China’s transition from plan to market since 1978 has not only increased prosperity but also has led to a new way of thinking. In a 2005 poll covering 20 countries, GlobeScan found that China had the highest proportion of respondents (74 percent) who agree that the “free market economy is the best system on which to base the future of the world.” That outcome is remarkable given that only a short time ago Beijing embraced a state-led development model.

The same poll found that U.S. citizens have strong support for the free market (71 percent) while Russia, which has a long anti-capitalist history, still has rather weak support (43 percent favored the market), and France, with its long attachment to socialism, has even less support with only 36 percent saying they favor a free market.

The significant change in the Chinese people’s attitude toward economic liberalism is further illustrated in the Chicago Council on Global Affairs’ 2006 multination survey of public opinion. Eighty-seven percent of those surveyed in China thought that “globalization, especially the increasing connections of their country’s economy with others around the world, is mostly good for their country.” That result compares with 60 percent in the United States and 54 percent in India.

It is not surprising that the Chinese people would embrace globalization as it has opened China to the outside world, brought about rapid economic and social change, and helped lift millions out of absolute poverty. In 1978, only 12 large state-owned enterprises (SOEs) had the right to engage in foreign trade. Today virtually any firm is free to enter the import-export business. China has become the world’s third largest trading nation and is the leading destination for foreign direct investment. Those regions that have experienced the greatest amount of economic freedom have also grown the most and have the highest living standards. Guangdong, Zhejiang, and Fujian are all heavily “marketized” (SOEs account for only a small fraction of output) and have growth rates far above the national average.

In widening the range of opportunities open to people, globalization has increased personal freedom and put pressure on the Chinese Communist Party (CCP) and National People’s Congress to pass a Property Law last March. It recognizes the importance of the private sector and better protects property rights—all with a positive impact on civil society.

People are free to own their own homes, operate their own businesses, and seek work in the private sector. Those and other economic freedoms would have been impossible under central planning and autarky. One can now read a leading business magazine like Caijing and see a glossy photo of the Statue of Liberty on the same page as an advertisement for private condominiums in Beijing. F. A. Hayek’s Road to Serfdom and the Cato Institute’s Toward Liberty can be found in Beijing bookstores. High-school students in Shanghai can now open their new history textbooks and find much discussion of globalization and economic reform but only a single reference to Mao.

Most surprising, one can travel to the Southwestern University of Finance and Economics in Chengdu and see a life-size statue of Adam Smith, who in 1776 wrote in The Wealth of Nations: When “all systems either of preference or of restraint” are abolished, “the obvious and simple system of natural liberty establishes itself of its own accord.”

Spontaneous order, or economic harmony, arises out of voluntary exchange based on what Smith called the “laws of justice.” The role of market prices and profits is to coordinate the myriad individual plans in the pursuit of happiness.

Smith’s principle of spontaneous order—or freedom under the law—is similar to Lao Tzu’s principle of nonintervention (wu wei). Long before the Wealth of Nations was written, Lao Tzu argued that when the ruler takes “no action . . . the people themselves become prosperous.” Today China’s President Hu Jintao is promoting the idea of a “harmonious society” and “peaceful development.” In doing so, he should embrace the ideas of Lao Tzu and Adam Smith, and realize that limited government and the rule of law are essential for peace and harmony.

The problem is that the CCP has no desire to let go of its monopoly on power. Creating “free private markets,” as the late Milton Friedman recommended to General Secretary Zhao Ziyang when they met in 1989, would require widespread private property rights and further undermine the CCP’s influence. That is why China’s leaders continue to favor market socialism rather than market liberalism.

Nevertheless, the momentum for market liberalization is strong, especially since China joined the World Trade Organization in December 2001. Trade liberalization has been good for China and good for the global economy. Even though millions of Chinese workers have been dislocated, the Chicago Council survey found that 65 percent of those polled in China believe that “international trade is good for the job security of workers.” In contrast, only 30 percent of Americans surveyed thought free international trade benefited workers.

