First of all, I think we have to clarify what shock therapy is in order to understand how one could escape from it. The basic logic of shock therapy is that you have to destroy the old system in order to make space for the market to emerge.

The idea is that the plan has to disappear so that market relations can emerge spontaneously. In more technical terms, shock therapy was a specific package of policies that assumed that you should liberalize all prices so that prices could move freely, since at the end of the day, from a neoclassical perspective, the free movement of prices is really the market coordinating mechanism.

Secondly, you should impose macroeconomic austerity — that is, monetary and fiscal policy in order to make sure, so the theory goes, that prices don’t spiral out of control after you have liberalized them. So the idea is that through macroeconomic controls, you could prevent the economy from entering into a period of sustained hyperinflation.

And then later on, or as much as possible synchronously, that should be complemented with privatization and trade liberalization. But even the most hard-core shock therapists acknowledge that privatization will be a slow and complicated process of institution building. So the shocking element of shock therapy is really the price liberalization, the so-called Big Bang in price reform that should then make space for market relations to emerge.

Now, China did not pursue such a Big Bang. Instead, China moved in a way where the core of the old system was in the first place maintained. That is to say that, initially, the relationships of command and order that characterized the old planned economy continued. However, every individual unit in the old system was allowed to produce for the market beyond fulfilling their orders. So the idea is a little bit like if you go to school and you have done all your homework, after you are done with school and done with your homework you can do whatever you want. So in that sense, it’s like, the margins that are beyond the things that you have to deliver. This took a particular logic starting from agriculture and moving into the urban industrial economy.

As for why all of that is key to understanding China’s world-historic economic boom — if we look at the structure of the world economy, we basically find that the richest countries are highly diversified. They produce all sorts of things from corn to computer chips, whereas poor countries are only producing a small number of fairly simple commodities, such as, let’s say, coffee beans. As a result, the poor countries are really a supplier economy to the core countries in the global economy. If China — being a very poor country in the 1980s, being technologically pretty backward — would have shock liberalized and would not have protected the backbone of the industries that had been built up during the Mao period, it would very likely have entered into the world economy just like such an exporter of only simple commodities, which would have meant that it would have become a mere supplier economy.

Now, on the surface, it looks as if China has done just that, right? I mean, China has been the “workshop of the world.” It has been exporting cheap labor and all of that. However, the strategy behind that, without having some sort of conspiracy theory of the long arm of the Communist Party that is reaching from Beijing across the world, was always more than just exporting cheap, light industry goods. The idea was always to attract foreign investment in order to enable an upgrading of China’s own industries, in order to learn from foreign technology, to learn from foreign management techniques, and thereby gradually build up its own competitive industries — and in that sense, become an economy that spans all relevant sectors in its own right, rather than being just a supplier for one sector or another for the global core countries.

So to the first part of your question, one angle on that is to simply look at the share of a country in world GDP. And if we use that simple and of course crude but yet somewhat revealing measure, we see that the picture from the nineteenth century to the twentieth century, in the case of Russia, is really a picture of rise up until the ’70s or ’80s, and then a picture of fall in terms of its share in GDP, where it rises to around 10 percent and then falls back down to around 3 percent.

On the other hand, in the case of China, it’s a picture of fall and then rise. We have to remember that in the early nineteenth century, China still accounted for about one-third of world GDP. It then falls to below 5 percent.

Yes. So basically China used to occupy one-third of the world economy, as late as the 1820s, right? It then falls below 5 percent in order to pick up again in the late ’80s really, and is now in some sense back on track to becoming the world’s largest economy.

But this is of course only looking in terms of weight of GDP in the world economy. If we think of it more qualitatively, we have of course to remember that the Soviet Union at some point was feared for the possibility of overtaking the United States due to its technological might. And in the 1980s it was still a highly industrialized country. Probably the fear of the Soviet Union taking over had more or less faded by then, but nevertheless, this was still a major industrial economy.

On the other hand, China in the 1980s was still an incredibly poor country. In 1980, the GDP per capita of China was less than that of Sudan or Haiti. We are really talking outright poverty. Of course, GDP is not necessarily the best measure to capture the achievements of Maoism in the realms of public health, education, and so on, right? So in that sense, it might be slightly misleading. Nevertheless, it is an important measure, and it does indicate the relative wealth of Chinese people in this period.

So from the vantage point of the 1980s, it is really absolutely spectacular to think that China would today be the focal point of a new Cold War, and Russia would have basically been a footnote in that discourse.

More immediately relevant, if we look at the 1990s, Russia went through a transition recession that was deeper and more prolonged than the Great Recession in the United States, and it came along with a mortality crisis that was so severe that nothing like it had been seen in peacetime in any industrialized country previous to that.

Yeah. That sounds about right. It’s just mind-boggling. It’s a crisis on a scale that makes the 2008 crisis look cute. So the contrast couldn’t be sharper. And of course I’m not arguing that Soviet history can be uniquely explained with shock therapy. However, I do think that the choice of economic policy does play a certain role. It’s not a monocausal explanation. Nevertheless, it is important.

So the fact that China in the 1980s was toiling — and in fact considering very seriously the idea of implementing a Big Bang, which would have been the first step in the direction of shock therapy — I think is quite important in understanding how the global economy is constituted today, and also understanding the history that has led us up to the moment that we are facing in 2021.

The book tackles two conventional wisdoms. One is that China is pragmatist because this is in the nature of Chinese people: the idea that Chinese people have always been pragmatist, and they will continue to be pragmatist, and pragmatism is what they are, and they will be pragmatist forever — that kind of thing. In other words, naturalizing the reform period as being some sort of a foregone conclusion.

