Capitalism and Entrepreneurship in Socialist China

Capitalism and Entrepreneurship in Socialist China

[MUSIC].>>Welcome back to our Inner Circle. I’m really excited to
have Adam Frost here. So we had a chance to meet him today. There’ll be a reception
right after this. Awkwardly it won’t
happen in the hallway because we have no hallway. So we will just make our way out to the entryway across the elevator, windows, and river,
and food, and stuff. So if you haven’t had a chance to talk to him there’s time then and I think we may also be
able to have you back tomorrow for lunch
that’s possibility.>>Yeah.>>So you can find him. Adam is a PhD student at Harvard. He’s in the History Department
and the East Asian Languages Department. Yeah, I’ll
wait for the [inaudible].>>A whole crowd yeah?>>No it’s good. You get
a permission. You don’t.>>[inaudible].>>All right. Adam Frost is
a PhD student at Harvard. He’s in History and
East Asian Languages. I believe you came across
Jennifer at some point and she was impressed and excited
and wanted you over here. She’s sorry she couldn’t
be here for a talk. He’s also a Fulbright
Student Award Winner. He is currently spending
a semester and Helsinki but we’ll have him back in Boston for
next year as he finishes up. Also a documentary you made
called The End of Bitterness.>>Yeah.>>About.>>Everyday Lives of
Beggars in Northwest China.>>I want to see that too. So thanks
so much for coming and [inaudible]>>Great. Thank you.
So today I’m going to talk about my research
on the History of Entrepreneurship and
Underground Capitalism in Socialist China and how I’m using unconventional sources
and new methods to explore the origins of
China’s economic rise. But first, let me begin with a story. So about a two hours drive North of Shanghai in the middle
of the countryside where it’s all fields and factories, there’s this 70-story luxury hotel that just rises out
of the country scape. As you can see a top
this hotel there’s a golden sphere like
the Eye of Sauron. Inside of this sphere is
a revolving restaurant which is staffed exclusively by
North Korean waitresses. Here one can dine on
fresh sashimi and French wine, and enjoy a panoramic view of the beautiful
surrounding countryside. Ten floors below that, there is a gold theme lounge. Everything’s gold, the walls
are gold, the floor is gold. In the middle of that lounge is
a one metric ton solid gold bull. It’s worth like 60
something million dollars. So this whole thing is a cathedral
of conspicuous wealth. It was built to celebrate the 50th year anniversary
of the founding of Huaxi, the wealthiest village in China. Huaxi is a strange place. It’s a mixture of
red theater and opulence. Everywhere in the village there
are statues of Mao Zedong standing next to Wu Renbao the
founder of the village. The streets of Huaxi
are lined by lane after lane of three-story European Villas. In front of every villa, there’s a BMW parked in the driveway. At the edge of the villa,
there’s this thing called the World Park which has a replica of Tiananmen
of the Great Wall, but also of the Statue of Liberty, Big Ben, the Arc of
Triumph and other things. In this socialist paradise everything is owned and controlled by
the village corporation. As long as villagers do
the bidding of the corporation and as long as they uphold
the reputation of their community, then they get to live
lives of socialist luxury. But what is most strange
about Huaxi is not the way it distributes
and performs its wealth, but the manner in which it became
so wealthy in the first place. So according to the myth
that is taught to every Huaxi child in school, the village’s rise
had everything to do with the indomitable Huaxi spirit, and the singular vision of the chief, the founder Wu Renbao. When the Huaxi brigade
was formed in 1961, it was a really poor community. Farmers lived in mud-brick houses and they formed tiny parcels of land. But under the leadership
of this guy, Wu Renbao, they bended together and they
built dikes and they dug irrigation networks and they
manually transformed the landscape. The story goes they eventually
made it amenable to agriculture. With more productive lands
they began accumulating surplus which they save and continually reinvested
in the community. After China’s opening
up and reform in 1978, the village voluntarily
decided to stay a collective. It continued to pour the whole of the community’s wealth into the creation of
new collective enterprises. Huaxi’s model, this
collective model of organization later became known as the Soon and Model of
Development in China. One of the major ways of
growth and development. After visiting Huaxi
for the first time, I became really interested in its history and in the truth
of its economic rise. So with the help of
some acquaintances, I was able to connect with a few elderly villagers there
and begin interviewing them, and they agreed to speak with me as long as I kept their names secret. These individuals began
providing a really alternative and more compelling
explanation for Huaxi’s rise. According to their accounts, during China’s socialist era, Huaxi was an epicenter of
elicit economic activity. In the wake of
the Great Leap Forward when the country was suffering from
severe shortages of food, clothing, other things, the village established a waste textile station. They began buying up
old clothes from villagers in the surrounding villages
and recycling it into cloth which they
then sold on gray markets. A few years later the village
hired a sitdown worker. A guy who had been
a factory worker in Shanghai and who was sent
down to the countryside. They hired him to help build
an Ironworks which they use to began producing
simple agricultural implements. By the start of the Cultural
Revolution in the late 1960s, Huaxi had already
