[This review was published in the Summer 2014 issue of The Journal of Social, Political and Economic Studies, pp. 251-262.]
How China Became Capitalist
Ronald Coase and Ning Wang
Palgrave Macmillan, 2013
China’s transition from Maoism to “capitalism with Chinese characteristics” is not only one of the principal facts about the global economy today, but is also a subject of great complexity and ambiguity. What is one to make of a society in which Adam Smith is revered while Marxism is still universally taught in the schools? In How China Became Capitalist, Ronald Coase, a Nobel Prize winner in economics, and Ning Wang, an assistant professor at the School of Politics and Global Studies at Arizona State University, have joined in writing an extended essay on the history and economics of China since the Communists completed their victory over Chiang Kai-shek in 1949. It is clear from the book’s title that they believe China has “become capitalist,” but it is apparent that there is much that is muddled about the transformation. There are many contradictory elements that go together to cook up a social and economic stew that is likely to bubble vigorously for quite a while before it develops any culinary coherence.
The subject is of such importance that there is compelling reason for serious minds to read this book attentively. It is full of information new to any reader who isn’t a China specialist. At the same time, it is for several reasons hard to recommend it to the general reader. It isn’t difficult reading or full of technical information, but neither is it particularly engaging, as one might require of a “good read.” Even though the chapter titles suggest a chronological account, there is throughout the book a rather jumbled mixture of time elements, with much rehashing, as though the chapters were done as separate essays independently needing to cover and recover the same ground. The result is not an ordered chronology. We are reminded of Eric Hoffer’s observation that many books’ content could just as well be stated in a single article, attaining greater concision and clarity . More substantively, a telling criticism is that there is much that Coase and Wang don’t explain or even inquire into, leaving many unanswered questions. We will have more to say about that later.
Through most of the country’s history before the Communist take-over in 1949, “the family had been the basic social unit and organizational form in rural China.” Mao changed things radically into the commune system, where “all assets were taken away from households and managed as collective goods.” Coase and Wang write of this as “an extreme form of socialist agricultural management where farming was organized by production teams…, with households treated as employees.” It will surprise many readers that Mao had an “instinctive hostility toward centralization.” There was “no private property or free market,” but also “much less central planning than the name socialism might suggest.” Although we are told that China received a fair amount of equipment from the Soviet bloc during the first Five Year Plan, the authors don’t explain how it happened that Communist China eventually built up “an impressive nationwide industrial base” during Mao’s tenure. We know that the Great Leap Forward in the late 1950s was an attempt at that, with its command that millions of people try making steel in backyard furnaces, but we also know that that was a disastrous failure. Perhaps a reason industrialization went forward lay in Mao’s “bias against consumer goods.” On another point, the authors tell us that since there was no market creating a price system, prices were set by “a powerful computing machine” that was intended to “calculate prices scientifically,” using input-output data. Even though Coase is a prominent economist and may be presumed to know much more than this book tells us, the discussion isn’t broadened to inform readers about Wassily Leontief and how his input-output theory became the basis for the Soviet Union’s socialist planning. That would have allowed readers to understand China’s experience in a broader, less provincial, context.
There is reason to believe that How China Became Capitalist was written partly with Chinese readers in mind. Although there are no extended passages on market economic theory in the book, Coase has included frequent didactical points about price theory and other aspects of free-market thinking, giving the impression, probably valid, that he hopes the book will be useful as a teaching resource inside China. The expectation that there will be Chinese readers may explain a surprising and rather perverse aspect of the book’s first chapter. We are told that there is “enduring respect for Mao within the [Communist] Party, the military, and the general public.” That may be the reason the first chapter treads so lightly on Mao’s reputation. You would think that with what the authors report as 30 to 40 million people having been starved to death out of deliberate state policy during the Great Leap Forward, and a “conservatively estimated 1,070,000” killed during the Cultural Revolution, Mao would be eternally marked as among history’s most hateful figures. That’s hardly the message, however, as we are told that “the disaster Mao inflicted on the Chinese people was matched only by his ineradicable accomplishments” in moving China from feudalism “into a unified, egalitarian state.” When Mao prevailed in the civil war with Chiang, “the whole nation was electrified with joy and exuberance,” an observation that consigns the erstwhile supporters of the defeated anti-Communists to a memory hole. Mao’s soldiers had been “dedicated, determined, and triumphant,” as well as “stalwart.” Mao himself is described as having been “a defiant and independent statesman.” His merciless “class warfare” is downgraded to mere “rhetoric”; and instead of ascribing the starving of 30 to 40 million people to a vicious unconcern for human life, all sorts of excuses are made for it: “naïve… structural flaws… misguided policies.” This is mixed in with criticisms, of course, so the total effect is one of equivocation and semi-condonation. Fortunately, the book has little to say along those lines in the remaining chapters.