Of course, the goal of trade is not to protect jobs but to create wealth—and global wealth is much greater today than it was two or three decades ago. Trade liberalization, the information revolution, and financial integration have combined with pro-market institutional change to make China’s future bright. Trade is not a zero-sum game: the richer China becomes, the more prosperous the global economy. Protectionism would destroy the market forces that have helped lift millions out of poverty, embolden hardliners, and politicize economic life. Both economic and personal freedom would suffer.

One lesson from China’s transition from central planning to a market-oriented system is that poverty is best addressed by institutional change rather than foreign aid and government intervention. Several decades ago most of the world’s poor were concentrated in Asia, not Africa. The reverse is true today. Foreign aid has not improved the plight of the poor.

Likewise, increasing the minimum wage is not a panacea. Politicians promise a higher wage but do nothing to address the underlying causes of poverty. Rather, if the legal minimum wage is above the prevailing market wage for unskilled workers, employers will cut back on hours, reduce benefits, and switch to labor-saving methods of production.

Hong Kong has no minimum wage yet is prosperous. China has no national minimum wage and lets the market guide local minimum wages so that they do not interfere with economic growth and employment. In Shenzhen, one of the most marketized cities in China, the minimum wage was increased last year to 810 yuan per month (about $105). Many companies already pay more than the minimum, so the higher minimum wage is unlikely to interfere with job opportunities. Indeed, there is a labor shortage, so market wages will be forced up by competition. As one local labor official said, “We are adapting to the market through the pay raise, rather than interfering with the market.”

Entrepreneurship Everywhere

The spirit of entrepreneurship is evident everywhere in China. One of the most popular TV game shows is “Win in China,” a contest in which the person with the best business plan is awarded venture capital financing of $1.2 million and gets to retain 20 percent of the equity. The first show in 2006 attracted 120,000 entrants. The host of the show, Anna Wang Lifen, launched the program because she sees entrepreneurs as “the heroes of our peaceful times.”

Although China has made substantial progress on its march toward the market, much remains to be done. Free markets require widespread private property rights, a transparent and just legal system, and the free flow of information. Moreover, if China is to develop world-class capital markets, Beijing must make the yuan fully convertible and allow capital freedom.

The right to freely buy and sell currencies and assets is an important element of personal freedom. In his “Memorandum to General Secretary Zhao Ziyang,” Friedman listed what he considered the fundamental lessons from studying the process of development. The first lesson, which he thought applied to China as well as India, is that the government should “end exchange control, establish a free market in foreign exchange, and permit the exchange rate to be determined by the market.” Without such reforms, he thought, corruption would continue. Although Hong Kong does not have a freely floating exchange rate (it has a currency board that fixes the Hong Kong dollar to the U.S. dollar), there are no capital or exchange controls. The high degree of capital freedom has enabled Hong Kongto become a leading financial center.

China is moving gradually toward a more flexible exchange-rate regime and slowly relaxing capital controls. That process will take time, but it appears China’s leaders support the long-term goal of a fully convertible currency. Ending capital and exchange controls would give the Chinese people greater investment options and increase efficiency. But, again, such reforms would threaten the CCP’s power.

Opening the CCP to capitalists is not sufficient. The Party’s monopoly on power has to be contested at some point. Nor is it sufficient to amend the PRC Constitution to better protect private property when there is no independent judiciary to enforce contracts. If China’s future is to rest with the free market, there must be political as well as economic liberalization. Ultimately a free market cannot exist without a free people. The real challenge for Beijing will be to institute a rule of law that protects persons and property against the state. The people’s preferences will then rule rather than the Party’s. China’s leaders would do well to follow the path of Lao Tzu and Adam Smith by adhering to Hong Kong’s model of “Big Market, Small Government.”

This year marks the 50th anniversary of the People’s Republic of China and the tenth anniversary of Tiananmen Square. The spontaneous demonstrations for freedom that took place in the heart of Beijing in May and June a decade ago met with a dramatic and tragic end when confronted with the power of the state.

It is no coincidence that the monopoly of power exercised by the Communist Party and the horrid events of 1989 are related. The party can survive only by its ultimate reliance on the use of force to prevent competition from those who would contest single-party rule. The recent crackdown on the founders of the first opposition party in the history of the PRC, the Chinese Democratic Party, attests to the insecurity of the ruling elite.