accumulated enough capital from these enterprises to
purchase an industrial lye, a punch press, and other really
expensive metalworking tools. Such industrial equipment I was told was actually readily available. They bought it from the Navy. Naval officers were selling
it to communities in the area and helping them actually establish
underground factories. Then Huaxi began hiring
more “Sunday engineers”. These were experts who worked in
state-owned factories and stuff, and then on the weekends
they would go and contract out their labor
to informal enterprises. They began producing things like really high-quality drill bits and threading dyes
and things and then selling them all over
China to places as far as Liao in the North and
Sichuan in the West. So from these stories I learned that Huaxi’s rise really
didn’t have much to do with this so-called Soon and Model of Development or the Huaxi spirit. While it certainly took advantage of the market
reforms of the 1980s, growth was not initiated by them. Rather Huaxi’s success was
a product of the knowledge and networks and capital that it
accumulated during the socialist era. In other words, by
the time that China embarked on the process of
reform and opening up in 1978, Huaxi was already well
positioned to take off. So as I learned more about this kind of
untold history of Washi, I began to wonder if what
was true of the village might also be true
of China as a whole. I began to ask were there
entrepreneurs who continue to operate and innovate throughout
China’s socialist era. If so, what did the processes
of entrepreneurship look like? Where did they occur? What effects did they have on the overall development
of the Chinese economy? So these are really large
questions of course. But they’ve only been tentatively explored in the existing scholarship. Most studies have really focused on the political and
institutional structure of China’s socialist economy. They look at how key institutions such as the commune,
or the work unit, the down way, and the
household registration system, how are they operated? But much less attention has been focused on how the economy
worked in practice, on how people got things done when the formal system could
and often did fail. This is mostly due to the simple fact that these things are
really hard to study. Such topics demand new
sources and new methods that not all historians are
necessarily comfortable with. So three years ago, while I was visiting
a Chinese flea market, I came across some documents related to underground
capitalists in the 1960s. There were a dozen or so large
brown folders like this. Each of which concern the case of a so called speculator and profiteer
[FOREIGN] for Chinese people. It was people like these men. Who were prosecuted for
engaging in elicit commerce, or selling Russian coupons, or other economic crimes. Each of the cases that I found
they involved a summary like this, which spoke of the types of elicit economic activities
that these people were doing, on how much money they were earning, or what type of goods were involved. These cases dealt with
all manner of things. Some talked about
illegally produced textiles and illegally hunted furs. Some talked about
smuggled wristwatches. Others talked about musical
instruments and even firearms. So all kinds of things are being
traded in these illicit markets. When I asked the seller where
did you get these documents? He told me that he had bought
them from an archivist, in a nearby city when the archive
was doing it’s cleaning, and that they were part of
a much bigger collection. So after chatting with
him a bit more he agreed to take me back to his house, and I ended up purchasing
a whole set of materials. This was my first collection
that I bought. He agreed to introduce me to other merchants who
also had similar stuff. So over the next few years, I networked with a whole community
of these documents sellers. Both in-person and online. I procured tens of
thousands of pages, I think about
30,000-40,000 right now. Pages of materials related to underground capitalism
and socialist China. What I found is that
these kind of sources as opposed to
official state archives. They paint a radically
different portrait of how the economy
functions in practice. They show that throughout society, there were innumerable entrepreneurs
who are identifying opportunities to profit from inefficiencies in
the planned economy, and more generally just
to make things work. They offer accounts of for example, farmers who traveled
to cities to sell handicrafts to urban workers, or merchants who purchase
large quantities of goods and smuggled them to
other administrative regions, or even state owned factories that would procure goods
outside of the system of formal distribution and buy things at market prices rather
than state fixed prices. In other words, the documents
said that everywhere there were entrepreneurs who were filling
the voids in the socialist system. So since I’m still in
the middle phases of my research, I’m writing up
the dissertation right now, rather than attempt
to make a bunch of big overarching historical arguments, I’m going to show you how I’m
engaging with these sources, and how I’m using them to conduct both quantitative and
qualitative methods of analysis. I’ll argue that it’s exactly through the process of combining
different modes of analysis, that we can maximize
the utility of these sources. That we can ultimately arrive at deeper understandings of how the Chinese economy
actually function. Yeah. Sorry yeah.>>Are these documents just
about the people who got caught?>>Yes just that people
who got caught. Yeah.>>So you don’t know what fraction
that is of all the people?>>I can talk about that later, am writing papers on that, but yeah I mean basically no. These are the people that
