The Economics of China, Part 2 of 3: The Socialist Era, 1949 to 1978

This presentation is the second part of a three-part series presented by instructor Dr. Jason Dean, Associate Professor of Economics at King’s University College at Western University. Using China’s economic history as its central case study, the series helps legal professionals understand how markets, government planning and economic incentives shape public policy and long-term development. 

Between 1949 and 1978, China built a command economy from the ground up and ran it hard, removing the mechanisms a market uses one at a time. Because the mechanisms were removed one at a time, in a documented order, the period is an unusually clean test of the argument the first course made in the abstract. 

The hour opens in 1958 with a steel campaign that went from thirty thousand backyard furnaces in July to six hundred thousand by September and close to ninety million people by December, producing metal no factory could use. Two questions are put at the start and answered later, once the framework is in place. Was this allocatively efficient? Would it have happened in a market? 

The course then goes back to what 1949 inherited, which was a wrecked capital stock, a worthless currency, and an economy where labour was abundant and capital was scarce. It follows the construction of the planned system through four changes phased in by 1956 and treats them not as four policies, but as the systematic removal of every mechanism a market uses to correct itself. Prices stop measuring scarcity and start carrying instructions. Quotas replace performance with tonnage and then begin to corrupt the information they are built on. Exit closes on both sides of the labour market, so nothing moves away from a bad use. Land title is handed to three hundred million peasants in 1950 and taken back by 1956. 

The central section is the famine of 1959 to 1961, and the account is more precise than the familiar one. Production did fall by about fifteen percent in 1959. That is not the explanation. Grain production per head ran near two thousand four hundred calories a day in 1959, and food actually available, after seed, feed, waste and exports come out, fell from just over two thousand one hundred in 1957 to about fifteen hundred by 1960. Fifteen hundred calories is serious hunger. It is not a level at which tens of millions of people have to die. What killed people was a procurement system that set each region’s quota in advance from expected output, so the share taken rose as the harvest fell and the regions that normally grew the most surrendered the largest quotas exactly when their own harvests failed. Famine severity was positively correlated with food production per person. The most productive regions died worst. Alongside that, the course sets out why output fell at all, including the diversion of a third of the farm workforce, the collapse of the incentive to work inside the commune, and the imported agronomy of Trofim Lysenko, who rejected genetics. 

The final sections follow the retreat of 1961, the Third Front, the Cultural Revolution and the drift of the 1970s, and close on the investment record for the whole period. Average growth of about eight percent a year conceals swings from plus fifty-four percent to minus fifty-two, and every one of those turning points carries the name of a political campaign rather than an economic change. 

The failure is treated throughout as structural rather than moral. Every mechanism described would have operated with entirely decent people in every chair, and the comparison the course insists on is never markets against an ideal government, but imperfect markets against imperfect governments.