In my book I’m challenging that idea by suggesting that in fact, in the first decade of reforms, it was not at all clear how China would be reforming. I think it was clear fairly early on that China was on course for market reforms. But the question of how to go about this was very fiercely contested. And this question of how, as I argue, is incredibly consequential, as the contrast with the Soviet Union illustrates.

The second point follows from that first point. Most of our discussions around China’s 1980s and China’s reform period have been focused on the transition from communism to capitalism, and have been focused on the big ideological and structural shift as such. What I’m arguing is that how this happened matters a great deal. So it’s not just about becoming capitalist, and then that’s the end of the conversation. Rather, the precise ways in which a country becomes capitalist is enormously consequential for the ways in which it integrates into the global economy and the ways in which it develops materially, and therefore ultimately also of great political relevance. So this is a call for introducing nuance in the debate over the transition from ambitions toward communism to some specific form of capitalist model.

That is probably a third conventional wisdom that I’m tackling here. What I’m trying to show by going so far back and theoretically engaging with China’s own statecraft tradition is that marketization is not equal to Westernization — and at the same time, that marketization within China’s own tradition has been highly contested. China itself has a history of controversies and debates that pertain to the question of how the state should be relating to the market. And these debates go very, very far back.

The point is not to suggest that we can take ancient China and then draw a straight line to the 1980s. Quite to the contrary, the point is that in the debates, controversies, and fierce struggles of the 1980s, there is a certain depository of knowledge, a certain local context that matters, but that is in itself not monolithic, and that presents in itself competing views and traditions of thinking about the state-market relationship.

So on the Guanzi side of the debate, I think one key insight is that the state should be using the market as a tool — and that the market is an incredibly powerful tool, but it has to be created and played by the state in its own interest in order to stabilize the economy, and in order to pursue power and wealth for the state.

To make this more concrete, I think the ideas of the of the “ever-normal granary” — or not only the ideas but the actual practice of it, which is already articulated in this ancient text — is quite useful. So the idea is basically that markets are powerful mechanisms, but they’re also prone inherently to instability and fluctuations. In the grain market, this means that in fall, if we assume a temperate climate, you would have harvest time, which means that the market will be flooded with grain supply, which would mean that the price for grain will be going down since you have this sudden large supply of grain. Now as the year evolves, up to the point just before harvest, the grain supply will be falling and as a result of that, the price of grain would be rising.

So in other words, the basic material structures of agriculture suggest that markets in agriculture are not stable and in a continuous equilibrium, but are inherently fluctuating. Now, this does not mean that you should be suppressing the market, but it means that the state should be participating in the market in order to make people less vulnerable to private speculation. If the market was left to its own devices, private merchants would be buying up grain for cheap in the fall and selling it at a very high price once grain becomes scarce.

Now the state does something similar yet different. The state buys the grain at a slightly higher price in the fall than the private merchants will be doing, thereby enabling the producers of grain to reap a higher income. At the same time, just before harvest when the price would be becoming very high, the state sells the grain at a somewhat lower price. As a result, the state also generates a revenue, which makes it less dependent on direct taxation.

The state tries to act in the interest of stabilizing the market as a whole, rather than in the interest of maximizing the profit for one private merchant. It stabilizes the market by adding to demand when supply is very high and adding to supply when demand is very high in relation to supply. It is really a logic of state market participation, where I think the boundary between state and market really breaks down. The state is inside of the market, and the market is inside of the state.

The granary system is essential for feeding the people, for ensuring the provisioning of grain, especially in times of crisis and famine. At the same time, the granaries are part of a private market. So you have these completely overlapping logics where there’s no such a thing as a private market. Instead, the private market really becomes part of the state and the state part of the market.

I think it’s part of a very prominent reading of history in China that the fall of the Nationalists was not least due to their inability to bring very severe and rampant hyperinflation under control.

Now the Nationalists tried all sorts of things, including a policy that was a success during World War II in the United States, which is imposing a general price freeze, which didn’t work at all. The reason why it did not work, I think, is because the underlying economic relations had crumbled during the civil war, which meant that the basic links of commerce had fallen apart, and people, in particular farmers and rural producers, had withdrawn their willingness to produce for the markets. The market links had become so feeble that they decided to instead produce for their own subsistence. So in that sense, you really get a dismantling or a falling apart of the social division of labor during wartime, in which context dictating price stability, simply by state order, did not work.

In contrast, the Communists did something that, to some extent, resonates with certain traditional statecraft practices — that is, the idea that state commercial agencies have to function as market integrators, creating a situation where money can actually buy stuff, and not only random stuff but the most important, most essential goods, which in the context of the 1940s were things like grain, cotton, salt, and so on. Commodities of basic consumption, but also basic production commodities.

So by bringing this straight under their control and ensuring that the money that the Communists were issuing was able to buy these important things, money had a real value attached to it. It was exchangeable against things that clearly were of value to pretty much anyone in that particular economic-social context.

This was part of the logic of economic warfare, where markets were reintegrated in order to stabilize the value of money, thereby stabilize prices, and thereby gain economic ground for the Communists. After the revolution, this problem of inflation continued, and in particular there was a problem with speculation, as private merchants were trying to corner specific markets, hike up the prices, and thereby make big, speculative purchases.

