The Western Economists Who Needlessly Delayed China's Revival
In his endlessly interesting 1982 book China: Alive in the Bitter Sea, Fox Butterfield described a tragically backwards country. So primitive were even the relatively well-to-do cities like Peking that when lightbulbs went out, citizens had to take them to a central authority at which a functionary would check the bulb’s serial number, then hand the subject one that worked. As for economic growth, there wasn’t much of an economy to speak of despite false GDP statistics that indicated activity where there wasn’t.
Interesting about all this is that by the time Butterfield’s book was published, China was five or six years into economic reforms. That the country remained desperately poor spoke to reforms that were anything but. While China’s leadership paid lip service to the notion of freeing up a country wrecked by communism, the actual changes plainly hadn’t lived up to their billing.
Which brings us to the recently released book Unlikely Partners: Chinese Reformers, Western Economists, and the Making of Modern China, by Julian Gewirtz. Though it likely wasn’t his intent, Gewirtz’s exhaustively researched but mostly dull book about China’s reform efforts from 1976-1994 reveals why China’s economy didn’t take off sooner. While Gewirtz acknowledges reform was slow, he seemingly couldn’t understand how slow, or why. Furthermore, he wanted to tell a story of heroic, technocratic economists fixing what was broken. Missed by the author is that as the country’s elites “embarked on a process of learning from abroad on a scale that has few parallels in human history,” they didn’t learn much that had to do with prosperity that can only spring from a reduction of the barriers erected in the way of the enterprising. Crucially missed by the author is the parodoxical truth that in seeking reforms meant to spur economic growth, China's elites spent way too much time with economists.
What made the listless initial reforms possible was the 1976 death of Mao Zedong. As Kremlin observers wrote at the time, “After Mao’s death, there is no single exceptional personality on the Chinese scene…” A lucky break as it were, because in the absence of China’s murderous tyrant, there existed a chance for the country to right its collapsed ship. And collapsed it was.
As Gewirtz notes, as of 1978 China had per capita GDP of $175. Poor as the country remains in a per capita sense to this day, nearly forty years ago it was neck and neck with the most impoverished countries on earth thanks to Mao’s witless collectivism.
Yet with China seemingly lacking a “single exceptional personality” to take over, reformers like Deng Xiaoping entered the void only to gradually move those wedded to the past like Hua Guofeng from the top of the pyramid. This was important, in a sense, because either out of fear for his life, or worse, because he thought Mao’s governance had been worthy, Hua was of the view that “It was under Chairman Mao’s leadership that the disaster-plagued Chinese nation stood up.” What a laugh. Figure that even Mao, contra his anti-capitalist rhetoric, acknowledged toward the end that China was “poor” and “blank,” and that it needed economic growth. Hua wasn’t the person to free the economy in order for production to take off.
Neither, in a sense, was Deng Xiaoping. He too continued to pay rhetorical lip service to the oxymoron that was a “socialist market” economy, but at the same time he knew change was necessary. Gewirtz writes that Deng “toured American factories (including those at Boeing and Ford Motor Company)” only to be “thrilled and astonished by what he saw.” Japan’s wealth inspired Deng too. China would grow even if it meant this isolated country would have “to learn how to use…foreign things,” or, as he most famously put it, “It doesn’t matter if the cat is black or yellow, as long as it can catch mice, it is a good cat.” To Deng the “spirit of sacrifice” would no longer define China’s existence.
And so the Chinese began looking around different countries. Gewirtz writes that a delegation went to England for meetings, including with “free-market standard-bearer Margaret Thatcher." And in looking around they were, much like Deng, mugged by reality in a sense. Gewirtz’s history doesn’t lack for interesting detail, and notable there is what senior economist Xue Muqiao saw on a flight to France: “The meal on the plane was richer than a state dinner,” after which Xue “was stunned” by the plenty he saw in French shopping centers.