Yet, even in the face of an oppressive government, the Chinese people have made substantial economic progress since 1978. They have done so because brave individuals have been willing to challenge the planned economy and because the communist party under the leadership of Deng Xiaoping recognized the failure of planning and the value of a market system. But the party has been unwilling to abandon its vision of a “socialist market economy” and allow a true market system to evolve.

The party leaders believe that without their firm guidance, life in China would be chaotic and unstable, and the economy would grind to a halt. No one better represents that view than Jiang Zemin, China’s president and chairman of the Communist Party. This past December, he celebrated the 20th anniversary of China’s economic reform, and attributed its success to “unswerving adherence to the Party’s basic line.” By his logic, continued economic success depends on the survival of the Communist Party and on the primacy of public ownership.^[1] Nothing could be further from the truth.

The Secret of China’s Success

China’s economy has grown by nearly 10 percent a year since 1978 because the government has gotten out of the way of the market and allowed individuals greater economic freedom—not because of strict adherence to the basic party line, which holds that the individual is a cog in the socialist state. The truth is that China’s economic reforms have succeeded because some individuals were willing to risk everything to escape the iron grip of state planners and a life with no future.

The first steps were taken by farmers who resisted state coercion under the communal system and initiated what Kate Xiao Zhou, author of How the Farmers Changed China, calls “a spontaneous, unorganized, leaderless, nonideological, apolitical movement.”^[2] The goal was to create a market-oriented system under which farmers would have greater control over the land at their disposal and be able to profit from voluntary exchange. It was only after that limited, spontaneous experiment with the “household responsibility system” (baochan daohu) proved successful that the party sanctioned the new arrangement.^[3]

As farmers gained wealth, they expanded into nonfarm production and experimented with a new form of collective ownership—the so-called township and village enterprise (TVE). Rather than actively promoting that new ownership form, party leaders cautiously observed its operation. Once success was evident, the Communist Party again was willing to permit expansion. However, it never envisioned that TVEs would far outperform state-owned enterprises. According to Deng, “Our greatest success—and it is one we had by no means anticipated—has been the emergence of a large number of enterprises run by villages and townships. They were like a new force that just came into being spontaneously.”^[4]

Today, the market-driven, nonstate sector, which includes TVEs, foreign-funded enterprises, private enterprises, and other firms that are not dependent on government handouts, is the dominant force in China’s “socialist market economy.” More than 70 percent of industrial output value is now produced outside the state sector. Most state-owned enterprises, on the other hand, are losing money and eating up China’s capital—more than 50 percent of state investment funds go to these collectives.^[5]

Another example of spontaneous order in China is the special economic zones. Those zones were first set up in the coastal areas, but the idea spread to other areas and took on new forms as competitive forces led some local officials to permit the growth of markets and foreign investment before receiving approval from the central government. Once the new institutions were successful, however, official recognition followed.^[6]

China’s economic success has been the result of millions of hard-working Chinese being set free to pursue a better life. The relaxation of price controls has allowed the market, rather than the plan and the party, to guide production and consumption. The continuing depoliticization of economic life has given people more time and energy to devote to everyday affairs. Personal freedom has inched forward as a consequence. People are now free to work outside the state sector and to choose their life’s work, to buy from alternative sources, to invest their money, and to enjoy the infusion of new products and new ideas brought about by trade liberalization.

The real lesson from China’s “economic miracle” is not that economic development depends on adherence to the “party’s basic line,” but that economic freedom is essential for increasing human well-being.

A Constitution of Liberty for China

The willingness of China’s leaders to open the country to the outside world, to permit new ownership forms, and to abolish much of the state planning system in favor of market pricing should be congratulated. But the lack of commitment to private property rights and, therefore, to limited government and the rule of law means that China’s future is unclear. So long as the market is contaminated by party politics and state planning, corruption will continue to pollute China’s economic environment.

