Leonard Liggio surveys the most significant economic transformation of the last century.

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Leonard Liggio was the Executive Vice President of Academics at the Atlas Economic Research Foundation, a Distinguished Senior Scholar at the Institute for Humane Studies, and a Research Professor at George Mason University’s School of Law.

The new relationship between China and the United States has a long history. America’s long term interests in China date to 1784 when the clipper ship “Empress of China,” sailed from New York for Canton. Although American shipping had dominated the British merchant marine for over a hundred years, this was the first American ship to travel to China. With the peace treaty between England and America after the Revolutionary War, American shipping could enter the area previously reserved by mercantilist legislation to the English East India Company—the Indian and Pacific Oceans.

Americans traded the furs procured in the Pacific Northwest (in conflict with Russian, English and Spanish claims) for the teas of China. The amazing Baltimore Clippers, American’s contribution to the highest technology of sailing ships, dominated the sea lanes to China and the East Indies during the early 19th century. With the ending of the Anglo‐​American administration of the Oregon territory and British Columbia in 1846 and the annexation of Alta California (and the western U.S.) from Mexico in 1848, the U.S. became even more interested in China and Japan. American agents sought to establish control over Formosa in the 1850s. American diplomats were active in seeking to annex Korea in the 1880s. Finally, in 1895, the Japanese unexpectedly defeated China in war, gaining Formosa and a leading position in Korea. Tsarist Russia, meanwhile, established a military dominance in Manchuria after adding large sections of it to Siberia in 1858 and 1860. Germany established a protectorate in north China, the British extended their sphere of influence from central China around Shanghai to the north, and France created an area of special interest in the south China provinces bordering its recently established protectorates in China’s former vassal kingdom, Tonkin and Annam—Vietnam.

The U.S. felt left out of this whirlligig of spheres of influence over the world’s largest population and market. When war with Spain was declared in 1898, before U.S. forces could cross the ninety miles to Cuba, Commadore Dewey’s squadron in Far East waters conquered Manila harbor (May 2,1898). The U.S. declared its intention to hold the harbor (finally taking the whole Philippines when the nationalists did not agree to ceding Manila to the U.S.) and immediately annexed the Hawaiian Islands (and Wake Island and Guam) as stepping stones—and military stations—to the China market. Thereafter, the U. S. participated in military expeditions in the Boxer Rebellion against foreign control of China.

Finally, a Republic was proclaimed in China in 1911 and the student radicalism in Chinese schools which had developed following the republican revolution exploded when it was announced that the Versailles Peace conference of 1919 had granted America’s ally, Japan, a special position in China. The students’ May Fourth Movement was the starting point for most of China’s future radicals, including Mao Tse‐​tung. These young radicals, including Mao, first studied European anarchist writings because they learned from the western press, socialist and non‐​socialist alike, that the Soviet Revolution was anti‐​Marxist, since it was supposedly oriented toward the peasant and not the industrial worker, and therefore was anarchist. [Chow Tse‐​Tung, May Fourth Movement: Intellectual Revolution in Modern China,(Harvard University Press, 1960). See also the moving novel by Fei‐​Kan Li (Pa Chin), The Family; and Olga Lang, Pa Chin and His Writings; Chinese Youth between Two Revolutions (Harvard University Press, 1967)]. However, after a few years, Third International agents arrived to try to set the record straight—Lenin and Stalin considered themselves Marxists.

Meanwhile, many of the students had moved toward a more socialist position due to the overlapping years’ long visits to Chinese universities of Bertrand Russell and John Dewey. Russell espoused a strongly decentralist philosophy emphasizing the peasants, traditional associations and the family, rather than Westernization. John Dewey countered with his centralized socialism or industrial democracy in which the peasants, traditional associations and the family would be crushed before the power of Westernization. The major focus of the students was to free China from foreign domination, and they believed that Westernization was a necessity to have the strength to achieve that goal.

Meanwhile, many of the students went to European universities, where they became communists. The new Chinese communist party allied with Chiang Kai‐​shek against the war lords. But when Chiang won Shanghai he turned on the communists and slaughtered them.

Mao Tse‐​tung, who had opposed the Russian‐​imposed urban worker strategy, now emerged to lead a peasant based movement which survived only by the Long March (discussed in the pro‐​Mao Red Star over China, by Edgar Snow). When the conflict with Japan expanded in the 1930s, Chiang withdrew from the industrial coastal cities to the interior of China. This involved Japan with the American military and naval forces stationed in China. From 1901 to 1938 the 15th United States Infantry was stationed in Tientsin. Over 500 U.S. Marines were stationed in Peking; from 1000 to 2000 Marines were stationed in Shanghai. U.S. Marines were stationed on the ships of the U.S. Asiatic fleet which wintered in the Philippines and summered in north China at the Shantung peninsula. During Franklin Roosevelt’s administration, U.S. forces in the Philippines were ready for short‐​notice orders to go to China, and several thousand Marines from the Fleet Main Base at San Diego were always available for service across the Pacific. The U.S. navy maintained the Yangtze River Patrol and the South China Patrol, both of which were composed of gunboats.

