James A. Dorn
China’s economic development since 1978, when paramount leader Deng Xiaoping began to loosen the Chinese Communist Party’s grip on economic life, is remarkable. Once people were given greater economic freedom—and were no longer bound by Mao Zedong’s rigid central planning—they created new markets and began to lift themselves out of poverty.
Two Chinese economists who witnessed the destructive nature of top-down planning and the toll on civil society from Mao’s policies deserve attention. Gu Zhun (1915–1974) was the first to openly criticize China’s use of Soviet-style central planning as a mechanism for allocating resources. He argued that, without competitive market prices, planners could never have sufficient information to efficiently allocate resources. Therefore, enterprises should be allowed autonomy to set prices guided by market demand and supply. He started as a committed member of the CCP but later realized—after suffering under totalitarian rule—that Maoist socialism was a recipe for enhancing the power of the state while destroying personal and economic freedom. He is often called “China’s Hayek.”
Wu Jinglian, one of China’s top reformers, was influenced by Gu’s pro-market thought and further developed the case for competitive market pricing and the need for a rule of law to bring about prosperity and social harmony. Now 96 years old, Wu remains a powerful voice for a free market—both in goods and ideas. He is known as “market Wu.”
It should be noted that China has established markets with socialist characteristics. The state still plays a major role in economic life, but many state-owned enterprises have disappeared in the wave of a variety of private and quasi-private property rights that have evolved since 1978. The nonstate sector has been the main driving force in China’s development, and China is now the world’s largest trading nation in goods. That achievement would not have been possible without the change in the climate of ideas brought about by such intellectuals as Gu Zhun and Wu Jinglian.
Gu Zhun: Early Proponent of Decentralization and Marketization
Gu Zhun was largely self-taught. Although he lacked a formal education, he became proficient in accounting at an early age and apprenticed for an established accounting firm in Shanghai. In 1935, he joined the Chinese Communist Party and, in 1949, he was appointed director of Shanghai’s Fiscal Bureau. However, in 1952, the tide turned when he was criticized for “counter-revolutionary tendencies,” demoted within in the CCP, and subjected to “reeducation.” In 1956, he was assigned to work at Beijing’s prestigious Institute of Economics, which was part of the Chinese Academy of Sciences (CAS). During Mao’s Hundred Flowers Campaign (1956–57), which allowed greater freedom to critique rigid Soviet-style planning, Gu wrote his famous article: “A Tentative Discussion on Commodity Production and the Law of Value under Socialism.” It was published in JingjiYanjiu (Economic Research Journal), Issue No. 3, 1957).
Wu Jinglian, who worked with Gu at CAS, noted that “Gu Zhun was the only one who stated unambiguously that the spontaneous fluctuations of prices—the real law of the market—should be allowed to regulate production under socialism.” He was “the first person in Chinese economic circles who developed the idea of the socialist market economy” (Wu 2013 [1997], p. 134).
The exact quote from Gu’s 1957 article is: “Because an enterprise will spontaneously pursue productions that can bring more profitable prices, and prices will … spontaneous[ly] rise and fall, such rise and fall will actually regulate production”(see Zhang 2020, p. 14).
One of the few English-language sources of Gu’s critique of central planning is Chor-yung Cheung’s article, “’China’s Hayek’ and the Horrors of Totalitarianism: The Liberal Lessons in Gu Zhun’s Thought,” which appeared in Reclaiming Liberalism, edited by David F. Hardwick and Leslie Marsh (2020, pp. 281–311). In reviewing Gu’s 1957 article, Cheung states that Gu:
Advanced the thesis that without the price mechanism in the market, there was no rational basis to come up with a common yardstick to measure and compare the relative economic efficacy of different products, services and factors of production in a society. Like what Mises and Hayek had argued, Gu believed that central planning alone would not provide us with the necessary information for economic allocation, production and coordination [Cheung, p. 288].
