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Show Notes:
Liberalism in China has taken many twists and turns. And in today’s episode, we explore its fascinating history, from its early pre-Western roots, all the way to its current incarnation within the Chinese Communist Party (CCP), and beyond. Joining us to unpack this fascinating topic is Evan Osborne, Professor of Economics at Wright State University, and author of the highly informative new book Markets with Chinese Characteristics: Economic Liberalism in Modern China. We talk with Evan about Chinese economic thought, the country’s economic history, and the role that the West has played in China’s liberalism. Evan shares his insights on how Western economic liberalism was first introduced to China in the mid-nineteenth century, before expanding on subsequent waves of expansion and repression over the next century. We then discuss the rebirth of economic liberalism in China over the past five decades, what the future of economic and political liberalism might look like in China, and the potential long-term implications of this. To learn more about economic liberalism in modern China, and the complex history that has led to this point, be sure to tune in to this fascinating conversation!
Key Points From This Episode:
- Introducing our guest, Evan Osborne, and his book, Markets with Chinese Characteristics.
- Unpacking the concept of economic liberalism.
- An overview of pre-Western, semi-liberal traditions in China.
- How China responded to Western ideas like those in The Wealth of Nations.
- The Chinese economy’s state of development with the arrival of Western powers.
- Freedoms that allowed Britain and other European countries to develop in key areas.
- The history of treaty ports and The Opium Wars.
- What subsequent political and economic transformations in China looked like.
- How these transformations spread into the interior of the country.
- Economic liberalization and how it helped facilitate a departure from imperial traditions.
- Unpacking the sharp turn against economic liberalism in China in the 20th century.
- How communist and Chinese theorists interpreted Adam Smith and other economic thinkers.
- What made the period of reform and openness in China possible after 1978.
- Why economic liberalization ended up being more successful in China than the Soviet Union.
- The Hokou (Household Registration) system in China; how relaxing it contributed to China’s rapid economic success.
- A closer look at the emergence of the entrepreneurial class and the business elite in China.
- The problem of corruption: how the Chinese government holds onto wealth and power.
- How Xi Jinping’s government has influenced liberalism in China.
- Evan’s predictions for the future of China’s politics and its economy.
Quotes:
“[In] the teens and the 20s, when the government was totally weak and the whole country was actually riven by civil war, private businessmen [were] doing a lot of the heavy lifting.” — Evan Osborne [0:18:21]
“It wasn’t like China was free of innovation, just like no civilization was totally devoid of that. But things after 1842 [were] totally different from the snail-like glacial, two steps forward, one step back type of pace that you see before the Westerners get there.” — Evan Osborne [0:18:59]
“In the wake of World War One, you get this sort of very sharp turn against this long trend of economic liberalism.” — Jeffry Mason [0:19:34]
“To move beyond capitalism is a way to move beyond foreign domination.” — Evan Osborne [0:21:46]
“[The] liberalism [that] remains, before Japan invades in 1937, is [there] mainly because of weak central government. They’d like to regulate, but they can’t.” — Evan Osborne [0:22:01]
“To be honest, I would say that in the eighties, before 1989, political liberalization was actually proceeding more quickly than economic liberalization.” — Evan Osborne [0:30:19]
“The government [is] reacting to threats to its hold on both power, and the wealth that accrues from having that power. That, to me, is the primary obstacle China faces these days in trying to become a more innovative society.” — Evan Osborne [0:38:41]
“You can’t do anything that will seriously threaten the CCP hold on power.” — Evan Osborne [0:40:02]
Links Mentioned in Today’s Episode:
Markets with Chinese Characteristics: Economic Liberalism in Modern China
Charter Cities Institute on Facebook
Charter Cities Institute on Instagram
Transcript
[INTRODUCTION]
Kurtis Lockhart: Welcome to the Charter Cities Podcast. I’m Kurtis Lockhart. On each episode, we invite a leading expert to discuss key trends in global development in the world of cities, including the role of charter cities and innovative governance will play in humanity’s new urban age. For more information, please follow us on social media, or visit chartercitiesinstitute.org.
[OVERVIEW]
Jeffrey Mason: I’m Jeffrey Mason, Head of Research at the Charter Cities Institute. Joining me on the podcast today is Evan Osborne, Professor of Economics at Wright State University. Our topic of conversation is his new book, Markets with Chinese Characteristics: Economic Liberalism in Modern China. We discussed Chinese economic thought and economic history and traced the introduction of Western economic liberalism and China in the mid-19th century, its subsequent waves of expansion and repression over the next century, and the rebirth of economic liberalism in China over the past five decades.
I hope you enjoy today’s episode. Thank you for listening.
[EPISODE]
Jeffrey Mason: Hi, Evan, thanks for coming on the podcast.
Evan Osborne: Sure.
Jeffrey Mason: So, in your book, what we’re talking about is the introduction, the history, up in the modern era of China, economic liberalism. What do we actually mean in this context by economic liberalism?