selectively got caught by the state. Was there someone else?>>My question was, who
produced this documents?>>Yeah. These are
state agencies who are identifying and prosecuting
entrepreneurs in the economy. The underground capitalist
or as they call it speculators and profiteers. Yeah.>>Is the selling of this documents
under [inaudible] by itself?>>Yes you got to do
elicit economics, the study elicit economics. But it’s not just me, there’s other people that
are doing this as well. Collecting these documents, and using them to develop new insights
about the Malice economy. But I’m the first one to do it
for economic stuff. Everyone.>>In particular I mean [inaudible]>>Yeah. No these are totally elicit. The state doesn’t really care that I’m buying these because
it’s just too small. These aren’t central
government documents, these are local government documents. But basically what happened was the local government
agencies produce these, they conducted all of these investigations about underground
capitalists in the economy. They produced these
investigative reports and there’s other
documents there too. They housed them in local archives. But over time, just so
much stuff built up. The Maoist state was really good
about recording lots of stuff, and the archives filled up. So then they had to have an archival
cleansing to open up space. When that happened, it was during the 1980s and there
were paper shortages in China. So the state said, okay archivist turn instead of just burning them, turn your archives over to paper
pulpers who will pulp them, and recycle them, and we’ll
use them to produce new paper. But somewhere in
that chain of custody, from archivist to paper
pulper someone said, “I bet I can make a lot more money by selling these to
private collectors.” So they entered into
private circulation. Then I was able to track
down these collectors. The people who had
bought the documents in the 1980s and then
after you meet one, he can introduce you
to a lot more and then just working
through that network, I was able to find a lot
more of these documents buy them back and then basically
create my own archive. So that’s the gist. Yep.>>How much have you spent.>>I get that question
every time actually. I’ve spent about $7,000. Which I mean, it’s a lot for graduate student but it’s not
that much to build an archive. Okay so.>>How much is the
value for the paper?>>Nothing. I mean right. I
mean if these were pulp they would be five bags 10 bags. It’s worth nothing in
its weight and paper. But now they’re worth
a lot, the merchants are selling them to
historians like me. They realize they can game
us against each other too. So they’re making nice profits. So as I said, I’m going
to use multiple modes of analysis to engage with
these sources and to show how different modes of analysis allow us different lenses into how the economy was
functioning and practice. So let me move to
my first mode of analysis, which is the most traditional,
most established. The case study approach. The deep reading of
individual sources. So among the thousands of cases
of speculation and profiteering, that I’ve collected
there are a handful of exceptionally detailed ones which offer really unique insights into how entrepreneurs were making
economic decisions, and how they were also justifying
their actions to state actors. To illustrate what this looks like, and how these sources might be used, I’ll talk here about
the curious case of this man Chung Hung he’s a socialist
fashion designer. So Chung Hung was
an educated man who was born to a small capitalist
family in Hangzhou, and after graduating from
middle school he worked as an accountant for the government and later as a
management of the shop. Now after the communist
rose to power in 1949, he was persecuted because he had
ties to the former government. So he was sentenced to
detention and reeducation. But after he was released, he moved from Hangzhou
to Nanjing and the opened this the Hundred
Flowers Artisans Co-operative. He began producing clothing
patterns such as these. For Sale. Very fashionable
pants as you can see. Then he sold these to
socialist consumers. Socialist consumers of course, they had have Russian
coupons they bought cloth, and then they use these patterns
to sew their own clothing. Now, in 1965 a decade later, Chung came under attack as
an unrepentant capitalist. After a series of
lengthy investigations, the so called Market
Administration Office found Chung guilty of tax evasion, of underground printing
and marketing, and collusion with other capitalists
and counter-revolutionaries. So according to
the investigative reports, Chung was actually the ringleader of an elicit network of designers who produce transported
and sold quote and quote “outlandish clothing
patterns” such as these, very outlandish as you can see. Across 23 provinces and two autonomous
governing regions of China. So basically, the whole
of China. Yeah.>>[inaudible]>>They’re selling it
for money. I mean, there’s money in the Maoist economy, it’s not a cashless economy. So I’ll say, Chinese
products were so popular that not only did regular
consumers buy them, but even state-run shops began
purchasing them and selling them. Within the span of two years, he supposedly derived more than
3,000 yuan in illegal profits. This is an astronomical figure, and I’ll put that into perspective
in a little bit. Yeah.>>[inaudible] better is
that you can have cash, but without that ration
coupon [inaudible].>>So that’s not true for this. I’ll actually talk about
the coupon economy very shortly. For these, you don’t
need ration coupons to purchase them, you need receipts. You’re going to have to
have a receipt and a stub. It’s usually one enterprise
buys from another enterprise, and there has to be
