Transcript
Rob Johnson:
I’m here today with Isabella Weber, an assistant professor at the University of Massachusetts at Amherst. We’re here to talk about many things, but her marvelous new book on China. And I underscore marvelous, called How China Escaped Shock Therapy. The market reform debate has come out this year and it’s causing quite a stir. Many of my friends have been knocking on my door, “You got to read this book. You got to read this book.” I did. Now I’m saying it to you, “You got to read this book. You got to read this book.” Isabella, thanks for joining me today.
Isabella Weber:
Thank you so much for having me. It’s really a great, great pleasure to have a chance to discuss my book with you. Thank you so much for the invitation.
Rob Johnson:
Oh, well, how do I say? It’s our pleasure, and you have a lot to teach, which people will learn about here in this next 45 minutes to an hour. But let’s talk about, first before we get in between the covers of the book and other thoughts that you have, I need to understand what inspired you to choose this topic and to write this book. What’s going on inside your heart that brought this tremendous effort to the surface?
Isabella Weber:
There were very two sources of inspiration. The first one was, when I was an undergraduate student, an exchange student at beta Peking University. I’m studying economics there. And I was quite struck by finding that our Chinese professors were using the same economic textbooks by American economists that we were studying from back in Berlin. And that seemed quite puzzling to me, since it seemed obvious that the Chinese economy was organized in ways quite different from the German or American economy. While at the same time the economics seem to be identical. So that raised the question on my mind, how could economics play a role in China when it was being taught in the exact same way as it was being taught in these radically different contexts?
The second source of inspiration I think has to do with me being someone who grew up in Germany in the 1990s, when there was a sense of triumphalism around the end of the cold war and the re unification of our country. But by the time I entered university, we were in the middle of great recession. And East Germany had by no means developed in the ways in which people had hoped in the 1990s. And I was then for a brief period working for a German foundation on the China desks. So I had a chance to attend conversations between Chinese delegations and their German counterparts. In particular, the Chinese delegations were interested in meeting former officials from the German Democratic Republic. So there I was as a young undergraduate graduate, just graduated, at these meetings. And especially at one occasion with the last prime minister of the German Democratic Republic, who to me was an unknown entity, I didn’t even know his name before. And who clearly at that point was basically ordinary retired person. On the other side, the Chinese delegation that was from some organization related to the state of party.
I don’t even recall which one it was, but it was quite clear that history had played out radically differently between those two sides at the table. So the question of how could history have played out so differently in the two contexts, in German Democratic Republic and the People’s Republic of China, was an implicitly obvious question in that context. So being an economist and taking this together with the first question that came to me when I was an undergraduate student in Beijing, it led me to try to study the intellectual foundations. The economic thinking if you want, that would have underpinned China’s market reforms. And that has shaped China’s path as being quite different and quite distinct from the other transitions, from socialism that we have observed elsewhere.
Rob Johnson:
Now, I understand from looking into your book that you addressed a question that many people were asking. How did China do so well when Russia, the former Soviet Union, did so poorly in the, what you might call adopting the Orthodox economic shock treatment and trying to show us a different path? And it’s not just, how did they do well? How did they get the confidence to do well? What’s the process of intellectual exploring and learning that brought them to that fork in the road, where they chose a better path?
Isabella Weber:
I think it’s important that in the 1980s, it was really an open-ended question how China would reform. It was also an entirely open-ended question what would happen to China’s position in the world. In the year 1980, China’s GDP per capita was less than that of Sudan or Haiti. So we are really talking about an incredibly poor country that of course had made substantial progress in terms of infrastructure development and basic industrialization, education, public health and all of that during the Mao years. But nevertheless was still an incredibly poor country. So in that sense, the starting point between Russia and China was quite radically different, it was not at all a foregone conclusion that history would look like as it did in the 1990s. So what I’m doing in the book is I’m trying to understand how economists really, or economic thinkers who were involved in the debates at the dawn of reform, were thinking about the question of what next. And how to reform the system, how to introduce market mechanisms into what at the time still was largely a command economy.
The contrast with Russia is not to say that the Chinese cure would have worked in the Russian case, but I think it rather stands as a warning that the stakes that were involved in the debates in the 1980s in China were incredibly high. Which is not to say that the outcomes would have been identical as in Russia and all of that, but still the scale and depth of collapse that followed shock therapy in Russia, I think illustrates that things could have gone quite terribly wrong in China as well had history evolved differently.
