At the beginning of economic restructuring in China in 1978, Marxist theory organized virtually all economic discussion in China.  However, by 2010, neoclassical economics and related schools of thought, such as “new institutionalist economics,” had become the hegemonic paradigm. Neoclassical economics came to dominate not only graduate and undergraduate economics education but also the editorial policies at China’s leading economic journals, as well as the credentials needed to secure a teaching position at China’s leading universities.  My recent article explores the implications of this paradigm shift for Chinese economic policy.

There are three key related questions: (1) What are the main methodological differences  between Marxist and neoclassical economics that lead economists to think differently about economic questions? (2) How did these methodological differences lead to different policy recommendations for Chinese economic development? (3) What were the interests and institutional forces promoting this paradigm shift?

Neoclassical economic theory was not only “taught” to Chinese students by Western economists in visiting lectures and at economics conferences financed by institutions like the World Bank, the Ford Foundation, and the IMF. Consistent with Gramsci’s concept of ideological hegemony, the internalization of neoclassical thinking was also an experiential residue of practical interaction with Western accountants, bankers, and lawyers, journalists, and business partners. The triumph of neoclassical economics was also partially a shift in the language used to talk about economics, reflecting the spread of a new discourse that was helpful for participation in international commerce, international credit markets, global planning discussions, and international academic conferences.  I only briefly address the institutional forces inside and outside of China that promoted the expansion of neoclassical economics here, but discuss the topic in greater detail in the second chapter of my book entitled Competing Economic Paradigms in China: The Co-Evolution of Economic Events, Economic Theory and Economics Education, 1976-2016 (2017).

The recent article begins with a focus on what is distinctive about Marxist and neoclassical ways of thinking about economic issues, highlighting, for example, the difference between methodological individualism and holism in economic analysis. The bulk of the article focuses on the implications of the paradigm shift for discussing concrete policy issues, such as the merits of state-owned enterprises (SOEs) in China, the nature of inequality in China, and the relationship between capitalism and the environment. I will focus in this post on the paradigms’ different discourses about SOEs and recommendations for future economic policy.

One of the major differences between the Chinese economy and Western capitalist economies is the significant role of state owned or state-controlled enterprises in China. Asking many neoclassical economists about the desirability of large SOEs often seems like waving a red flag in front of a bull. The economist gets ready to charge, marshaling theoretical arguments and classical examples of failed experiments with public ownership. Like a vampire that rises from the dead, the continued presence of SOEs in China seems to haunt neoclassical economists, who perpetually try to drive a stake through the SOEs’ inefficient hearts.

For decades, there have been alarming warnings from neoclassical economists that the Chinese economy is threatened with imminent collapse due to the inherent inefficiencies of SOEs and the debt fragility of the Chinese financial system it creates. The spirit of classical liberalism animates these warnings. The latter’s assumptions about human nature and institutional evolution make it difficult to imagine how public ownership, or egalitarian-oriented compensation policies, or cooperative-oriented institutional designs could be economically viable in the long run. From a classical liberal perspective, the challenge is to “solve the agency problem,” and nothing works as well as private property and the profit motive. Unless there are self-interested owners, economic efficiency will suffer, or as Milton Friedman counseled the Chinese, “Do not compromise by partial privatization. … If the shift can be achieved, transitional costs will pale into insignificance…. All of the peoples of the world would benefit.”

Marxist economists begin with very different assumptions about human nature and the historicity of social institutions, a starting point that raises the possibility that publicly owned institutions could efficiently pursue social objectives. Marxist assumptions also suggest that it may be possible to mobilize voluntary cooperation with weaker material incentives than those implied by classical liberalism.

It has not been possible to resolve debates between neoclassical and Marxist visions of Chinese SOEs by appeal to empirical evidence. This is partly because it is impossible to do controlled experiments in the social sciences. It is also because of the importance of counterfactual arguments (different “what ifs”) to conclusions about the viability of China’s SOEs, and the importance of different assumptions about future trajectories.