Evan Osborne: Essentially, free market, both thinking, thought, theory and also, maybe at least as important on the ground. Policy, sometimes the absence of policy, China had all kinds of problems governing the country, sometimes that was for the best between 1842 and 1949. So, that often played out is the absence of restrictions on economic freedom. The positive presence, in other words have lots of economic freedom. So, liberalism means freedom.
Jeffrey Mason: Okay. Before the arrival of this Western liberal tradition, it this is interesting history that you trace out there. These bits and pieces, right? It’s not the whole package. But these bits and pieces and these parallels of ideas in liberal economic thought, that way, way, predate Smith and others. So, could you talk a little bit about the sort of very early pre-Western, somewhat liberal tradition in Chinese?
Evan Osborne: I mean, China is the world’s oldest continuous civilization, and they had lots of thinking about things that Westerners were thinking about, too. But most of it was not economics. There was certainly no coherent body of thought that was then known as political economy. But even that in the West, didn’t mature until the 1700s, maybe. But they have lots of thinkers and they had a very strong government, a series of dynasties, you probably know. Some of those thinkers looked at some of the same issues about why do people get rich? What were the benefits for the broader society of their becoming rich and so often that there was an argument by a couple of people, that people got rich by figuring things out, and deciding what needed to be done where, and the government knew this too, when it came to famine relief, for example.
So, those bits and pieces were there, but they never cohered quite the way they started to do it in Western thinking, especially English thinking, Northwestern European thing, maybe in the 1700s and 1800s. So, when the Westerners got there by force in 1842, there was shock. People started to think maybe about whether there was something Chinese had to learn and economic freedom was part of that.
Jeffrey Mason: One of the things I also found really interesting is when works like The Wealth of Nations and others start to arrive any a handful, these are translated into Chinese. So, some of these scholars are absorbing this new material. Can you talk about sort of what the theorists, the historian, the folks who are sort of thinking about these questions? What is their reaction and sort of their scholarship in response to some of these new ideas?
Evan Osborne: So, China already had this extensive set of people who are serious thinkers. Initially, there was a tendency to just reject it, and to view the triumph in 1842. China’s big country and that was just a cultural triumph. It’s just an accident of negligible importance. But the triumph for the superiority of Western military weaponry and doctrines was clearly apparent. So, more and more Chinese started to sense that it wasn’t just an issue of cherry-picking the technology and not worrying about the system that produced the technology. They started to give serious thought to the idea that China needed to change was a dictatorial, imperial system, so you can only take that so far.
But within those confines, people started to think about whether there should be more economic freedom. Then later on, they began to be contaminated by some less savoury Western ideas. But there was a period of time when there was a belief, first of all, that the government should relax its control of the economy. Then later on, this was only briefly a popular idea in the Imperial Palace, that maybe there should be some political, substantial political freedom as well. In the meantime, and this is my actually favourite discovery in researching this book, it’s incredible how much growth there was. Again, that was partly because the government was too weak to impose a heavy hand. The city of Shanghai, in particular, just exploded, both economically and in terms of physical infrastructure. Those two things are related, I think, and also culturally. That to me, was a fascinating tale.
Later on, after the imperial system was toppled in 1912, it was very unfortunate that the person who led the charge was pretty well-known in the West. Sun Yat-sen, he’s known as in the West was a pretty much doctrinaire socialist by this time. Again, there was too much political weakness for him to be able to do much about those dreams. But later on, after he died in 25, his successor, who also was pretty well known, Chiang Kai-shek was more corrupt about corruption personally than about economic policy. But his party was certainly deeply committed to this idea that China was weak and had to be regimented. The economy in particular had to be regimented to make China strong. This was something that the communist once they took power and 49 just ran with, to a catastrophic extent.
Jeffrey Mason: So, going back quickly to 1842 is this first arrival, with the military conquest. It’s clear, I think Europeans have technological superiority. But there were some interesting things, I think you pointed out about the Chinese economy, where maybe the Europeans on balance is, they’re more developed. But it wasn’t quite so drastic, or black and white, at least in terms of things like standards of living, as one might expect.
So, what’s kind of the State of Play or the level of development of the Chinese economy like at the time of arrival of the Western powers.
Evan Osborne: So again, I would say the disparate or the inequality was primarily the military and scientific. Those are very important, of course. But China had a very sophisticated economy. They had both small businesses and large businesses. The large businesses were definitely as was often true in Europe as well, under the ones that control, but the heavy influence direction by the state. So, there were some similarity between Western Europe and China in that regard. But they had sophisticated businesses and lots and lots and lots of private economic activity. Of course, in the countryside, while also substantially market directed, when the Europeans got their substantial poverty, and that continued to be true really well into the 20th century, although it was getting better when the Japanese invaded, and [inaudible 0:07:55] destroyed everything.