According to Cheung, Gu recognized “the dynamic nature of economic calculation and the static nature of central planning” (p. 291). Without any knowledge of Mises and Hayek’s contributions to the calculation debate (see Cheung, p. 307, n. 4), Gu Zhun (1957) used his own experience, with accounting and central planning, to reach the following conclusion:
Economic calculation’s ability to make adjustment helps economic planning obtain data that cannot be obtained by statistical surveys, and it is on the basis of these data that future economic planning is to be made.… [Thus,] by observing the movements in the retail market of consumption goods … and by looking at the price adjustments made in the sales of these products, one can detect all the changes … in demand and supply and, in accordance with which, one could adjust one’s production decisions. Similarly, in each production enterprise, the sales situations and the related price and profit adjustments … are important indicators telling us the degree of equilibrium achieved between product production and consumption and the changes in productivity level. Information of these kinds are all very useful for future economic planning. Society’s reproduction process is a continuous process and the annual production plan for society does not come out of the blue. The information and data generated from economic calculation form one fundamental basis for economic planning. Without these, no economic planning can be made. [Translated by Cheung, pp. 291–92.]
This kind of thinking led the CCP to label Gu a “rightist” (i.e., a counter- revolutionary) in 1957, when the Hundred Flowers Campaign was abruptly ended (see Naughton 2013, p. 113). In 1958, during the Great Leap Forward, Gu was expelled from the Party and sent to a labor camp in Hebei province. In 1959, he was transferred to another camp during the Great Famine. After his internment, he returned to the Institute of Economics in 1962, with the help of the institute’s director, Sun Yefang. However, in September 1965, Gu was labeled an “ultra-rightist” and suffered during the Cultural Revolution. These experiences convinced him of the grave dangers posed by central planning and absolute power under one-party rule (see Cheung for details).
In sum, Gu Zhun was a courageous and independent thinker who held fast to his case for using market-based price signals to guide the allocation of resources. He recognized that it would be impossible to effectively allocate resources under state planning, in which all prices are fixed, and enterprises must march to the planners’ preferences. However, he never went so far as to call for widespread privatization. He wanted to combine market pricing with socialism, thus adhering to “market socialism.” Nevertheless, he is often referred to as “China’s Hayek.”
Wu Jinglian: New Economic Thinking
Wu Jinglian’s early adherence to Marxism and central planning gave way to his recognition of the key role of competitive markets and the price system as necessary components of what became known as China’s “socialist market economy.” As noted, Gu Zhun influenced Wu’s thinking regarding the problems of comprehensive planning and control versus the benefits of a dynamic market pricing mechanism (see Gewirtz 2017: 51).
Wu suffered during the Cultural Revolution for his “revisionist” views, but went on to play a key role in advancing China’s nascent market economy after 1978. His articles and books were very influential in persuading scholars and officials of the advantages of decentralization and using markets to allocate resources and create wealth. This was particularly true after Deng Xiaoping’s Southern Tour in 1992, when China returned to the path of reform and opening to the outside world after the 1989 Tiananmen tragedy.
At the Fourteenth Party Congress in October 1992, Jiang Zemin, general secretary of the CCP, officially accepted the term “socialist market economy” to mean an economic system characterized by “market forces … serving as the basic means of regulating the allocation of resources”—as opposed to Soviet-style central planning. In this new way of thinking, China would keep socialism as its primary mission while allowing demand and supply to set prices. In this quasi-market regime, it was hoped that efficient enterprises would grow while unprofitable ones would vanish (see Gewirtz, p. 251).
Of course, this terminology is confusing because, as Milton Friedman told Chinese officials in 1980: What China needs is “the widest possible use not of the market but of ‘free private markets’” (Friedman 1989: 569). His emphasis is on “free” and “private.” His logic is straightforward:
The market is a mechanism that may be mobilized for any number of purposes. Depending on the way it is used, the market may contribute to social and economic development or it may inhibit such development. Using or not using the market is not the crucial distinction. Every society, whether communist, socialist, social democratic, or capitalist, uses the market. Rather, the crucial distinction is private property or no private property. Who are the participants in the market and on whose behalf are they operating? Are the participants government bureaucrats who are operating on behalf of something called the state? Or are they individuals operating directly or indirectly on their own behalf? [ibid., pp. 568–69]
In sum, China needs a system of free markets based on secure private property rights and a just rule of law protecting those rights. This includes a free market for ideas, in which people can criticize government and violations of human rights without fear of reprisal (Dorn 2021).