Rob Johnson:
And I know in China from reading the history of the various imperial regimes, their sensitivity to social discordance, social disruption, is very high because many emperors fell from not foreseeing. And obviously because of the sheer scale and size of population and a large geographic scale. It’s a formidable challenge. When I first went into China about 1990, a gentleman took me out to lunch and he said, “Yes, I work with this planning agency and so forth,” and he says, “Mr. Johnson, the migration that’s taking place right now is as if every citizen of the United States of America went to Baltimore and then walked across to San Diego, California. The whole country.”
He said, “We can’t do these things too rapidly. We have to do these things in a gradual continuous way. The transformations are important, but can you imagine the American people stomping across the country with no infrastructure, nowhere to sleep, no this and that.” He just was very animated. And it woke me up quite clearly that the things I’ve learned as a PhD student in textbooks or whatever, might not be germane to this type of challenge that he was facing.
Isabella Weber:
This is of course in 1990, so this is after the big clash and the massive crackdown in 1989. And in fact, the spiraling out of control in ‘88 of prices. So I think it’s important to remember, this is, I think in some sense also the story of my book. That in the ’80s, ideas of very rapid change, and in fact, so-called package, sorry, package reforms that would have involved overnight price of relaxation and very radical tax and beach reforms, that would have been quite drastic and quite fast, were very much on the table. Which is something that we have largely forgotten. So we tend to take the idea of gradualism as a foregone conclusion. But rather than seeing this as predetermined by something inherent in the Chinese constellation, what I’m trying to argue in the book is that there was a real debate and that there was a real intellectual and political struggle over the direction and approach of reform.
Rob Johnson:
Yes. And so how, I’m thinking of this like a theater play, how did people come together to debate? Or how did people tour the world? Who were Chinese, who have responsibility to come to the place where they could arrive at a plan or a vision of how to do this?
Isabella Weber:
Thank you very much for this question. I think one of the things that many of the people that I’ve interviewed have stressed is that the 1980s was really a quite unique space for communication in China itself. In the sense that after the culture revolution, economics as a discipline was pretty much shattered. At the same time, economics as a discipline was being re-established very quickly and was being set in command. So you had this contradiction of discipline that was really just being revived, just being recreated and at the same time being elevated to a very powerful position in the recreation of the Chinese system. One specific alliance that emerges in this context is between young Chinese intellectuals who had spent their youth in the countryside, often from the teens to the mid twenties, during the cultural revolution. Some of them went voluntarily, many were basically forced to go to the villages. Who returned in the late 1970s when Deng Xiaoping reinstated the university entrance exam, but who continue to have their allegiances with the countryside since they had lived in these villages for extended periods of their life.
And in fact, during their twenties had often engaged in extensive reading circuits, discussions, in some cases even very low key experiments. But the question of how to reorganize the Chinese countryside, how to reorganize the political economy of agriculture… And these emerging young reform intellectuals formed an alliance with first-generation revolutionaries that in China, unlike in Russia, were still around in the 1980s. Some of them had also been, I mean, consider a number of them had also been ousted during the cultural revolution. So they themselves were returning to the centers of power after a whole period of being removed from the system. And often also having spent quite extended periods in the countryside, in some cases in re-education camps, in some cases in prisons, in some cases in situations of manual labor and other settings.
But anyways, they were removed from their positions of influence and returned themselves to the center of power. And there’s older generation revolutionaries, of course also had grown into thinking about economic policy-making, not least during the Chinese civil war, when the countryside was incredibly important. And when they were using techniques of economic warfare that involved using market mechanisms to reintegrate the economy and overcome hyperinflation. In fact, there are interesting episodes of communists trading agencies out speculating speculators by pulling together certain commodities and thereby flooding the market with a certain commodity, and thereby reversing the certain price spikes in specific commodities. But that’s just a footnote. The point being that these first-generation revolutionaries had firsthand an extensive experiences in using market mechanisms as a policy tool. So when these two groups return to the cities, return to the centers of power to join the efforts of really rebuilding the Chinese economic system, they form a very peculiar and very unlikely alliance.
So this was one force in the reform debate. On the other hand economists who used to be established economists in the pre-cut revolution era, of course also returned to the cities. Many of them were actually trained in more or less Soviet orthodoxy, and formed an alliance. Which we can broadly think of as an alliance between this group of people who were trained in economics proper with young scientists who were at the time studying the latest techniques and mathematics and computer science and so on. So this was a quite extraordinary mix of people and quite extraordinary setting of communication and debate in trying to remake China really.
Rob Johnson:
I remember earlier this year, there’s a documentary film Lincoln named Adam Curtis, who’s with the BBC. And he did, I think it was a six part series called, I Can’t Get You Out of My Head. And it kept shifting between the United States, Britain, China and a little bit of Russia in the earlier phase, but he was basically talking about disorientation. And he had a big episode about how Mao’s wife was essentially very influential, then set aside and then tried to come back. And that post cultural revolution, how do I say? Intensity of filling the void, was a very, very market… It had a very big impact on me just to watch that signal. And I can’t imagine being an intellectual and being courageous after having been sent to the countryside, but obviously things did change.