Jeffrey Mason: For folks who maybe haven’t read John Machir, and others. I like the way you highlight in this book about the importance of why starting from a relatively similar point over several hundred years, the Europeans come out militarily, technologically, scientifically superior. The role of information networks and why those were sort of rich in Europe and those outcomes and why they maybe weren’t so rich in China, and then the subsequent technological scientific outcomes. It’s almost [inaudible 0:08:24] of point. Can you talk about that? Why was that the case?
Evan Osborne: Europe is a big place, was a big place, then too. So, I would say it’s mostly Northwestern Europe. You can point to Scandinavia and to a significant extent to France, but above all, Britain. Britain was a substantially free country and people were free on their own, to look at scientific inquiry, the nature of scientific inquiry. Then, once they figured out how to do that, to go off and start running, to make scientific discoveries.
I mean, every society, civilization of any complexity had scientific findings. But the idea of science as a system that was uniquely Northwestern European, and it was a creation of the 1600s and 1700s, and Northwestern Europeans were just off and running with it. So, in Britain in particular, it was a free enough country that scientists could share. This went on in France too, share what they learned. It didn’t threaten anybody politically, and so they could do their discoveries, and there was some benefit to the state if they discovered militarily useful findings. But in the 1700s, late 1700s, industrialization really start to get going, and I was just very struck by how freely business people, technicians, technological people. James Watt is the most famous, but there were others, could share what they learned and learn from each other. There were all kinds of the societies in Britain, where people would just go around from town to town and share their technological discoveries and they would learn from the scientists, and the scientists would learn from what sort of accidentally, or maybe without knowing the deeper reasons scientifically why they could learn from each other.
This was largely absent in China. It was a much more centralized society and the political authorities are often scared of encouraging anything that would threaten the political power structure. China had many, many, many books, and many, many, many authors. But it’s striking how most of these books – people had thousands of books, but they kept them secret. It could happen at any time, that some book that you own to become dangerous to you personally. Of course, that existed in Europe as well. I don’t want to deny that but it was much freer.
People would form these networks, sometimes crossing national borders. They could use Latin, if necessary, to communicate. They would create these networks all on their own, both purely scientific, and also in terms of feedback between science and commerce, and you just really did not see that anywhere else. That was, again, I would say, to some extent, a function of European countries being smaller. Therefore, it’d be impossible for people who would learn these things and want to learn more, if they got too much hot water at home to go somewhere else. You just didn’t see anything like that in this highly centralized Imperial society that was, in some ways, I guess, still is China.
Jeffrey Mason: You had mentioned earlier, Shanghai, but there’s lots of other treaty ports. So, treaty ports get established, we have the Opium Wars, Western powers are coming in. What is in the immediate decade, two, three, after entry? Can you speak to the scale in and around these treaty ports, what the economic transformation looks like? What the political economy transformation looks like?
Evan Osborne: So, the treaty that ended the first Opium War allowed pretty much any Western business. They could import anything they wanted to tariff-free, bringing any technology they wanted to. Of course, they didn’t speak the language. So, there was only so much they could do. It was also true that China is a vast country, and many cities were at least early on, mostly untouched by this. But the Chinese people started to get that there was something going on here and they would pack up and move to Shanghai in particular. That was the city that was more than any other you’re trying to influence all she could probably say [inaudible 0:12:26], which is not too far from Beijing.
People just started pouring into the cities. Even if the government wanted to do something about it, they were too weak to do that. So, Chinese people quickly mastered commercial structure that was unknown in China. The joint stock corporation, they mastered that, and they mastered technology, and they mastered European style accounting, which didn’t exist, really, to any degree in China. They quickly figured out ways to take these new ideas, and then combine them with things they knew about China, the Westerners did not. Therefore, create and take advantage of these business opportunities. That’s how the technology and the cultural change starts to radiate out from the treaty ports, basically, carried by these entrepreneurs who often came from other places and moved to Shanghai.
So, they would go back to their home villages, and they would build temples, and they would introduce toothpaste, and other things of this kind that were just unknown in China. It’s a radical technological change. If the ordinary thing is for people’s teeth to fall out when they’re 40 or whatever. Those kinds of innovations, climate control started to become a thing. And railroads, which are often built with lots of local opposition.
Entrepreneurs were a big part of making this happen, and often, they didn’t even bother asking for permission from the government, because they knew we would be between delay, and lost opportunity. Chinese, even more than Westerners learned how to play this game very effectively. If you go away to the interior, China, say, Tibet, or someplace like that, Western penetration is quite minimal, even in, say, 1900. But the farther away you get from the treaty ports, even very far away by say, 1900, you start to see significant impact of this science, these commercial forms, this technology, this literature, all these new things, start to have impacts well away from the coast. And businessmen, I would say, we’re not the only but big carriers of these innovations, these new ideas.
