And now moving on from the ridiculous to the sublime. . . . I am currently reading a brand new book on “How China Became Capitalist,” written by Ronald Coase and Ning Wang. Coase on China! Isn’t that pretty much the dictionary definition of “self-recommending?”
The authors set the stage by discussing policy attitudes at the time Mao died in 1976. They emphasize two points:
1. There was a sharp move away from ideology, partly in reaction to the chaos of the Cultural Revolution. The new motto was “seek truth from facts.”
2. At the same time policymakers couldn’t even imagine any non-socialist paths for China. Capitalism was out of the question. The goal was a more effective socialism. This may seem odd given the messed up state of China’s economy, and the subsequent reforms. But those problems were attributed to the Great Leap Forward and the Cultural Revolution, which were seen (accurately) as deviations from Stalinist orthodoxy. The Soviet economy was still seen as a success story in 1976, as they had industrialized rapidly and beaten the formidable German army.
The focus of the leadership was on the crown jewels of the Chinese economy; the big state-owned enterprises. The goal was to make them more efficient, partly by reorganization, partly by importing Western technology and ideas.
The initial reforms were timid; they did not allow the SOEs to set wages or prices, or lay off workers. And the results were predictably disappointing, although a bit of progress was made (partly by rehabilitating all the technical experts who had been ostracized and exiled during the Cultural Revolution.) But Wang and Coase focus elsewhere, on what they called the “marginal revolutions.” These were the changes that occurred at the margins of society, in the backward areas where the Chinese leadership was not focused. The leadership had a sort of laissez-faire attitude toward these marginal areas, letting those groups experiment as long as they didn’t adopt capitalist practices.
Wang and Coase emphasize 4 marginal areas of the Chinese economy:
1. The very backward farm sector, which had low productivity under the Maoist system of communes.
2. Rural organizations such as township governance units. These were the groups that implemented the insane GLF policies such as encouraging farmers to set up steel mills.
3. Twenty million unemployed youth in the cities, who had just returned from the countryside (where they had been sent during the Cultural Revolution.)
4. The coastal areas in southeast China, which were relatively underdeveloped in industry, partly due to fear of a Taiwanese invasion.
In these four areas the Chinese government was willing to tolerate some experimentation, but no capitalism. But capitalism is what they got. These marginal groups continually overstepped the boundaries of what the Chinese government was willing to allow. Sometimes they went to jail. Sometimes the Chinese government later allowed the experiment to continue. This gave the central government a sort of “deniability” if things went wrong. They could say the innovations had been illegal, and shut them down.
People often praise the Chinese government for their “wise reforms.” Sorry, but these reforms were not implemented by the Chinese government, they were implemented by the Chinese people, at great personal risk. The government grudgingly OKed them much later. The only exception was the 4 SEZs of southeast China, which did provide some legal protection for foreign firms. But even there the foreign investments started before there was any legal protections. Hong Kong was investing in Guangdong as early as 1978, before the SEZs were set up in 1980.
The most interesting case was the “township enterprises,” which were supposed to be “collectives.” In the end it turned out that they were overwhelming private firms; entrepreneurs put on a “red hat” so that they wouldn’t seem like capitalists. Deng Xiaoping was amazed by their success in the 1980s, when small manufacturing firms sprouted up all across the countryside. Deng had focused on fixing the SOEs, and didn’t expect much of anything from the rural sector.
The unemployed urban youth were allowed to become self-employed, but they naturally overstepped that boundary and started hiring (i.e. “exploiting”) lots of workers. Eventually this was allowed, but as late as 1992 Deng had to intervene to protect a particularly successful seller of watermelon seed snacks from going to jail for the crime or running a business.
Coase and Wang didn’t exactly call China a Hayekian success story, but that seems to be their message. Thirty years after reforms began in 1978, China’s economy was about 70% private enterprise and 30% SOE. That 70% was created in classic Hayekian fashion, with spontaneous experiments all across China, especially among the poorest and more marginalized sectors of society. By 1988 those marginalized groups had often moved ahead of their richer neighbors, who worked in the urban SOEs.
I’m only half way through the book. Eventually the urban sector bounced back, and raced ahead of the countryside. I believe in the second half of the book they explain how SOEs were allowed to set wages and prices, lay off workers, issue stock, make foreign investments, etc. So the 30% that is still communist is rapidly evolving toward capitalism. I’ll do another post when I finish the book.
I just saw that the city of Hangzhou is going to have a Hong Kong firm run it’s subway system. They’ll make money by setting up large shopping centers along the way. I can’t even imagine a city like New York doing something so capitalistic. Can you?
More to come . . .
PS. Obviously Hayek would not approve of the soft budget constraint on the big SOEs.