James Dorn is vice president for academic affairs at the Cato Institute and professor of economics at Towson University. He is the editor of China in the New Millennium: Market Reforms and Social Development (Cato Institute, 1998). A shorter version of this article appeared in the Journal of Commerce.
This year marks the 50th anniversary of the People’s Republic of China and the tenth anniversary of Tiananmen Square. The spontaneous demonstrations for freedom that took place in the heart of Beijing in May and June a decade ago met with a dramatic and tragic end when confronted with the power of the state.
It is no coincidence that the monopoly of power exercised by the Communist Party and the horrid events of 1989 are related. The party can survive only by its ultimate reliance on the use of force to prevent competition from those who would contest single-party rule. The recent crackdown on the founders of the first opposition party in the history of the PRC, the Chinese Democratic Party, attests to the insecurity of the ruling elite.
Yet, even in the face of an oppressive government, the Chinese people have made substantial economic progress since 1978. They have done so because brave individuals have been willing to challenge the planned economy and because the communist party under the leadership of Deng Xiaoping recognized the failure of planning and the value of a market system. But the party has been unwilling to abandon its vision of a “socialist market economy” and allow a true market system to evolve.
The party leaders believe that without their firm guidance, life in China would be chaotic and unstable, and the economy would grind to a halt. No one better represents that view than Jiang Zemin, China’s president and chairman of the Communist Party. This past December, he celebrated the 20th anniversary of China’s economic reform, and attributed its success to “unswerving adherence to the Party’s basic line.” By his logic, continued economic success depends on the survival of the Communist Party and on the primacy of public ownership. Nothing could be further from the truth.
The Secret of China’s Success
China’s economy has grown by nearly 10 percent a year since 1978 because the government has gotten out of the way of the market and allowed individuals greater economic freedom—not because of strict adherence to the basic party line, which holds that the individual is a cog in the socialist state. The truth is that China’s economic reforms have succeeded because some individuals were willing to risk everything to escape the iron grip of state planners and a life with no future.
The first steps were taken by farmers who resisted state coercion under the communal system and initiated what Kate Xiao Zhou, author of How the Farmers Changed China, calls “a spontaneous, unorganized, leaderless, nonideological, apolitical movement.” The goal was to create a market-oriented system under which farmers would have greater control over the land at their disposal and be able to profit from voluntary exchange. It was only after that limited, spontaneous experiment with the “household responsibility system” (baochan daohu) proved successful that the party sanctioned the new arrangement.
As farmers gained wealth, they expanded into nonfarm production and experimented with a new form of collective ownership—the so-called township and village enterprise (TVE). Rather than actively promoting that new ownership form, party leaders cautiously observed its operation. Once success was evident, the Communist Party again was willing to permit expansion. However, it never envisioned that TVEs would far outperform state-owned enterprises. According to Deng, “Our greatest success—and it is one we had by no means anticipated—has been the emergence of a large number of enterprises run by villages and townships. They were like a new force that just came into being spontaneously.”
Today, the market-driven, nonstate sector, which includes TVEs, foreign-funded enterprises, private enterprises, and other firms that are not dependent on government handouts, is the dominant force in China’s “socialist market economy.” More than 70 percent of industrial output value is now produced outside the state sector. Most state-owned enterprises, on the other hand, are losing money and eating up China’s capital—more than 50 percent of state investment funds go to these collectives.
Another example of spontaneous order in China is the special economic zones. Those zones were first set up in the coastal areas, but the idea spread to other areas and took on new forms as competitive forces led some local officials to permit the growth of markets and foreign investment before receiving approval from the central government. Once the new institutions were successful, however, official recognition followed.
China’s economic success has been the result of millions of hard-working Chinese being set free to pursue a better life. The relaxation of price controls has allowed the market, rather than the plan and the party, to guide production and consumption. The continuing depoliticization of economic life has given people more time and energy to devote to everyday affairs. Personal freedom has inched forward as a consequence. People are now free to work outside the state sector and to choose their life’s work, to buy from alternative sources, to invest their money, and to enjoy the infusion of new products and new ideas brought about by trade liberalization.
The real lesson from China’s “economic miracle” is not that economic development depends on adherence to the “party’s basic line,” but that economic freedom is essential for increasing human well-being.
