The Economics of China, Part 2. The Socialist Era, 1949 to 1978

Between 1949 and 1978 China built a command economy and dismantled the mechanisms a market uses, one at a time, in a documented order. That makes the period an unusually clean test of what the first course argued in the abstract.

The hour opens in 1958 with a steel campaign that ran from thirty thousand backyard furnaces in July to ninety million people by December, producing metal no factory could use. Was it allocatively efficient. Would a market have done it. Both wait for the framework. That framework is the four changes phased in by 1956, treated not as four policies but as the removal of every mechanism a market uses to correct itself. Prices carry instructions instead of measuring scarcity. Quotas reward tonnage, then corrupt the information they rest on. Exit closes on both sides of the labor market. Land title goes to three hundred million peasants in 1950 and is taken back by 1956.

The centre is the famine of 1959 to 1961. Output fell about fifteen percent, for reasons the hour sets out, and that is not the explanation. Available food went from just over twenty-one hundred calories a day in 1957 to about fifteen hundred by 1960, serious hunger but not a level at which tens of millions die. Quotas were fixed in advance from expected output, so the share taken rose as harvests fell and the biggest growers surrendered the most exactly when their own crops failed. Famine severity rose with food production per person. The most productive regions died worst.

The close runs from the retreat of 1961 to the drift of the 1970s and ends on the investment record, where an eight percent average conceals swings from plus fifty-four to minus fifty-two and every turning point carries the name of a political campaign rather than an economic change. The failure is structural, not moral. Every mechanism would have run the same way with entirely decent people in every chair, and the comparison is never markets against an ideal government but imperfect markets against imperfect governments.

LEARNING OBJECTIVES

• Explain why a shortfall in output does not by itself account for a famine, and identify the distributional mechanism that does.
• Trace how a price set as an instrument of policy stops functioning as information, and name a specific allocation error that follows.
• Explain why a quantitative target degrades the information it rests on, through the ratchet that sets next period's target from this period's result and through reporting incentives that no market price exists to check.
• Distinguish the tasks a command system performs well from those it performs badly, and support both with evidence from the same three decades.
• Read a volatile investment series and judge whether allocation is responding to expected returns or to political conflict.

TARGET AUDIENCE

CPAs, lawyers, financial advisors, analysts, managers and business owners. The hour is economic reasoning worked through a fully documented case, so it suits anyone whose job involves forecasting when prices are set by policy rather than scarcity, reading figures produced by people whose targets depend on them, or judging how a rule changes behaviour once the people under it start responding to it. No background in Chinese history is assumed and none is needed.