Now, what the state commercial agents did in this context was to basically coordinate and out-speculate the speculators by bringing substantial shares of a certain market, let’s say cotton cloth, under their control, and then when prices were hiked up to a very high point, flooding a local market prominently with cotton cloth, as happened in Shanghai. Suddenly, all this cotton cloth was on the market so that prices started to fall. As prices started to fall, private speculators would become panicky, would start selling. As they started selling ever more, everybody else was going to try to get rid of cotton cloth as quickly as possible, so that the speculative hike turned around and the bubble burst. So it’s really making the bubble burst by flooding the market with the stuff in which there is a bubble. And as these private merchants then basically went bust, they were taken over by the Communist state.

All of this is a long-winded way of saying that the first-generation revolutionaries who were still in power, or who were economists who had been involved in these price-stabilizing and economic integration activities in the ’40s who then returned in the 1980s — all of them were thinking about the market in terms of these kind of experiences. They were thinking about the market as a tool that could be used to political ends, where there was no such thing as a very clear boundary between state and market.

As John Kenneth Galbraith, who was really the economist in charge of price controls in the United States, writes later on reflecting about the experience of World War II, it is very easy to fix prices that are already fixed. So since the American economy, for the prices that would have been most prone toward rapid increase, was highly concentrated, the prices of goods such as steel would not be set on a free market with many small competitors anyway. Rather, it would be set basically through negotiations between a small set of players. So it was fairly easy.

Yes. Despite conventional wisdom to the contrary.

So let’s say the demand for steel would be skyrocketing since the expansion of war production required steel as a key input. Now, what would the big steel producers do if they were left to themselves? Well, they would hike up prices in order to make windfall profits. What can the state do? It can basically force them to stick with the prices that had proven to be profitable enough — since they were profitable before the war, right? — but not let them reap windfall profits by not letting them hike up prices in light of this sudden increase of demand.

It made sense economically because the expansion of production would not have been able to catch up with demand in any case. So in that sense, it is really about windfall profits, where the increase in prices — which in standard neoclassical theory would induce an increase in supply — in such a situation like under war does not increase supply because you cannot expand steel production quickly enough as the war is demanding more steel. So all that you get by letting prices free is to let big private corporations have big windfall profits. In that sense, for the very concentrated sectors, the price controls worked very well.

As I write in the book, Leon Henderson, the American director of the Office of Price Administration, actually even traveled to China and advised the Nationalists. So there’s a very direct link between the American and the Chinese wartime experiences.

But in contrast to the American situation, China was a much more agricultural economy and a much more fragmented economy. And more importantly, these basic links of suppliers and demanders, the basic links of production, were disturbed in the Chinese context of civil war, whereas they were basically intact in the context of the American war economy. Therefore prices that were not really coordinating production decisions in the American context could well be fixed without too much issue. In the context of China, where prices were also not coordinating production, but where there was also a very erratic supply of goods that were in very, very high demand, the price fixes didn’t work, because prices were extremely volatile inherently as a result of the specific economic structures.

After the war, the situation was one where basically you wanted very rapid structural change in the sense that you wanted the economy to move back from producing for the war to producing for private consumption — from producing tanks to producing cars, if you like. At the same time, due to a very rapid economic expansion, a very intense boom during the wartime years, and under conditions of relatively scarce supplies of consumer goods, people in the United States had accumulated quite high savings.

Yeah, and when the war was over, people who had sacrificed during the war, working hard, saving, and not enjoying much consumption, wanted to use that money to buy durable consumer goods. In fact, some of America’s most famous economists — people like Irving Fisher, Paul Samuelson, but interestingly also Paul Sweezy and so on — argued in a letter to the New York Times in 1946 that if price controls, which at that point were basically more or less universal, were to be lifted more or less overnight, what would happen is that demand for certain goods in short supply would be higher than supply, whereas that supply could not be expanded very quickly.

It takes some time until a factory producing tanks can be switched back to producing cars. If you now simply say, okay, prices are free and all that demand for cars is thrown at these car-producing companies, then what they will do will be to hike up prices, since there is not enough competition, since all of the car producers will take a certain amount of time until they can pick up production again. So therefore what these economists argued was that prices should be left in a selective fashion, where only those prices where supply had again picked up, and where shortages induced by the war had been overcome, would be let free, whereas those prices where there were still severe shortages that could not be overcome in a short period of time should continue to be fixed at a lower level.

That did not happen. There was this whole political meltdown that ultimately led to a very sudden release of pretty much all price controls, which then reincited inflation — a sharp period of inflation followed by an economic downturn. And that was in part because business groups like the National Association of Manufacturers (NAM) were so opposed to wartime price controls and extending them at the time. In terms of sheer power politics and interests of business groups, it’s of course very unpleasant from their perspective to give up on the prospect of windfall profits.

In Austrian economics, there’s this whole idea — I mean, in fact, in the socialist calculation debate — that is all about the possibility of a rational economy. The Austrians, in particular Mises, attacks the idea on the socialist side that socialism could achieve an economy that would be more rational than the capitalist economy, which, by socialists has, of course, traditionally been described as crisis-prone and as such irrational.

Mises’s argument is that, since in a socialist economy you don’t have a clear point of reference for economic calculation — that is, you don’t have a rational standard of value — therefore you cannot have a “rational” economy, since you don’t have any ways of assessing whether it is rational or not.

Now coming from that kind of logic, the Austrians are arguing that only a completely free price system has the ability to generate rational prices and therefore to provide a rational reference framework for the economy as a whole. The idea becomes that once you start controlling one price — and there are these polemics where, for example, Mises is saying that only controlling the price for milk would be enough to destroy the free price system — but the idea is that once you control one price . . .

