Tuesday, August 18, 2015

What Is The Chinese Economic System?

In a recent post Paul Krugman in while criticizing China's interventions in forex markets to engage in a peculiarly managed minor devaluation of  the yuan/rmb (not worth all the hype and flagellating, frankly), he labeled the Chinese system as being "rapacious crony capitalism."  This has led various commentators in various papers to have varying degrees of vapors.  But even if we grant that "rapacious" is not a scientific term that may be dramatic for blogging but is not useful for seriously categorizing the Chinese economic system, the hard fact is that it is not obvious what it is, and it may simply be too complicatedly mixed and large for any of the usual categories to really fit.

This is actually a  current professional problem for  me and my wife, who are nearing completing the third edition of our textbook, Comparative Economics in a Transforming World Economy, MIT Press.  It is one of the two most widely used textbooks in that field, our big rival being one by Paul Gregory and Robert Stuart (with Bob having just passed away very recently).  Our second edition was in 2004 and is seriously out of date, and unlike textbooks in many fields, pretty much all of our chapters need substantial rewriting.  As it is, we are nearly done, but the remaining country studies are the hardest to do, and of those the last to be done and the hardest to do will be our chapter on China.  From the standpoint of professional comparative economics, what the heck the Chinese system is is a matter of serious and substantial debate.

So, at some level we are sort of traditional on these matters.  There are two big categories out there: the degree to which an economy is run by markets rather than central planning and the degree to which it is characterized by private or state ownership of the means of production, with private ownership being "capitalism" while state ownership being "socialism," this last categorization being basically codified by Karl Marx himself.  There are of course many other such matters of significance, such as policies about social safety nets and redistribution, but these are generally viewed as less central in determining the fundamental nature of the system.

So, the US has always been more or less a market capitalist system, despite episodes during major wars, especially WW II, of being command capitalism.  After all, while there remained private ownership of the means of production (capitalism), there were no private automobiles produced in the US due to command orders of the US government.  But, the US and UK and others who went into such modes during wartime dropped them when the wars were over.  They were strictly temporary.  As it is, the command mode has pretty much disappeared in the world, with only a handful of pathetic cases left, most notoriously North Korea, although even it is moving towards more of a market system (especially in agriculture, usually the first sector to move in that direction), even if it remains the last remnant of the old command socialist type.

As it was, China never was that much of a full-blown command socialist economy.  It was always more decentralized than the old USSR, with this partly due to its sheer size and diversity, something we characterized with a quotation for the beginning of our China chapter in the past (and which may yet be kept): "The mountains are high; the emperor is far away." (old Chinese proverb)

OK, so our old title for the chapter was "China's Socialist Market Economy: The Sleeping Giant Wakes" (the last drawing on a famous statement Napoleon Bonaparte supposedly made about China: "China is a sleeping giant. When China wakes, she will shake the world.")  Very likely that title will stay.  But it is in fact a title that comes from the Chinese government itself, a characterization that they continue to hold to; China is a "socialist market economy."

OK, it is indeed a market economy.  It probably was not during the Mao era, even if command central planning was much  weaker than in the old USSR.  There was still command planning, but a lot of it was decentralized to local levels.  After Deng Xiaoping took control in 1978, he pretty much undid most of the command central planning apparatus, moving the economy to being predominantly a market one.

The more complicated issue involves property ownership, and here there is no agreement.  A major part of this is that China has property forms that are not seen anywhere else in the world.  One of the larger parts of the Chinese economy, which used to get lots of publicity but has not received much lately, is what was called the Town and Village Enterprise (TVE) sector.  This is the sector  that lies between the remaining state-owned sector (from the center) and the fully privatized corporate capitalist sector of the Chinese economy.  There are at least four different property forms in this mostly rural part of the Chinese economy, with them varying from being somewhat more publicly (if locally) owned to being more privately, although in some cases cooperatively so, owned.  Much of this sector, which as more than a third of the whole economy, is very hard to characterize as being either socialist or capitalist, although clearly the Chinese like to consider it more  socialist.