A Constitution of Liberty for China
The willingness of China’s leaders to open the country to the outside world, to permit new ownership forms, and to abolish much of the state planning system in favor of market pricing should be congratulated. But the lack of commitment to private property rights and, therefore, to limited government and the rule of law means that China’s future is unclear. So long as the market is contaminated by party politics and state planning, corruption will continue to pollute China’s economic environment.
If China wishes to continue its rapid economic growth into the next century and end corruption, it must strive for institutions that are consistent with free-market principles and the rule of law. That is why Justin Yifu Lin, Fang Cai, and Zhou Li argue that “It is essential for the continuous growth of the Chinese economy to establish a transparent legal system that protects property rights so as to encourage innovations, technological progress, and domestic as well as foreign investment in China.”
Ultimately, economic and political reform are inseparable. To depoliticize economic life and nourish China’s fragile spontaneous market order, there must be constitutional change and new thinking (xin si wei). The Chinese people need to understand and appreciate the nature of spontaneous order and the institutions that underlie that order—namely, private property, freedom of contract, and limited government. Most of all they need to adopt what F.A. Hayek called a “constitution of liberty.” As Roger Pilon, director of Cato’s Center for Constitutional Studies, stated, “If China is to preserve and expand upon its recent achievements, it will need a constitution that institutionalizes, not simply tolerates, the forces that have led to improvements there.”
Chinese scholars are beginning to realize the necessity of constitutional change. In 1991, Jixuan Hu argued that the market is a “living system” that cannot be designed. “By setting up a minimum group of constraints and letting human creativity work freely, we can create a better society without having to design it in detail. That is not a new idea, it is the idea of law, the idea of a constitution.” To accept that idea, however, means to understand and accept the notion of spontaneous order and the principle of nonintervention (wu wei) as the basis for economic, social, and political life.
But as Pilon explains, the development of China’s spontaneous market order is being limited by the Communist Party’s adherence to a constitution that turns the relation between the individual and the state on its head. Instead of protecting individuals and their property rights, the Chinese constitution makes the individual subservient to the state and narrowly circumscribes rights, allowing only that amount of freedom that does not threaten party rule. Rights are temporary and arbitrary, not permanent, and depend solely on the will of the rulers.
What China needs is a government of limited powers that respects the life, liberty, and property of each individual—not 100 more years of communist rule and “public” ownership. It is not enough that China has permitted the market to develop; China must now recognize the futility of trying to plan the market and to control the lives of 1.3 billion people. A better way is to increase freedom within a constitutional setting that establishes general rules to constrain government and let people be free to choose.
Lao Tzu Thought
In considering what steps to take next, China’s leaders should look to their own ancient culture and rediscover the principle of spontaneous order—the central principle of a true market system. In the Tao Te Ching (also known as the Lao Tzu), written more than 2,000 years before The Wealth of Nations, Lao Tzu instructed the sage (ruler) to adopt the principle of noninterference as the best way to achieve happiness and prosperity:
Administer the empire by engaging in no activity.
The more taboos and prohibitions there are in the world,
The poorer the people will be.
The more laws and orders are made prominent,
The more thieves and robbers there will be.
Therefore, the sage says:
I take no action and the people of themselves are transformed.
I engage in no activity and the people of themselves become prosperous.
“Lao Tzu Thought,” not “Mao Zedong Thought,” is the beacon for China’s future as a free and prosperous nation.
Truth versus Party Line
The truth is, the basic party line is inconsistent with a spontaneous market order and a free society. When push comes to shove, the party, not the individual, rules, and no dissent is tolerated. Until that totalitarian mentality is contested, China’s future will be plagued by uncertainty, and the nascent market economy will be in constant danger.
The right to dissent—that is, to be different, to think, to choose—is the hallmark of a free and civil society. The party’s recent crackdown on dissidents, including the harsh sentencing of Zhang Shanguang to 10 years in prison for “informing” Radio Free Asia of the protest by 80 farmers in Hunan’s Xupu County against excessive taxes, is yet one more egregious example of how the party’s quest for “stability” is, in reality, a ploy to protect its monopoly power.
It is time for the Communist Party to abandon its top-down model of “stability” and allow the forces of freedom and individual responsibility to create a new constitutional order from the bottom up—based on the consent of the people and a respect for their natural rights to life, liberty, and property. Only then will the institutional incompatibility that now exists in China’s socialist market economy disappear and a true market-liberal order emerge—based on liberty and justice for all.
