How China Became Capitalist

In the late 1960s and early 1970s, at the height of the Cultural Revolution unleashed by Mao Tse Tung against his opponents in the Communist Party, China was the Mecca for a whole generation of soi disant revolutionaries in the West. It was the place, they thought, where individualism and bourgeois consciousness was being eradicated by a true ‘permanent revolution’, one that would transform human nature as well as social and economic arrangements. Today, forty years later, all of those hopes have been dashed. Far from becoming the centre of a proletarian revolution and transformation of consciousness, China has gone capitalist. Instead of workers control and the use of politics to plan and direct economic life, the Chinese economy is increasingly driven by private property, market exchange, and profit maximisation. The results have been extraordinary, with China recording year after year of spectacular growth in GDP to the point where in sheer output it is now the second largest economy on the planet and is poised to overtake the United States as the world’s largest economy sometime in the next fifteen years.

Of course all of this must be qualified. In terms of GDP per capita China still lags well behind the US and even more importantly the adoption of market institutions and mechanisms has stringent limits: the Chinese economy still features a very active and dynamic government while output rather than return is still the main concern for many enterprises. Even so, what we have seen in China since the end of the 1980s is one of the great transformations of human history, an event of world historical significance. Nor was this entirely unforeseen: in 1982 the Institute of Economic Affairs published a pamphlet entitled Will China Go Capitalist? by Steven Cheung. He answered in the affirmative – a classic example of a bold prediction that came true. However he thought that the process was likely to be slow and prolonged whereas in fact it has been rapid and swift. Now a book has come out with the title How China Became Capitalist, by Ronald Coase and Ning Wang, published by the IEA in conjunction with Palgrave. Where the Cheung work looked to the future this one retrospectively looks at the story of how one of the world’s leading communist states became a capitalist economy.

The account is fascinating and full of detail. Several things emerge clearly that contradict the commonly understood account of how this transformation happened. In the first place the outcome, of a broadly market economy, was not the one aimed at by the leadership of the Communist Party. Deng Xiaoping and his colleagues remained committed to socialism and were not looking to transform the nature of the system. Rather they sought to solve concrete problems and to make the state controlled economy work more effectively. In many ways a crucial element of this was the debates that took place within the party from the later 1950s onwards, between Mao and those who advocated a more pragmatic line. The latter were brutally treated by Mao and his acolytes during both the Great Leap Forward and the Cultural Revolution and the reforms brought in after 1980 were in many ways the triumph of the pragmatic wing of the party over the Maoist one (although as the authors point out there was plenty that they could draw on in Mao’s own writings). The reforms were similar in some ways to the ones tentatively introduced into the Soviet economy in the early 1960s or Hungary in the 1970s but unlike in those earlier cases there was no pulling back.

The main reason for this is the basic reality that is the central argument of the book. Most of the changes that transformed the Chinese economy did not come from above and were not instigated by the Party or the government. Rather they were a spontaneous process that came from below, from the villages of rural China via local community enterprises and from peasant farmers through their effective privatisation of the agricultural sector via the system of personal responsibility contracts. The agricultural reforms of the early 1980s, which effectively ended the collectivisation of Chinese agriculture and laid the foundation for the subsequent changes elsewhere, were actually a case of the state recognizing, and giving an official imprimatur to, changes that had already taken place at the grassroots. This point has been made before, notably by Kate Zhou in her books How The Farmers Changed China: Power of the People (1996) and China’s Long March to Freedom: Grassroots Modernization (2009) but it bears reiteration as this is a kind of social change that is not as well known or studied by scholars as those of top down reform or violent revolution. One obvious historical comparison is with the introduction of the New Economic Policy in the Soviet Union in 1923 following the abject failure of ‘war communism’. The crucial difference is that in the Chinese case the Party did not act to stop these grassroots developments but accepted them and increasingly assisted them.

One reason as to why they may have done so is another important theme of this book – the part played in the transformation by the experience of Chinese history and recurring arguments within the historical elites over economic policy. Grassroots upsurges of innovation in the face of controls designed to block them had happened before in Chinese history, notably under the later Ming emperors after 1560, and there had been repeated debates in Chinese imperial history between those among the elite who believed in encouraging and accepting (while also directing) these kinds of economic innovations and on the other side people who argued that the dynamism of market relations would destroy social stability. A perception gained ground among China’s contemporary leaders that it was the victory of the latter that had ultimately weakened China and left her vulnerable to the ‘barbarians’.

The final important theme follows from this which is the prediction that as China becomes more definitely settled as a capitalist economy so its distinctively Chinese features will become more prominent. One of these is the role of Confucian ideas as a way of understanding and legitimating economic change. It is often thought that Confucianism as a body of ideas is hostile to trade and markets but in fact there are aspects of the Confucian tradition that are sympathetic and even highly individualistic in their approach. Given its central place in Chinese history and intellectual life we can expect Confucianism to revive even more strongly in the near future and to develop in many interesting and often unexpected directions. Another is the distinctively Chinese habit of having quite different kinds of economic organisation in different provinces or districts: thus historically certain key industries were simultaneously state monopolies in one province, private monopolies in another, run by a cartel in a third, and subject to open market competition in another.

The transformation of China’s economy and society in the last thirty years is a fascinating example of the interplay of the present and the past, of a revolution that is the product of undirected, piecemeal changes that collectively bring about a transformation – a Hayekian revolution in fact – and of the way that for this kind of transformation to happen the main role for political power is to encourage change rather than to check it and to not try to reverse the innovations thrown up by the ingenuity of millions of individuals. China’s leaders had the sense to do this, at least in the economic sphere.

Click here to purchase How China Became Capitalistby Ronald Coase and Ning Wang.

Dr Steve Davies is the Head of Education at the IEA. Previously he was program officer at the Institute for Humane Studies (IHS) at George Mason University in Virginia. He joined IHS from the UK where he was Senior Lecturer in the Department of History and Economic History at Manchester Metropolitan University. He has also been a Visiting Scholar at the Social Philosophy and Policy Center at Bowling Green State University, Ohio. A historian, he graduated from St Andrews University in Scotland in 1976 and gained his PhD from the same institution in 1984. He has authored several books, including Empiricism and History (Palgrave Macmillan, 2003) and was co-editor with Nigel Ashford of The Dictionary of Conservative and Libertarian Thought (Routledge, 1991).