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.

In considering the implementation of these policies, however, market reformers assumed that ‘the market’ contains its own ineluctable logic which tends to impose a dynamic of competition-induced pressure to develop the forces of production, to cut costs and boost efficiency, and so on, in any society based on large-scale factory production regardless of its class structure. In fact the leading Chinese theorists of market reform took great pains to insist that ‘the law of value’ must be operational in China’s ‘planned commodity economy’ because, according to them, ownership is entirely irrelevant to the day-to-day operation of the enterprises. They could make this argument because they had a techno-economic determinist model in which commodity production is seen to grow directly out of the forces of production. According to China’s senior reformer-economist Xue Muqiao: ‘Like capitalist society, we too are engaged in large-scale production, and not the natural economy of self-sufficiency. In large-scale production, the relationships between the various occupations, industries, and enterprises are extremely complex, and could hardly be managed without market relations. Of course, capitalist market relations involve free competition, whereas our market regulation is guided by the plans.’ In this and similar formulations it was the division of labour, and the factory as a social-productive unit producing specialized products, which was thought to be identical with the economic system of commodity production tout court. So although the state owned the firms and as ‘supreme organizer’ planned economic development in broad terms, nevertheless the state’s enterprises were thought to be independent ‘economic entities’ whose external functioning in the broader economy, and even their internal management, was ultimately governed by the ‘objective economic laws’ of commodity production. It was on this theoretical basis that the reformer-economists insisted that if the state would just ‘let go’ of the enterprises, ‘separate itself’ from the day-to-day management of the enterprises, then the objective laws of the market would naturally discipline the enterprises and in the process ‘correct’ the plan.footnote5 The World Bank of course was hardly concerned to reconcile socialism with the turn to the market. But it made virtually the same argument: ‘Once a suitable economic environment is created through price reform and increased competition, and provided that indirect levers such as taxes and credits are skillfully applied, pursuit of profit should lead most enterprises in economically appropriate directions.’footnote6

This attempt to reform the bureaucratic economy was hopelessly contradictory and helped to set the scene for the crisis of 1988–89. It was doomed from the outset because, pace the theorists of market reform, it was precisely the ‘ownership system’, and more specifically, the system of bureaucratic property and surplus extraction, that determined the fundamental constraints on managerial freedom in the day-to-day operation of their firms. As we shall see, the capitalist-like autonomy that China’s industrial managers were nominally granted beginning with the devolution to managers of the so-called ‘eight rights’ in 1978—the most important of which were the right to retain part of the profits, to engage in production outside the state plan, to market over-plan output, to issue bonuses, to hire and fire labour—was largely meaningless. This is because the real power to ‘direct the pace and pattern of development’ (by rationing inputs of labour, raw materials, means of production and working capital; by determining what products and how much of their output the firms could sell on the free market; by arbitrarily taxing profitable firms and redistributing these funds to support unprofitable firms whose production was required by the plan; by refusing to let firm managers exercise their putative right to discharge redundant or inefficient labour; and by refusing to let market forces drive state firms out of business) remained lodged outside and above the level of the firm—in the hands of the party-bureaucracy. It is these real structures of property and surplus extraction—class relations of exploitation, power, and domination—which were historically formed and which, so far, have been left largely intact by the reforms, that limit market reform within the system—and not the other way around, as market reform theorists supposed.footnote7