Jeffrey Mason: Would you say in terms of this sort of interior drive? Is that mostly coming from sort of this emergent Chinese merchant class, if you will? Or is this mostly being driven still by outsiders?
Evan Osborne: I would say there were some of both. But if I had to pick one, I would say, it’s significantly more a Chinese phenomenon. I mean, Westerners are very comfortable in Shanghai. They were making a lot of money, probably, many of them and they didn’t have any particular desire to go further into the country, and then in any event, they didn’t speak a language, typically. Whereas for Chinese commercial figures, this was an incredible opportunity. So, my instinct is that it was much more Chinese than Western-driven once you got away from the coasts.
Obviously, the initial spark is the introduction by Westerners of Western things. But getting it into the interior of the country, I would say that was mostly a Chinese task. The one exception to that was in the northeastern part of the country, where Japan was already after they defeated China in 1895. They got their own free trade agreement, and they were able to import capital equipment and goodwill. So, they began throughout the week, I guess, not called Nigeria, to own a lot of the economy. But more generally, I would say that, apart from the treaty port cities themselves, most of the heavy lifting was done by Chinese. Again, northeastern China being an exception.
Jeffrey Mason: So, you describe it, there’s this fairly lengthy period of, there’s this expansion, dissemination of goods, ideas, all kinds of things further and further to China. We kind of have this culmination, if you will, because you create this Republican moment in China in 1911. So, how does the economic liberalization? How does that ultimately facilitate your help to facilitate the abandonment of the old Imperial tradition in favour of this new Republican tradition?
Evan Osborne: That’s an interesting question, because by 1900, there’s a substantial body of educated elite opinion in China that views with resentment. Their weak central government and how the foreigners are pushing it around, it’s very little China was officially colonized, but their government was bullied all the time by these foreign powers. Even before the client ended the imperial system, there is this substantial emphasis on anti-imperialism. Get these foreigners out of our country. Sun Yat-sen was the notorious, I would say, figure in that regard.
By the time we get to 1911, I would say that whatever economic progress results after that time, and until about 1937, mostly happens because of government chaos and weakness and not because of any attempts by the government to promote it, because the resentment, and fear, or hatred, whatever the proper word is, a foreign domination is now a major political force.
Jeffrey Mason: This more elite and private actors kind of filling the void left by the weak state?
Evan Osborne: That’s a big part of the story. Wealthy Chinese businessmen in particular, are putting down a lot of outside of that colonial districts themselves in cities like Shanghai and [inaudible 0:17:45], they’re putting it down a lot of these tram lines, and plumbing, and the foreigners can’t put anything down outside of the extraterritorial jurisdiction themselves. But Chinese who can afford it, are really keen to spread all this wonderful new modern technology, including, and I think this is also important, the technology of public health.
So, the introduction of medicines and better sewage systems, all these very basic things by now and in many European cities are almost unknown, and much of China, and it’s mostly Chinese private money that makes it happen. So, in the teens and the 20s, when the government was totally weak, and the whole country was actually riven by civil war, private businessmen are doing a lot of the heavy lifting. Again, if you want to get too far into the country, there’s not so much to this, but the coastal areas, China is becoming much more modern city. It doesn’t compare necessarily to London yet. But if you compare it to China in 1850, the differences are palpable.
Jeffrey Mason: Certainly, I would imagine faster than any kind of economic transformation China had ever seen up to that point.
Evan Osborne: Oh, yes. It wasn’t like China was free of innovation, just like no civilization was totally devoid of that. But things after 1842 are totally different from the snail-like glacial, two steps forward, one step back type of pace that you see before the Europeans get there, the Westerners get there.
Jeffrey Mason: So, what’s interesting then, I think, is we have this sort of long period, it’s clearly very politically fraught, but this sort of long period of material and other types of progress in some ways. In the wake of World War One, you get this sort of very sharp turn against this long trend of economic liberalism. It’s interesting that it both comes from the communists, as well as the enemies, the KMT, and it’s kind of everybody, regardless of what side of the factions of the day you’re on. Everyone kind of seems to turn against economic liberalism to some degree or another. Why does that happen?
Evan Osborne: Again, there’s already some significant settlement often driven by anti-imperialism. But already, foreign capitalists are seen as foreign. That’s the operative problem there. In the second half of the 1910s, there are two events that are dramatic in terms of changing the nature of Chinese history. The first is the way that the Chinese small, but still official delegation at the Versailles conference is treated. They go expecting to get German colonies that had been there for some time. I think it’s called Tsingtao, a Chinese beer, that was established by Germans during the colonial era in the province, I think, of Shandong.
In any event, of course, they lost the war. So, they lost those colonies, and China wanted to get them back. But instead, they were given to Japan, which had more substantially contributed to the war effort. The Chinese understandably feel like they just been stabbed in the back. That promotes substantial increased resentment. Secondly, and undoubtedly, there’s some synergy going on here is the Bolshevik Revolution. And so, Lenin comes to power. The first thing he does is he renounces all Russian territorial claims in China, which no Western country has ever done. He is talking about how – I think he already had written this book on this theme by this time, colonialism is capitalism.
