Xiaogang village signed a secret contract in 1978 and China began to grow

Picture a mud-walled farmhouse in Anhui province, winter of 1978, and eighteen farmers sitting in the dark. They are not plotting a coup. They are plotting a harvest. The document they are about to sign is so dangerous that they agree, in writing, that if any of them is arrested for it, the others will raise his children until they are eighteen. That is the opening scene of the modern Chinese economy: not a five-year plan, not a party congress, but a handful of hungry men who wanted to keep some of the grain they grew.

Hold that picture in your head, because it answers a question that every defender of central planning would like you not to ask. When China became rich, who did it? The Communist Party likes to say it did. The record says something different. The record says farmers, traders and factory-town entrepreneurs did it the moment the Party took its boot off their necks, and that the boot has been creeping back ever since.

The terms of the argument

Let me define terms, because this debate is usually fought in fog. Central planning is an economy in which the state decides what is produced, in what quantity, at what price, and who gets it. A market economy is one in which individuals and firms decide those things through voluntary exchange, with prices carrying the information. Collectivization is the forced pooling of private farmland and tools into state-directed units. The claim of this post is simple and falls into four numbered premises.

1. Mao Zedong's collectivization and the Great Leap Forward produced one of the worst famines in recorded history.
2. The turn toward growth began when peasants were allowed to keep the proceeds of their own labour, which is a property-rights reform and nothing else.
3. The reforms that followed, under Deng Xiaoping, were a retreat from planning, and each retreat was rewarded with growth.
4. The Party's continued political control is not the reason the reforms worked. It is the reason they are fragile.

If those four hold, then China is not a counter-example to the free economy. It is the largest single demonstration of it in human history.

Premise one: the famine that collectivization built

In 1958 the Communist Party launched what it called the Great Leap Forward. The idea was to leap from a farm economy to an industrial one by organizing the countryside into giant people's communes, where families gave up their plots, ate in communal canteens, and were told to produce steel in backyard furnaces. Local officials, afraid of being branded rightists, reported harvests larger than the real ones. The state then took its share of grain based on the fantasy figures. The grain that remained for the farmers who had actually grown it was not enough to live on.

The famine that followed ran from roughly 1959 to 1961. Estimates of the dead differ, and scholars who have worked in the Chinese archives disagree with each other. The figures run from the mid-teens of millions at the low end to more than forty million at the high end. Even the low end is a catastrophe that dwarfs most wars. Let me say that again in a way no one can miss: a government killed more of its own people by planning the harvest than most governments have killed in battle.

Notice the mechanism, because it is the same mechanism in every planned economy. The planner cannot see the field. Officials lower down the chain tell him what he wants to hear. He sets quotas on that false information, enforces them with the police, and discovers the truth only when the villages are quiet. In a market, a farmer who misjudges his crop loses his own money, and a price tells everyone else immediately. In a plan, the error is imposed on everyone and the signal is punished. If you want the longer version of why prices are signals, see profit is a signal, not a sin, and what a loss tells a company.

Mao died in 1976. The countryside he left behind was poor, crowded and still short of food.

The steelman

The best case for the other side deserves a fair hearing, and it goes like this. China in 1949 was a wrecked country, torn by decades of invasion and civil war. A strong state, the argument runs, was needed to impose order, build roads, schools and clinics, and lay down the industrial base on which later growth stood. Life expectancy did rise in the Mao years. Literacy grew. The reforms of the 1980s succeeded, the defenders say, because the state had built the foundations first, and because the state, not the market, directed the later investment in infrastructure.

That is not a foolish argument, and part of it is true. Peace and basic public health matter to growth, and the end of the civil war brought some of both. But notice what the argument has to hide. It cannot explain why the same country, with the same state, the same schools and the same roads, grew slowly under planning and fast when planning loosened. Foundations are not an explanation when the building did not go up until the plan came down. And it cannot explain why the largest economic catastrophe in the country's modern history, the famine, was produced by the planners at the height of their power.

Premise two: the contract in Xiaogang

Now back to the farmhouse. Xiaogang was a poor village in Fengyang county, in Anhui, a region with a long tradition of sending its people begging in lean years. Under the commune system the farmers worked in teams and were paid in work-points regardless of how much any one of them produced. Everyone understands what that does. If you get the same share whether you labour or loaf, you will find that you have a great many urgent errands.

