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14. The Flaw in the Market
- University Press of New England
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“To get rich is glorious.” With these words, Deng Xiaoping, premier of China, leader of the most populous Communist nation on Earth, ushered in the global capitalist era. In 1976, Mao Tse-tung, who’d exiled Deng for his pragmatism and openness to Western economic ideas, died, opening the door for the reformist Deng’s rise to power. Deng returned from his exile to Beijing’s halls of power in 1977 and seized the reins of China just a year later. Deng Xiaoping’s first actions after being restored to the leadership of China were remarkable departures from China’s Communist past. In 1977, he successfully pushed to allow Chinese capitalists to join the Communist Party. In 1978, he opened China to foreign corporations, purchasing aircraft from Boeing and allowing Coca Cola to begin selling its products in the country. In 1979 he began to unravel the system of communal farming in China. He lowered minimum quotas on Chinese farmers, gave them more control over what was planted, and allowed them to keep whatever profits they could garner from selling any production above and beyond their quota. In the next few years he would open China to foreign investments, create incentives for local managers based on the success of their state-run operations, and allow private businesses to operate for the first time since the Communists had taken over the country in 1949.1 Deng’s rise to power and his reforms, in a manner rather unnoticed by the West, heralded the end of the era of state-run economies and the final phase of capitalism’s takeover of world economies. Eleven years after Deng’s reforms in China, Mikhail Gorbachev’s attempts at political reforms in the USSR would lead to its disintegration and the end of the richest state-run economy on the planet. Two years later, in 1991, a nearly bankrupt India, in a move of desperation, dramatically loosened economic controls, allowed fourteen the flaw in the market 189 T h e F l a w i n t h e M a r k e t foreign companies in, and embraced capitalism. In those short thirteen years, more than a third of humanity would go from living in a state-run economy to living in a market-driven economy. Markets drive more of what happens around the world today than governments do. Virtually all of the world’s $73 trillion in economic activity goes through markets of some sort. By contrast, the world’s governments spend around $25 trillion a year. And much of that they spend by buying goods and services on the open market. Nor is this a bad thing. In fact, in almost every case, the arrival of markets— when coupled with property rights, the rule of law, and good governance—has led to massive reductions in poverty and increases in living standards. In 1978 China had an estimated 270 million people living in poverty. Seven years later, that number was less than 100 million. Deng’s reforms amounted to the largest and fastest sweep of poverty reduction ever seen within a single generation.2 India’s reforms may have topped it. In 1990, 50 percent of Indians lived in poverty. Today it’s less than 25 percent, and the UN believes that number will be 22 percent in 2015.3 Per capita economic growth rates doubled in China and increased by half in India after their markets were opened and competition was introduced. Even in Russia, which had the rockiest road to reform, the transition to capitalism has roughly doubled per capita wealth. Wherever market-based systems have gone head-to-head with command economies, the market-based systems have come out on top, with greater innovation, greater economic growth, and greater welfare for the people within the system. Consider the Cold War between the USSR and the United States of America. On paper, the USSR and the United States started out at the end of WWII as well-matched rivals. Indeed, the USSR had larger stockpiles of coal and iron, two and a half times the land area, a 20 percent larger population, more college graduates, more scientists, more engineers, and vastly more oil than the United States. By most measures, the USSR had the upper hand. If we were predicting the future based on natural resources, we would have predicted that today the Soviet Union would be the dominant super power. Yet in the forty-five years that followed, the...