Isabella Weber:
And we have to remember that some degree of change of course already happened still under Mao. The Nixon visit happened still under Mao. In 1975 before Mao’s death, several of the key leaders, including Xiannian and Deng Xiaoping, temporarily returned to Beijing and all of that. But then after Mao’s death in 1976, there cannot be a question that the attempt of late Mao has met continuous revolution and mobilizing the masses and all of that is entirely over. The heir of Mao, Hua Guofeng, the dedicated heir of Mao, then attempts another big push, more or less a Soviet style big push. This time however, meant to be an internationalized version of big push industrialization, fueled by foreign technology and finance by petroleum exports. However, these projected petroleum findings were never found, so that this model of working towards industrialization very quickly ran out of steam.
And in fact brought the danger of foreign indebtedness, as Branko Milanovic recent post has also been discussing in to my book, brought the danger of foreign indebtedness right up on the agenda in China. So that it was clear that that model also couldn’t work. So there was really the question of what now? How can we move forward? It became clear fairly early on, it’s my impression, that more market would be on the agenda. Already 1979, Deng Xiaoping talks about how markets could not be limited to capitalism, how socialism should be able to also use markets and all of that. Even though it’s not yet an official national policy to move towards markets, it’s very much in the discourse. It’s very much on the minds of the reform economists. But the big question that arises is, even if we agree we want more market, how do we introduce market mechanisms into a system that previously has basically been run as a command economy with elements of planning and elements of anarchy?
So how do we introduce market mechanisms starting from the industrial organization that was inherited from the Mao period? And that is really the big question of the reform debate of the 1980s. So on my mind, of course, there is tension between those who want reform and those who don’t want reform. But from the interviews that I’ve led, my sense is that the tension between those who were dedicated to market reforms but disagreed on the right approach to pursuing marketization, was at least as intense as that between those who were in principle skeptical of moving towards the market and those who argued for more markets.
Rob Johnson:
I once made a video with a gentleman who lived in Hong Kong, I believe he was Dutch, named Frank De Carter. And he had written a book about the cultural revolution and its aftermath in this period. And I don’t recall a great deal about it, but the kind of, might call severity and scale of the challenge. And also he had talked about people who had been moved to the countryside were experimenting with markets, particularly local agricultural markets. So that there was a little bit of a foreshadowing of greater reliance on markets.
Isabella Weber:
There was a foreshadowing, both in terms of very local experiments but also intellectually. In the sense that the people like Chinese or Tang Mu-shan and so on, would have already started to discuss how agriculture could be organized differently. And would also have already started to engage in conversations with very senior leaders, such as Hu Yaobang. Who in fact, as it so happens in the early ’70s apparently, according to some of these younger reformers, was more radical than the younger reformers themselves. So clearly the question of how to move from a more or less universally collectivized form of agricultural production to one that involves more household responsibility and more orientation towards market incentives, was already being debated relatively early on. But the kind of dynamic that it took on after Deng Xiaoping ascended to power after 1978, I think still does mark a qualitative and quite dramatic shift.
Isabella Weber:
And that has to do both with marketization but also that the adjustment of the so-called prices under the Mao system. The relative prices between agriculture goods and industrial goods, were set such as to organize a continuous extraction of surpluses, tragically at some point of course, even more than surpluses, and from the countryside to the urban industrial economy. So in 1978, Deng Xiaoping raises the plan price for agricultural goods substantially, which actually is an important element in the takeoff of agriculture.
And then of course, the first experiments that are happening in the late 1970s, possibly not entirely new just because of what you just referred to. But what I think is qualitatively different is that the central leadership starts to pick up on this and sends out research delegation and encourages some of these young intellectuals, such as Tong-tsu, Wang Tao-tiang and so on. Who returned to the cities to go out and research how these experiments are playing out and report back and analyze and systematically evaluate what to do about these experiments and whether they can be transferred into national policy. Which then prepares the ground for these changes to move from bottom up smaller scale peripheral experimentations towards becoming national policy.
Rob Johnson:
Well, I remember, as I mentioned earlier, my friend who had talked about the migration of the entire population across the United States, was over the course of our lunch describing to me the scale of the needed change in how food was produced and distributed. I remember reading years later, a man, a physician was at the Cleveland Clinic. He was at Cornell at the time, named Colin Campbell wrote a book called, The China Study. About the transformation of diet from subsistence farming to being in an urban area and working, how do you say? Eating more protein. In this case, pork fish and other things. But how the production of food for a population of that scale could be transformed so that there was not starvation and so that people could be mobile, I think that’s a fabulous, I don’t know, what you might call an experiment in human organization to be learned from.