If China wishes to continue its rapid economic growth into the next century and end corruption, it must strive for institutions that are consistent with free-market principles and the rule of law. That is why Justin Yifu Lin, Fang Cai, and Zhou Li argue that “It is essential for the continuous growth of the Chinese economy to establish a transparent legal system that protects property rights so as to encourage innovations, technological progress, and domestic as well as foreign investment in China.”^[7]

Ultimately, economic and political reform are inseparable. To depoliticize economic life and nourish China’s fragile spontaneous market order, there must be constitutional change and new thinking (xin si wei). The Chinese people need to understand and appreciate the nature of spontaneous order and the institutions that underlie that order—namely, private property, freedom of contract, and limited government. Most of all they need to adopt what F.A. Hayek called a “constitution of liberty.”^[8] As Roger Pilon, director of Cato’s Center for Constitutional Studies, stated, “If China is to preserve and expand upon its recent achievements, it will need a constitution that institutionalizes, not simply tolerates, the forces that have led to improvements there.”^[9]

Chinese scholars are beginning to realize the necessity of constitutional change. In 1991, Jixuan Hu argued that the market is a “living system” that cannot be designed. “By setting up a minimum group of constraints and letting human creativity work freely, we can create a better society without having to design it in detail. That is not a new idea, it is the idea of law, the idea of a constitution.”^[10] To accept that idea, however, means to understand and accept the notion of spontaneous order and the principle of nonintervention (wu wei) as the basis for economic, social, and political life.

But as Pilon explains, the development of China’s spontaneous market order is being limited by the Communist Party’s adherence to a constitution that turns the relation between the individual and the state on its head. Instead of protecting individuals and their property rights, the Chinese constitution makes the individual subservient to the state and narrowly circumscribes rights, allowing only that amount of freedom that does not threaten party rule. Rights are temporary and arbitrary, not permanent, and depend solely on the will of the rulers.^[11]

What China needs is a government of limited powers that respects the life, liberty, and property of each individual—not 100 more years of communist rule and “public” ownership. It is not enough that China has permitted the market to develop; China must now recognize the futility of trying to plan the market and to control the lives of 1.3 billion people. A better way is to increase freedom within a constitutional setting that establishes general rules to constrain government and let people be free to choose.

Lao Tzu Thought

In considering what steps to take next, China’s leaders should look to their own ancient culture and rediscover the principle of spontaneous order—the central principle of a true market system.^[12] In the Tao Te Ching (also known as the Lao Tzu), written more than 2,000 years before The Wealth of Nations, Lao Tzu instructed the sage (ruler) to adopt the principle of noninterference as the best way to achieve happiness and prosperity:

Administer the empire by engaging in no activity.

The more taboos and prohibitions there are in the world,

The poorer the people will be.

The more laws and orders are made prominent,

The more thieves and robbers there will be.

Therefore, the sage says:

I take no action and the people of themselves are transformed.

I engage in no activity and the people of themselves become prosperous.^[13]

“Lao Tzu Thought,” not “Mao Zedong Thought,” is the beacon for China’s future as a free and prosperous nation.^[14]

Truth versus Party Line

The truth is, the basic party line is inconsistent with a spontaneous market order and a free society. When push comes to shove, the party, not the individual, rules, and no dissent is tolerated. Until that totalitarian mentality is contested, China’s future will be plagued by uncertainty, and the nascent market economy will be in constant danger.

The right to dissent—that is, to be different, to think, to choose—is the hallmark of a free and civil society. The party’s recent crackdown on dissidents, including the harsh sentencing of Zhang Shanguang to 10 years in prison for “informing” Radio Free Asia of the protest by 80 farmers in Hunan’s Xupu County against excessive taxes, is yet one more egregious example of how the party’s quest for “stability” is, in reality, a ploy to protect its monopoly power.^[15]

It is time for the Communist Party to abandon its top-down model of “stability” and allow the forces of freedom and individual responsibility to create a new constitutional order from the bottom up—based on the consent of the people and a respect for their natural rights to life, liberty, and property. Only then will the institutional incompatibility that now exists in China’s socialist market economy disappear and a true market-liberal order emerge—based on liberty and justice for all.