Chinese Nationalism Divides

When Chiang abandoned the industrial coastal cities to the Japanese, the Nationalist movement split. The liberal capitalist merchants, bankers and industrialists (left‐​Kuomintang) who had sought the modernization of China, including the ending of landlord tax‐​collector feudalism and the recognition of the peasants’ right to the ownership of their land, remained with their capital and property in the cities. Their leader, Chiang’s prime minister, Wang Ching‐​wei, established a left‐​wing or capitalist government in Nanking and became prime minister of a Chinese government allied with Japan. Chiang, in the interior, ruled with the support of the landlord tax‐​collectors and their sons the army officers (right‐​Kuomintang). Freed from the money power of the left or capitalist wing, the landlords began a feudal reaction to re‐​establish collection of taxes and feudal dues from the peasants. The peasants turned for help to the armed force willing to side with them; the communists. When the Japanese surrendered, over one hundred thousand American troops were aiding Chiang in taking control of north China’s cities, while the communists rushed to consolidate their control over the countryside. Thereafter, the U.S. poured billions in military supplies into the Chiang army. But time after time huge American‐​equipped armies went over to the communists: the communist commanders said they had the best supply system in the world, American supplies which they needed only to capture in order to have American‐​made weapons.

After the communists captured the capital, Nanking, the American diplomatic staff remained, while the Soviet diplomats dutifully followed Chiang further and further south. However, when the communists moved the capital to Peking, the Americans refused to move north and finally ended diplomatic relations. The British, following international law, recognized the new government and benefited from a quarter‐​century of nearly exclusive trade with China.

When the Chinese Communists came to power in October, 1949 it was at the end of a long period of conflict internally: the warlords, the Japanese, civil war, and, at the beginning of external conflicts, the Korean war to 1953 and France’s Vietnam war to 1954. The political trials, detentions and executions are part of the wide area of denial of civil liberties in China. Having spent a quarter‐​century winning the support of the peasants as the basis of their victory, the communists faced what became a continuing dilemma—how to relate to the private property attitudes of the peasants and still have political control.

In one sense, this was part of the broader problem of how to conduct a complex economy while attempting to impose political controls on the market. Because inflation had been a major cause of popular disaffection with the Chiang regime (the Nationalist secret police engaged in wholesale executions of businessmen for violations of the price control regulations during the runaway inflation), the communists went out of their way to establish a stable monetary system.

In order to accumulate capital for industrial development they encouraged savings, and offered interest rates to attract them. Where industrial firms were nationalized, the former owners were given twenty‐​year interest‐​paying bonds and were encouraged to remain as managers at attractive salaries—which became the subject of much criticism at the height of the cultural revolution. [The development of responses to the need for market processes to operate the Chinese economy is examined by Dwight H. Perkins, Market Control and Planning in Communist China (Harvard University Press, 1966) and Perkins, ed., China’s Modern Economy in Historical Perspective (Stanford University Press, 1975).]

Agriculture is the base of the Chinese economy. When they came to power the Chinese communists rejected the Soviet model of using agriculture as merely a means for amassing capital for industrialization. Instead, the communists viewed the peasants as the potential mass of consumers for industrial products. Thus, even in the parts of agriculture in which communes were established, the peasants owned their own homes, work tools, domestic animals, individual plots of land and bank deposits. Kenneth Walker [Planning in Chinese Agriculture, Socialisation and the Private Sector, 1956–1962] has noted the discouragement produced by comparison of collective agriculture in the Soviet Union to its private peasant farming. With a high proportion of Soviet dairy and vegetable production in the private sector, the Chinese emphasized voluntary participation in cooperatives and higher prices for farm goods.

During the 1950s there was a process of loosening controls on the peasants; although rice and grain lands were more likely to be under cooperative or collective operation, vegetables and livestock were mainly private. In Kiangsu province in 1957 only 3% of pigs were collectively owned​.In the January, 1966 Asian Survey Michael Okenberg noted that there had been a large increase in hog production due to price incentives to private hog producers.

Walker noted that private plots were larger in socialist collectives (in order to encourage peasants to voluntarily establish collectives) than in the non‐​socialist cooperatives. In both, the peasants had much independence, but the collectives introduced profit‐​sharing in order to encourage production.