Isabella Weber:
And I think this is a very important point to keep in mind in the sense that it was of course, not simply about marketization. It was not simply about moving towards a more efficient economic system, but it was really also about development. It was really about lifting people out of poverty and trying to solve the basic problem of food provisioning and provisioning of other basic needs that had not been addressed sufficiently and satisfactory. So that certainly is an incredibly important element of the starting point of reform. In fact, many of my interview partners were stressing seeing in the beginning of reform, this was not a theoretical question of where the market is better or plan is better or what is the ideal type of system, but it was really a question of addressing the problem that about 200 million persons were still poorly fed and poorly clothed.
And that someone like Xiannian had come to the conclusion that if reform wouldn’t be successful, then the local carters from the countryside would be leading the masses to the gates of the cities and basically demanding a better material conditions. So that was in that sense a very pressing problem of basic needs. In the sense it’s more directly than the new question of idealized visions of perfect market economies or something like that.
Rob Johnson:
Now, when I read your book, I had this vision of what I will call it, idealistic figures. The person from the west, the advanced economies are way ahead of China. You got to just do that system as soon as possible to get up and moving. And then you have a different perspective in China, understanding the scope and the scale of these transformations. And they’re reviewing the market, not as salvation, they’re viewing the market as a tool. And as you said, underlying development objectives in the market as a means to an end, not as an end in itself. And I find it very interesting to follow the dialogue that you presented.
Isabella Weber:
So that is certainly the perspective that in the end prevailed in the 1980s, but towards the mid 1980s, the idea that you could not have a hybrid system, you could not have plan and market at the same time, since this will be creating too much friction. And would in fact create a situation that possibly will be worse than the system before reform, was becoming a more and more pronounced opinion. So the idea-
Rob Johnson:
For those young people, this was just after the Reagan and the fat truth, people came on stage. And so you were hearing that other side of the debate quite vividly throughout the west.
Isabella Weber:
So this is really the same logic as the rise of neo-liberalism has brought to the policy agenda in other places. Interestingly this way of thinking about economic system reform in the Chinese context was introduced by people like Milton Friedman who visited China already early on. However, it was also importantly articulated by Eastern European emigres economists, such as [inaudible 00:28:06] and so on. Who used to be involved in reforms in their own countries and then basically were exiled after these reforms had failed. And they had a sense that the attempts at gradualist reforms in Eastern Europe basically had played out to be a failure. So therefore they thought that the economic system could not be reformed by tinkering around with the existing institutions, but that instead you had to find a holistic solution that would provide a blueprint for a different economy.
And then the task will be to really overturn the existing system and create that kind of blueprint, which is a radically different logic from that ultimately prevailed in China. Where instead the existing planning institutions and institutions of the planned economy were used as entities for market creation and actually as active elements that helped to quite literally create a market infrastructure. Instead of assuming that by abolishing the plan and by abolishing the institutions of the planned economy, a market economy would be arising like phoenix from the ashes just spontaneously by itself.
Rob Johnson:
So as you move on in the 80s and you’ve read and study the development strategies, are knowledge intensive thing? I mean, obviously after 2000 knowledge intensive strategies and education and tech related things have taken hold, but what was the strategy related to foreign direct investment and which we might call the inward infusion of knowledge at the time that your book is focused on?
Isabella Weber:
So there is of course, the special economic songs that already start in the late 1970s, but that is then being elevated to a much more systemic strategy towards the late 1980s under the label of the so-called Coastal Development Strategy. Which is still really designed by Zhao Ziyang, even though he’s often not being given credit for it since it only really takes off in the 1990s when Zhao Ziyang has long left the scene or has been long forced out.
So the idea of the Coastal Development Strategy was basically to use China’s advantage and having very cheap, disciplined labor and have relatively good infrastructure, and to use this to basically attract foreign direct investment then export goods. Initially, predominantly in the light industries. And thereby generate an export surplus that would then enable China to finance the upgrading of its upstream industries to improve its technological base and also to learn from foreign management techniques and technology, sorry, technologies. But all of this always with an eye on avoiding foreign indebtedness, so that a strategy of expert surplus would give China levy to import certain things that were critical for the country’s development without having to rely too heavily on foreign credit as such.
So that kind of strategy was designed in the late ’80s. It was basically modeled on the experience of the East Asian tiger. So the idea was that Taiwan and Korea by that time had more or less developed so much that wages had risen and that they had more or less, we’re on the way to losing their comparative advantage in low wage export oriented manufacturing. So that China could basically take on that gap that was opening up. And thereby also of course, importantly rely on capital from the East Asian tigers. So basically really, really step into the gap that was opening up as these economies were on their way towards climbing up the value chain.