From the price of milk right into fascism, exactly. So you have this idea that if you only control one price, let’s say milk, then the price of milk to the price of bread is out of proportion. And once the price of milk to the price of bread is out of proportion, then the price of bread to butter might be becoming out of proportion, and so on so that there is this ripple effect that goes through the whole economy. The idea is that allegedly once a state controls one price, it must eventually control all prices in order to catch up with the effects that follow from one selective price control. And therefore, eventually, price controls must lead into a planned economy and ultimately into totalitarianism. And as you say, this is the slippery slope of the road to serfdom.

I think this is an aspect of Austrian and neoliberal thinking that might not have been fully appreciated in the recent debates, which is that for them, the free movement of prices is really the most sacred of all in the market economy. Without the free movement of prices, there’s no reliable information, and there’s no economy to speak of.

Exactly. Since we are all isolated containers that only communicate through price relations, if we don’t have the ability to engage in free relations of that type, it would basically be undermining freedom as such.

Now this is, of course, coming from a very theoretical, abstract standpoint, but is then turned into polemics that intervene into the postwar debate. And these are incredibly convenient for the business groups for whom having price controls means losing windfall profits.

The relationship between Hayek and Friedman is complicated and subject to a whole literature in its own right, but let me just say that Friedman, of course, expended an enormous amount of effort in studying American economic history, and part of it was also targeted against the idea that wartime price controls could have been any good.

And then in the late 1970s, when Friedman starts to propagate ideas of shock therapy, he is basically also a warrior in defense of free prices. So as much as there are differences between Hayek and Mises and Friedman, and different schools within neoliberalism and all of that, on the question of free prices and the necessity for free prices, there’s a pretty wide-ranging agreement within the neoliberal camp.

Monetarism as an economic theory is basically structured around the idea that all monetary problems originate from the monetary sphere. As a result, there’s no consideration of changes in relative prices and how they relate to changes in the overall price level.

There is what we call in economics a classical dichotomy, where the so-called real economy, which is real in the sense that it is expressed in real units rather than monetary units, is a world of its own. And money is like a sort of veil that happens above or that is covering that real economy.

However, while there is this dichotomy and this separation, it’s a bit schizophrenic. On the one hand, the real economy and the monetary economy are separate, but on the other hand, if the whole role of money is to function as if there was no money, and whenever something goes wrong with money then this has the potential to set off a crisis in the economy as a whole, then it is as if we were saying money doesn’t matter, but at the same time money is the only thing that matters since it has the potential to create a crisis.

Exactly. But the state should be acting as if it’s not there. It is necessary because we somehow need money, but we should be acting as if it’s not there. And whenever the state acts as if it is there, then this is like the end of it.

“Squeezing the peasants” comes from the title of an article written by Robert Ash. That is a very careful empirical analysis. Robert Ash is a professor emeritus from SOAS, the School of Oriental and African Studies in London.

The basic way we can think about this model is if you imagine you are in a poor economy that is a closed economy and you want to industrialize. Before you industrialize, everybody is pretty much working for subsistence, in the sense that all the stuff that is being produced is roughly also being consumed — which may include, of course, consumption above subsistence, but nevertheless the predominant task is to produce stuff that people need in order to continue to live on.

If you are in such a situation and you want to industrialize, you need to have someone who is feeding and clothing and housing the people who are building a coal mine, building a steel plant, building highways, building copper mines, and so on.

Exactly. They’re not producing their own food. They’re also not producing clothes or anything else in a light industry factory that would be immediately useful for consumption and would maybe take some pressure off of the rural households, which in that period often still produced their own clothes.

So as these people are engaged in producing stuff that is important for the project of industrialization, that has a very long gestation period. Only after several years, the steel factory will start to produce steel. And then it will produce, maybe, in the first instance, tractors. So maybe add another five years until anything comes out that would be helping the production for stuff that is more immediately useful. If you think of it in these very simple terms, then someone has to be producing a surplus that in a very immediate sense finances the buildup of basic industries, basic infrastructure, and all of that.

Now in China’s still very poor agricultural economy, that surplus was basically coming from the peasantry or from the rural communities. So this meant that the communes were constantly producing more grain and other agricultural inputs for the urban industrial economy than they were getting back in return output of the urban industrial economy. Basically, there was a net transfer from the countryside to the cities that would enable such basic infrastructure development.

Stuff that is being produced in the urban industrial economy is being sold to the countryside at a relatively higher price, the tractors and machinery and so on. So the relative price functions as a tool of redistribution from the countryside to the urban industrial economy.

That is nothing new in the Chinese context. This is a basic problem in development economics. It’s also a problem that goes back to the New Economic Policy and the debates around tax in the Soviet Union. But it was a more or less continuous element of the Maoist development model. After the Great Leap and the disastrous famine, there were some adjustments, but the prices were basically put back again.

For people who aren’t familiar with Chinese history, there were really disastrous famines. One of them was one of the worst famines in modern history. Felix Wemheuer has written a terrific book comparing the Soviet and the Chinese famines that provides a lot of details on how this has happened. Some estimate up to forty million people died, but the estimates are still contested. I’m not a scholar of this and I want to be very careful because I think this is incredibly important, and an extremely horrifying history that should in no way be downplayed.

The revolution was always about much more than material development, but escaping poverty and catching up with the imperialist powers, which were perceived as pretty direct imperialist powers from the perspective of the Communists in the early time, was always part of the project — in some sense, elevating this aspect of the project to the most dominant one that constitutes the shift.