So, we get to this post-capitalist, to communist, whatever you want to call it world, and colonialism will stop. There’s already a widespread belief, Sun Yat-sen, at least among them, of people who think that the main feature of Chinese life since 1842, has not been increased prosperity, but foreign domination. To move beyond capitalism is a way to move beyond foreign domination. These two events both lead to a, I would say, decisive turn against economic liberalism, for decades. In fact, what liberalism that remains, before Japan invades in ‘37 is mainly again, because of weak central government. They’d like to regulate, but they can’t.
Jeffrey Mason: So really, it pretty much would have been dead, if they could have, even before Japan invades and then the communists won the Civil War.
Evan Osborne: There was a substantial increase in bigger cities. The capital of them was Nanjing, and the KMT, which ran the country except the communist area, without challenge for 10 years. During that time, substantially increased economic control. Sun Yat-sen was dead by this time, but his belief that big business was inherently exploitive, and sort of the handmaiden of imperialism was deeply ingrained in KMT thinking. So, to the extent that they could, I would say, and this is one of my prime bindings, I think, the KMT was totally opposite behaved in exile after the war, but they substantially where they could increase the amount of economic control.
So, the physician’s organizations, and these other private organizations are all funneled to the KMT. Famine relief is funneled through the KMT to the central government, when there were all these vibrant, private business leaders who felt obligated to do it before. So, it’s to the extent possible centralization of everything and so that happens well before 1949.
Jeffrey Mason: So, then we get – moving forward to the story. Then we get to 1949, communist have won the Civil War, and you got an interesting bit in there about how the work of Smith and others who influenced this liberal tradition. Obviously, they’re not Smithians, but I think it was interesting bit about how the Chinese theorists and I guess, be the communist theorists, Maoist theorists in China, how they interpreted Smith and others that had this small, but maybe not totally irrelevant place in sort of recent Chinese economic thought?
Evan Osborne: The first thing, when we talk about this, think about, Marx was a very pungent writer, and he had really bitter things to say about many of the better-known political economists of the 19th century. But he was actually far more complimentary than critical of Adam Smith, who he said, “Well, he got this and that wrong.” But overall, he moved the ball forward a lot. So, that’s how the Chinese see him in their universities and so on, after the war. So, he was the right economist for his time. He was the bourgeois economist for the bourgeois era when industrialization is just taking off.
He wasn’t Marx, but it was too early for that. You couldn’t go to a bookstore and buy Adam Smith. But if you worked at a university and you were an economist say, even though access to it was somewhat limited, you could read. And not just The Wealth of Nations, but some high-end, The Road to Serfdom was even available. And again, it was not something that anybody could come in off the street and check out. But Smith had his place in how communist thought. So, he was like the setup to Marx, like maybe it’s a good way to put it. Marx was the end of the discussion. There’s no more we need to add any economics to Marx because it’s perfect. But Smith was part of that building of that perfect edifice.
Jeffrey Mason: Right. Okay. So, right now, the Maoist in power and economic liberalism is about as swept away as it possibly could be. We get about three decades or so of that. I think most people sort of know just how terrible Great Leap Forward in cultural evolution, all this was. But then we get to this period of reform and openness that starts in 1978, spearheaded by Deng Xiaoping and others. So obviously, the death of Mao, I think, plays a role in this being able to occur. But what else? What are the other factors that sort of make this departure from the past several decades of policy possible?
Evan Osborne: So, even now, you can’t say too much about the cultural revolution, or the Great Leap Forward. But what everybody noticed in decision-making positions in China was how poor it was. In fact, it was much more than it was in 1949, had been in 1949. I’ve seen World Bank data that’s indicate it was in ‘79, it was one of the 10 poorest countries in the world. It was not one of the 10 poorest countries in the world in let’s say 1920. It was poor, but not like that.
So, China had suffered this horrendous famine in the fifties, late fifties, and early sixties, and they also had suffered, like three-quarters of a million deaths and an earthquake, I think, ‘76. And it was a helpless country. So, they already had all these problems, you may know with the Soviet Union, politically. They had fought brief set our battles in ‘68. So, China is just too poor and therefore too weak, and they sort of have to figure out how to make it work in terms of Marx’s theory. But there’s eventually enough people agree that something has to change, even if you don’t want to call it market economics, market economics has to be allowed.
So, it was, again, two steps forward, one step back. It begins in ’78, ’79, but then it really accelerates after the 1989 Beijing massacres, when Deng Xiaoping was still alive, decides that he can overcome the political storm, political crisis by allowing Chinese to make money. What was fairly modest reform until then, in the early nineties, under his leadership becomes much more substantial reform.
