The spectacular choreography in the opening and closing ceremonies at the Beijing Olympics leaves the impression that China can accomplish anything, including becoming the world’s largest economy. But organizing a sports contest and achieving sustainable development - in the liberal sense of widening the range of individual choice - are different: the first depends on planning, the second on freedom.
In a sports contest there is a winner and a loser; it’s what economists call a “zero-sum game”. Politicians often view economic competition in a like manner, so that China’s rise implies lost opportunities for other countries. That is why members of the US Congress often perceive an American trade deficit with China as bad but a surplus as good. Such mercantilist thinking is dangerous because it can lead to trade wars and, thus, to economic nationalism.
Under central planning and autarky, there is no room for expanding individual choice.
Unlike the policy of engagement and dialogue, which has worked well to promote peaceful development, protectionism would limit alternatives open to people, reduce the wealth of nations and increase the chance of conflict. Fortunately, a recent poll by the Chicago Council on Global Affairs shows that a majority (64 per cent) of Americans favour “friendly co-operation and engagement” as the appropriate response to China’s rise.
The win-win nature of free trade, and its reliance on a system of private property and the rule of law, is in stark contrast to a planned economy with state ownership and no economic freedom. Under central planning and autarky, there is no room for expanding individual choice.
When Beijing chose to embark on the path of economic liberalisation 30 years ago, no one could have foreseen the spectacular transformation that was to occur. Now, in the aftermath of an “exceptional” Olympics, the entire world recognises the progress China has made.
What is less visible is the conflict between power and freedom. Behind the planned harmony of the Beijing Games stands the vast power of the state. The challenge facing China is how to balance and limit that power so that it allows the spontaneous order of the market to create new opportunities and wealth.
In a planned order, there is certainty and apparent order, but no freedom. In a liberal market order, there is uncertainty of results - but the rules of the game are well defined and the process of development consensual. People become rich by creating new goods and services that make people, including the poor, better off. Internal and external trade is instrumental in that process, as are institutions that protect private property rights.
China’s current “socialist market economy” favours a balance of power over freedom. Yet, it has been the opening to the outside world, the widening of market alternatives to state control, and the expansion of private ownership that have enriched people and increased the demand for protection of private property.
China will need to widen and deepen its privatisation effort so farmers can fully share in future prosperity, the governing process will have to become more transparent, and rule of law must replace cronyism and corruption.
The current emphasis on inequality, both by analysts in China and by foreign commentators, misses the mark. Pointing to a widening gap between rich and poor neglects the essential issue of coercion versus freedom. In a planned order, rulers can make the distribution of measured income very equal, but the distribution of power will be highly unequal, as the late Lord Bauer liked to remind proponents of a redistributive state.
Fairness and freedom go hand in hand, if by fairness one means “just rules of conduct”. If China is to become a truly “great society”, the fairness of rules, not outcomes, needs to be the focus.
Ending the hukou (internal passport) system that discriminates against rural migrants would increase income mobility. If farmers were given fully transferable rights to their property, which could be used as collateral for entrepreneurial activities, social co-operation - rather than class conflict - would result.
Social and economic harmony requires a proper balance between coercion and consent. Achieving that balance will be the major challenge for China going forward. The Beijing Games were “exceptional”, but they should not be used as a blueprint for China’s future development.
As Adam Smith noted: “In the great chessboard of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature [ruler] might choose to impress upon it.
“If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder.”