In the winter of 1978, by the account that has become the standard one (sources differ on the exact date and some say seventeen households), eighteen heads of household signed a secret agreement to divide the collective's land among the families. Each family would farm its own plot. Each would hand over its quota to the state and the collective, and keep whatever was left. The signers pressed their fingerprints to the paper, and that pledge about the children is the part that tells you how afraid they were. In that place and in that time, dividing the land was a crime that could end in prison, or worse.

The result was not subtle. The village's harvest the next year is reported to have exceeded its total for the previous several years combined. Whatever the exact figure, the direction was beyond dispute. People who own the margin work the margin.

Here is where the story turns from a village to a country. Local officials in the area chose not to prosecute, and the question of what to do reached the higher levels of the Party at precisely the moment the Party's own leadership was changing. In December 1978 the Third Plenum of the Eleventh Central Committee confirmed a shift of priorities toward economic construction, and Deng Xiaoping emerged as the dominant figure. The experiment that began as a crime was tolerated, then allowed in poor areas, then spread.

Premise three: the household responsibility system

What began in Xiaogang became known as the household responsibility system. Families contracted with the collective for land, delivered a fixed quota to the state, and kept or sold the surplus. Over the next few years it spread across the country, and by the early 1980s it had become the dominant form of farming. The communes themselves were dissolved in the following years, most of them by the end of 1983, and what had been called people's communes went back to being townships.

Look at what had actually changed. Not the land, which remained formally owned by the collective. Not the Party, which remained in charge. What changed was the right to the marginal bushel. After the quota was met, the extra was yours. That is the whole reform. A property right, narrow and imperfect, restored the link between effort and reward, and farm output rose across the country in the years that followed. Food that had been rationed became plentiful. Rural families began to produce more than they could eat, and discovered that they could sell it.

Once there was a surplus, there was trade. Once there was trade, there were rural enterprises, small workshops and township factories, which in the 1980s became one of the engines of growth. Nobody in Beijing designed them. They emerged because people with extra goods and extra hands found each other.

Shenzhen, 1980

The cities came next. In 1980 the government designated Shenzhen, a fishing-and-farming area beside Hong Kong, as one of its first special economic zones. Zhuhai, Shantou and Xiamen were designated alongside it. Inside those zones, foreign investment was welcomed on better terms, firms could hire and contract more freely, and market pricing was tolerated well beyond what the rest of the country enjoyed.

Think about what a special economic zone is, because the phrase is a confession. It says: we have a country where our own rules do not work, so we have fenced off a small piece of it where the rules are different, and we are watching to see whether the other rules do better. Shenzhen did better. A place that had been a modest border area became one of the great manufacturing and technology cities of the world. The central planners in Beijing could not have predicted that outcome, and they did not plan it. They permitted it, and then, to their credit, they allowed the lesson to spread.

I would argue that is the single most important sentence in the story: they permitted it. Every large gain in the reform era came from permission, not direction. Permission to farm for yourself, to open a workshop, to hire, to export, to keep foreign earnings, to let a price move. Deng's reforms were a long list of things the state decided to stop forbidding. That is not the language of planning. It is the language of liberty on a leash.

Premise four: the warning in the leash

So the Party's defenders say, look, the Communist Party presided over all this growth. Therefore the Communist Party model works. Anyone who has ever heard a Soviet-era slogan should feel a chill of recognition at that sentence, because it is the same trick, played in a new key.

Here is the rebuttal in four points.

1. Timing. Growth followed the retreat from planning, not the planning. The Party had thirty years of full control under Mao and produced a famine. It produced a boom only when it relaxed control over farms, prices, trade and enterprise.
2. The comparison. The reform era did not just lift China. It lifted places that were not under Party control at all, such as Hong Kong, Taiwan and South Korea, which had grown through markets and trade decades earlier. The pattern holds across very different governments. What they share is not the politics. It is the economics. For a controlled comparison of the same idea, read Two Germanys and two Koreas, the natural experiments that socialism lost.
3. The reversal. Where the Party has expanded its direction of the economy in more recent years, through state champions, directed credit and political oversight of private firms, the results have been the familiar ones: misallocated capital, empty developments, and a dependence on the state's favour that makes every businessman a supplicant. I will leave the particular figures to the reader to check from reliable sources, because they move, but the mechanism is the one Mises described, and it does not respect borders.
4. The cost of the bargain. The Party that loosened the economy did not loosen itself. In 1989 it used the army against its own students in and around Tiananmen Square. A system that permits markets and forbids dissent has made a bargain: you may get rich, so long as you do not ask who is permitting it. Permission that can be revoked is not a right. It is a loan.