This is really a turning on its head of orthodox materialism, where the idea is that forces of production are developing progressively, and then the relations of production — the social organization of production — is an expression of the state of technological development. Of course, all of this is in some sort of a dialectical relationship. But in the orthodox Marxist reading, the development of the forces of production might be emphasized over the development of the social relations of production. Late Maoism, as an ideology, suggested that one should turn this around — that if one could achieve sufficient revolutionary enthusiasm amongst the masses, this could basically help the Communist project really leapfrog into higher stages of socialism, even starting from poor material condition to begin with.

This whole project had basically faded by the early ’70s, and by the time of Mao’s death in 1976, it was all about bringing back people who had been sidetracked during the Cultural Revolution, and in fact persecuting the leaders of the Cultural Revolution. So you get this massive political shift.

Exactly, to put it in possibly too simple terms, but nevertheless to the point. So that’s going on in the ’70s. And then Hua Guofeng, who is Mao’s designated heir, steps on the scene as part of a widely underappreciated opening up of China to the outside world — but a very different one than then occurs under the reform and opening up.

Yes. He’s popularly remembered as being a “whateverist” — the guy who upheld whatever Mao said, whatever Mao did should be continued. This is how he has been portrayed by reformers in the Chinese context for some time. Nevertheless, the more recent historical scholarship has kind of resurrected Hua Guofeng, suggesting that he might have been more than just a whateverism guy.

He did two important things. On the one hand, he returned China to an agenda of economic development. He wanted to pursue this under some sort of a ten-year, big-push, Soviet-style industrialization plan, which was meant to be fueled with foreign technology and financed with petroleum exports. At the same time, as part of this pursuit of foreign technology, Hua Guofeng started to send delegations around the world.

This is when you get the first tours of Chinese delegations to all sorts of countries, including capitalist countries. And there is a very clear realization on the part of the Chinese elite, who saw that capitalist companies had become rich and prosperous with no sign of revolution. The idea of China overtaking these countries had become a very remote goal. And at same time, the sense of any progressive or revolutionary movements in the capitalist world was a fantasy at that point.

The attempt at a big push basically fails, not least because the petroleum findings that were meant to finance the import of foreign technology are not forthcoming. It becomes clear that if China would continue importing foreign technology and capital goods on a large scale, it would run into a foreign indebtedness problem, which is the kind of indebtedness problem that other socialist countries have run into and which made them vulnerable to the adjustment programs of the Bretton Woods institutions.

So in this context, China is basically realizing that it is still a very poor country. Yes, it has made progress in terms of building up infrastructure, building up heavy industry, achieving basic education, literacy, overcoming certain problems in public health, and all of that. But it is still really at the bottom in terms of its economic prosperity, and the momentum for revolutionary enthusiasm has been completely turned around.

This indeed pragmatist attitude of saying, “Let’s do whatever it takes to get China out of this situation” becomes the agenda of the day. Deng Xiaoping rises and the reform and opening period starts. The idea was that, since China had tried to jump over stages in history in the late Maoist period, what China should now do is to instead take a big step back and learn from the capitalist countries — which, in a technical sense, not necessarily in an ideological sense, including integrating market mechanisms into China’s system.

Starting from that perspective, markets were initially not meant as an end in themselves, but rather as a means to an end. However, the big question that emerges is: How can markets be integrated into China’s system, and how should one go about this? In this context, these two sides of the debate that I’m chronicling in great detail in the book are emerging as the two contenders in what I’m calling China’s market reform debate.

When Deng Xiaoping comes into power, he basically turns around the slogan of the Cultural Revolution that was “Politics in command” and says economics should now be in command. However, economics as an academic discipline had been shattered during the Cultural Revolution. The institutes for economic research were closed. The most prominent economists had been sent to the countryside, if not into labor camps or into prison. In the late 1970s, these economists are returning to the cities, reopening research institutes, and starting very quickly to engage in dialogues with foreign economists. However, even though they have been working on questions of reform, it takes them some time to rekindle their project and to develop reform proposals that are sufficiently concrete to really inform economic policymaking.

They do engage in extensive dialogues with Eastern European émigré economists, who were deeply versed in the Eastern European reform debates, most of them exiled. They were deeply versed in so-called mainstream economics, or neoclassical economics. Eastern Europe and the Soviet Union were strong in neoclassical economics, and furthermore they had also acquired knowledge of the latest developments in Europe, the United States, and the UK as a result of living in exile.

The World Bank, in the early years of reform, was a key player in helping to organize exchanges between these Eastern European émigrés and the Chinese economics profession. And very much in line with the reform thinking that had been developing in the Eastern European context, there emerged ideas that one had to think about reform in terms of one organic whole, where you could not change some parts of the system first and then tinker around and move ahead or something like that. Rather, there was a sense that the attempts at gradualism in Eastern Europe had failed and that, instead, one would have to come up with an analysis of the system as a whole, design a new target system, and then decide concrete steps that would, as swiftly and as scientifically as possible, move the old system toward this new target system.

This way of thinking about reform is really analytically in parallel with shock therapy, where the idea is also that you have to change the system as a whole and create one unified system of freely moving prices. You want to have universally, or as universally as possible, free prices in order to establish a new complete market economy.

Now, as these debates were ongoing and evolving, and gradually being congealed into reform proposals, actual reform in the agricultural sector was already in full swing. It started pretty much the moment reforms started.

Precisely. And out of the agricultural reforms, an alternative camp of reform thinkers emerges that proposes a different approach to economic system reform.