The Great Leap Backward

However, in mid‐​1958, Mao introduced his most fantastic undertaking: The Great Leap Forward. In addition to trying to develop industry without capital investment in tools and machinery by emphasizing labor intensive methods, he undertook a push to collectivize agriculture and force peasants into more collectivized “communes.” Political incentives were substituted for market price incentives. The set‐​backs on all fronts of the economy suffered by China (to which was added the withdrawal of Soviet technical assistance) led to the de facto retirement of Mao from political leadership. Mao left the presidency and limited himself to ideological work as Party Chairman. In a February 1959 conference it was noted that the public sector could not produce enough pigs to provide fertilizers for the soil, and so a major effort was established to encourage private pig rearing by price incentives. In the Spring of 1961 the party line was declared to be: “take privately reared pigs as the main source, publicly reared pigs as the auxiliary.”

From 1960 there were calls in the party press for the restoration of private plots where they had been collectivized, or making the private plots large enough for realistic farming (the pre‐​1956 plots were viewed as the standard size). The private farm plot was declared to be the desire of the vast mass of the population and that the party had to accede to this popular demand. A debate ensued as to whether the private farm plot was socialist or feudal in character. Some party experts held that the private farm plot was “one form of socialism.” In China everything backward is viewed as feudal; everything modern and productive is viewed as “socialist” Thus, industry and price incentives are viewed as “socialist” and inefficient methods as “feudal” Most party spokesmen held that private farm plots were “individual” in character and did not involve exploitation of labor. And being “individual” they were “socialist.” During 1961 the private plots were the dominant form and have survived as such since then. Teng Hsiao-p’ing advocated individual farming and expansion of free markets (legalizing black markets).

In January, 1965, Ch’en Yun, who had opposed the militant collectivization plans in agriculture reappeared in public life. Ch’en Yun was a member of the seven‐​member standing committee of the Communist Party Politburo. The maintenance of the non‐​collectivist emphasis in Chinese agriculture continued during the Cultural Revolution which began to emerge in late 1965, in large measure in response to the escalation of the American intervention on China’s border in Vietnam.

The central thread running through the ideology of the cultural revolution was the assault on dogmatism whether in the government or the party. In particular, the cultural revolution began as an ideological attack on state power, as personified by President Liu Shao‐​chi. His major work, “How to be a Good Communist,” was viewed as the epitome of the ideology of bureaucracy: obedience to power is extolled and submission to the communist party and its decisions are given priority over truth. At the beginning of the cultural revolution, K.S. Karol, (China, The Other Communism, 1967), quoted Mao: “if Marxism‐​Leninism could be summed up in a single sentence, it would be: to rebel is justified.” Karol concluded that “Mao would like to institutionalize disobedience of superior authorities, thus erecting a permanent barrier against the men in power.”

International affairs played a central role in the origins of the cultural revolution. Liu Shao‐​chi and his protege, Peking mayor Peng Chen, in the split with the Soviet Union, had sought to encourage the sectarian formation of rival new communist parties. In addition, emphasis was placed on support of state power, especially in relations with Asian and African countries. The Indonesian army coup of September 1965 triggered Mao’s return to power via the Cultural Revolution. Defense Minister Lin Piao’s “People’s War” (1965) became the guide book of the cultural revolution. Lin recommended the wholehearted application of “national democratic revolutions” which embrace the revolutionary middle classes—“patriotic and anti‐​imperialist democrats”—on the principle of the “broadest possible united front” and of “winning over the middle forces and isolating the reactionary forces.” Premier Chou En‐​lai, who had been the political instructor of Lin Piao at the military academy, sought to develop a new foreign policy in the context of the recent failures and in the context of the American escalation in Vietnam.

One of the results of the Cultural Revolution was to turn the major cities and their industrial complexes over to army direction. The substitution of the authoritarianism and dogmatism of the military for those of the party made a bad situation worse. For if the party at times was forced to deal with the reality of the public’s opinion and consumer preference, these were realities totally absent from the army’s functions. The chairman of the state planning commission, Politburo member, Po I‐​po, one of the most knowledgeable economists in China with a deep understanding of price mechanisms, was purged, as was the secretary‐​general of the Chinese communist party, Teng Hsiao-p’ing. Attacks on Po I‐​po reached a high pitch by August, 1970. Thereafter, Chou En‐​lai regained a leading role in the economic area, and sought to re‐​establish proper accounting in industry. After the death of Marshall Lin Piao (September, 1972) while Mao’s wife and her associates dominated the ideological arena, Chou En‐​lai moved toward more rational industrial policies. A former associate of Teng Hsiao-p’ing, Yu Ch’iu-li became head of the state planning commissions, (October, 1972) and Teng re‐​appeared in public in April,1973. Teng was formally rehabilitated in January, 1974.

Enter the Nixon Administration

In July, Henry Kissinger visited China (secretly) for the first time. In November, China was admitted to the United Nations. In February, 1972 Richard Nixon visited China, and with Chou issued the Shanghai Communique, the basis for subsequent U.S.-Chinese relations. In September, Japan and China established full diplomatic relations, and soon China was in close contact with the European Common Market as well as the major European industrial countries: England, France and West Germany. Strong emphasis was placed on using foreign technology in order to modernize Chinese industry.

