In the late 1970s, in the face of a deepening economic crisis, growing political unrest and the ideological exhaustion of Maoism, China’s pragmatic post-Mao leadership turned to the market to rescue their sinking bureaucratic economy.footnote In the West, many left-wing China scholars began to look with favour on the ‘market road to socialism’. Thus, by 1982 Mark Selden and Victor Lippit conceded that ‘the market, then, appears as a necessary but dangerously volatile instrument in the socialist transition. . .[T]he market must play a significant role in the transition process to increase economic efficiency, realize socialism’s inherent potential for material prosperity, check bureaucratic power and extend the scope for initiative and responsibility among the immediate producers.’footnote1 In its initial formulation, maintained through most of the eighties, the official view was to merge market and plan into a ‘planned commodity economy’ by introducing elements of the market (supply/demand pricing, competition, specialization, economic incentives, reward for performance, the threat of unemployment and bankruptcy for failure to perform) while maintaining the framework of the bureaucratic ‘socialist’ economy (understood as majority state ownership and the predominance of centralized bureaucratic planning). As the World Bank conceived the task:

To be efficient, [China’s] enterprises must be motivated to improve their economic performance; they must have some freedom for manoeuvre; they must be faced with economically rational prices; and they must be subjected to competition. . .In addition, the state must retain the ability to direct the overall pace and pattern of development. The essence—and the difficulty—of a successful and comprehensive reform thus lies not only in bringing together the several elements of market regulation, but also in combining them with an appropriately modified system of planning.footnote2

In the reformers’ vision, market forces would subject producers to competitive pressures, thereby inducing them to adopt profit-maximizing, cost-cutting, innovative approaches to the economy, thus compelling them to boost productivity and rationally restructure production. In the words of a People’s Daily editorial of the period: ‘Competition forces leaders of an enterprise to strive to make the enterprise grow, to improve management, to raise the quality of products, to reduce costs and to put cheap but good products on the market. This forms a sharp contrast with the past situation in which “products were turned out as usual whether or not they found a market”, “wages were paid as usual whether or not the enterprise made a profit or incurred a loss” and people “shared food from the same big pot” under socialism’ (6 June 1980). Furthermore, the reformers did not fail to specify the penalties for failure to shape up and perform. As one official put it: ‘Let the factories and shops feel the pressures. . .If a product is poor in quality, sells at too high a price, or does not meet the demands of the market, trade departments can reject it and buy from other manufacturers. . .Such competition is sure to put the enterprises which are under bad management and running big deficits in an unfavourable position. Some might have to change leadership, some might have to close down.’footnote3 In this way the reformers hoped to break out of the old pattern of ‘extensive’ growth, in which economic growth takes place mainly by reproduction of existing units of production (i.e. adding ever more workers and factories without systematically raising the efficiency of those units of production), to a pattern of ‘intensive’ growth in which economic development is powered by the systematic adoption of productivity-increasing methods and technologies by the productive units, as in modern capitalist economies. The shift to productivity-driven growth would in turn, it was hoped, generate the export earnings required to pay back foreign borrowings to finance the Four Modernizations.footnote4

To be sure, the market reform strategy had a powerful common sense appeal, especially compared with what passed for economic policy under the Maoists. If one could assume that ‘the market’ would impose its famous logic of cost-cutting, profit-maximizing, and so forth in any social system, capitalist or non-capitalist, then market reform would seem an attractive means of rationalizing the bureaucratic economy. The question is, was this a reasonable assumption? Was it reasonable to suppose that market forces, like competition and supply/demand-determined prices, could actually reallocate resources, reward efficient and penalize inefficient producers, redistribute income and thus ‘correct’ the bureaucratic plan, so long as the over-arching socio-economic structures of power and property—namely the system of bureaucratic-state ownership and surplus extraction—remained in force, and so long as the bureaucracy ‘retain(ed) the ability to direct the overall pace and pattern of development’? In short, was it possible to reform the bureaucratic system by radically altering its essential dynamic without upsetting these overall structures of class power and property?

For market reformers, the process of grafting market forces onto the bureaucratic economy was understood as an administrative problem, a problem of policy and implementation of policy. They thought that the success of China’s market reform project depended upon the gradual implementation of progressively deeper, ever more radical market reforms within the overall framework of the state-owned, state-planned economy. In most scenarios, this boiled down to a three-stage process. First, the devolution of authority to the enterprise managers and the introduction of state/enterprise profit-sharing—this to give enterprise managers the freedom to alter the product mix and to discipline and reward labour according to performance (this first step was actually initiated in 1978). Second, the gradual freeing of prices and state controls over resource allocation so that newly empowered managers could respond to market demand and maximize the cost/price ratio (this second step began with the institution of free market prices for sales of over-plan output in the early 1980s). Third, the imposition of ‘hard budget constraints’, that is capitalist-like sanctions of bankruptcy and unemployment, to force producers to respond appropriately to market signals on pain of failure.