Exactly, but a much younger generation. So whereas the economists returning to the research institutes were more of a middle-aged or older generation, and often trained in Soviet orthodoxy, the people who emerged through the agricultural reforms were basically an alliance between more or less first-generation revolutionaries and a young generation of intellectuals who were sent to the countryside in their teenage years. They had often spent until their mid-twenties or late twenties in small villages. They were from urban, often intellectual families, but had really spent the most formative years in their lives in the countryside.

During the Cultural Revolution, they had started to think about ways to reform agricultural production, and had started to think about alternative ways of organizing the political economy of agriculture. And through these discussion circles and pamphlets coming out from the “young intellectuals” who were living in the countryside and thinking about China’s future, they had started to be in dialogue with some of most powerful leaders who returned to the centers of power in the late ’70s.

When they return to the cities, they continue to be dedicated to the question of agricultural reform. They take the initiative to conduct survey experiments that are starting more or less bottom-up in the countryside with the so-called household responsibility system.

These people are really not within the system, in the sense that many of them are not even party members, but they are linked to the system through the support of some key elderly leaders. And since these bottom-up experiments with the household responsibility system are starting, and the reform leadership needs a way to evaluate what’s going on, they fulfill an important role. They represent certain external third-party agencies not linked into the system, and their evaluations, the surveys that they conduct, are taken very seriously, and help to create legitimacy for the breakthrough of the household responsibility system.

Now, what is the household responsibility system? It is the idea that instead of the production team or even the commune as a whole being responsible for the delivery of an output quota, such as a quota in grain, to the plan, this responsibility would now be moved down to the households who would have access to land and inputs and machinery and all of that to produce their share in the quota — but beyond producing their share in the quota, the households would now be allowed to produce for the market.

Exactly. And it is an incredibly radical reform, which amounts to the dismantling of the communes, in a country in which about 80 percent of the people are living in the countryside. The dismantling of the communes and the undermining of the institutional base of the Communists that was rooted in collective production is anything but marginal.

This creation of markets in the agricultural economy came along with an increasingly active role of state commerce that helped to link these market relations that were emerging in the rural sphere to the urban industrial economy. What that meant was that there was basically a demand pull for products that were outside the plan. Also, in the urban industrial economy, people who decided to work overtime to produce for the market and to produce more than the quota was asking from them wanted to have something in return for their work. They will be demanding things wristwatches, radios, bicycles, and all of that.

In this period, we also have the popping up of the famous township and village enterprises, which, of course, could draw on the Maoist tradition of building small-scale factories in the countryside, but they also needed inputs from the urban industrial economy. Both for producer and consumer goods, you have a demand-pull dynamic that kind of transfers the second track, the market track, from the countryside into the urban industrial economy more or less endogenously. A dual track was also emerging in the urban industrial economy. And the big question was: Should this be suppressed? Is this something bad? Is this something messy? Or is this something good that can be harnessed, systematized, and turned into a logic of market reforms?

The second side in the reform debate, which opposed the perspective that was emerging out of this neoclassical way of thinking about target systems and steps toward target systems, came precisely out of this logic of agricultural reform and defended the dual-track system as a way to create markets and to harness them through state institutions. As every individual production unit started to cater not only to the plan, but also to the market, they would themselves be transformed from units that were simply implementing commands that were coming from above into enterprises that were increasingly market oriented, so that the dual-track price reform and enterprise reform were kind of going hand in hand, and were more or less organically evolving.

The armchair economics side of the debate, if one wants to polemically call them that, is arguing that the Eastern European experience shows that gradualism cannot work, and therefore you need to move in one big step according to one big blueprint, supposedly like West Germany.

Milton Friedman argued when coming to China — and also when arguing for shock therapy elsewhere, including in Chile — that the price reform after the war in West Germany would have been a very simple thing where basically Ludwig Erhard liberalized all prices overnight, and that would have more or less instantaneously created a functioning market economy and laid the ground for the West German economic miracle. So this is one of the anecdotal pieces of evidence that is invoked again and again in support of the idea that one would need a Big Bang in price liberalization.

In 1986, China came very close to implementing such a Big Bang. And in fact, Zhao Ziyang had taken the initiative to set up an institute that was charged with designing plans for a very comprehensive and far-reaching price reform.

There were people who were skeptical of the idea that transforming China into an economy that saw a greater role for markets could be achieved through a Big Bang. The people who are thinking that, the dual-track reformers, mainly located at the Economic System Research Institute but also at other research institutions, tried to understand the reality on the ground of what a Big Bang would be. They organized a delegation to Hungary and Yugoslavia — interestingly funded by George Soros — and conducted about six weeks of interviews and on-the-ground investigations trying to understand how Yugoslav reforms had proceeded and what the mistakes to be avoided really would be.

What they heard from the reformers in Eastern Europe itself, or in Hungary and Yugoslavia to be more precise, is that the idea of doing a rapid price liberalization is in fact not a helpful approach, because what it would amount to is an increase in prices of the most upstream production goods, which under the Soviet system traditionally had been priced below cost in order to subsidize more downstream industries.

So if you were to let those prices free, these prices would be shooting up now, as long as each individual production unit in the socialist system was not working strictly on its own accounts. It would simply hand down a price increase that it faced to the next production unit, such that as the price of steel went up, the price of tractors would go up, and as the price of tractors would go up, the price of whatever was being produced with the tractors would go up.

Precisely. As long as you don’t have budget constraints, you don’t have a labor market, and you don’t have a capital market; there’s no constraints that would make the liberalized prices magically happen in some way to rationalize the economy. So in that sense, all that it would induce would be a wage-price spiral since people, as you just said, could not be laid off.