Jeffrey Mason: What sort of opposition were the reformers facing from the hardliners? Was it just a theory-based? What were sort of the key objections by the hardliners and the anti-reformers?
Evan Osborne: Well, it was substantial in the ’79, ’80, that interval, and capitalism was exploitation. It was a way to go back to those dark times before 1949. Never mind that they became much darker after 1949. So, I would guess, you could say, that Chinese economists, and intellectuals believed in Marxism for the same reason they did in the Soviet Union. There’s no empirical evidence that it’s true. But nonetheless, the theory seems to work, okay. So, to allow capitalism to come back, was to go against the historical tide.
So, 1979, everybody who matters in China, practically, has been trained as a Marxist, and especially as Marxist economists. It’s an uphill battle to get it accepted. As I said, it’s only in small experimental steps throughout the 1980s, roughly speaking, and then it’s only in the early nineties, that people start to see results, and then decide to expand them to the entire country.
Jeffrey Mason: So, in 1989, and the early nineties, it kind of looks like this moment, where, at least to an outside observer, it might look like this moment prior to the crackdowns where China gets both the economic and the political liberalism. Of course, it doesn’t happen. A big part of this is I think, the leadership of the CCP can see what’s happening in the Soviet Union and the other members of the Eastern Bloc, and they obviously don’t want that to happen to them. This is a little bit of a hypothetical. But say things – the 1989 has actually moved forward to 1985 before things really start to fall apart in Eastern Europe. Do you see a different outcome? Or based on what you know of the dynamics of what happened, was there always going to be we’ll get the economic liberalisation but the political was never happening, no matter what?
Evan Osborne: I mean, it’s hard to say. The standard sort of trope at that time in the mid to late eighties was that when economic liberalism and therefore national prosperity precedes far enough, the people will demand successfully, political freedom, democracy and so on. I think that’s how people thought about it outside – Chinese people, I mean, thought about it then. To be honest, I would say that in the eighties, before 1989, political liberalization was actually proceeding more quickly than economic liberalization.
So, in the late seventies and early eighties, there was a crackdown on the so-called democracy wall movement. But nonetheless, you could buy – there’s no Internet then, of course, but there were dissident magazines, and people could organize sessions at universities to try to get at what the truth was about the cultural revolution, and the birth pangs, if you like, of the Chinese revolution.
The eighties, even well before for it, the crackdown, where I would say, maybe as politically free as they were economically free, and of course, that all came crashing down in June 1989. In fact, one of the things that brought public discontents into the arena in the late eighties, was actually the economic phenomenon of liberalizing prices. Because the prices were repressed, and suddenly, they were much more expensive. So people, their salaries weren’t getting any bigger, and so they couldn’t afford things, and they, naturally, got upset.
I’m not quite sure how much interchange there was between anger over higher prices, and maybe more generally, economic reform, and certainly, there was some and the explosion of political discontent, but a lot of people have drawn that length.
Jeffrey Mason: Especially, once you get into the nineties, the reforms are “saved” by the southern tour, and were set on the track that we’re on now today. Why is it that you think Chinese economic liberalization, one just in general, ended up being more successful than much of the former Soviet Union? It’s kind of a disaster in Russia and a lot of the other former just constituent republics. Why is it more successful? But also, how do we get this much, much greater trial and error experimental? You guys figure this out. If it works, great. If it doesn’t try something else. Why is it that China is able to have this kind of approach in this period, as opposed to something more centralized?
Evan Osborne: That’s a complicated question. Deng Xiaoping had that famous saying about, “It doesn’t matter whether it’s a black cat or a white cat, as long as it catches the mice.” Throughout the eighties, there was a belief that we can just try these things and see how they go. And if they go well, we’ll expand them to the rest of the country, Shenzhen was like that. I think, when it was named, especially economics on the very first one in ‘80, or ‘81, it had maybe 20,000 or 30,000 people, and now it’s got well over 10 million. I’ve heard stories about people who went there without legal authorization to try to make it big.
So, there was a belief that we can try things. In the Soviet Union, which I’m not an expert on, it was a big bang, and then my understanding is, that a lot of the state property, somehow people got off, and maybe they’re a former communist functionaries. They had some money to spend, and so they spent it on these companies. Then, basically reinstated monopoly only now it was a private monopoly. In China, in contrast, in here, you get into the non-economic territory. But what you observe is that everywhere around the world that Chinese go, their income seems to exceed that of the natives. That’s true in the US, in Canada, in the Philippines, in Thailand, everywhere. One wonders, the extent to which businesses is something that they take naturally in their cultural framework to, so that could be part of the story.
Jeffrey Mason: Yes. I think listeners who maybe know Garett Jones’, I believe, it’s The Culture Transplant, will know the story about Chinese elsewhere and abroad. One of the things that you just briefly mentioned was people wanting to move from the countryside or smaller towns to Shenzhen and to these other hotspots for China’s new growth. Can you speak more to how the relaxation of the Hokou system contributed to China’s rapid economic success?