Rob Johnson:
I also remember in that window of time, the Japanese were starting to engage in outward foreign direct investment. Where their awareness, their manufacturing promise would be subject to great competition as the human capital developed in the tiger split on the scale of China as well. And my sense was in this, I worked in investments in emerging in non Japan, Asia primarily at that time, was that when the Chinese devalued quite markedly in 1994, it reoriented the direction or the pattern of foreign direct investment, both out of Japan, but from many places around the world towards China. And of course the, what you might call hole, that emerged in the balance of payments in places like Malaysia and Thailand then played out in the Asia crisis thereafter in the substantial devaluation that they endured. But I think you’re seeing this as something the scale of China makes a successful transformation, their influence on the world indirectly. I’m not talking about in debate now, but the influence of the size and scale and potential of that economy becomes very, very powerful.
Isabella Weber:
And I think this is also something that has been on the minds of Chinese reformers, not in the sense of trying to forge ahead to become more powerful than anyone else, but in the sense of being acutely aware that China’s size makes it a huge responsibility to take the domestic problems very seriously. And that the problems or the challenges I should say, of reform presented itself quite differently. And the challenge of development itself presented itself quite differently in the Chinese context compared to much smaller countries, including the neighboring East Asian countries. So that acute awareness of the scale of the problem, I think is there throughout.
Rob Johnson:
In another meeting in my life later, I was meeting with the Chinese government official and he said, he was criticizing the United States for not engaging in more transformational assistance to the population. And he could see the anti-Chinese sentiment building towards, as it relates to globalization and the stress that America was under. And he said something to me, he said, “The Americans never understood that if Tonga wanted to develop a few of their people could come over and get educated in American colleges, they could tie us up with a special trade agreement and America would be the tugboat that would pull Tonga up the ladder.”
But he said, “When we’re four times the size of the United States, when we start this development, that one, fortieth of the per capita GDP, when they tie us to them, we were so big. We could swamp the tugboat that you couldn’t pull us up. We pull you down or we met somewhere in the middle.” And that his point was, there are gains from trade, but the Americans mismanaged it and the American elites are now under a great pressure. And the American elites are blaming China.
Isabella Weber:
I just wanted, in relation to that, stress one aspect of the Coastal Development Strategy that actually resurfaced in the context of the so-called Dual Circulation Strategy that has been emphasized in more recent years. And that is, that the Coastal Development Strategy, I think was never meant to turn all of China into basically an export manufacturing zone for companies headquartered in Europe and the United States. Rather the idea was, as I’ve tried to say, to generate an export surplus, which then could be used to develop China’s own economy. And to develop it in a way that it would be a complete economy in the sense that it would have all the important sectors within its own domestic system, rather than just being a supplier or just being the workshop of the world, as of course it has been for the last two decades or so.
But the ambition, I think has long been to move beyond being the book bank of companies headquartered elsewhere, but to eventually develop competitiveness and develop whole industries within its own system. Which I think is important in trying to understand the relationship between the United States and China, since it shows that the Chi-Merica type of relationship with China was the work bank and the U.S., was the headquarters. So in terms of that relationship that we used to read on the back of our iPhones until very recently decided California and manufactured in China. That wasn’t going to last from the Chinese perspective. Pretty much if you read the documents from the late 1980s, it was already on the agenda that China did not want to just be the manufacturer, but it realized that it had to that place in the first instance in order to develop the preconditions for more ambitious industrial development. Which is not to say that there has been one great conspiracy that dates back to the late 1980s, but just in terms of the development strategy, I think that has been adherent.
Rob Johnson:
And as we saw, you might say the Americans had the misperception that they were going to fall into line, is that supply platform? The Chinese was using their surplus in their investments, and some of the foreign direct investment to improve their understanding of knowledge intensive value added. And I think the China 2025 report when it was released, created the stark contrast between the two visions. But I’ll tell you a great story, I had a woman that I worked with at the United Nations from China, who was a descendant of Confucius. And she did a lot of work with me when we were forming INET, building a conference in Hong Kong with meetings in Shenzhen. And I met her father. And one day there was a thing, there’s like a consumer electronic show convention in Las Vegas every year, and I’m sitting in her home with this gentleman, who’s the father. Calls me and he says, “I’m coming to New York tomorrow. Would you like to have lunch?”