If these price increases were handed down to the bicycle and the wristwatch and the radio and all of that, consumers would be facing increased prices, and then they as workers would be demanding higher wages. And since the production units were still not organized as market-oriented enterprises, these wage increases were likely to come forward so that you would basically get a wage price spiral.

It would risk entering a period of hyperinflation without actually adjusting relative prices or creating institutions that were actually functioning as market actors. So instead, what you would get would be a big mess. That would not help China’s reindustrialization project. And that would also not create some sort of wonderful market miracles. So this message was sent back from Hungary and Yugoslavia, which then induced Zhao Ziyang, together with warnings from the state-owned enterprise sector, to turn around and stop that plan for a Big Bang.

In 1988, there was another big attempt at a Big Bang. This time, Deng Xiaoping himself took initiative as reform had entered a certain political and social deadlock.

Yes, there was mild inflation, there was corruption, and also it became clear that not everybody stood to benefit from marketization, whereas in the early years it looked as if everybody would just be better off as marketization was becoming more and more widespread.

It became clear that some getting rich first also meant that others were left behind. Social tensions that came from the commodification of life and the economy were building up, and political opposition from those who wanted reform, but who did not want to give up on certain key socialist principles of organization from within the system, was also mounting, so that you get these increasing tensions around the project of reform itself. This leads Deng Xiaoping to basically subscribe to this idea of this wonderful project, which seems to have the potential to cut the Gordon knot.

Deng Xiaoping starts lobbying for comprehensive price reform. So in this context people travel to West Germany, this time in part facilitated by the Friedrich Ebert Foundation, and go to interview people who were involved with the West German currency and price reforms.

And ironically it is Herbert Giersch, who is affiliated with the Mont Pelerin Society and is a major ordoliberal, who is warning the Chinese delegation against the idea that they could produce a sudden miracle by pursuing price liberalization. His line of argumentation is to some extent related to the argument that these same people had been messaging back from Hungary and Yugoslavia, namely that liberalizing prices is not going to create a market economy if you don’t have market players that are already there.

He’s saying that the situation in West Germany after the war was radically different from the situation in China in the 1980s in the sense that in Germany, despite the war economy and fascism, big capitalist enterprises had famously continued to exist. So therefore you had all the market players in place in such a situation. He said it may well be that simply liberalizing prices can revive the market; however, this was not the material reality or the institutional reality that China faced.

Well, that’s the big question kind of looming in the background of the book, and that I’m not addressing head-on since I do not have much evidence that in fact the shock therapists were for system change not only economically but also politically.

That said, I have seen some internal conversations between certain economists and certain World Bank officials that suggest that the logic of one needing political system change before one could have serious economic system reform was very much well and alive in this context.

And that shouldn’t come as a surprise because, after all, someone like Otto Schick, who in fact visited China, was also arguing that radical political change will be necessary in order to achieve serious economic reform. So in that sense, the notion that political reform or even political system change had to precede market reforms was certainly around.

This was a context of already-heightened social and political tensions. It was also a context of already high inflation by the standards of China’s own development — we have to remember that Mao’s economy was ironically an economy of one of the greatest periods of price stability in the twentieth century. Against the background of enormous price stability, there were certain price rises happening early in the year 1988. In this context, the announcements for comprehensive price reform unleash a panic where people start a bank run and start to hoard whatever durable consumer goods they can get hold of.

There’s this famous anecdote of people in Kunming, which is the proverbial city of spring in China, where it never gets very hot or very cold, starting to buy up whatever stock of air conditioners they can find, which at that time is not about climate change but about panic. Basically the belief was that one would rather hold an air conditioner, even if there’s no use for it, since it was still a better store of value than holding money.

Money as being a good store of value was crumbling. As a result of this extreme bottom-up backlash against the announcements of price reform, Deng Xiaoping basically makes a big turnaround, and you get this move away from reform, the attempt to cool down the economy. This messy situation that emerges in 1988 is part of the economic backdrop of what then happens in 1989.

I think this also relates to your previous question on whether the shock therapists wanted such a political meltdown.

So in 1989, when these mass protests and really this social movement is happening, these gradualists who are themselves part of the younger generation — older than the students at that point, but still part of the younger generation of reform intellectuals — basically declare in a pamphlet solidarity with the demand of the protesters for dialogue between the protesters and the leadership, which is ultimately aligned with what Zhao Ziyang then does.

Zhao Ziyang famously goes to the Square of Heavenly Peace and talks to the students, which sets up the complete sidelining, politically, of Zhao Ziyang. Zhao Ziyang lands in prison until the end of his life as a result of this expression of solidarity on the part of a range of key gradualist reform movement thinkers. They then basically more or less disappear from the scene.

Many of the gradualists go into exile, study in the United States, in the United Kingdom, and other countries. Some small number end up in prison. Some disappear by going into private business, and a very small number also continue political careers. It’s not like everybody has disappeared, but it is a huge blow to this force in reform thinking and reform policymaking.

On the other hand, those who had argued most vividly for a Big Bang type of approach — including, by 1988, also increasingly arguments for privatization — this group seized the opportunity to denounce Zhao Ziyang for having betrayed reform by pursuing the kind of false approach that he, in their eyes, had been pursuing. In using this political opportunity to denounce Zhao Ziyang, they are setting themselves up for influence in the 1990s.

It’s very, very messy, and there’s no such thing as a clear-cut interpretation, but it’s clear that price reform would only be possible with Pinochet-type methods. There was certainly a reflection that a good degree of authoritarianism might be required for very brutal market reform. So in that sense, it’s not like most shock-like market reforms equal ambition for democracy or something like that, but rather there’s a whole blend over of people who are both economically liberal and politically radical liberals, but also people who are economically not as radical but want different forms of democratic organization and all of that.