Evan Osborne: That system, it’s also called sometimes the [inaudible 0:34:37], I think system. It has its origins, I think, during Republican China, but it wasn’t nearly as comprehensive or sweeping as it became under the communist. After 1949, you had a card, an ID card or document that said, “You live here. You can’t move if you have a rural [inaudible 0:34:58]. You can’t move to the city or vice versa.” So, population mobility was basically nil. In the eighties, and especially in the nineties, when again, reform takes off, these decisions were often made by local authorities.
It might be, for example, a provincial governor, or even the equivalent of that at the city or county level, they will decide to substantially relax the [inaudible 0:35:25] requirements to live there. In addition to lay it on top of that, once the city started to boom, people start to migrate there illegally. They don’t have any authorization. But still, there are jobs waiting there for them, and so they go anyway, and of course, that’s a worldwide phenomenon.
Here, I would say, that the ability of local governments to do their own thing, and to not just be dictated to by the central government, early on, it was like that. The central government had to get permission to Shenzhen to become a special economic zone. But later on, local officials had more authority to relax the residency requirements. Even now, it’s still true that the biggest cities Beijing, and Shanghai, and so on, impose a lot of restrictions in that regard. But throughout the 2000, 2010s, and much of China, even though you have that card that said, where you’re registered, also what class you are, you can move around at will, pretty much, with the exception, again, of those few giant cities, where their local governments are very protective there. I don’t know, ethnic purity, or whatever you want to say.
Jeffrey Mason: Sure. Looking at this period, there’s an interesting case that I think that Yuen Yuen Ang makes in her book, China’s Gilded Age, that I think is really interesting when she talks about how there’s corruption, and there’s corruption, and how some types are kind of inherently unproductive, and there’s not really anything redeeming about them. But then there are other types where maybe it’s not great that this exists, but it can actually play a growth facilitating, especially when we’re talking about this sort of elite-level bargaining.
So, bearing in mind, as you move through the nineties, and to now talking about both this emergence of entrepreneurial class, but then also at the same time, this business elite as well, and the kind of both sort of sprang up at the same time.
Evan Osborne: So, I think the key phenomena there, understand the idea that if we stipulate that there’s a lot of government control over who can do what with their nominally private property, then bribes are a way to oil that machine and make it run faster or better. But at some point, you reach the end of the line there and the people who got rich in China, in the early generations, in the eighties, and nineties, they had more freedom, and they were molested less frequently by government officials. Because still, the imperative then was to let people run and see how fast they could go.
As China got more and more wealthy people, and bureaucrats discovered that while we’re pretty rich already, we don’t need to worry so much about freeing up people, now we can get our cut. Then, arguably, the corruption problem got worse. So, there are many successful, very successful Chinese business people, and often, they made their fortunes in the eighties and nineties, without that much difficulty. But then there’s this new class and I talked about some, of people who make their money doing genuinely disruptive in the economic sense things. That becomes a threat to the government, and so it’s not just a corruption problem anymore, although that certainly exists. It’s also the government reacting to threats to its hold on both power and the wealth that accrues from having that power. That, to me, is the primary obstacle China faces these days in trying to become a more innovative society.
Jeffrey Mason: That was something I wanted to get into a little bit. How do you see this economic liberalism that emerge? How has that changed under Xi Jinping’s leadership over the past decade and change?
Evan Osborne: So, I think the standard, I believe it’s certainly not entirely wrong, is that since he took office to power, he has substantially increased rollback the liberalization of the economy and there’s a lot of truth there. Now, if you go there, you still see. I’ve been there since 2018. But I saw then certainly, that the restaurants are – and people get their food privately, and they get their housing quasi privately. There’s still a lot of role for market forces to play in people’s daily lives and I don’t see that changing.
But the Indian Prime Minister Nehru used to talk about the commanding heights, and how important it was for the government to have control of the commanding heights of the economy. And for sure, and partly driven by fear of losing access to all that wealth and power. The Chinese Communist government sees Is it that way. So, you can’t do anything that will seriously threaten the CCP hold on power. Now, people need to eat, and they need to have clothes to wear, and they need to some extent get advice on how to invest their money. It’s perfectly okay to rely on market forces to do most of that heavy lifting. But if you have, for example, [inaudible 0:40:25], who I talk about in the book, he, I think, was the founder of Alibaba, and he few years ago, had already founded a new company called the Ant Group, which was basically substantial financial reform. It was financial innovation. And it would have allowed if it hadn’t worked what he imagined it would, people to get access to capital, whether they were small or bigger entrepreneurs, or companies, independently of the traditional state-owned banks, or the larger sort of half state-owned banks. And obviously, that’s a disruptive thing.