Now this odd term is close to others that have been or still are used to  describe economies around the  world.  One is "market socialist."  That was most famously used to describe the former Yugoslavia, which also  had a form of workers' management that attracted lots of attention from comparative economists.  Other nations also were called this, especially Hungary, which lacked the workers' management part.  They had forms of collective or state ownership, but no (or little) command central planning.  The state-owned enterprises operated in market environments.  The famous Hungarian comparative economist, Janos Kornai, came up with the matter of "soft budget constraints" as something such economies generate, governments regularly bailing out their firms, although we do see this quite a bit in more market capitalist economies as well.

The other similar term is  "social market economy," which Germany uses to label its system ("sozialmarktwirtschaft" in German).  This is really a fully market capitalist system, but one with a large social safety net. And the Germans have that, certainly compared to the US, and many have commented on the generally better functioning of that economy (which also  has lots of labor-management cooperation) than many other economies around.

So, the  Chinese system is not like either the old Yugoslav or the current German system, even though it has a lot of  state or  collective ownership, and certainly is heavily a market system.  Clunky and not precisely accurate and vaguely propagandistic as it is, "socialist market economy" may be the best we can do.

Additional material:  Oh, on the "cronyism" part, this clearly is an issue, and a big one in China now.  Especially favored to get high positions in larger enterprises, whether privately or state or hybridly owned are reportedly children of high Communist Party officials. Corruption has increased substantially, and current Chinese leader (holding all three of the top power positions, Party General Secretary, President, and Chair of the Military Commission) has put into place a large anti-corruption campaign.  This has much support because of the scale of the problem, even as many perceive it to be somewhat directed at political enemies.

Barkley Rosser


Wallfly said...

I know it's probably a pointless exercise but I don't like the term "socialist" to describe command economies. The distinction is political. The default operating mode of the socialist movement int the 19C was essentially democratic and this was true even of the Bolsheviks. It was also standard ideology (from classical Marxism) that socialist revolution in an underdeveloped society was impossible and would result in dictatorship. Again the Bolsheviks believed this and rather thought what they were doing was dependent on a "just around the corner" European wide revolution.

What we call communism as an ideology is the largely improvised attempt at self-justification (in the most charitable interpretation), a whitewash of the failure of Russian Revolution (and in the Chinese case, it was to expropriate classical Marxism to fulfill their nationalistic aspirations, again in a situation likely to produce dictatorship).

In short it is not a coherent ideology or economic model but an ad hoc
mishmash, whatever it's achievements and (many) failures. Calling them socialist gives Communist command economies a historical continuity which is inaccurate as well as a undeserved political legitimacy. It is to participate in the tacit conspiracy of communistic and anti-communist ruling elites to assert that continuity and/or legitimacy.

(And I think for progressives, the cautionary aspects of this history are worth knowing as well, even as the democratic and egalitarian struggle continues).

rosserjb@jmu.edu said...


Please read my post carefully. I agree with you. There are two comparisons: market versus command, and capitalism versus socialism. The first is about how economic allocative decisions are made in an economy. The latter distinction is about ownership, who owns the means of production, private individuals or the state? That latter definition and distinction indeed dates from Karl Marx. Call it "classical socialism."

This leads to the possibility of these hybrid forms such as market socialism and socialist market economy. They do not have command driving allocation (or not primarily), but markets. But, they have lots of state ownership.

This also allows for the relatively rare form: command capitalism, which, I pointed out, characterized the US economy during WW II. Classical fascism of the German variety was essentially this form, command but private ownership, and thus not "socialism," even as many libertarians and others want to say Naziism was "socialist" because the word appeared in the title of the party. As it was, Hitler purged the socialist faction soon after he came to power. However, in Italy, Mussolini's version had both less command and more socialism as he did nationalize many firms, most of which remained nationalized after WW II, with many of those only getting privatized in more recent years.