So when I say shock therapy in my book, I’m really referring to a very specific definition of shock therapy, as I have laid out in the beginning of this interview, which is in some sense a technical term that comes from a specific economic policy discourse. This is not to say that there haven’t been shocks in the 1990s and that there haven’t been quite drastic privatizations in the late 1990s.

The point is that at the heart of the debate of the 1980s was not a question whether or not to quickly liberalize in essential sectors. You may well liberalize overnight the prices for bikinis, or you may well overnight liberalize the prices for little toy mirrors for children. But what you should not be doing, from the perspective of the gradualist reformers, was to liberalize overnight the prices of the backbone of the industrial urban system.

Let me also clarify that this means that there is a recognition that the building up of heavy industries under the Mao period actually was of some value, and that it was about reindustrializing the state-owned enterprises, changing their mode of operation, making them competitive, introducing international management techniques, and bringing them to the technological frontier — rather than about primarily splitting them up and creating a competitive market as an end in itself.

I think it’s important to study the 1980s to understand how China came on the specific reform path that it has been pursuing. At the same time, I think that the situation today is quite drastically different from the situation in the 1980s in so many ways.

First of all, China has risen quite significantly economically. Yes, China’s GDP per capita is still very low compared to the United States. There is still a huge gap. Nevertheless, the position of China in the world has changed drastically. But also internally, China has changed drastically. The 1980s was a moment of genuine openness. It was not clear what was going to come next. It was a moment of very open debate, open not only in the sense of not censored but also in the sense of really being at a historical juncture where the question of how to move into the future was at stake.

So in that sense, today’s moment, I think, is really drastically different from the 1980s. At the same time, of course, 1989 set a pattern of sharp political constraint, and also established the willingness to use means of coercion if that is what seems to be necessary, while at the same time prioritizing economic growth and marketization, whatever it takes.

I mean, I do think that it is very significant. I agree with the basic thesis articulated by Durand in this piece. I think there’s an ironic parallel between 1979 and now, where in both cases, the sudden and quite drastic shift in economic policy orientation in the United States is done in ways that is primarily oriented toward the domestic context, where, of course, the Volcker shock unleashes a massive crisis and in the Global South due to the increase in interest rates, which creates a massive problem for highly indebted developing countries.

And now again, it seems that everything that is progressive and wonderful and that I’m fully in support of in terms of climate change and public investment and all of that, is entirely, at the same time, focused on the domestic economy, and as such is once more not really thinking in terms of how the globalized world is hanging together, and the implications of bringing American industry home for the rest of the world.

So in that sense, there’s some strange ironic continuity that of course also pertains to China. And I think it is quite telling that the first shift is happening in a context where, of course, in the late 1970s, it was by no means clear that the Cold War was over, but the great hype around the Soviet economic miracle was also kind of receding. So the sense of American economic power would have been quite high in the late 1970s.

Now, this reversal is happening at a moment when that exact sense of being an economic power without any serious contender in the world is very clearly coming to a close, so that this is kind of the bitter taste that comes with the shift to Bidenomics. And it seems that this shift has only been possible in response to what is perceived as the threat of China, the idea that the United States needs to do whatever is possible to confront China’s rise. And we tend to think of the crisis of American neoliberalism in domestic terms, but China’s boom, rooted in China’s escape from shock therapy, plays a major role in delegitimizing the neoliberal consensus in the United States and giving rise to Bidenomics — which has all these progressive valences, but is also, disturbingly, embedded in this new Cold War framework.

The irony is that, on the one hand, the rhetoric against China’s economic practices as being unfair, all of that is probably at the greatest height that it’s ever been, while, in the same sentence almost, there is a call for the exact same practices within the United States. Meanwhile, the challenges at stake — pandemics, climate change, even the need for public investment in the United States itself — could probably be tackled much more effectively with a more cooperative type of approach.

Let me be clear that the point I’m making is that China has escaped shock therapy. But escaping shock therapy is not the same as building model socialism, or escaping capitalism. These are two very different things.

At the same time, I think that the nature of socialism is a very serious question that the Left faces in the twenty-first century. My sense is that a serious reflection about the history of socialism and the attempts at socialist projects in the twentieth century could be quite useful in thinking about how to move forward with ideas of socialism.

This is kind of my nonanswer to say that my book is an attempt to contribute my understanding of China’s trajectory at this pivotal moment of the 1980s, and I think a lot more historically grounded discussion and reflection is needed to draw the kind of conclusions that you are asking me for.

I think so. Generally speaking, it would be a good idea to think about markets more flexibly. We don’t have to think about a market economy as being a pure market economy. And at the same time, this element of thinking about the market as a tool that kind of comes back and again and again in my book, I think can be a useful starting point.

I think what has to follow, and which is something that I have not done in the book, is to think very carefully whether it is possible to use the market as a tool — and in the hands of what kind of organization it could be a tool as opposed to a organizational mechanism that unleashes such a powerful dynamic of its own that it turns from being a tool into being the logic of the system itself.

Think of Marx’s analysis of the evolution from a tool to machinery, where initially the worker uses the tool as a tool and then the worker becomes a tool of the machine. Can the market ever be a tool in this sense? Or is the market always a machine that kind of takes over, and has such a strong dynamic of its own that it cannot be simply used? I don’t have an answer to that question, but I think it’s a question that a serious debate might be useful for.