The problem, once again, had to do with the reforms Deng and others had in mind. They wanted to be half pregnant as it were. Deng asked “Why can’t we develop a market economy under socialism?” As Gewirtz explained it, a socialist system would be crafted that would “incorporate market mechanisms and renounce a state of perpetual poverty.” Yet there was the problem, one not touched on enough by the author: Collectivism and markets are like oil and water. They don’t work together. The leadership wanted what couldn’t be, owing to Deng’s view that “Socialism also involves a market economy, just as capitalism does not do away with government planning.” True, but capitalism is rendered weaker by planning, so the notion that a country could practice more muscular socialism with markets interspersed defied basic common sense. It gets worse.
Eager to re-embrace the world in concert with accession of hard currency exchangeable for resources, Deng told World Bank president Robert McNamara “We are very poor. We have lost touch with the world. We need the World Bank to catch up.” Of course, missed by Deng was the basic truth that still holds today: truly reforming countries quite simply do not need World Bank aid. Indeed, proof that the much-vaunted reforms that took place throughout much of the book’s timeframe didn’t work was that up to the mid-1990s, the World Bank was still China’s “largest single source of foreign capital.” But economically progressing countries don't need loans that aren’t informed by market discipline.
Even worse, World Bank loans always come with strings attached. Though Bank officials claim a market orientation, the policies of high taxation and currency devaluation that they’ve historically foisted on countries have invariably weakened them, as opposed to propelling them into the first world. Former World Bank official William Easterly’s book, The Elusive Quest for Growth, details how countries embraced by the Bank were invariably worse for it. In short, funding that has nothing to do with the profit motive invariably perpetuates the policies of slow growth and poverty already in place. That Gewirtz glossed over this historical truth was but one weakness in a book full of them.
Gewirtz similarly ignored the truism that as politicians are human, they’re in it for the power. China’s stabs at reform revealed this in spades. The leadership, and this included Deng, wanted it both ways: prosperity, but without giving up control of the economy. The problem is that prosperity springs from economic freedom, plain and simple. The bigger problem was that in opening the country up to western economists, Deng and his gang of halfway reformers logically found lots of economists like Ota Sik, Wlodsimierz Brus, and Janos Kornai who were all too eager to tell them they could basically have their powerful cake, and eat the prosperity that comes from economic freedom too. Though Kornai in particular was critical of socialist economies and the inevitable shortages that result, he was all-too-willing to tell a Chinese leadership reluctant to give up power that Marx’s ideas could be mixed in with those of the free market. Under the guidance of Sik, at one point economists in China began the process of trying to divine market prices by surveying “7,000 enterprises, 10,000 farms, and 5,000 shopping centers.” You can’t make this up, and worse, the author in Gewirtz plainly didn’t see the absurdity. Seeing China’s poverty up close, Brus concluded that a “gradual approach to reform would be necessary.” Nonsense. Missed by all three was that economic growth is simple: people want food, shelter, and after that life’s myriad luxuries. But the only way to get all three is to produce. In order to produce, individuals require abundant productive freedom, at which point markets multiply. Gewirtz couldn’t quite grasp this, so instead accepted the faux reforms as realistic.
Interesting about all this is that amid the regular visits from the world’s soft central planners dressed up as reform economists, free market maven Milton Friedman dropped in. No doubt Friedman had his own flirtations with central planning himself; his monetarism whereby “money supply” would be planned by a central authority most notable in that regard, but compared to the other economists advising the Chinese, Friedman was David Ricardo. During his disastrous first visit, he told Chinese officials “to use free private markets over as wide an area as is politically and economically possible,” only to be challenged every step of the way by Chinese economists who, despite living in a country defined by staggering poverty, had the nerve to talk about “the internal contradictions of capitalism.” Friedman’s conclusion was that the officials he met with were “unbelievably ignorant about how a market or capitalist system works.”
Sadly, Friedman was the lone reasonable western economist to get even an unfair hearing in China according to Gewirtz’s history. The others were mostly worthless. One, Lawrence Klein, was convinced that China’s growth could be aided if he organized “a seminar on econometrics.” It’s hard to know if one should laugh or cry. There’s again no mystery about prosperity, as in it’s about economic freedom. Econometrics wouldn’t achieve anything.