The recent publication and popularity of a Chinese language edition of Hayek’s classic book The Constitution of Liberty, now in its second printing, is a sign that the old top-down order of planning and control is slowly giving way to a new spontaneous market order of liberty and opportunity. People are beginning to recognize the need for adhering to universal principles of justice. Mao Yushi, director of the Unirule Institute in Beijing, told the Wall Street Journal, “We need to make everyone equal before the law and set the rules of conflict resolution.” In his opinion, liberty, not democracy, should be the primary concern.^[16]

The challenge for China is to allow liberty to grow by adopting constitutional constraints on government power. In the end, it must be the Chinese people themselves who will have to meet that challenge by ending the power of the party and securing the power of the people to choose their own institutions. That will not lead to chaos but to a new spontaneous order for China.

Notes

1. “President Jiang Says China to Maintain Socialist Economy” and “President Jiang Calls for Another 100 Years of Communist Rule,” Agence France Presse, in Inside China Today, December 18, 1998 (http://www.insidechina.com/china/business/news/98121801.html and http://www.insidechina.com/china/news/98121808.html).
2. Kate Xiao Zhou, How the Farmers Changed China (Boulder, Colo.: Westview Press, 1996), p. 4.
3. See Justin Yifu Lin, Fang Cai, and Zhou Li, The China Miracle (Hong Kong: The Chinese University Press for The Hong Kong Centre for Economic Research, 1996), pp. 132–33.
4. Deng Xiaoping, Fundamental Issues in Present-Day China, translated by the Bureau for the Compilation and Translation of Works of Marx, Engels, Lenin, and Stalin under the Central Committee of the Communist Party of China (Beijing: Foreign Languages Press, 1987), p. 189.
5. East Asia Analytical Unit (EAAU), China Embraces the Market (Barton, Australia: EAAU, Department of Foreign Affairs and Trade, 1997), pp. 10, 338. Hugo Restall estimates that “as many as 70 percent [of state-owned enterprises] are losing money” (“China’s Long March to Reform,” Wall Street Journal, September 23, 1997, p. A22).
6. See Steven Lewis, “Marketization and Government Credibility in Shanghai: Federalist and Local Corporatist Explanations,” in David L. Weimer, ed., The Political Economy of Property Rights: Institutional Change and Credibility in the Reform of Centrally Planned Economies (New York: Cambridge University Press, 1997), pp. 259–87. According to Lewis (p. 283), “By the early 1990s, when surplus domestic capital could be moved between localities and banks more freely, and as central and local authorities began to decrease their monitoring of rural localities, thousands of non-sanctioned land development companies and ‘development zones’ had sprouted up around China.”
7. Justin Yifu Lin, Fang Cai, and Zhou Li, “The Lessons of China’s Transition to a Market Economy,” Cato Journal, Fall 1996, p. 226.
8. F.A. Hayek, The Constitution of Liberty (Chicago: University of Chicago Press, 1960).
9. Roger Pilon, “A Constitution of Liberty for China,” in James A. Dorn, ed., China in the New Millennium: Market Reforms and Social Development (Washington, D.C.: Cato Institute, 1998), p. 333.
10. Jixuan Hu, “The Nondesignability of Living Systems: A Lesson from the Failed Experiments in Socialist Countries,” Cato Journal, Spring/Summer 1991, p. 44.
11. Pilon, pp. 334–41.
12. Nobel laureate economist James M. Buchanan has called “the principle of spontaneous order” the “most important central principle in economics.” (In J. M. Buchanan, What Should Economists Do? [Indianapolis: Liberty Press, 1979], pp. 81–82.) It is the idea that individuals seeking their own gain in a system of private ownership and free markets bring about mutually beneficial exchanges, and that competitively determined prices coordinate economic decisions without central planning.
13. Tao Te Ching (the Lao Tzu), 57, in W.-T. Chan, A Source Book in Chinese Philosophy (Princeton, N.J.: Princeton University Press, 1963), pp. 166–67.
14. See James A. Dorn, “China’s Future: Market Socialism or Market Taoism?” Cato Journal, Spring/Summer 1998.
15. See John Pomfret, “4th China Dissident Sent to Jail,” Washington Post, December 28, 1998, p. A17.
16. “China Rediscovers Hayek,” interview with Mao Yushi, Wall Street Journal, June 12, 1998.