Under socialism with Chinese characteristics, public ownership is still held high by the CCP. However, the nonstate sector has been the key to development and China’s rise as a major trading nation. There has been privatization of state-owned enterprises, and private property is permitted. As the PRC Constitution states:
“The socialist system is the fundamental system of the People’s Republic of China. Leadership by the Communist Party of China is the defining feature of socialism with Chinese characteristics. It is prohibited for any organization or individual to damage the socialist system” (Art. 1). “In the primary stage of socialism, the state shall uphold a fundamental economic system under which public ownership is the mainstay and diverse forms of ownership develop together” (Art. 6). “The state shall protect the lawful rights and interests of non-public economic sectors such as individually owned and private businesses” (Art. 11). “The state shall practice a socialist market economy” (Art. 15).The myriad forms of nonstate ownership that have emerged in China are fascinating (see, for example, Oi and Walder 1999). Beijing’s promise to protect private property rights, however, is spurious—as is Article 33 of the Constitution: “The state shall respect and protect human rights” (Art. 33). The CCP’s monopoly on power crowds out any true rule of law to protect persons and property. Adherence to socialism is mandatory. That is why most reformers shy away from calling for Friedman’s “free private markets” and use “socialist market economy” instead.
Wu Jinglian, who was awarded the prestigious China Economic Prize in March 2005, was bold enough to argue that, “Only by matching the rule of law with the market economy can we achieve total success.” More recently, in December 2012, at a Chatham House conference on “Challenges for China’s Economic Policy and System Reform,” Wu remarked: “Economic and social conflicts have more and more shown in recent years that such conflicts … have to be resolved by further economic and political reforms. Only when we have set up an inclusive economic and social policy can we overcome such contradictions and maintain our prosperity, political stability, and social harmony” (Chatham House 2012: 3).
Wu’s remarks came shortly after the CCP’s 18th National Congress in November and the transfer of power from Hu Jintao to Xi Jinping as general secretary of the CCP. Wu took this opportunity to remind everyone that, “under the administrative system, individuals did not have the opportunity to choose and to make the best of their abilities.” However, “with the reform and opening up, [people] have the opportunity to flourish. Since the 1980s and 1990s, tens of millions of private companies have been set up. It is [the] private sector that has pushed forward the booming of the Chinese economy” (ibid., p. 4).
Despite this progress, Wu declares: “Our reform has not been fully implemented. Under the current system, there are still lots of various things from the old system, mainly reflected in state-owned enterprises still in a monopoly position.” Moreover, “governments at all levels still maintain their power to interfere with our economy,” and there is no “true rule of law” (ibid.).
For China’s future, Wu sees two possibilities: either marketization will continue, and government will play a smaller role in economic life; or “government and state-owned sectors will gradually strengthen their control and intervention in the market”—and China will practice “crony capitalism.” He concludes: “Unfortunately, since the [beginning of the] 21st century, the second trend has become more prevalent” (ibid., p. 5).
Unlike socialists who argue that China’s problems are due to the presumed chaos of a market economy, Wu blames economic and social disorder on the lack of “a law-based market economy.” Meanwhile, “the more the government intervenes [in the market], the more the corruption will spread” (ibid., p. 6).
The fundamental challenge for China’s leaders, according to Wu, is “to build a new market economy on the basis of rule of law and political reform.” If this can be done, then China will move from being “the manufacturing base for the world” to being “a big market for the world” (ibid., p. 9). He should add that China would then be closer to a “free private market.” Of course, Wu understands that this would be a quantum leap from China’s market socialist economy, and the barriers to the transition are enormous. But as the Chinese say, “little drops of water wear away big stones.”