Again, the "social market economy" of Germany is not properly "socialist" as it has never involved state ownership, much less command, but simply a large social safety net.

Got it?

john c. halasz said...

The term "social market economy" is actually a coinage of the Ordo-liberals and doesn't quite mean what you state in their terms. The "social" referred to their belief that markets left to themselves go astray and become dysfunctional, -the ordo-liberals were opposed to classic laissez-faire,- and referred to the government enforcing the requirements of smoothly functioning market, in a fairly hierarchical fashion, with only rather abstemious social welfare benefits. The relative generosity of the German welfare state (until recently) was due to hold-overs from the Bismarckian state and concessions to coalition partners and opponents. Also, it's little remarked that the Nazis assigned economists and officials to do post-war planning, rather in the manner of the Beveridge Report, and suitably scrubbed no doubt of the most outlandish Nazi assumptions, that became largely the blueprint for the development of the BRD welfare state.

The cargo cult economics that the German currently practice, which is otherwise so puzzling, I think can be explained by the acceptance by virtually all parties (except partly Die Linke) of one or another version of Ordo-liberalism, which can be shaded one way or another from differing perspectives.

rosserjb@jmu.edu said...


You are correct that the term came from the Ordo-Liberals, more precisely, Walter Eucken. However, there were divisions between them over it, and a faction always was friendlier to what was indeed a traditional German attitude towards providing such a safety net, somthing long supported by at least elements of conservatives in German society as exemplified indeed by Bismarck overseeing the creation of the first social security system in the world, with it being the model for the system set up in the US 80 years ago.

During the postwar period, the Social Democrats unsurprisingly tended to push harder for a bigger and wider social safety net, but it was also supported by the main conservative party, the Christian Democrats, who, derived from the pre-war pro-Catholic Center Party, reflected Catholic views that had both supported corporatist style worker-managed cooperation (which was forcibly imposed from above during the fascist era), but also a social safety net of some extent.

Wallfly said...

BR, Thanks for the reply. I did not mean to imply I had a problem with your ideological outlook (which in any case is not really germane to the OP) but let me make a more finely focused observation (even though I think your typologies are useful and make sense). Apologies in advance for restating the obvious.

The quibble I would have is that I don't think think it is quite right to call "state ownership" socialist. It actually does not get at the essence of "classical Socialism" (partly for historical reasons) and elides a question that you could argue is more political than economic, "who owns the state".

The historical reason why there is confusion is that while the internal party dynamics and participation in mass movements/parties in classical Marxism were operationally democratic there was a theoretical problem. Marx's theory of social development projected the rise of overwhelmingly proletarian society. In these conditions, it was not so problematic to equate the rule of a workers party with a democratic polity (and not so necessary to think about issues of political conflict, representation, multiple parties, etc.).

In other words, classical socialism really was conceived of (at least implicitly) as state (or workers) ownership within a democratic polity. And if anything Marx was reluctant to not elucidate any "blueprints" for how said society would be organized economically which I think strongly suggests that "socialism" for KM was not defined primarily by economic organization rather than its guiding principles.

Is that distinction particularly important to comparative economics? I don't know but it occurs to me that ownership (and property rights) are essentially political constructs/issues.

The problem for the two axis typology is that "who owns the state" overlaps (not only when there is state ownership) with the question of how are investment decisions made and there is not a simple linear continuum. Those decisions can be made by elites in the state, they can be made privately or as the outcome of some democratic process.

So in short, I think popular sovereignty (specifically ps, as specified by democratic norms) is something I would want to incorporate in this typology (perhaps easier said than done).


rosserjb@jmu.edu said...


Of course the issue of who owns what is very political, whether we are talkng about the means of production or the state itself. Marx himself of course, as you already noted, argued that the bourgeoisie tends to take over the state, although that is in a principallly capitalist political economy society.