a whole document trail. So it’s complicated, but basically, the currency they’re using is cash. So over the next 10 years, [inaudible] would be repeatedly
arrested, prosecuted, and punished for an array of
economic and political crimes. However, rather than submit, he resisted prosecution
the whole time. He wrote more than a dozen letters of appeal to higher government offices, defending his actions and
justifying his motives. In these letters, he argues that the real reason he was prosecuted by this local government agency is that he had out-competed
state-run enterprises. He points out a fundamental
contradiction in the government’s position toward individual enterprise. For
the Chinese speakers, [inaudible]. Although he and another handful of individuals,
about 148,000 people, in the Chinese economy
had been granted licenses to operate
independently as businessmen, he argued that if he actually created products that
the masses desired, if he did his job, then he would ultimately run afoul of state-run enterprises because they believe they could do everything. Such arrogance, he said, on the part of these enterprises had resulted in a general decline in the quality of goods
such as these patterns. As he explained, here’s
a quote from his case, “Now there are no good
clothing designs. Why is this? In Xuanwu District, the Red Flag Blueprint Cooperative
struggled to attract business, so they turned to a local textile company to
supply them with patterns. However, they soon found that
the patterns the company created did not suit
the demands of the masses. The designs weren’t good-looking, and the variety of
articles was too limited. As a result, sales were sluggish, and they soon suspended production.” I love this last line,
“In this business, there is no shortage of
arrogant people who think they can do everything themselves and end
up failing halfway through.” So this is a pretty
damning critique, right, of the formal socialist economy
and the state-run enterprises. In these letters of appeal, this is just one of, like I said, about a dozen or so, [inaudible] is arguing that there are
fundamental limits to the capacity of state-run enterprises and
large-scale collectives to satisfy society’s demands. He says, “No matter how skilled their employees or how efficient
their factors of production, there are certain tasks
such as the design of clothing patterns that they’re
simply not equipped to handle.” He said, “This is because
they’re too far removed from the people they’re ostensibly
producing clothing for.” One more quote, last quote,
“When designing clothing, one cannot create as one pleases, nor can one work while isolated
from sources of information. One must unify the social
habits and customs of one’s country with knowledge about the human form and modern style. If one does not proceed in this way, then one will produce
bizarre clothing that is unsuitable for the masses. Therefore, in addition to consulting other countries’ designs as well as the intrinsic characteristics of Chinese ethnic style,”
I love this part, “I also dive into the realities of life by visiting every clothing shop, by listening with an open heart
to the suggestions of customers, by learning what styles
the masses desire, and by exchanging experience
with others in my trade. It is from these aspects that I accumulate knowledge and over
the passing of months and years, innovate new techniques that
improve the quality of my work.” So I think this is pretty amazing. This is a guy writing a letter
of protest to state agencies, and he’s defending
his entrepreneurial ethic. We see this so clearly
actually in his work. So here, we have nine variations on the design for long-sleeve shirts that are designed for
the laboring masses. So we notice that these shirts
are supremely practical. I mean, they have
high collars and big pockets. The practicality is further
highlighted by the fact that the models are shown clutching
hoes and their lunches. In this illustration, the imagery
is even more over, right? The person at the top right is
spooning out slop to her pigs. The person here on the left is
gazing out over her flock of sheep. Yet critically, these designs
are also fashionable. The clothing is much shapelier
than Zhongshan suits. There are also many variations
on a single style. The designs are situated within
scenes of everyday life. As we can see here, the young shepherd is standing in a particularly fashionable pose that not only accentuates
her short-sleeve shirt, but also shows how it can be stylishly paired with
trousers and loafers. It is these elements of fashion, based on intimate knowledge
of consumer desire, that enable [inaudible] to
generate such great demand for his designs and why
businesses throughout China, including the state-run
department stores, were eager to buy his products and then have them
on offer to their customers. So individual cases like that of Mr. [inaudible] reveal that the
individuals who are prosecuted as so-called speculators and profiteers
in the economy were often entrepreneurs who
created very real forms of value in a socialist economy. Through the utilization
of their tacit knowledge and the enactment of
different types of value, they produced and marketed goods that consumers ultimately desired. Moreover, entrepreneurs
like [inaudible] not only subverted state control of
production and exchange, but they actively challenged it. By co-opting Maoist discourse and appealing to
the needs of the masses, [inaudible] was able to justify. He attempted at least to
justify his actions to the state and legitimize
his contributions to society. So we’ve seen now how this case study approach
can, yeah, go ahead.>>Is it a single merchant study, or do you observe any kind of change of his behavior
across the time frame?>>Of this one individual?>>Yeah, or do you have
a multi-sample study?>>So no, this is
