Everyone knows Ronald Coase is a great economist, but "How China Became Capitalist" shows us that he is a great historian too. In his new book, Coase approaches history in the same manner he approaches economics. As an economist, Coase has always guarded against the tendency for grand, scintillating theories to overtake quantifiable facts. In writing about what is arguably one of the most turbulent periods in Chinese history, he again seems to relinquish all presumption by piecing together observable historical evidence and letting the conclusions emerge by themselves. The results were surprising but not altogether unintuitive.
Many regard China's transformation from a communist economy to a capitalist one as one of the greatest paradoxes in the 20th century. The authors, however, are able to provide a persuasive account of how this came to be. The general theory is that the capitalist transformation in China is the product of marginal, or fringe, revolutions that occurred independently of the machinations of the Chinese government. This is not to say that the Chinese government did not play a role in fostering these developments. As illustrated by the authors, in many cases the Chinese government fostered the environment conducive to the flourishing of capitalism without intending to. The emergence of private farming in the 1960s is a good example. Private farming was encouraged by the Chinese government as a temporary measure to quell grain shortages after the failure of the Great Leap Forward became apparent. Such an ad hoc measure however, had lasting, albeit unintended, implications for China's economic development.
The argument is more nuanced than this. What this book does particularly well is its portrayal of the government's persistent attempt to reconcile the conflict between ideology and pragmatism. Far from being blinded by ideological fervor, the Chinese government was cognizant of the benefits of a capitalist economy. This prompted them to create entities like the Special Economic Zones- market development that can still be controlled by a communist state. In doing so, they hoped to enjoy the perks of capitalism without having to adopt the supposed values of a capitalist state.
The last point is given the reflection it deserves in the closing paragraphs,
"The stupendous loss in the depth and richness of human nature is noticeable part of the price we have paid in transforming economics from a moral science of man creating wealth to a cold logic of choice in resource allocation...As a result modern economists are hard pressed to say much that is coherent and insightful..."
We are reminded here that the creation of wealth is merely a means to attain human goals of creativity and happiness. Accordingly, Economics should be used to cultivate all that is best in human nature: compassion, appreciation of beauty, or the ability to empathize with others. Richard Sandor, whose book Good Derivatives: A Story of Financial and Environmental Innovation I had read recently is a fine example. Modern economics has enabled us to think on the behalf of many generations to come. It does so by providing us with the tools to stop global warming.
"How China Became Capitalist" is a story of many threads, all of which are based on sound historical evidence and sober economic reasoning. It is a book that can be read by a wide audience, as it avoids of technical industry jargon. Instead, it demonstrates many economic principles with real world examples- whether it is asymmetric information caused by a centralized government and decentralized townships, allocative inefficiency induced by subsidizing incompetent manufacturing plants or structural employment through migration laws.
It may surprise you that a book that discusses such a complex issue so effectively is only 207 pages- a feat that is no doubt made possible by the mastery of the authors.