At a crude way one can think of this if one is thinking about moving from capitalism to socialism, whether democratically or not, as how the nationalization of the formerly privately owned firms happens. It can happen in a gentle way, where the state buys out the previous capitalist owners, if not with cash outright, then some sort of bonds or some assets that have value and which do not involve the capitalists becoming immiserated. OTOH, one can simply dispossess them, as was done in the old USSR, taking ownership without compensating them at all and maybe even throwing them in jail to show that one is really serious about class struggle.

As it was, after WW II we saw quite a few nations in Western Europe, where a majority of the workforce were in labor unions that supported some sort of social democracy, and where in fact parties supporting socialist ideals came to power through parliamentary elections, and in some of these we saw these governments then nationalizing major firms and many sectors, with an obvious example being UK in the late 1940s under the Attlee Labour government. Obviously this did not bring about a more general end to market capitalism as many had hoped, and much of that has been undone since, especially starting with Thatcher, although portions of the social safety net that were expanded then remain, most notably the National Health Service.

I am not sure I am really answering your question, Wallfly, but I take it seriously, and I think I know what it is, but I fear I am beginning to ramble. Certainly the economic and political get tangled up here, and one political economic observation we make in our book is that we rarely see democracy and a permanent command system coinciding, although a "classical socialist" one in the sense of a predominance of state ownership may well be democratic.

john c. halasz said...

Just to indulge my pedantic streak,- (but, hey!, given your purpose, it might be of some help),- I don't think it was Euken, but rather one of his colleagues who coined the term "Sozialmarkt Wirtschaft". Nonetheless Eiken was a conservative Christian, (though an associate of Bonhoeffer, so definitely not a Nazi), who believed strongly in maintaining hierarchical social order. So the "Sozial" part concerned not just state support for the "market order", but also the maintenance of church and family as the required basis for that maintaining order. The original doctrine wasn't concerned much with state-sponsored welfare measures, as with the private basis of market oriented welfare. Adenauer was, indeed, RC and was the mayor of Koeln for the Centre Party, before the Nazis and widely touted as a potential Kanzler, but it was his great good fortune that Bruening received the honor instead. (Erhard was Bavarian, so likely RC as well). But I would tend to discount any RC "social doctrine" influence. (German RCs tended to be quite conservative, as witness the most illustrious exponent of that other "Freiburg school"). At any rate, one of the key components of the original Ordo-liberal doctrine was not just precisely defined and state-enforced property/contract rights, but a rather harsh view of bankruptcy to go together with an aversion to debt, especially of the public kind, and hard money mania.

As an aside, I've often found it strange that proponents of "free markets" don't tend to tout the functional virtues of bankruptcy, since the re-circulation of economic resources by that means is actually one of the sources of the much touted efficiency of markets, reducing the size, scope and duration of errors in production and allocation. Obviously, there must be some putative optimum between too lax and too strict bankruptcy measures, to avoid "moral hazard", deficient and expensive credit provision, and "soft budget constraints", but the lack of bankruptcy provisions for sovereign debt and the refusal of equitable provisions between the bailouts for creditors and the maintenance of useless unproductive debt of borrowers, seems a key part of the current global crisis, especially as re-enforced by Ordo-liberal ideology.

rosserjb@jmu.edu said...


You are basically right. Eucken coined "Ordo-Liberalism." "Sozialmarktwirtschaft" was coined in 1946 by Watler Muller-Armack, later Foreign Minister under Ludwig Erhard.

Thornton Hall said...

The answer might be right there in the banner at the top of the blog.

Main Street and Wall Street are physical places where actual human beings interact. If economics is about anything at all (????), it's that.

Obviously some abstractions like "ownership" and "government" exist, but many common abstractions actually don't exist (eg, demand) and those that do come chock full of assumptions.

If our abstract nouns are insufficient to describe the interactions of 1 billion people, then a speculative coda to the chapter might return to the actual corporeal human beings at the core and ask, "What, exactly, do these people do? What individual behaviors lead to the construction and delivery of a drill press to Thornton's workshop?"

The individual behavior will form patterns and abstract categories name the patterns for future reference. The new nouns and verbs generated might shed light on the way non-Chinese humans behave. And that, of course, is the point of "comparative" anything.

rosserjb@jmu.edu said...