And I said, “Yeah, sure.” So I sit down in this Italian restaurant, this man walks in with this box and he said, “We’re going to have lunch, but I got to ask you first,” he said, “We just won the grand prize at the consumer electronics show, and you have to find a way to give this to Senator Joe Biden.” And I said, “Okay.” And I knew Joe Biden was about to get what’s called a Four Freedoms Medal at the Roosevelt Institute, which was a place I was affiliated with. But I said, “I’ll try. I don’t know him well, I worked in the Senate for a few years, but I’ll do that.” So he’s then sits down. He takes out another copy of the phone and he shows me this phone.
And he said, “Joe Biden came and gave a speech to us in Shenzhen about how we were going to make the parks and America was going to design these phones. And it frustrated us so much that we went and developed our own phone. And we brought it to the Las Vegas show, we won the ground price. And I want you to give this to him, to thank him for inspiring us to build our own phone that could compete with the Apple iPhone.” And I will say the graphics were beautiful. It actually had 3D for the video. I watched a picture of a plane landing on an aircraft carrier, which is perhaps an ominous symbol. But the whole idea of the pride of climbing up that value chain was in evidence at that lunch. It was really very market.
Isabella Weber:
I think this is a great anecdote and it encapsulates much of the development of U.S., China relations in the last years. I think it’s also important to remember that of course, China has been incredibly reliant on American technology and American software and so on, until very recently. I mean, we see this with the computer chips shortages. We see those with the big announcement very recently that Huawei might now have developed its own operating system for smartphones, because all the Chinese phones previously have been operating on Google Android. The Chinese state owned banks were running on software that was basically Cisco software and so on. So you have had a lot of American software right at the heart of the Chinese system.
In fact, you probably still have a lot of American software right at the heart of China’s system. So I think in some sense we’re at the tipping point. I mean, the staggering thing is that China, some Chinese companies, I mean, the whole story around 5G is a story of a Chinese company reaching the technological frontier in an infrastructure technology that is incredibly important for the world. And this is in some sense of first, I mean, when has it been the case that a non-European or American company has reached the technological frontier in a key technology that everybody will rely on. That is, I mean, I cannot come up with another example. So I think this is a lot of the tension that we are dealing with has to do with these kinds of questions.
Rob Johnson:
The energy that I see now as polarizing has something to do with that Chinese not conforming to an American vision of the system. Well we’ll surely talk about. But there’s another side to it that I’m interested in exploring with you. Which is your book suggests that there was an experimental improvisational way in which Chinese officials view the markets as a tool. And when you look at the United States now or parts of Europe, UK, you see a lot of distress because unbridled reliance on the market is not doing everything that it should in relation to education, gender, and racial inclusion. Climate, and even one might say the episode of the financial crisis of 2008 and nine, where the state had to snap their fingers and come forward with roughly $800 billion because of, how do I say? Misdeeds or misunderstandings related to an unbridled market prices. Can the west learn from the way in which the Chinese approached economic development for the economic transformations that the west needs to make in the next phase? That it appears the Biden administration is embarking upon. Are these some substantive?
Isabella Weber:
Thank you. This is a great question. Just to be sure, China’s transformation and reform has of course come along with very deepened inequalities, environmental issues and especially inequalities along lines of gender and ethnicities. So just to be sure that there is no [crosstalk 00:45:39] section that happened.
Rob Johnson:
Well, let me interject you as well. I’ll interject, one other thing that really surprised me. Some people came to visit me. They make something called the Hurun Report about wealth concentration. This was 2015. And they came into my office and they said, “We’ve done this study. There were 535 people between the Congress and the Senate and then there’s the Supreme court justices, and there’s the Obama cabinet. And altogether they’re worth six and a half billion dollars,” he said, “And there were about 203 people between advisors and members of the national people’s Congress. And aggregate them all together in an economy that’s two thirds of the size and there were $70 billion.”
And they said, “So the concentration of wealth and the question of whether politics can broadly serve people, where people act like the Chinese economy is more receptive and sensitive, will be tested by this concentration of wealth and what in America we call plutocracy.” And shortly there after, when Shichang led something called the anti-corruption campaign. So I sensed that in some ways they were responsive, I don’t know enough about the internal coalition politics and what was really on the agenda, but it really was the case that… I guess I’m putting an asterisk on my question to you, along with gender and other things, the danger of money politics controlling governance that the market now has captured the state, might be even higher in China than it is in America.
Isabella Weber:
I think this is a very stunning figure that you just reported and immensely interesting. It might also tell us something about distribution of rich people between different sectors of elites across politics and the financial world and all of that. To maybe start by going back to your initial question, I think what we can possibly learn from the Chinese is to think not as much in dichotomies of state versus markets, but to see rather possibilities for state market participation as a possibly productive arrangement. Which in some sense, the initiatives that we now see coming out of DC in terms of public investment agencies, is basically something along these lines. Where the idea is, that there is a publicly owned entity that will be quite literally participating in the market by investing in certain needed infrastructure. Which is not the same as just them doing monetary policy and hoping that by lowering the interest rates this infrastructure will be forthcoming by itself.