Laughably, one of the expressed fears about economic growth was that it would cause inflation. Either new to economics, a slave to fallacy, or both, Gewirtz unsurprisingly accepted as fact the silly notion that too much growth would lead to higher prices. Indeed, throughout Unlikely Partners Gewirtz embraced the discredited Phillips Curve theory that substantial growth would cause China’s economy to “overheat.” He quotes Chinese economist Zhu Jiaming as asserting that amid any “high-speed growth phase,” inflation was “typical.” Without a direct quotation of the Nobel Laureate, he writes about how James Tobin explained to Chinese officials that “China’s high growth rate and high rate of inflation were bad for the economy and that going forward China should aggressively pursue a contractionary monetary policy.”
Back to reality, economic growth is the greatest enemy rising prices have ever known. We know this intimately in the capitalist U.S. Be it the first computers that cost over $1 million, the first mobile phones that cost $3,995, or the first laser printers that retailed for $17,000, economic growth is all about falling prices; the latter in direct contradiction to the economists inside and outside of China attempting to advise the country’s often ignorant leadership. Totally missed by Gewirtz is that economic growth signals rising investment that logically is directed toward productivity enhancements that invariably bring down the price of everything. As for the idea of growth causing inflationary labor shortages, let’s be serious. If we ignore how automation wrought by growth combined with a globalized labor force always mitigate alleged labor shortages as is, we can’t ignore that in the early 80s China was still one of the poorest, least gainfully employed countries in the world. Even if the Phillips Curve were true, it certainly didn’t apply to the China that Gewirtz was attempting to write about. But once a slave to fallacy, seemingly always. Importantly, it wasn’t just the ridiculous Phillips Curve that Gewirtz accepted as truth.
Going back to Tobin once again, Gewirtz writes that the Yale economist wowed his audience with his contention that “macroeconomic policy should seek to maintain a balance between aggregate supply and aggregate demand.” Ok, but no policy is required with the latter simply because without supply, there is no demand. We produce so that we can consume, but in a book bereft of the critical analysis necessary for a better understanding of what actually took place in China, a statement that was nonsensically superfluous was accepted by the author as the stuff of genius.
Later on the always uncritical Gewirtz wrote of how Chinese economists “had studied the experiences of the four Asian tigers (Singapore, Taiwan, South Korea, and Hong Kong), and marveled at the “astonishingly rapid transformation” all four had enjoyed thanks to their “export-led growth” strategies. The problem here is that there’s no such thing as “export-led growth.” About this, could Gewirtz really believe that the four Asian tigers were full of people eager to feverishly produce in return for nothing? Back once again to reality, exports are an expression of a desire to import. To “carry out” is to “carry in,” by definition.
More on trade, Gewirtz writes that Chinese officials let the “trade deficit grow to help with rising inflation in 1988.” The problem there is there’s no such thing as a trade deficit. Trade occurs among individuals, and logically balances. Individuals are only able to demand insofar as they supply. The “deficit” Gewirtz might have been referring to was in fact a signal of rising foreign investment in China; the latter surely a bullish signal. But to Gewirtz, his insertion of a non sequitur represented another opportunity for the “market socialists” to plan a shrinking of demand.
Maybe most comical of all was the author’s analysis of Deng’s proper decision in 1987 to institute “immediate, sweeping price decontrols.” Such a decision would be essential for a formerly impoverished economy to emerge from poverty given the basic truth that prices are the way that market economies organize themselves; the prices existing as signals telling producers what to produce, and also what not to produce. Not to Gewirtz. Endlessly mistaken, he contends that “A crisis immediately followed” as “consumers faced the prospect of soaring prices and pent-up inflation exploding throughout the economy…” Ok, not only is inflation a monetary phenomenon whereby the unit of account is devalued (as opposed to it either being a function of too much growth as Gewirtz presumes), the rising prices were the logical result of the cost of goods and services moving up to reflect reality. What Gewirtz mistook for a “crisis” was the market working to make rational what wasn’t. Missed by Gewirtz is that prices in a market economy for any scarce good always start out high, only for the high prices to serve as lures for other competitors whose production will ultimately force them down.
