 46 were Chinese (of which four were from Hong Kong), but only two of those were private. Under crony capitalism, getting rich is neither glorious nor necessarily conducive to prosperity. One would then conclude that the Chinese system is even worse than our own, although we may be heading in the same direction through regulation, bailouts, and central banks’ bond holdings. Coase and Wang, however, provide many good arguments against this interpretation of Chinese capitalism. And there must be something capitalist in a country where taxes don’t exceed 20 percent of gross domestic product.
Conclusion | Some criticism can be addressed to How China Became Capitalist. I wish the authors had provided more evidence about the power, and the current evolution, of the large state-owned enterprises. On a more theoretical level, the book too often ignore the teachings of Public Choice economics and seems to assume that the Chinese state has been selflessly aiming at the happiness of the Chinese people. It would have been useful to learn how Chinese politicians and bureaucrats thought they could benefit from the marginal revolutions they launched or tolerated. As I am finishing this review, I find corroborating evidence under the pen of Jamil Anderlini of the Financial Times: “In the many small uprisings that continually bubble up across China, the protagonists almost always believe that if the country’s enlightened leaders only knew about local corruption, they would descend like a deus ex machina to administer justice.” The authors of How China Became Capitalist have not stressed enough the persistent tyrannical trends within the Chinese state and Communist Party. Power corrupts.
Yet, How China Became Capitalist is a fascinating book that teaches much about what China is and, as Coase is fond of saying, “what happens in the real world.” It will change many of the reader’s ideas on China and suggest a host of interesting questions about the world.