Well, Thornton, the population of China now is 1.4 billion, and that is part of the problem in trying to analyze or characterize the place. We have unreliable data coming from corrupted sources about a huge number of people living over a large area in widely varying conditions and trying to come to some sort of general statements, and that in itself is sort of pathetic, even if I am going to do so professionally in the not too distant future. All I can say is that I shall try to pay attention more closely to the things that seem real rather than those that are either abstract or just incredible.

Jack said...

How one describes the economic system that is the current China is only a superficial start to our understanding of that system. granted that it is worthwhile to understand what the system is, but it is far more important to better understand how it got that way. It seems like a long way from Mao and Chou to now. I see very little written these days about the Nixon trip in 1972 and the beginning of the China economic revision from whatever it was to what it is. Will you review of their system cover any of the role played by our own government officials, only beginning with Nixon, in the rise of China? Which, by the way, was accompanied by our own system's slow and steady decline.

rosserjb@jmu.edu said...


Not here. In the chapter in our book we do not start where you want to start, but take a much longer historical view and perspective. The Nixon trip was certainly important, and probably marked the end of the extreme version of the GPCR, but the real policy change came with Deng at the end of the 70s, and, frankly, I do not think US officials played much of a role in it. This was the outcome of a basically internal battle that had been going on since at least the early 60s. You have to keep in mind that Deng was imprisoned something like four times. This sort of thing had far more salience than that the US got NSA listening posts in western China to listen to the Soviets, which was the real bottom line of Nixon's visit.

Thornton Hall said...

I do understand the limitations in the situation. Just thinking that the difficulties might be an opportunity to speculate how future analysis might build new categories from the ground up.

The ax I continue to grind away is how do you change the self-sealing wrongness of the current economic paradigm? By "self-sealing" I mean that every method of seeing the wrongness is blocked by the rules of economics. Krugman and DeLong demonstrate that good people who care about human suffering can look directly at the discipline that, thanks to fundamental errors, causes that suffering and say "I must preserve this discipline."

What can break this grip? Perhaps 1.4 billion people whose experience cannot be forced to fit the paradigm?

rosserjb@jmu.edu said...


People like anne, a regular commentator on Economists View, where this post got linked to, but whom does not comment here, although she says she reads what we say, would say that you are mostly right. I fully agree that the currently dominant economic paradigm is seriously flawed, and I post many things making that point.

The problem here is that ultimately we do not know what the Chinese system is. It is drawing on many of the flawed paradigms, including the financial ones that paine over Economists View got all worked up about, along with many complicated cultural and historical factors that few outiders can really get their hands on.

I wish the Chinese people the best, but, you are right, Thornton, they are now operating well beyond the estabishled paradigms that outsiders try to assign to them.

Jack said...

"...but the real policy change came with Deng at the end of the 70s, and, frankly, I do not think US officials played much of a role in it. This was the outcome of a basically internal battle that had been going on since at least the early 60s."

What I was trying to get at is that I do clearly recall reading in the popular business press, maybe as long ago as the '80s/'90s, about financial support for the construction of China based factories coming from some form of U.S. guarantees, maybe from IMF. Such support would certainly have lent support to the fight over policy changes which you highlight. Granted that the Chinese leadership had to drive the effort forward. But how much assistance did that process receive from U.S. policy to support the efforts of U.S. corporations in their search for low wage manufacturing centers to replace high wage American workers?

rosserjb@jmu.edu said...


By the 80s it was basically over, although a lot of the details were still to be worked out, and a hardline faction continued to resist. By the 80s, sure outsiders entered the game, but they were not there in 78-79 when Deng took over and changed the fundamental policy and approach, and aside from Nixon, they certainly were not there back in the early 70s, where, frankly, what was driving it was Cold War foreign policy stuff, in particular Nixon siding with the Chinese in the then pretty hot Sino-Soviet split, which had actually broken out into a shooting war in 1969, soon after Nixon came to power. Nixon's ultimate position was signaled at that time because reportedly the Soviets approached him about using nukes against the Chinese, and Nixon would not tolerate that.