Although “it is now widely accepted that the Chinese government masterminded China’s shift to a capitalist economy” and it is commonly claimed that “China is a quintessential state-guided economy,” the authors of How China Became Capitalist disagree, arguing that the transition to a market economy was not consciously planned, but instead evolved “from the bottom up” as a “resounding triumph of pragmatism.” From the book’s rather scattered presentation, it will be helpful to piece together a decade-by-decade chronology of how this came about:
1970s. Mao died in 1976, marking the end of the ten-year Cultural Revolution. The transformation began that very year when one of the communes decided to try private farming; and we are told that private farming, even though outlawed, “continued to develop in many disguised forms” later in the decade. “The real agricultural reforms, decollectivization and the rise of the household responsibility system, developed from the bottom up.” Simultaneously however, there was important movement at the top (which is something that would support the consensus with which our authors disagree). An important Communist Party meeting in 1978 “is now widely recognized as a watershed in the history [of Communist China]… and the beginning of China’s post-Mao economic reform.” The meeting saw a “decisive shift of focus away from the radical ideology of continuous revolution towards socialist modernization.” With that, “China reopened itself to the outside world, welcoming technology, capital, and the ideas and practices of the market.” Monetary incentives, theretofore condemned as “a relic of capitalism,” gained acceptance.
1980s. The first experiments with a market economy started in coastal Guangdong and Fujian provinces when in 1980 four Special Economic Zones were established to welcome foreigners to do business in China. Indeed, it was in 1980 that Milton Friedman, the Nobel winner arguably most prominent as a champion of a market economy, gave his lectures on price theory in China. Just two years later, President Ronald Reagan visited China, at which time China became open to U.S. universities, American markets, and Western investment. The export-promotion policy that has been so salient in creating the enormous trade deficit with the United States and China’s vast dollar reserves (about which our authors oddly have little to say) got underway. Internally, what had theretofore been many small state enterprises were consolidated into larger units, and those were given more autonomy and allowed to pursue profit. These developments were slowed early in the decade by an anti-reform movement that came in the wake of the Tiananman Square massacre and by an economic contraction that followed a rapid expansion of credit. Overall, though, “intensive exposure to the outside world, particularly to the West, served as a powerful catalyst for changes in Chinese attitudes to the market, to capitalism, and to economic development.”
1990s. In 1992, “the market economy was, for the first time, officially recognized as the ultimate goal of China’s economic reform” (although after this chronology we will review the ideological changes occurring and see the mixed nature of this recognition). Price controls were abolished at that time, a safety net with unemployment insurance was created the next year, and in 1994 there was a streamlining of China’s taxation, with the addition of a Value Added Tax (VAT). The authors don’t comment on it, but we know that a VAT typically taxes imports and subsidizes exports, making it a valuable tool in the export promotion policy. There was much “foreign direct investment” (FDI), attracted by “China’s low labor cost and lax regulation.” A Securities Regulatory Commission was created in 1992, although it wasn’t until 1998 that “the first domestic private enterprise” was listed on the stock exchange. Private enterprises started springing up in 1992 when “the first state enterprise was sold to its employees.” (As with so much else, Coase and Wang could add an extra dimension by telling the role employee ownership played in Tito’s Yugoslavia and how it has been important in socialist thought within the American Left.)
Much was occurring inside China. In agriculture, the government had long controlled what peasants planted, but that control was lost after improved incentives were allowed. In fact, the private sector “ultimately replaced central planning.” The authors feel that “competition among county-level local governments [is] the key to understanding the miraculous rise of the Chinese economy.” Interestingly, the authorities there indulged, as people will, in local protectionism, setting up trade barriers; and raw materials were obtained in violation of socialist controls by paying bribes. Township and village enterprises thrived, resulting in rural industrialization. This was accompanied by “the official recognition of private enterprises in the mid-1990s.” China’s transportation infrastructure underwent “impressive development.” The coastal cities grew immensely, so that Shenzhen near Hong Kong, for example, grew to 14 million people. The result was that “by the end of the 1990s a dynamic market economy was in operation all over China.”
We have mentioned the beginning of unemployment insurance. It had long been Communism’s boast that it did away with unemployment. In China, what was known as “the iron bowl of socialism” involved lifetime jobs with a single employer. With the growth of a market economy, this was replaced by the safety net.
2000-to the present. China became so integrated into the global market that in 2001 it joined the World Trade Organization (WTO). We are told that “China now has a common national market for most consumer products.” Surprisingly, however, almost all that Coase and Wang say about developments since the turn of the century points to quite a muddled and imperfect system. The existence of a “state assets exchange” has stunted the growth of the stock market so that it “only plays a marginal role.” Prejudices remain strong against private entrepreneurs. There is now a single supervisory body for all state enterprises, which are not allowed to fail (thus suffering, from a Western economist’s point of view, from the lack of Schumpeter’s “creative destruction”) and are given special privileges, sometimes including a monopoly position. The economy is marked by “pervasive and corrupt intervention of the state and special interest groups… what critics call ‘crony capitalism.’” China has 1.3 billion people, and it is noteworthy that its population is “aging at an alarming rate.”