So, we’ve seen, not to that extent, because we’re a free economy, but decentralized finance, has had its disruptive effects here as well. But we’re largely okay with that. Of course, people were hurt and complain, and sometimes they’ll get enough attention from the government officials to have some effect. But we’ve had so much economic disruption in the last 34 years, because of technological reasons, and so we’re more comfortable with that.
In China, the people there, I don’t think have any problem with learning new ways to manage their money. But the government, the one-party, authoritarian government, makes a lot of money from being that kind of government. I’m sure they stay awake at night, sometimes thinking about what could happen to them if they lose that power. Anything that an entrepreneur does, and again, [inaudible 0:41:49] is a good example of this, that threatens to disrupt the macrostructure of the economy is a threat, and so has to be prevented.
So, my interpretation is that if you want to rely on market forces that dry clean your clothing, and to make the furniture for your apartment, fine. If you want to rearrange fundamentally the finance system, well, no. You can’t do that.
Jeffrey Mason: So, there’s kind of a trade some dynamism for some central security, essentially, is the deal. What do you predict the effects of that being over, say, the next 10, 20 years?
Evan Osborne: Well, sort of a parallel trend. The Chinese government, as it’s currently constituted, is very enthusiastic about not just engineering domestic technological progress, innovation in particular, but to basically set up a separate technological framework that’s based in China. So, they often resent that all the financial in the SWIFT system and the computer architecture and all these things have been basically creations of Western countries in the US substantially. They want their own standards.
Part of the reason for that is they can make money by getting other countries to plug into those standards, and part of it is because they don’t want to face what Russia faced, after they invaded Ukraine. So, they kicked them out of the SWIFT system. China wants to have its own architecture, or technological, or financial, whatever it may be. Unfortunately, my personal view is that innovations of this kind bubble up from the bottom, and there’s going to be 10 failures for every success.
If the government says, “This is going to be the success, and so we’re going to make sure all the money goes here,” that’s just not going to be effective, is letting, to use an ironically Chinese phrase, to let a hundred flowers bloom and see which one grows the tallest. So, I am pessimistic about the ability of the Chinese through the framework they’ve adopted, the policy framework they’ve adopted, to achieve what they want to achieve. Now, they can and will, if they haven’t already, do big things, where [inaudible 0:44:00] is known.
So, for example, the 2008 Olympics and the 2022 Olympics, were major spectacular successes. Soon, I suppose, there’s certainly talk that they’ll be on the moon. I can’t speak to how militarily effective they are. But they have now just launched their fourth aircraft carrier. So, these kinds of big projects, they can do that, because they’re a command and control economy, society. But the things that change, the increased productivity in ways that fundamentally we never thought of before, you’re much less likely to get that from such and such agency funding such and such a project. I know the American DARPA agency, many have changed the name, but still exists, is often credited with funding all these early innovations, and I’m not sure how true that is. But ultimately, progress comes from figuring out competitively which out of those hundred experiments is the one success and you have to tolerate that 99% of them, or 99 of them are not going to succeed. We do that with venture capital and the rest of it, and being comfortable with businesses failing and closing.
In China, I feel the instinct is more to pick the winner, and then direct resources to that winner, precede winner, even though it hasn’t won anything yet. Over the long term, this kind of economic structure, which who knows may not last, but I’m pessimistic about the ability of that system to cultivate that much fundamental transformative innovation.
Jeffrey Mason: Yes. It’s hard to imagine China beating out, say, Sam Altman on things like AI. I’m curious to see how that develops. So, your book was just published this year. I’m curious if you know, what’s your next big project? Are you still focusing on China or on to something new?
Evan Osborne: I have a minor research paper that’s coming out of this – I got the idea while working on this. I don’t know. I had a book that came out in 2018, and then this one took longer than I thought, to get published. So, I’m not sure if I have any future projects of this magnitude on the immediate horizon. I do like China. I speak the language decently. And this tension between what I see is this incredible cultural capacity to do things well, economically, to innovate, to create successful businesses, and the controlling hand of their totalitarian government, it’s a tragedy in many ways. But it’s interesting, certainly. So, this ongoing tension between the political need to control, but to control this system that seems to have so much potential in this culture that seems to have so much potential, which was demonstrated the last 40 years. If it weren’t so tragic, it would be very interesting.
Jeffrey Mason: Sounds like a great book. All right, everyone. Evan’s book is, Markets with Chinese Characteristics: Economic Liberalism in Modern China. That’s available on Amazon, and actually, also available for download via PDF. So, we’re very grateful for that. Thank you. And thank you for doing the podcast. I really enjoyed our conversation.
Evan Osborne: Thank you for your interest.
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Kurtis Lockhart: Thanks so much for listening. We love engaging with our listeners, so please always feel free to reach out. Contact information is listed in the show notes. To find out more about the work of the Charter Cities Institute, please follow us on social media, or visit chartercitiesinstitute.org.
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