Conclusion: Liberating Thought
When Mao Zedong briefly opened up space for critically discussing alternative economic systems during the Hundred Flowers Campaign, he famously said, “Let a hundred schools of thought contend.” At that time, Gu Zhen took the opportunity to criticize Soviet-type central planning and make the case for a competitive price system to allocate resources more efficiently. His focus was on the market as a way to spontaneously set prices by demand and supply as opposed to the rigidity of central planning. Mao, however, quickly shut the door on open discussion and sent those who questioned his doctrinaire socialism—and exhibited the slightest support for freedom from state control—to “reeducation” camps to correct their thinking. Gu was caught in that trap. Today he is regarded as a pioneer in China’s reform movement and known as “China’s Hayek.”
Gu was influential in steering Wu Jinglian away from a youthful embrace of state planning to a leading proponent of decentralization, marketization, and the rule of law. However, like Gu, he was disciplined and silenced by Maoists and suffered during the Cultural Revolution. With the death of Mao in September 1976 and the rise of Deng Xiaoping, who in his 1978 speech called for “emancipating the mind,” Wu was able to have his voice heard by China’s leaders. In particular, Deng called for “pathbreakers who dare to think, explore new ways, and generate new ideas.” After 1978, the focus was on reform and opening as opposed to ideological struggle. Nevertheless, socialism with Chinese characteristics remained the CCP’s primary ideal in order to protect the Party’s monopoly on power.
Wu acquired a keen understanding of the fundamental differences between plan and market, as expressed in his 1991 article, “A Discussion of Plan and Market as Resource Allocation Mechanisms” (chapter 17, in Naughton 2013). Like Gu, he recognized the importance of markets in conveying information that was impossible to centralize.
Wu touted the success of the market in promoting China’s economic development:
Even though our market is fragmented by regional protectionism, and market signals are distorted by government price-setting and excessive administrative interference, a market has nevertheless grown vigorously through the cracks and holes in the command economy.… Especially in a few regions and sectors, where reform advanced quickly and the constraints of government commands were relatively few, market elements are strong and their performance in the past year of economic maladjustment has been clearly superior. This forcibly demonstrates how market forces can create stability and a prosperous economy [Wu 1991, in Naughton, p. 229].
In 2003, Wu gave a lecture to a government training class and emphasized that, “the system of private property rights [is] the foundation of the market economy.” He told his listeners that Adam Smith’s Wealth of Nations “advocated the role of the market’s invisible hand in effective allocation of resources”; and also that “a nation’s economy will achieve its best possible development only under a natural and free system” (Wu 2003, in Naughton, p. 87). Such remarks would have been unthinkable during Mao’s rule.
While Wu had been scornfully labeled “market Wu” by hardliners who wanted to revert to central planning after the Tiananmen uprising in 1989 (see Barboza 2009), that term became a badge of honor after Deng Xiaoping’s Southern Tour in 1992. By 2018, it was clearly recognized that “Wu Jinglian and his disciples were the key brains behind reform,” as Fran Wang reported in Caixin Global.
Unfortunately, since Xi Jinping’s rise to power in 2012, China’s march to a market economy has slowed, and the state sector has advanced (see, for example, Lardy 2019, The State Strikes Back). In China, “socialism” trumps “market” and will continue to do so until people are free to choose. Likewise, public/state ownership remains dominant in China’s Constitution. If truth is to be obtained from facts, as held by Marxist dogma, then the one fact that China’s leaders need to recognize is, “Markets without divisible and transferable property rights are a sheer illusion,” as Warren Nutter observed in 1968 (see Friedman 1981: 7). Following in the footsteps of Mises and Hayek, Nutter argues, “If all property is to be literally collectivized and all pricing literally centralized, there is no scope left for a mechanism that can reproduce in any significant respect the functioning of competitive private enterprise.”
China’s marketization has been successful only because of the growth of the nonstate sector and the evolution of property rights to allow innovation and risk-taking by entrepreneurs. Pioneers like Gu Zhen and Wu Jinglian paved the way for economic liberalization that has allowed millions of people to lift themselves out of poverty. What China needs is more freedom and less state control—greater emancipation of the mind for everyone—so that people can realize their full potential under a genuine rule of law that protects persons and property.
James A. Dorn is Senior Fellow Emeritus at the Cato Institute.