In January, 1975 Chou En‐​lai announced new plans for industrialization and modernization. In October, Hua Kuo‐​feng emerged to prominence by presenting the report of the National Conference on Learning from Tachai in Agriculture (Tachai is China’s major oil field in Manchuria). In January, 1976 Chou died, with his memorial speech presented by Teng Hsiao-p’ing. In February a new campaign against Teng was launched, and he was purged anew in April. Hua Kuo‐​feng was appointed premier in place of Chou on the basis of his leading role in agricultural policy. After Mao’s death in September, Hua was named party chairman and Mao’s widow and her associates were denounced for dislocating economic development, especially with reference to agricultural production. In December a Second National Conference on Agriculture was held. In January, 1977 official policy emphasized “prosperity,” “political liveliness,” the blooming of a “hundred flowers,” and “comprehensive modernization.” In August, the 11th Party Congress set guidelines for economic development under Hua’s leadership and re‐​rehabilitated Teng.

During 1978 the Chinese leadership embarked on a radically market‐​oriented path of economic development. Hua Kuo‐​feng, party chairman and premier, visited Yugoslavia and discovered the market road to socialism. The clear intention of the Chinese leadership is to go beyond the limited economic liberalization introduced to Soviet Russia by Khrushchev. It is aiming at the much more market‐​directed Yugoslav model. As Fox Butterfield (New York Times Magazine, Dec. 10, 1978) noted: “hardly a week goes by without a Chinese delegation trooping off to study some aspect of the Yugoslav experience, from its system of worker self‐​management to its wide‐​open tourist policy.… In recent weeks, the world’s leading bankers have been virtually tripping over themselves in the lobby of the old Peking Hotel in a scramble to help finance these enormous purchases, which would mount up to $60 billion.” With the almost $50 billion owed to U.S. banks by Russia and the Soviet bloc, such credits could severely test the West’s financial structure. Bank of America executive vice‐​president, James Wiesler says that although little is known of China’s financial situation, there is intense competition among foreign banks to provide loans.

Recently Peking Review has published articles which reveal the new direction of the Chinese economy: “Refuting Yao Wen-yuan’s Fallacy that the Principle ‘To Each According to His Work’ Breeds Bourgeoisie,” by Su Shao‐​chich and Geng Lan‐​jui (February 10,1978), and “On the Question of Profit,” by Hsu Ti‐​hsin (February 24,1978). Hsu said that through profit “we can check the economic results of the management of our enterprises and evaluate their contributions to the state, thereby prompting the enterprises to make careful calculations, practice business accounting, reduce costs and increase profits.” Hsu says that a socialist economy should not “onesidedly” stress profit, but should put planning first and price second. His conclusion, however, strongly affirms that

socialist enterprises must first of all ensure the quality of their products and try to improve it continually. With this as the precondition, they do their best to increase production, practice economy, cut down the cost and make more profits. It is quite obvious that the greater the amount of such profits the better, for it is a proof that these enterprises are operating efficiently and are making greater contributions to the state and people. This has nothing in common with “putting profit in command.”

In Peking Review, December 8,1978, an article on “Technology Import and Self‐​Reliance” quoted Mao: “Rely mainly on our own efforts while making external assistance subsidiary, break down blind faith, go in for industry, agriculture and technical and cultural revolutions independently, do away with slavishness, bury dogmatism, learn from the good experience of other countries conscientiously and be sure to study their bad experience too, so as to draw lessons from it. This is our line.” China is embarking on a vast program of importing technology from abroad. American and European companies are seeking contracts with China. The Japanese are being favored by the Chinese as the preferred trading partner, because Japan does not have a large military establishment threatening China (and without a major military budget it has lower costs than the U.S.).

China News Analysis, July 14 and 21,1978, discussed the movement toward profits in the Chinese economy, including the National Conference on Turning Losses into Gains by Strengthening the Economic Management of the Enterprises. Some of the economic reports regarding the economy frankly describe the gap between planning and reality. There may be a movement toward calling the goal of production for profit,“the plan,” and allowing the realization of profitability as the fulfillment. Planning now refers to imposing the discipline of prices on consumers, including state agencies and even the army. Many of the new ideas are emerging from the Academy of Social Sciences, headed by Hu Ch’iao-mu, a major adviser of Teng. China News Analysis, July 14,1978, concludes: “It is quite possible that there are men in Peking who see that the present system of planned economy is not working and cast a furtive glance at the system in force in Yugoslavia. Certainly Cheng Ming, a new monthly magazine vociferous in support of Teng Hsiao-p’ing, which is appearing in Hong Kong under communist auspices, had in its 8th issue a long article praising to the skies the self‐​management of the factories of Yugoslavia.”