explicitly not multi-sided. As I said, this is the most
traditional form of analysis. That’s a case study, a
classic, and, of course, it’s much more detailed
than this, but this is my limited
presentation, right? So that is how most historians actually would
do this kind of research, right? They’d pick five of these cases, and they would do very deep readings. I mean, his case is 800 pages long, it’s four giant tomes
of investigation. They just keep investigating him, keep prosecuting him over 15 years. This is the kind of
insights, I think, that you can derive about entrepreneurial processes through
the deep reading of materials. But now, I’m going to move on to
a different type of analysis, much more like the one
you’re suggesting. So we’ve seen now how this case study deep-reading approach can yield new insights into socialist
economic practice. However, this method, as I’m sure you’re implying,
faces severe limitations. When reading a handful of
cases or a single case, it’s often impossible to really
make sense of the actions of individuals because you
don’t know how they’re situated within
broader networks of activity. Worse still, you can’t talk
about is generalizability. Is this guy the exception, or is he one of hundreds of
fashion designers in Maoist China? We don’t know by just
reading his one case. So it’s for these reasons that we need to turn to
a second mode of analysis, the kind of meso reading of
larger collections of sources. Here, I’ll show how by reading dozens and dozens of cases of speculation and
profiteering together, we can begin to identify certain patterns in the modes
of entrepreneurship. To illustrate that,
I’m going to focus on one particular sphere of
illicit economic activity, the trading of ration coupons. Yeah.>>Can you give us
some 10-second lesson on how money [inaudible] money
versus coupons?>>My next paradox. So in the 1950s the Chinese party, communist party, enacted systems of formal rationing and distribution. At first, this began for products like grain,
really core products, but then it slowly expanded to other commodities such
as cotton and coal, and for every one of
these core commodities, the government agency would print
and distribute ration coupons. So ration coupons are a little bit different than
what most people think, and maybe the Soviet context. So in the Chinese context they’re
called priceless securities, that were theoretically valueless, and they could not legally
be bought, sold or traded. Coupons functioned as
entitlements to make a certain purchase of a designated amount of good
at a state fixed-price. So when a consumer would
go to a state run shop, they needed to come with
both coupons and money in hand. Without the coupon, you’re
not entitled to a purchase, and without the money you can’t
exercise that entitlement. So the coupons and the money work
together in the economy. So the basically
the formal circulation of coupons looks something like this. State agencies at all levels
would print coupons, they would distribute them to local households or through
people’s work groups, and the households would
then redeem them at a number of state agencies
or state shops, and things. So this whole system kept coupons circulating within
a really limited region, within a single county, within a single city,
something like that, and this theoretically
tied socialists consumers to their places
of household registration. If you’re a farmer who doesn’t have a ration coupons for this city, you’re not going to be
able to find food, right? That’s the idea, keep
people locked down based upon where they’re
being issued coupons. However, much to
the vexation of the state, these coupons became objects
of private exchange, and entrepreneurs like
this guy would buy up coupons, and then circulate them
outside of formal channels. So again here’s that formal system, and here’s how
the most simple form of illicit circulation would work. So in a simplest type of circulation you had
local coupon traders like that guy I just showed you who would
travel from village to village, and they would buy up coupons
from individual households, and then resell them
to other households. This is really important,
some households had more coupons than they needed, other households were like
on the verge of subsistence. If you were a farmer and had
five children or something, or a factory worker
and had five children, you may not have enough coupon to feed everybody but if
you only had one kid, you’re probably getting more than you actually need to support
the whole family. So these merchants helped
redistribute them between households. Some traders were also
a little bit more entrepreneurial, and they would collude directly
with the state agencies, and they would just buy
a whole coupon books, large quantities of coupons, and then recirculate them
on a much larger scale, and these activities
helped alleviate, like I said the maldistribution
of goods within communities. But they were also more complex
types of circulation that helped redistribute
coupons across space. So when local traders accumulated
a large supply of coupons, instead of selling them
directly to households, sometimes they would resell
them on to wholesale brokers, and these brokers
were specialists who identified regional differences
in ration coupon prices, and then they would recirculate them from areas of lower to higher value, their arbitraging prices
across time and space, and this involves smuggling
the coupons across these administrative boundaries which they did through a number of methods. One case I have a ration coupon guy had a big cart full of cabbages, and he had cut
all the cabbages in half, chord them out and then
stuff them full of ration coupons and then
glue them back together. So they used all methods to try to illicitly circulate
