How China Became Capitalist.

• Author: Dorn, James A.

How China Became Capitalist

Ronald Coase and Ning Wang

Palgrave Macmillan, 2012, 256 pp.

In 1981, shortly after China began to liberalize its economy, Steven N. S. Cheung predicted that free markets would trump state planning and eventually China would "go 'capitalist'." He grounded his analysis in property rights theory and the new institutional economics, of which he was a pioneer. Ronald Coase, a longtime professor of law and economics at the University of Chicago and Cheung's colleague during 1967-69, agreed with that prediction. Now the Nobel laureate economist has teamed up with Ning Wang, a former student and a senior fellow at the Ronald Coase Institute, to provide a detailed account of "how China became capitalist."

The hallmark of this book is the use of primary sources to provide an in-depth view of the institutional changes that took place during the early stages of China's economic reforms and the use of Coaseian analysis to understand those changes. In particular, Coase's distinction between the market for goods and the market for ideas is applied to China's reform movement and gives a fresh perspective of how China was able to make the transition from plan to market. The key conclusion is that the absence of a free market for ideas is a threat to China's future development.

The book has six chapters and an epilogue. It begins with an account of China at the time of Chairman Mao Zedong's death in September 1976, and then examines the transitional period during 1976-78, the rise of Deng Xiaoping, the "marginal revolutions" during 1978-88, the reversal after the 1989 Tiananmen crackdown, and the restart of the economic reforms in 1992, signaled by Deng's famous "Southern tour."

During the first decade of reform, the rise of the nonstate sector--motivated by the terrible costs inflicted on the Chinese people (especially peasants, entrepreneurs, and intellectuals) by Mao's Great Leap Forward (1958-61) and the Cultural Revolution (1966-76)--was characterized by four "marginal revolutions."

First, private farming (the "household responsibility system") arose to replace the state-ran communes that had led to mass starvation. Poor farmers in small villages began the market revolution, not planners in Beijing. Local officials, however, played an important role in giving rural households more autonomy, allowing them to sell their produce on the open market after meeting a state quota. Productivity increased and farmers began to reinvest their profits, which led to the second marginal revolution: the emergence of township and village enterprises. The TVEs released entrepreneurial energy that had been suppressed under the old regime, helped transform the countryside, and spurred industrialization. Both reforms sprung from the bottom up; there was no central blueprint. Local private parties and officials pushed for institutional changes that would allow more freedom and more choices. When local market experiments were successful, central authorities sanctioned them--and the masked reforms became transparent and spread.

Two further marginal revolutions occurred with the rise of private (individual) businesses in urban areas and the approval of Special Economic Zones in Guangdong and Fujian. The...