A heavy blanket lies over the country’s intellectual life. There is no “free market in ideas”; “most Chinese universities and the educational system in general still remain under state control… [with] pervasive ideological control.” Thus, “Marxism has been, and still is, taught to students from primary school as a ‘scientific’ theory and the final truth on human history and social evolution.” Even the archives of the Cultural Revolution remain closed to other than a few scholars. As in much of the developing world, the best minds are emigrating. All of this results in what the authors call “the Achilles’ heel in China’s growing manufacturing sector”: a “lack of innovation in science and technology.”
Politically, “the Chinese Communist Party has survived, and indeed thrived, over the three decades of market transformation.” In 2011, the Party had 80 million members (which is a lot in absolute terms, but in percentages is only slightly more than 6% of the population). It would be valuable to know who these people are, how they become members, what processes or criteria lead to their inclusion, and what role they play in the society and the economy, but How China Became Capitalist doesn’t speak to these questions.
Ideological transitions. Anyone who studies how religions pass through varying stages of belief and sometimes dissolve into superficial commitment, manipulation of language to change meanings while maintaining a facade of continuity, and a pragmatic embrace of practical life that negates much that was previously considered sacred, will recognize all of that in the muddied and often self-contradicting evolution of Chinese ideology since Mao’s death. One of the contradictions appears when Coase and Wang tell us, as we have seen, that Marxism is still taught universally, and as final truth, while at the same time they explain that “few, if any, of the new Party members are attracted to, or even familiar with, communism.” We can see how the new members might not be attracted to communism, but not to be familiar with it after years of schooling in it is hard to understand. This is as unfathomable as the fact that “Adam Smith has emerged as a guiding figure in China thirty-two years after the death of Mao.” If we didn’t come upon the foibles of the human mind so often in our own daily experiences with others, we might be led to wonder whether the Chinese have a uniquely credulous mentality.
There was an interesting parallel to the “don’t ask, don’t tell” policy the U.S. military adopted until recently about homosexuality in its ranks. In the 1980s and early ’90s, “entities in the individual economy could not hire more than seven employees – any private enterprise of eight or more employees was deemed to be capitalist and was therefore illegal.” But in the face of “mass unemployment,” the Chinese government adopted the “Three Nos” policy – “no promotion, no publicity, and no ban”—toward private jobs, with the enterprises using various subterfuges.
Deng Xiaoping, China’s principal leader during the early years after Mao, developed a form of mental convenience that reminds us of the twentieth century Christian theologian Reinhold Niebuhr’s much-secularized redefinition of “God.” We are told that “Deng never abandoned his political belief in Marxism,” which was possible because “he creatively redefined Marxism.” With him, “the essence of socialism was the ultimate achievement of prosperity for all.” That, of course, is a feel-good definition devoid of content. This conceptual vacuity may not be entirely present in the formulations that rationalize the growth of a market economy as a supplement to, or instrument of, socialism, such as when it is said that the idea is “to appropriate capitalism for the good of socialism” or to “co-opt capitalism to save socialism.” (As with much else, it would have been helpful if the authors had related all this to events outside China. The socialist parties of Western Europe went through a similar change in the late 1950s, as we saw in the Bad Godesberg declaration in Germany in 1959 accepting private property. “Democratic socialism” became a matter of the state’s occupying “the commanding heights” of a market economy.)
There have, of course, been those who have struggled to keep China faithful to the old-time religion. The movement into agnosticism hasn’t been uniform. “Economic reform was halted,” for example, “in the mid-late 1980s.” when it was found that “Hu Yaobang’s… liberal political views were many steps ahead of his fellow Party members.” There was at that time an “Anti-Spiritual Pollution” campaign. We are told that “throughout the 1980s, the most stubborn resistance to market reform… originated in China’s remaining commitment to socialism.”
When we are told that “the Chinese Communist Party no long identifies itself as a revolutionary vanguard,” we see how remarkably the world has changed since the days when the Soviet Union, Mao’s China, and “national liberation movements” throughout the Third World exported or promoted radical zeal and weaponry. It is no coincidence that all three of these sources of militant revolution dried up at approximately the same time, again demonstrating how Chinese Communism is not adequately seen as something totally separate from the rest of the world Left.
One difference is that the Communist Party has retained its hold (just as it has in Vietnam). The Party’s “legitimacy” today is said to rest not on doctrinal enthusiasm but on keeping the masses satisfied. With the Party continuing at the top, it is possible to speak of “capitalism with Chinese characteristics.” Challenges to the Party’s supremacy may arise, if they occur, from burgeoning corruption or a stalling of the economy.