these across space. In this second type of
a more complex circulation, the brokers typically
wouldn’t sell them on directly instead they would
pass them onto an intermediary, a group of people, that are sometimes referred to
as coupon runners, and these are guys who are situated
within the local communities. They’re usually young guys with not much capital but
they know everybody, so they know who to
sell the coupons to, and these coupon brokers would for
example resell some of them to the bosses of underground factories that needed to be able
to feed their workers. Others would sell
them to labor gangs. So these guys would hire a whole groups of workers
from the countryside, illegally transport them to the city, and then contract out their labor
to formal enterprises, so they needed coupons to
be able to feed them again, and others still sold them
to black guesthouses, and these were basically
underground hotels, elicit hotels, and elicit hotels would maintain stocks of
coupons to sell them to the businessmen and
merchants that would travel there doing
unsanctioned trade. Whenever they couldn’t sell
in bulk to these industries, they would just recirculate
back directly to households, and so through this system of circulation you can see we
have coupons being produced here that might be
recirculated all the way into a new administrative region, and to illustrate
briefly how I’m able to reconstruct these networks, I’ll just read briefly from
the self confession of one man who was one of
those coupon runners. So this guy in his account, when he’s explaining to
the government officials that are prosecuting him he said, “I began trading these coupons
priceless securities in 1963. At first my business
was small-scale but eventually I connected
with a coupon broker, one of those wholesale agents
by the name of Qin. I didn’t have any capital
at that time, so Qin kicked me the ball, i.e he gave me coupons on credit
without me paying him yet, and so he gave me 600
jin worth of coupons, I took them and sold
them off to my friends, second brother, two-tongue
water dog, some other guys, and by buying coupons at 0.58 yuan per jin and
reselling them at 0.6, I earned my first profit of 12 yuan.” So we get a lot of details here about how these networks
are connected, how these different actors
are engaged with each other, how everyone is earning
money on the spread. It is through the aggregation of individual accounts like
this that we can begin to, like I said reconstruct
these patterns of entrepreneurial activity, and as well their effects on society, and as we’ve seen in
this brief example, just the elicit coupon trade involved a whole gamut of actors who
were recirculating coupons, and who were also creating
an intersubjective basis of value for things that were supposedly declared
valueless by the state. By assigning market value to coupons in the form of
black market prices, they ostensibly helped transmit information about supply and demand, and recirculate these coupons
into more productive channels. So that’s the meso-level analysis
I was talking about, the reading of dozens of cases together but it’s
still pretty traditional. You’re still just looking at the information contained
within sources, and then juxtaposing
it together yeah.>>[inaudible] the governments
tie these coupons to individual IDs instead of just cash because that would
have prevented this trade.>>Very sure, they tried to, but in the [inaudible] state,
it’s 1950, 1960. You have a couple million people in your administrative
bureaucracy and you have a population that you’re
managing of 500 million, it’s huge, it’s complex. There are systems of control, they weren’t robust enough
to deal with this activity, and in fact they were
constantly worried that they’re getting the distribution
of coupons wrong, that it’s causing some people
to go hungry, some people not. The mechanisms of
knowledge information exchange and stuff like that are
really rudimentary, so I think there’s
a mythology maybe about how like powerful some of these socialist misstates are
because they are authoritarian, and they do centralized a lot of control but their capacity
is really limited, and so this is another words
the best they could do.>>[inaudible] meso-level register
everyone in your business, and they cash in their coupon, check them off, some
kind of voting system.>>Yeah they did, they try to,
and then they also tried to restrict the space of these coupons. You had coupons at different levels, so I gave a very
one-dimensional depiction of this but the coupons are being
printed at the national level, the provincial level, the county level and they’re
constantly trying to say, we need to produce more county-level, less national level
because they’re being recirculated illicitly and stuff. So the government is constantly
adopting measures to do these things but then
the entrepreneurs are also innovating new measures. When the government stopped producing so much national level coupons, they were entrepreneurs who responded by illegally counterfeiting them. Say, I’m fine if you’re not going to produce them,
we’ll produce them, and so they actually smuggled
national level coupons out to Hong Kong where they had really
sophisticated printing presses, and printing operations, and where the government couldn’t
crack down on them, and so Hong Kong would just produce tons of these counterfeited things, and then recirculate them
back into the economy. Yeah.>>[inaudible] one-to-one ratio
indicating the amount of goods produced and amount of
[inaudible] and that’s [inaudible] change the, looks like
basis for [inaudible].>>Ideally, but practically, no. They just simply, like I said, they don’t really even know how
much is being produced, right? For example, you might know how
much is formally being produced, but all of these people are