The publication of a primer on libertarianism in Japan is another sign of two heartening developments: the continuing process of the world’s people being drawn closer together, and the worldwide spread of the ideas of peace and freedom at the end of a century of war and statism.

Americans, and especially American libertarians, find much to admire in the Japanese people: their strong families, their commitment to education, their strong sense of individual responsibility, their peaceful and democratic society, and their productive entrepreneurship that has given the world so much material progress over the past 50 years. The Japanese can take much pride in their economic success, and they certainly don’t deserve the criticism they have received from protectionists in the United States and Europe who don’t want to compete in a global economy.

But recent economic problems in Japan and its Asian neighbors indicate that there are problems with the region’s economic policies. An economy largely based on private property, individual initiative, and free markets has been hampered by too much state allocation of capital and too much of what Americans call “crony capitalism.” These policy mistakes have led to the need for currency reform (mostly in Asian countries other than Japan) and deregulation of financial services. Also, Japanese consumers have not always reaped the benefits of economic growth, and deregulation of retailing—particularly a repeal of the laws that impede the opening of large discount stores—might allow them to achieve standards of living commensurate with their productivity. But none of this should obscure the real achievement of the Japanese in dramatically increasing their living standard in scarcely a generation through productive enterprise in a system based on low taxes, free trade, and the rule of law.

The libertarian philosophy has much to offer Japan as we move into a global millennium. But an obvious question may occur to Japanese readers: Are these just American ideas, or at most Western ideas? Do they have any relevance to the people of Japan and Asia?

Universal Values

Some Asian leaders have criticized liberalism and proposed “Asian values” as an alternative. Singapore’s leader, Lee Kuan Yew, has said that his country does not “need the kind of free-for-all libertarianism that we see in America.” But the values of individual rights, limited government, and free markets are universal values. The principles of science are universal, even though so much of the discovery of those scientific principles took place in the West. No one would argue today that mathematics and physics are “Western” ideas or that Asians cannot participate in the scientific enterprise. Liberalism, now known as libertarianism, developed in the West, but it speaks to all people.

But Westerners steeped in the ideas of John Locke and Adam Smith can learn much from Asians who study the traditions of Confucius and Lao-Tzu. Lao-Tzu, who wrote that “without law or compulsion, men would dwell in harmony” and who taught that harmony can emerge from competition, may well have been the world’s first libertarian. A similar concept can be found in Zen.

Today the Asian emphasis on strong families and personal responsibility fits better with libertarian political philosophy than does the unfortunate trend in Europe and the United States toward personal irresponsibility, a sense of entitlement, and reliance on the state. Indeed, Japan and America have more to learn from each other than either of us has to learn from the failing welfare states of Europe or the statist model of France.

Libertarianism is sometimes perceived as a radical philosophy, even in its American home. But in fact it is the fundamental philosophy of the modern world: liberty, equality, enterprise, the rule of law, constitutional government. These ideas have become so commonplace that we forget how radical they were at one time. Libertarians want to apply those principles more consistently than do the adherents of other ideologies. But few people in the modern world would want to reject libertarian ideas wholesale.

Liberalize to Prosper

The largest trends in the world reflect libertarian values. Communism is virtually gone, and few people still defend state socialism. Eastern Europe is struggling to achieve societies based on property rights, markets, and the rule of law. Honest observers throughout the developed world understand that the middle-class welfare states are unsustainable and will have to be radically reformed. The information revolution is empowering individuals and small groups and undermining the authority of centralized power.

Perhaps most importantly, the increasing globalization of the world economy means that countries that want to prosper will have to adopt a decentralized, deregulated, market-oriented economic model. You can’t avoid world markets in the 21st century; or if you do, you will be left out of the phenomenal economic growth that global markets and technological development will deliver.

So one reason that Japanese readers should be interested in libertarianism is very simple and practical: these are the ideas that drive the modern world, and you need to know about them. The other reason is that libertarianism offers to every country the promise of peace, economic growth, and social harmony. I hope Japanese readers will join American libertarians in working to restrain state power and liberate individuals, families, associations, and enterprises.