Free Enterprise or Big Government: The Rise of China

Free markets or government control? The debate rages on.

The discussion is not limited to op-ed pages or political debates. Different policies are put into practice in different countries. Call these countries policy laboratories if you like, but the outcomes influence the future.

On one side are those who favor human freedom. They trust in the free market and they trust people, not always to do the right thing, but to correct themselves when they get it wrong.

On the other side are those who favor government regulation, control or even ownership of a nation’s economy. Many of them do not believe in freedom. They see freedom as a ploy that the strong use to make the weak complicit with their own exploitation.

In their view the rich accumulate all the assets and buy off the rest by telling them that they are free. They favor policies that exercise more or less control on the economy and insist on a system of social justice that redistributes wealth.

In 2008 it appeared that the free markets had failed. One can easily argue that it was the regulatory regime that caused the markets to malfunction, but, most Americans accepted that the markets had failed. It was a perfect opportunity for the Keynsians to trot out their failed nostrums and to take control. As always, they insisted that they were saving free market capitalism.

When their plans did not seem to be working, they advised more government control, more government regulation and more government ownership.

With any luck this will merely produce stagnation. At that point, if we are fortunate, the right leadership will promote  free market poicies to a populace grown weary of government.

It’s what happened when Margaret Thatcher and Ronald Reagan took charge in 1980. Yet, before either of them took power, Deng Xiaoping was using free enterprise to rescue the Chinese economy from the Communist death spiral that had starved tens of millions of people to death and had consigned the large majority of the population to extreme poverty.

I think it fair to say that Deng’s reforms turned out to be the most important economic story of the twentieth century.

Most people recognize that Deng did it by gradually privatizing the Chinese economy.

Now Nobel prize-winning economist Ronald Coase has written, with the assistance of Ning Wang a book about it. Entitled How China Became Capitalist, the book explains how capitalism propelled China to power and prosperity.

It is not surprising that the proponents of government intervention should be offering a different interpretation of what happened in China. To maintain their own credibility they have argued that China was able to turn the tide because Deng brought in superior managers.

Reviewing the Coase/Wang book, Charles Wolf explains their thesis:

Messrs. Coase and Wang interpret China's rise in terms that are distinctly different from what has been accepted as conventional wisdom, which holds that China's dramatic rise has resulted from astute guidance by its Communist Party leadership. But as the authors demonstrate, China's dramatic economic growth over the past three decades hasn't been a top-down process engineered by party leaders in Beijing. Instead, China's rise has been a bottom-up process driven by what the authors call the "four marginal revolutions."

First came the "household responsibility system" in agriculture that, the authors say, "emerged spontaneously in rural China" in the late 1970s and was implemented nationwide in 1982. This system allowed farmers to sell some of their output at free-market prices. The next "revolution" resulted from rural industry reform in the form of township and village enterprises, which impelled townships to behave like entrepreneurs in producing and marketing their products. These enterprises in turn led to the emergence of entrepreneurs and the "individual economy"—"a euphemism for private economy," the authors explain, that was intended to disguise the underlying capitalist reality of this third revolution. The fourth revolution was the establishment of the "special economic zones" in Shenzhen and several other towns in Guangdong and Fujian provinces, as well as in Shanghai and other coastal cities.

Wolf continues that Chinese policy was guided by principles of pragmatism and empiricism. That means that China’s leaders were not idealists. They were freeing the markets from government control and were willing to accept the outcome. Had it not worked, they would have jettisoned capitalism. Since it did work, they have doubled down.  They were not trying to impose their ideas on reality:

The guiding principles have been pragmatism, experimentation and the Confucian injunction "to seek truth from facts"—or, as Deng Xiaoping, who pushed through many of the post-Mao reforms, put it in a famous dictum: "Practice is the sole criterion for testing truth."

Still, China remains a conundrum. What does it mean that China has achieved what it has achieved in the absence of political freedom? Can reform be sustained in its absence?