producing stuff on the side. You don’t even know how many coupons
are being printed really, because it’s all
these different state agencies or each printing them. Sometimes, they’re overlapping. Sometimes, some areas
have overprinted, and other areas haven’t. So there’s all kinds of
inefficiencies associated with this formal system which have to
do with state capacity and also, with problems of knowledge. So the entrepreneurs, these people, these illicit coupon brokers, are responding to
those inefficiencies, and they’re trying
to profit from them. In general, I think they’re
making these work a little bit better. Yep.>>The diagram had, a few slides back, it seems like
a lot of the inefficiencies, or so-called inefficiencies, that are actually channeling coupons to underground or operations
that shouldn’t be happening. [inaudible] From the point
of view of the government, it doesn’t seem like
an inefficiency that, [inaudible] gap that
needed to be filled.>>Yeah, sure. Sure. But it
depends on who the government is. So the central government
may think that, but the local government may say, “Hey, we need underground factories. We need stuff to be produced here.” The state-owned
enterprises aren’t being supplied with enough materials. Where are they going
to get them, if they can’t buy them from
underground factories? So yeah, what you see is the
emergence of this complex ecosystem of illicit circulation which supports a whole other elicit industries. Like I said, I just mentioned
underground factories, black gas houses, and
the labor contract teams. These are all illicit endeavors too. So there’s a complex economy that’s being built out
of these actions. Yeah.>>I think the question is, so the central planning
is very inefficient, and the illicit people are taking advantages
of those efficiencies, but somehow they had to be more
efficient in their knowledge and their information exchange in order
to take advantage of all that. On top of which, do no get
caught or not get killed, right? So how would you
explain the difference? Why are the illicit folks, they would just
constantly [inaudible]?>>Oh [inaudible] I mean like I said
it’s a negotiated process, right? It’s going back and
forth all the time. There’s crackdowns and then loosening
up, and so on and so forth. This is always in flux. I wouldn’t say that they’re the illicit people are
closer to the ground. They use their personal networks
to accumulate knowledge. You’ll ask your uncle who
lives in the city next to you, “Hey, how much of
the coupon prices over there? ” when he comes to visit, and then you transmit that knowledge
maybe to your network. I found out that people were using telegraphs, and letter networks, and things like that
through the form of pulsar system and encoding messages about how much
the coupons costs there. So they’re using all manner of underground channels to
transmit this information. In fact, like their information, a lot of times was a lot more, was lot deeper because
the state wasn’t even collecting this information. So they have much better
knowledge about supply and demand in many ways
than the state does. Yeah. So let me move on. I’m going to move to
the third type of analysis. We saw the micro case study, and there’s mezzo
level networking type of analysis. Finally, I want to say there’s a role for macro level analysis too. So while mezzo of analysis
enables us to observe assemblages of people and goods
in society in the economy, rather than individual actors, it still offers little insight into the macro structure
of economic practice, and it doesn’t really tell us
anything about the scale and scope of informal economic activity. To get a sense of these things, we have to zoom out
further still and adopt a really bird’s eye view
of these sources. The way to do this, I argue, is by analyzing them as
sets a quantitative data. So last year, I procured a really large collection
of over 2,000 cases, individual cases, of speculators and profiteers from
a single county in China. It’s this place right
here [inaudible]. It’s now part of Hangzhou. A Lake County in
the middle of Zhouzhang. Over the course of eight months, I read through these
2,000 individual cases, and I typed up types of data that were contained
within these documents. These are all
handwritten manuscripts. So the only thing I
can do is paste it. Like OCR for Chinese text is not as developed as phonetic Western script, and manuscripts are just impossible. You’re not going to
be able to anything. So I just had to manually
type up everything. But I was able to build
a large relational dataset. Don’t worry about
the specific information there, but the idea is that every case was entered as a unique row
in this dataset. They’re all assigned a unique number
and then they’re related. So we have the sheet shows
all the individual cases. This sheet shows all the goods. So for example, one case might involve five different
types of goods. So we’ll use these ideas
one-to-many thing. We also have a lot
of information about the people that were involved
who were being prosecuted. Then I also have
information on the edges, the connections between places. If someone buys some good in
Hangzhou and moves it to Shanghai, I can establish an edge
between those places. So we get a lot of information
about, like I said, the people involved in
illicit economic activities, the goods that are being
seized by the state agents, and how these entrepreneurs
are ultimately punished. So what do these tell us about the functioning of the macro economy? Well, first, the dataset
reveals something about the scale of elicit
economic activity. Here we can see
a distribution of cases. These are the value of cases
calculated by state agents, i.e the amount of money
and goods that they seized at the prices