Unknown said...

At Thornton hall & rosserjb,

I think what mr. Thornton is getting at is that it doesn't really matter if it is the state or private sector, for example, that owns the capital. What matters is the value system inherent in the social/cultural institutions that ultimately determine (so called) individual actions/behavior and thus determine macro economic outcomes.

Couple of examples, In Germany, unions have veto power over any corporate board decisions. Given this, to what degree can we say that capital is "owned" by the private sector if any given investment decision can be vetoed by the non private sector? Yet, in some sense, this arrangement is just a formality reflecting the cultural/social institutions that have evolved for likely a very long time. Japan has similar formalities rooted historical institutions that seem to render the abstract political/economic labels somewhat nonuseful. (related, Japan has a 99 percent literacy rate-- unheard of outside communist states).

So, the take away is, the social institutions that determine economic outcomes. If a minority takes power and high jacks the institutions for its' own gain, it doesn't really matter what the details are, it will likely result in negative outcomes, ultimately.

Which brings us back to China. I am not an expert but it seems to me that the cultural/ Maoist revolution actively encouraged
a set of social/cultural institutions whose value system is not unlike a teenager who has been with out adult supervision for a very long time.--okay, that's a bit over the top but you get my point. It doesn't matter if it is free market or state operated if everybody is acting like teenagers. (Apologies in advance to teenagers for the analogy)

rosserjb@jmu.edu said...


Unions are private sector, not public. Yes, the German system is of considerable interest and reflects German historical past.

There are quite a few non-communist (or formerly communist) nations that have 99% adult literacy rates besides Japan.

I am not sure the Maoists were acting like teenagers or not, although lot of teenagers were part of the more unpleasant carryings-on during the GPCR. There really was a serious systemic change initiated by Deng, even if it is hard to pin down or characterize and may reflect a hijacking of the system by a crony elite.

Unknown said...

Thanks for the reply. Much appreciated.---And, Yes. Of course. Private sector. Thanks for catching that one.

Though it doesn't really change the story and may even further my point since, in this example, the private sector in the form of unions is acting like the public sector, in consequence, in that it is very specifically allocating capital it does not "own".

Isn't this something akin to what you might see in a command economy? In consequence? If so, why would we not use similar words when talking about the German economic model? I suspect the reason is that Germany is very successful economically which would a contradict our "given" understanding command economies. This is a bit of hyperbole but is used to prove a point...

The point is that it seems the language starts to break down and that it seems social/cultural institutions are more important in determining efficient (or inefficient) allocation of capital. Not the formalities associated with whether it is public/private-market/command.

As someone alluded to above about Paul Krugman saying good people care about the suffering of others--it may turn out that the institutions surrounding a this type value system may also have good macro outcomes, regardless of whether it is called a market or command economy.

anyway, I feel I am starting to rant a bit... thanks for reading..

rosserjb@jmu.edu said...

I do not think that unions have ever controlled much capital in the US, and when they have allocated it, it has not been according to command economy principles.

Germany and US very different on policies about unions and their behavior. The union movement always much stronger than in the US, with its roots in the medieval guild system, which simply never existed here. A far higher percentage of the workforce has been in unions there, and they do have this widespread Mitbestimmung system that does involve labor input to management decisions and even corporate control, even if this has its limits. This sort of thing does not exist in the US, and when VW attempted to import it into their plant in Tennessee, the Republican governor went out of his way to block it.

Thornton Hall said...

Obviously you are very well versed in the details of the economics here. But there is a meta-question lurking out there, certainly. What is the best scale at which to understand economics? Do we imagine the actors to be individual people? Collections like government? Abstractions like "capital"?

Economists have a bizarre tendency to treat these as givens, when in an actual science there is a back and forth between the act of observing and the demarcation of what is being observed.