For example, neoclassical critics of SOEs minimized the positive aspects of government-owned firms’ past performance. They admitted China grew very rapidly with large SOEs, but their counterfactual claimed the country could have grown even faster if only the economy had been capitalist. The critics argued that the SOEs’ historical successes were unsustainable. The SOEs’ improved performance allegedly rested on harvesting onetime low-hanging fruit, such as the deployment of a backlog of obviously superior new technologies. Alternatively, the SOEs’ tenuous viability was due to unfair government favors. As for those SOEs that genuinely succeeded (without subsidies and in sustainable ways), they were really “red hat firms,” that is, private firms in disguise.

In contrast, Marxist and other theorists more sympathetic toward public ownership fit the same events into a different framework, one equally resistant to definitive refutation by empirical evidence. They argued that the SOEs’ increase in total factor productivity, technological sophistication, and product quality during the 1980s demonstrated that publicly owned firms could operate efficiently. They pointed to recent fears in the Western popular press and political circles that state-backed public firms in China may dominate future high-tech industries, fears that seemed to contradict the enfeebled portrayal of the SOEs. It is hard to argue at the same time that China’s SOEs are the Achilles’ heel of the Chinese economy and the dynamic heart of China’s emerging AI, green energy, and internet competitiveness, if not outright leadership. SOE defenders also argue that the enterprises successful reliance on voluntary cooperation and weak material incentives in the 1950s demonstrated that nonmaterial motivations could succeed. These conditions were subsequently undermined by the disillusionment accompanying the destructiveness of the Great Leap Forward and Cultural Revolution, but they demonstrated the feasibility of organizing production in a cooperative fashion. Similarly, the SOEs’ lower profit rates often reflected a nonlevel playing field, due to the SOEs’ higher pension obligations for retired workers, greater responsibility to employ surplus labor during economic slowdowns, higher tax rates, and higher environmental and safety standards than those imposed on private firms. The SOEs’ performance looks even better if narrow measures of firm success, such as profitability, are augmented to include other metrics such as equity issues, job security concerns, subjective measures of well-being, Amartya Sen’s index of capabilities, and dynamic long-run issues involving learning effects and human capital accumulation.

The recent paper concludes with a discussion of the different policy agendas that emerge from the different framings offered by neoclassical and Marxist economics. For the neoclassicals, the key task is completing the transition to capitalism,  through policies such as:

  • Privatization of the SOEs, rural land ownership, and the banking system
  • Deregulation of interest rates, labor mobility, and capital flows
  • Reinforcement of social institutions protecting property rights
  • Strengthening markets for control of Chinese corporations (to subordinate all participants in the economy to market discipline)
  • Increasing openness to foreign capital

Debates among neoclassical economists usually revolve around how fast to move to a deregulated capitalist economy. This is a continuation of the “gradualist” versus “shock therapy” debate. It is a subset of the larger debate between laissez-faire-light (which includes support for modest “industrial policy”) and laissez-faire-strong neoclassical economists

In contrast, there are two different Marxist agendas for future economic policy in China.  “Primary stage of socialism” theorists advocate using capitalist techniques in order to advance the “forces of production.” Except for prioritizing the maintenance of power by the Chinese Communist ‘party, their recommendations often resemble neoclassical thinking. The alternative Marxist agenda calls for returning the focus of Chinese economic policy to building socialism. This agenda calls for:

  • Reviewing how different economic policies can advance the construction of socialism in China, alternatively expressed as creating a “socialist social structure of accumulation” (SSSA)
  • Addressing exploitative relationships in the labor market, both in terms of income inequality and power relations in the workplace
  • Reevaluating China’s position within global capitalism and the world division of labor

Steve Cohn is Charles W. and Arvilla S. Timme Professor in Economics at Knox College.  His teaching and research centers on methodological debates in economics and alternatives to the dominant neoclassical paradigm.

To read more, see: Steve Cohn. “The Implications of the Triumph of Neoclassical Economics over Marxist Economics in China” in Review of Radical Political Economics 2020.

Image by Magalie L’Abbé via Flickr (CC BY-NC 2.0)