But at the same time, it’s also not the same as planning. Because I mean, it requires a degree of planning but it’s not the old-style planning where you have a whole apparatus of planning and institutions that really can implement from the very top to the bottom, to the very details on the ground. So I think in that regard we might be able to learn something from China. At the same time I think it is quite ironic that at the very moment when the U.S. is at probably the height of a debate around redefining the relationship between the state and the market in ways that we haven’t seen in decades. At the same time the demonization of a different kind of state market relationship in China is also reaching a peak. So it seems like there are two quite contradictory discourses happening at the very same moment in time. Which I’m not sure if it’s necessarily helpful for either of these two discourses.
Rob Johnson:
I have a friend who’s a member of the U.S. government, works on national security in China. And he said to me, “I’m so discouraged because we’re not learning from the Chinese model, it’s been demonized. Our model is failing. I’m wondering if we need an alien to invade this planet and teach us all how to do economics the right way for people.” He said about two weeks ago. But I think you’re exactly right, that it’s almost indigestible to learn the lessons. Which we might call the echoes of a cold war nationalistic mentality in the United States, would make it very hard to stand on center stage and admire and emulate the Chinese explicitly. But we can still work.
Isabella Weber:
I think there’s actually also an implicit lesson of the Chinese trajectory. I do not think that we can understand China’s reforms by conceptualizing it as having copied the Singaporean model or having copied the practices of West Germany in terms of its social market economy. Something like that. I do not think that the Chinese have in a wholesale fashion imported another countries’ model. But what they did do is that they have studied very carefully specific policies and have studied very carefully under what kind of conditions these policies were implemented in other countries. And then compare these conditions very carefully with their own local conditions, and then have asked themselves what of these foreign policies can we implement in our own context, possibly with a certain adaptation to the specific conditions that we are facing? And in fact, the Chinese of course, have not been shy at all in learning from American experiences.
In the 1980s, one of the interesting experience that China did study was the post-war transition of the United States from the war economy back to a more market based economy. Where some similar challenges emerged as in the context from the transition from a socialist planned economy to a more market based economy. So of course those two cases are not entirely identical but there are certain parallels that make the comparison relevant. And in the United States of course, there were almost universal price controls at the peak of World War Two. And then after the war, in fact a number of Chinese, sorry, of American high-profile economists, including several precedents of the American Economic Association. Including prominent names like Paul Samuelson and Irving Fisher, were actually warning against liberalizing prices too quickly.
And we’re arguing that prices should be liberalized in a fashion that whenever bottlenecks were overcome in a specific production line, then the prices could be liberalized. So let’s say if there’s a bottleneck in steel, then only once the supply of steel has caught up, you can liberalize the price for steel. That didn’t happen in the American case basically, because of the political dynamic that was playing out at the time. Which then recited as the Atlanta Fed has actually just been arguing recently, which then recited in a period of rather high inflation that canceled out a lot of savings that were accumulated during the Second World War. Thanks to the very high growth rates during the war and the price stability that had been achieved by the price controls during the war.
So this kind of experience was studied carefully in China in the 1980s, and actually helped inform someone like Li Ying and others who were arguing against the idea of rapid price liberalization in the context of China’s own transition. Now, ironically, as the Atlanta Fed has been arguing, the current situation after the COVID pandemic has a certain parallel with the transition from the war economy.
In the sense that the economy had been on hold and it’s now going back to a different structure and pattern. Which involves an important button access as we have seen with the shooting up off of commodity prices. So I think it’s really not trying to copy from China in any wholesale fashion or trying to pursue some sort of a Beijing model or something like that. I think that, that will be absurd. But I think there is an important lesson in thinking creatively about history and taking historical lessons seriously and adapting them to contemporary and big policy questions. And in that regard, I think the Chinese have been quite successful at several critical locations.
Rob Johnson:
Learning a lot in listening to you today, because the kind of questions that are often asked to me may not be the right questions. In other words, China learned how to make a transition toward the market from the state and use gradualism rather than shock treatment. It appears now in the realm of climate and other things that some of the Western countries, particularly the United States have to make a transition towards a greater role for the state. And so it’s not at the point of war demobilization, it’s at what I’ll call climate war preparation, infrastructure, knowledge intensive, rebuilding of schools and other things. And so I think the sustainability, whether it be environmental financial or social, depends upon the pragmatism. That’s the part that I loved in reading your book. It’s the pragmatism, the non hardened on your logical improvisational experimental mindset. But it’s going in a different direction than China had to go in the period that you described in your book.
