[This review was published in the Summer 2014 issue of The Journal of Social,

Poltical and Economic Studies, pp. 251-262.]

Book Review

How China Became Capitalist
Ronald Coase and Ning Wang
Palgrave Macmillan, 2013

Chinas 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 books 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
isnt a China specialist. At the same time, it is for several reasons hard to
recommend it to the general reader. It isnt 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 Hoffers 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 dont explain or even inquire into, leaving many unanswered questions.
We will have more to say about that later.
Through most of the countrys 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 dont explain how it happened that
Communist China eventually built up an impressive nationwide industrial base
during Maos 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 Maos 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 isnt broadened to inform readers about Wassily Leontief
and how his input-output theory became the basis for the Soviet Unions socialist
planning. That would have allowed readers to understand Chinas 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 books 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
Maos 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 historys most
hateful figures. Thats 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. Maos 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: nave 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 Chinas 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 books 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 Chinas 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 Chinas 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 Chinas 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 Chinas taxation, with the addition of a Value Added Tax (VAT).
The authors dont 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 Chinas low labor
cost and lax regulation. A Securities Regulatory Commission was created in
1992, although it wasnt 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 Titos 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. Chinas 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 Communisms 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 economists point of view, from the
lack of Schumpeters 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 countrys 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 Chinas 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 doesnt speak to these questions.
I deological 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 Maos 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 didnt 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 dont ask, dont 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 bantoward private jobs, with the enterprises using various
subterfuges.
Deng Xiaoping, Chinas principal leader during the early years after Mao,
developed a form of mental convenience that reminds us of the twentieth century
Christian theologian Reinhold Niebuhrs 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 states 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 hasnt been uniform.
Economic reform was halted, for example, in the mid-late 1980s. when it was
found that Hu Yaobangs 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 Chinas 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, Maos 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 Partys 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 Partys 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 Maos 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 Chinas 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 theyre 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 Maos
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 Wangs 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 worlds 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 nave? 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 Hallidays magisterial biography Mao: The Unknown Story
(2006), and of Dr. Li Zhisuis The Private Life of Chairman Mao (1994). Li
served as Maos personal physician for 22 years. Our discussion of each of these
books is available on this reviewers web site.
1


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

1
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 Journals Spring 2007 issue, pp. 61-73. The review of Li Zhisuis book is
BR52 (Book Review 52) and appeared in this Journals Summer 1998 issue, pp.
216-219.