To his credit, Gewirtz quotes Friedman as properly pointing out that price controls were making goods “more expensive, not less,” and Friedman was absolutely right. As was Deng. The “crisis” that Gewirtz writes about was nothing of the sort. In fact, it was a signal of the Chinese economy positively adjusting to reality whereby prices would reach their natural level. Absent real prices there aren’t markets, and there’s no economic progress.
So while Gewirtz purports to have written a book about China’s wise embrace of outsider ideas from 1976-1994 that led to a country's positive economic transformation, what he’s more realistically written is the story of failed reforms that delayed China’s eventual revival by at least sixteen years. Indeed, no less a keen observer than Peter Drucker proclaimed as late as 1987 in the Wall Street Journal that “I doubt there is a single Chinese business that is actually in the black.” No surprise there when we consider the reforms in China that, while plainly an improvement on the past, hadn’t gifted the Chinese with stupendous growth simply because the reforms were rooted in the naïve presumption that soft collectivism, price controls and a partial markets were the path to prosperity. Not really.
In his defense, Gewirtz does acknowledge that more substantial reforms actually took place toward the end of the history he set out to write. Irony of ironies, the Tiananmen Square violence that led to a crackdown on the reformers (Zhao Ziyang, a reformer whom Gewirtz properly rehabilitated in his history, was placed under house arrest for good) was also the “endgame” for China’s socialist system, according to Friedman. In a sense, this makes sense. Reform that wasn’t really reform was eventually going to rile up the people.
Deng was ultimately emboldened by Tiananmen and its aftermath, only to confidently assert that “Whoever is against reform must leave office.” Even better, the agents of change who followed Deng were true believers relative to those who came before them. Indeed, Gewirtz reports that Jiang Zemin was an Adam Smith devotee, and that by 1999, 95% of retail commodities were sold at market prices. In 1993, Friedman’s book Capitalism and Freedom was for sale in China. Reform was real, and evidence supporting this claim only requires a look at what Shanghai, Beijing, and other formerly decimated Chinese cities have become. They’re quite simply dazzling. Sorry, but planned economies don’t look like this. Economic freedom eventually reached China, but not in any substantial way during the period that Gewirtz says it did. Western economists failed this most impoverished of countries, but thankfully reality ultimately caught up with the half-baked ideas of Sik, Brus, Tobin, and others. Self-regarding economists and their enablers in the media will likely celebrate Gewirtz's book as a tribute to their genius, but any half-serious reader of the book will conclude that the economists who advised China were the problem.
And there lies the problem with Gewirtz’s history. While his research is once again exhaustive, his unearthing of voluminous information in no way increased his understanding of economics. Going back to his skepticism-free assertion early in Unlikely Partners that “Economic expertise would be critical in creating a socialist system that could successfully incorporate market mechanisms,” one can only conclude that Gewirtz was the wrong person to write a very important history.
While he was seemingly trying to tell the story of economic liberalization on the way to prosperity, he couldn’t get beyond a limited understanding of economics that revealed an author desperate to tell the tale of planned prosperity. The problem is that prosperity is very messy, and is defined by constant failure as the start-up bankruptcy rate in Silicon Valley reveals in living color. Missed by Gewirtz is that prosperity can’t be planned simply because economic freedom is spontaneous.
While China’s people aren’t personally free, they’re economically free. We know this once again because no centrally planned economy would be the recipient of so much foreign investment, and also the center of so much economic dynamism. The story Gewirtz wanted to tell, or tried to write, is a fantasy. Unlikely Partners fails based on its author’s mistaken understanding of how China became what it is today. It wasn’t its openness to the ideas of academic economists, it wasn’t its leaders “crossing the river by feeling for the stones,” instead it was about a once prosperous people being left alone to once again prosper. That’s the story Gewirtz should have told, but lacked the understanding to tell.