Isabella Weber:
I think one aspect of the Chinese approach in the 1980s that is also worth noting is that there’s a very clear distinction between what I’m calling in the book, I’m building on the so-called ancient statecraft theory of heavy and light. What is heavy and what is light. That is a very clear distinction between the important and essential and the not so important and periphery. Which is a distinction that after the COVID pandemic should seem quite familiar to us since we have all gone through about a year of reducing the economy to its essential core. So we should have a pretty good empirical reference point in what is essential and what might not be as essential. And I think that China’s transformation was really organized around an acute awareness of how certain essential parts of the system are hanging together.
And that one should not take rush movement in the essential parts of the system. One can liberalize quickly in the inner central parts. You can liberalize factories that are producing bikini’s overnight, nothing wrong with that, but you cannot liberalize your steel sector overnight. Because if you liberalize your steel sector overnight, all downstream industries will be shocked. If you liberalize your bikini factory, then that would not have any ripple effects throughout the system.
So I think that logic of understanding very clearly what are the essential parts and what are the less essential parts, and then thinking about how one can steer the essential parts towards a transformation of the system as a whole, it’s really another important lesson that emerges from the Chinese story. And I think that in fact, this is something that we can see as part of the government practice to some degree until today. If we look at how the Chinese are dealing with their own inflation question, then we can see that they have basically made it very clear that monetary policy, that is cracking down on men through monetary policy is the means of last resort.
Instead, what the Chinese are trying to do is to contain the price rises off essentially goods first, thereby avoiding ripple effects throughout the system. And thereby containing cost push inflation by focusing on the essential element that is unleashing that kind of dynamic rather than by constraining monetary supply for the economy as a whole. So that logic we can see again and again in all sorts of economic policy decisions.
Rob Johnson:
And you’ve recently written a very interesting provocative piece in project syndicate about how the Chinese efforts to address inflation may have benefits for other countries most perhaps particularly the United States.
Isabella Weber:
I mean, if inflation is the biggest threat to the prospects for investing on a large scale into urgently needed infrastructure, then the fact that China is moving towards containing its own inflationary dynamic. Taking this together with the consideration that of course, given the current structure of supply chains, any major increase in investments into physical infrastructure would involve quite significant imports of machinery and so on from China. Then I think it becomes clear that in fact China’s containment of inflation, if anything is helping the American project of trying to rebuild its own economic base. So I think this is a lesson that can possibly help us to think about the post COVID recovery in terms that might be more mutually beneficial rather than seeing it predominantly as American recovery somehow being exclusively in competition with China.
Rob Johnson:
Well, Isabella, when I was a young engineer with MIT, through a total coincidence I ended up in a class on international trade and then coming under the influence of a man named Charles Kindleberger. And he convinced this future oceanographer and naval architect to become an economist. And he was very, very, how would I say this? He was just very charming, took us all to the symphony to watch the rehearsals at the Boston Symphony, we had coffee. Mentored all of, about seven or eight of us. And I remembered one day I was walking across the Memorial Bridge with him, and on the radio was the song by Bob Dylan called the Ballad Of A Thin Man. And one of the pinnacle moments in the song is, there something happening here, you don’t know what it is, do you, Mr. Jones? And Kindleberger turned to me and he said, “There’s something happening here and you don’t know what it is. Do you, Mr. Johnson? At least not yet.”
And I smiled, he said, “You’ve got to add economics as a second major.” “No, no, no, no.” And he was very energizing. But when I listened to you today, there’s all kinds of songs always go through my head. I’ve worked in the world of music. I’m always reminded when I hear someone like you with this historical kind of Kindleberger texture, and that conceptual ability to, which I might called transport us to the challenges of our present time. Marvin Gaye’s song, What’s Going On, in the third verse he says, “We got to find a way to bring some understanding here today.” And then this last hour, I think you would have been Marvin Gaye grin. Thank you very much for your offering and for sharing your thoughts with us, and for writing this wonderful book.
Isabella Weber:
Thank you so much for having me and for engaging in this very enlightening conversation. Thank you for your great questions. This was really great. Thank you.
Rob Johnson:
And as we get down to tracks, I want to have you come back on as you’re moving forward and building in the texture and depth you have here. And I know you have some forthcoming papers in the Journal of Economic History and other things. And as I know Bob Pollin is working on climate, the collaboration between the U.S. and China. There’ll be many more chapters for you and I, if I’m lucky on this podcast.
Isabella Weber:
I am much looking forward to those forthcoming chapters. Thank you so much.
Rob Johnson:
Thank you. And check out more from the Institute for New Economics Thinking @ineteconomics.org.