Some questions left unanswered or that should be discussed. An “elephant in the room,” so to speak, about China today is the question of how Marxism and Communism, so centered on class theory, will be able to digest the growth of a large wealthy stratum. We recall Mao’s “let a hundred flowers bloom” period, which ostensibly encouraged freedom of thought but which ended tragically for those who had stuck their necks out. Are those who are accumulating wealth today destined for a similar fate, with their heads resting uneasily on their shoulders? Or does the current “pragmatism” allow a permanent accommodation with wealth? And where are the rich fitting in sociologically and politically? Are they a separate power-center, or are they being integrated into the Communist Party itself? These questions, unaddressed by Coase and Wang, go to the very heart of China’s present and future.
There are several other aspects that receive no attention.
. In the absence of some explication of the Chinese monetary system, an important void remains in our understanding.
. “Central planning” is mentioned repeatedly without describing what the planning has sought for the economy, leaving it in effect a wild card. It is rather meaningless as a generic concept.
. We are told that in 1989 “student protests broke out in over 130 Chinese cities” and are left with the impression that simultaneous action in so many places just happened spontaneously without organization or some sort of linkage. What were the instrumentalities, such as through the press or private networks, that made that possible? (If it were to happen today, of course, we might well imagine the internet, texting or something equivalent to Facebook would account for it.)
. The book says that “Marxism was rarely, if ever, seriously studied or understood by Mao and his comrades,” with the result that “the Chinese Communist Party has always been more Chinese than communist.” This sounds rather suspiciously like the argument that “they’re just agrarian reformers” that was pressed so vigorously about the Chinese Communists by the American Left in the late 1940s. It seems contradicted by what we are told by the authors about Mao’s quick replacement of the millennium-old family-oriented agricultural system, abolishing private property and establishing universal communes. In fact, we could coin a phrase and call that “Communism without a Chinese face.” Nevertheless, there has been such a thing as the blending of nationalism and Communism. This produced one of the great conundrums of the “Cold War”: the fact that most, if not all, of the “national liberation movements” in the Third World mixed their national, ethnic aspirations with Communist ideology and support. A prominent example of that mixing can be seen in the life of Nelson Mandela. In a separate but related point, we are prompted to ask how it has been that various Maoist parties have existed in the Third World if Maoism had little ideological content. Those parties have been peopled by indigenous radicals who are not Chinese nationalists.
As we review a book, one of the purposes is to discuss as thoughtfully as we can the intellectual issues the book brings to light. Among those suggested by Coase and Wang’s discussion are:
. Do the authors realize the implications of the statement they make near the end of the book, “for an open market in ideas to operate, participants have to recognize that an unimpeachable truth does not exist”? For those of us who fully accept the empirical, scientific, secular mindscape that has come into being in quite recent centuries, there is merit to the statement. It is not one that finds ready acceptance in a partisan world, however. It places the speaker radically at odds with all of the world’s doctrinal religions, now and historically, and with all of their quite literally billions of followers. Such intellectual openness would even allow violations of the taboo against a “revisionist” examining of historical events. It would be interesting to know whether the authors, confronted by specific taboos, would stand by their statement.
. The authors adhere to an elevated tradition that has its primary exemplars in John Milton and John Stuart Mill. This leads them to say such a thing as “harmony arises only as a result of interactions of different voices through a market for ideas.” Is this not wonderfully naïve? – even though it is a noble sentiment. It hardly fits the realities in Iraq, say, or in post-Mubarak Egypt. The problem with their statement could be corrected if it were expressed as an aspiration and not as an empirical truth.
. We are surprised that although there is frequent citing of the Austrian economist Friedrich Hayek, there is no mention of and no Index entry for Ludwig von Mises, from whom Hayek learned so much and who articulated many of the ideas the authors attribute to Hayek. Other omissions that are surprising (although certainly understandable in light of so many written sources about Mao) are of Jung Chang and Jon Halliday’s magisterial biography Mao: The Unknown Story (2006), and of Dr. Li Zhisui’s The Private Life of Chairman Mao (1994). Li served as Mao’s personal physician for 22 years. Our discussion of each of these books is available on this reviewer’s web site.
It would be unreasonable to expect all these things to have been examined in How China Became Capitalist, but we have mentioned much that should have been explored . We return, however, to the point we made initially – that readers who have a serious interest in China will do well to read the book attentively for the information and analysis it does give.
Dwight D. Murphey
 See www.dwightmurphey-collectedwritings.info. An article centered on the Jung-Halliday book appears on that site as A93 (i.e., Article 93) and was published in this Journal’s Spring 2007 issue, pp. 61-73. The review of Li Zhisui’s book is BR52 (Book Review 52) and appeared in this Journal’s Summer 1998 issue, pp. 216-219.