That last point is where the story becomes a warning rather than a model. The liberty that China's farmers and entrepreneurs have enjoyed is the liberty of a tenant, not an owner. Our Declaration says that governments are instituted to secure rights that people already have. In China, the rights arrive by grant, and the grantor can withdraw them. That is the oldest tyranny in the world, only more comfortable.

What the left gets wrong about this story

I want to be careful here, because there is a clever version of the opposing argument that I have not yet answered. It says: China proves that you can have markets and a strong state together, and that this is better than the American model of limited government. The state steers, the market rows.

Let me answer it on the merits. First, the evidence of the steering is mixed at best. For every success the state claims credit for, there is a ghost city, a bad loan, or a failed subsidy that no one celebrates. We hear about the winners because the winners are advertised. Second, the argument ignores the thing that actually changed in 1978, which was not the strength of the state but the weakness of its grip on the farm. Third, and most important, the American argument for limited government was never that limited government is the fastest route to a high growth rate. It was that people have rights, and that a government with unlimited power over the economy has unlimited power over everything else. A rising GDP does not answer that objection. A nation can grow and be unfree. We should not mistake the first for the second.

And let us have a little fun at the expense of the idea. If central planning were the secret of prosperity, the Chinese Communist Party would have discovered it in 1958, rather than in a farmhouse in 1978. The Party tried planning at full strength with the most ambitious scheme any government has ever launched. The reform era is the Party's quiet admission that it was wrong, delivered through actions rather than words, which is the only kind of apology that regimes like that one are capable of.

The Founders' test

Measure all of this against the American tradition. John Locke, whom our Founders read closely, argued that a man has a property in his own labour and in what he mixes his labour with. The Fifth Amendment says no person shall be "deprived of life, liberty, or property, without due process of law," and that private property shall not be taken for public use without just compensation. The Founders did not discover that property rights produce prosperity by studying Anhui. They started from a moral principle and got the prosperity as a result. The Chinese farmers started from hunger and discovered the principle by trial and error. Same destination, longer road.

That is why the Xiaogang story matters to us. It shows that the argument for property and exchange is not an American prejudice. It is a discovery that people make whenever they are allowed to try, under every flag and in every language. It also shows how little it takes. Eighteen farmers, one sheet of paper, and a rule about the surplus.

Compare it with the programs we are told we need at home. The planner promises better outcomes if only we hand him the dial. The farmers of Xiaogang already ran that experiment, and so did the commune cooks, and so did every country that has tried to put a committee where a price should be. For other places where the experiment was run and the results recorded, see cuba's ration book and more than sixty years of promises at the bodega and plymouth tried common property in 1621 and nearly starved before 1623. The Pilgrims, by the way, ran a version of the same experiment in their first years at Plymouth, and by Governor Bradford's account they set it aside in 1623, which means that the lesson was learned by a few dozen colonists on a cold coast before China's Communists were a gleam in anyone's eye.

What it means for the argument at home

Three practical conclusions.

First, when someone says that a big program will work because the government is determined, ask what the incentive is for the person at the bottom of the chain. If the answer is "he will do it because he is told," you are in Fengyang county in 1958. If the answer is "he keeps part of what he produces," you are in Xiaogang in 1979.

Second, when someone cites China as proof that central control delivers growth, ask him to name the growth that came from the control. The honest answer is that the growth came from the exceptions.

Third, and here the constitutional point returns: a rule of law that protects property from the government is worth more than a government that promises to be generous. The Party can grant and revoke. Our Constitution does not leave the grant to the grantor. That is why it is the better arrangement, and why it is worth defending even when the economic argument is not on the front page. You can find the Fifth Amendment text and the rest of the document at the Constitution page.

The case in brief

1. The Great Leap Forward and collectivization, from 1958, produced a famine in 1959 to 1961 that killed millions, and it was caused by planning, not by weather alone.
2. The turn toward growth began in 1978 when farmers at Xiaogang, and then the whole country, were allowed to keep the surplus above their quota, which is a property right.
3. Deng Xiaoping's reforms, including the household responsibility system and the Shenzhen special economic zone of 1980, were a long series of permissions, each one a retreat from planning.
4. The Party's control over political life is not the source of the boom, and it makes the gains revocable, which is why China is a warning and not a model.

What you can do: read the Fifth Amendment in the Constitution, then ask your own state legislator what the state's rules on property and licensing do to the person who wants to start something small.