Serious institutional incompatibilities still exist in China’s market‐socialist economy, reflecting the uneasy mix of plan and market. Those inconsistencies must be resolved in favor of the free market if China is to achieve stable long‐run growth and prosperity. The crux of the problem is that hard liners still cling to state ownership in order to protect their power base, while the market requires clearly defined and enforced private property rights. To resolve that tension requires constitutional and political reform. The Soviet system failed because it disregarded reality ? namely, the reality that the way of the market, not the plan, is most consistent with human nature and, thus, with individual rights to life, liberty, and property. What China needs is not market socialism but market liberalism ? or what could be appropriately called “market Taoism.” The reformers in the Chinese Communist Party (CCP), such as Premier Zhu Rongji, recognize the importance of competition in turning China into a modern market economy. But Zhu and others are pitted against a stubborn coalition of hard liners whose primary concern is to stay in power and to eliminate competition. If China enters the WTO, as now appears likely, and significantly opens its markets to foreign competition, that will substantially increase the chances for a true market economy to develop and for eventual political liberalization. People have a natural propensity to trade, and trade requires private property to be legitimate.
The Chinese people, when allowed to choose, favor the market over the plan and private over state ownership. In the booming coastal regions, individuals have freely opted for the non state sector, and millions of people have voluntarily left their homes in the countryside to search for a better life. According to Minxin Pei of the Carnegie Endowment for International Peace, when 5,455 people in six provinces were asked to express their view on private ownership, “78 percent agreed with the statement, ‘Private property is sacred and must not be violated’ ” ? and that was in 1993. In 1999, on the 10th anniversary of the so‐called Tiananmen Incident, a lone protestor opened his umbrella to reveal in Chinese characters the slogan: “Privatize. Give all state property to the people.” His courage and boldness reveal what China may become in the next several decades, if the party gets out of the way of the market revolution that is sweeping the global economy. China’s leaders know they must allow alternatives to state ownership if the economy is to be efficient. But if the non state sector continues to grow, the party will continue to shrink in influence. So there is a natural clash between the party and the market, with the result being a regulated socialist market, not a free private market. As Milton Friedman said at his lecture in Beijing on Sept. 30, 1980, what China needs are “free private markets” ? in a word, “privatization.” Eventually a decision will have to be made to either allow full privatization of state assets or continue to suffer the inefficiencies of state control.
The division within the CCP on the question of how best to deal with SOEs is reflected in the following slogan, which was approved for the PRC’s 50th anniversary celebration: “Adhere to the basic economic system with public ownership dominant and diverse forms of ownership developing side‐by‐side, and ‘to each according to his work’ as the main distribution form and with other forms as well” ? a prime example of socialism with Chinese characteristics.
Marx and Engels, in their “Manifesto of the Communist Party” (1888), recognized the benefits of private property: “The bourgeoisie [i.e., private owners of capital], by the rapid improvement of all instruments of production, by the immensely facilitated means of communication, draws all, even the most barbarian, nations into civilization. The cheap prices of its commodities are the heavy artillery with which it batters down all Chinese walls.” The abolition of private ownership and the suppression of free markets under communism deprived millions of people of the opportunity to improve their lives during the 20th century. Moreover, the absence of economic freedom blocked any exit from the all‐powerful state. Today, as we enter the 21st century, there are not many young Communists left ? in China or elsewhere. The CCP has lost much of its credibility and is no longer the major route to success. The Chinese people are now freer to trade and to travel, and to see for themselves the benefits of the spontaneous market order. So, the answer to the question of China’s future is clear: If China adopts the principles of market liberalism and practices market Taoism, the people of themselves will prosper; if it sticks with market socialism and fails to be integrated into the global economy, the Chinese people and those of the West will be poorer.