Ronald Coase on China’s Transition to Capitalism

Legendary Nobel Prize-winning economist and legal scholar Ronald Coase has just published a new book, How China Became Capitalist, coauthored with political scientist Ning Wang. It’s incredible that Coase is still publishing books at the age of 102! He puts the rest of us academics to shame.

Coase and Wang summarize their thesis in this article in the Cato Policy Report:

No one foresaw that the “socialist modernization” that the post-Mao Chinese government launched would in 30 years turn into what scholars today have called China’s great economic transformation. How the actions of Chinese peasants, workers, scholars, and policymakers coalesce into this unintended consequence is the story we tried to capture. Today, we don’t need to present any statistical data to convince you the rise of the Chinese economy, even though China still faces enormous challenges ahead. Many Chinese are still poor, far fewer Chinese have access to clean water than to cell phones, and they still face many hurdles in protecting their rights and exercising their freedom. Nonetheless, China has been transformed from the inside out over the past 35 years. This transformation is the story of our time. The struggle of China, in other words, is the struggle of the world.

Against conventional wisdom, we take the end of 1976 as the start of post-Mao reform and argue that China basically became a market economy by the end of the 90s before it joined the World Trade Organization in 2001. In the new millennium, the Chinese economy has kept its growth momentum and become more integrated with the global economy. As an account of how China became capitalist, our book focuses mainly on the first two decades of reform.

As a property scholar, I was particular interested in Coase and Wang’s emphasis on the crucial importance of the reestablishment of private property in agriculture:

There is no doubt that the post-Mao Chinese government pursued a series of reforms. But today, with the benefit of hindsight, we know that the economic forces that were really transforming the Chinese economy in the first decade of reform were private farming, township and village enterprises, private business in cities, and the Special Economic Zones. None of them was initiated from Beijing. They were marginal players operating outside the boundary of socialism. For these marginal forces, the Chinese government was happy to leave them alone as long as they did not threaten the state sector or challenge the Party’s political power. This created a room for what we called the “marginal revolutions” that brought entrepreneurship and market forces back to China during the first decade of reform.

One such marginal revolution is private farming. Private farming was certainly not new in China. Before 1949, it had existed for millenia. In the early 1950s, Mao tried ruthlessly to collectivize farming. Some peasants believed in Mao and hoped collectivization would offer them a way out of poverty. After 20 years of collective farming and 40 million famine deaths, they knew better. Many went back to private farming after Mao died, even though Beijing was still trying to beef up the commune system. In September 1980 Beijing was forced to allow private farming in areas where “the people had lost their confidence in the collective.” But once the floodgates of private farming were opened, it could no longer be controlled. By early 1982 it became a national policy. Chinese agriculture was decollectivized. Later in the official account of reform, Beijing would credit itself for launching agricultural reform. But the reform enacted by Beijing merely raised the purchasing prices of grain and increased grain import; private farming, which really transformed Chinese agriculture and freed Chinese peasants, did not come from Beijing.

Mao Zedong’s collectivization of Chinese agriculture cost tens of millions of lives, and was probably the largest mass murder in all of world history. In a society where the vast majority of people were still peasants, the re-privatization of agriculture in the late 1970s and early 1980s was a huge step forward, possibly doing more to generate economic progress than any of the other reforms adopted by the Chinese government during that period.

The Chinese government’s respect for property rights is far from ideal, even today. But it is a major improvement relative to the bad old days of Mao.