The recent publication and popularity of a Chinese language edition of Hayek’s classic book The Constitution of Liberty, now in its second printing, is a sign that the old top-down order of planning and control is slowly giving way to a new spontaneous market order of liberty and opportunity. People are beginning to recognize the need for adhering to universal principles of justice. Mao Yushi, director of the Unirule Institute in Beijing, told the Wall Street Journal, “We need to make everyone equal before the law and set the rules of conflict resolution.” In his opinion, liberty, not democracy, should be the primary concern.
The challenge for China is to allow liberty to grow by adopting constitutional constraints on government power. In the end, it must be the Chinese people themselves who will have to meet that challenge by ending the power of the party and securing the power of the people to choose their own institutions. That will not lead to chaos but to a new spontaneous order for China.
- “President Jiang Says China to Maintain Socialist Economy” and “President Jiang Calls for Another 100 Years of Communist Rule,” Agence France Presse, in Inside China Today, December 18, 1998
- Kate Xiao Zhou, How the Farmers Changed China (Boulder, Colo.: Westview Press, 1996), p. 4.
- See Justin Yifu Lin, Fang Cai, and Zhou Li, The China Miracle (Hong Kong: The Chinese University Press for The Hong Kong Centre for Economic Research, 1996), pp. 132–33.
- Deng Xiaoping, Fundamental Issues in Present-Day China, translated by the Bureau for the Compilation and Translation of Works of Marx, Engels, Lenin, and Stalin under the Central Committee of the Communist Party of China (Beijing: Foreign Languages Press, 1987), p. 189.
- East Asia Analytical Unit (EAAU), China Embraces the Market (Barton, Australia: EAAU, Department of Foreign Affairs and Trade, 1997), pp. 10, 338. Hugo Restall estimates that “as many as 70 percent [of state-owned enterprises] are losing money” (“China’s Long March to Reform,” Wall Street Journal, September 23, 1997, p. A22).
- See Steven Lewis, “Marketization and Government Credibility in Shanghai: Federalist and Local Corporatist Explanations,” in David L. Weimer, ed., The Political Economy of Property Rights: Institutional Change and Credibility in the Reform of Centrally Planned Economies (New York: Cambridge University Press, 1997), pp. 259–87. According to Lewis (p. 283), “By the early 1990s, when surplus domestic capital could be moved between localities and banks more freely, and as central and local authorities began to decrease their monitoring of rural localities, thousands of non-sanctioned land development companies and ‘development zones’ had sprouted up around China.”
- Justin Yifu Lin, Fang Cai, and Zhou Li, “The Lessons of China’s Transition to a Market Economy,” Cato Journal, Fall 1996, p. 226.
- F.A. Hayek, The Constitution of Liberty (Chicago: University of Chicago Press, 1960).
- Roger Pilon, “A Constitution of Liberty for China,” in James A. Dorn, ed., China in the New Millennium: Market Reforms and Social Development (Washington, D.C.: Cato Institute, 1998), p. 333.
- Jixuan Hu, “The Nondesignability of Living Systems: A Lesson from the Failed Experiments in Socialist Countries,” Cato Journal, Spring/Summer 1991, p. 44.
- Pilon, pp. 334–41.
- Nobel laureate economist James M. Buchanan has called “the principle of spontaneous order” the “most important central principle in economics.” (In J. M. Buchanan, What Should Economists Do? [Indianapolis: Liberty Press, 1979], pp. 81–82.) It is the idea that individuals seeking their own gain in a system of private ownership and free markets bring about mutually beneficial exchanges, and that competitively determined prices coordinate economic decisions without central planning.
- Tao Te Ching (the Lao Tzu), 57, in W.-T. Chan, A Source Book in Chinese Philosophy (Princeton, N.J.: Princeton University Press, 1963), pp. 166–67.
- See James A. Dorn, “China’s Future: Market Socialism or Market Taoism?” Cato Journal, Spring/Summer 1998.
- See John Pomfret, “4th China Dissident Sent to Jail,” Washington Post, December 28, 1998, p. A17.
- “China Rediscovers Hayek,” interview with Mao Yushi, Wall Street Journal, June 12, 1998.