Getting Rich Is Glorious
Lemieux, Pierre, Regulation
How China Became Capitalist
By Ronald Coase and Ning Wang
256 pages; Palgrave Macmillan, 2012
A 2010 GlobeScan opinion poll shows that more Chinese (67 percent) than Americans (59 percent) strongly or somewhat agree that "[t]he free market system and free market economy is the best system on which to base the future of the world." Most analysts never suspected that the communist giant would, in three decades, become a capitalist (or near-capitalist) country and go from one of the poorest countries in the world to the second largest economy and the largest trading nation.
PIERRE LEMIEUX is an economist in the Department of Management Sciences of the Universite du Quebec en Outaouais. He is the author of The Public Debt Problem: A Comprehensive Guide (Palgrave-Macmillan, forthcoming January 2013).
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 Chow 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.
A 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? …