they evaluate the map, which are much, much
lower than market prices. As we can see, the data
has a huge right tail, and it actually extends into
the tens and tens of thousands. But the mean value we
get is about 212 RMB. So the mean case involves about 212 RMB of goods
in their calculation. Now, because these goods are being calculated at the prices
officials are using, rather than the market values, this is really strongly
downwardly biased. When they’re seizing stuff
like ration coupons, well, those are theoretically valueless, so they just enter zero for that. So these cases actually involve
a lot more money than this. It’s approximately at
least twice as much. But anyway, we’ll use that 200 RMB value to just
get a sense of how big it is. So to put this in perspective,
we can compare this. This is Angus Maddison, and he looked at the per capita consumption figures
throughout the Socialist era. As we can see, rural consumption, this red line, grew really slowly
throughout the entire period. In fact, it never really exceeds a 150 RMB until
almost the Reform era. This means that the mean case, which involved the seizure of
more than 200 RMB of goods, represented nearly two years of
consumption for rural worker. So these are a lot of
goods being seized. In other words, the illicit
economic activity, at least the ones that
was being prosecuted by the state, had scale. The mean entrepreneur
that’s being prosecuted is not a farmer selling
a couple of chickens. It’s a trader who’s dealing
in a quantity of goods that represents years of income
for the average worker. More interestingly though,
the dataset also provides insight into the spatial scope
of these activities. So here, we get the spatial
distribution of these networks. Don’t worry about
the value, but just get the general impression of
the shape of the networks. So as we can see,
illicit activities do not just occur within
administrative units. Remember [inaudible] is
this green one right here. The illicit activities are not
bound up to that immediate region. Rather, they’re being carried
out across really large spaces. As we can see in
this magnified area., this core cluster for the people
that know the geography of China, this core cluster transitions smoothly into adjacent
provinces as well. It’s not being contained by
administrative boundaries. These activities are
transgressing boundaries. We also saw there’s
distal connections which extend all the way to the very North of
China and well into the interior. What I find really interesting, if we compare this map with this one, this is from William Skinner,
some of you may know him. He was anthropologist geographer guy. He had this classical
delineation of the regions, the macroregions, physiographic
macroregions of China. He said these are the regions in which traditional commerce
networks existed. So if we compare
our core region here to this, it looks a lot like
William Skinner’s, lower Yangzi macro region. From this preliminary evidence, we might conclude two things. One, the economy was a lot more network than
previous people have said. There’s a lot more network
connections between places. Two, elicit economic activity, it looks like, is being shaped a lot more by these traditional networks. Then by the socialist
administrative boundaries. He’s talking about Imperial China, for like 500 years. So, according to skinnier, this is how commerce was carried
out in Imperial Chinese Society. So, I think these are some of
the insights that we can develop through quantitative analysis
of these sources. So, to briefly summarize, in this talk I’ve
highlighted the lacuna in our understanding of
the Chinese socialist economy. I tried to point to the use of these unconventional sources bought from secondary document markets, as a possible means of
beginning to fill this void. Moreover, I’ve argued in favor of a mixed-method bottom-up
approach to analysis which really differs from
how historians have tried to explore the economy in the past. As I’ve shown while the traditional case study method
that other historians would use enables us to explore some really interesting aspects
of entrepreneurship in society, such as the processes of valuation, and the legitimization
of their activity. It also suffers from
really strong limitations. In order to make
more generalizable claims and deal with issues
of scale and scope, we must read increasingly
large collections of these grassroots sources at
different levels of distance. I’ve just suggested that
no single mode of analysis, how I’ve generically
turned the macro, mezzo, micro none are intrinsically
superior to the others, but each links to different
types of questions. Each yields insights which
really can be combined together, and used to maximize
the utility of these sources. Finally, while I did not
explicitly attempt to make really big overarching
historical claims. The implications of this
research are wide reaching. As we’ve seen from
these limited vignettes, the socialist economy was
quite dynamic and complex, at least weigh more so than
previous scholars have suggested. It requires no great feat
of imagination to see the connections between
these entrepreneurial processes, these nascent things that we’re building up during the socialist era, and the broader processes
of historical change, how the Chinese economy
takes off in the 1980s. I’ll be very happy
to talk about this, and anything else you want to
talk about in the Q&A. Thank you.>>Did you want to take questions?>>No, go ahead and
whatever, sure. Yeah.>So one of the things
that I am curious about even off you hear
about [inaudible] analysis. It’s like a notion of baseline. I’m really struck by
the bundle of scale, right? I know that their spread traders
from the macro analysis, I know that this is case of fashion designer from
a micro analysis.>>Yeah.>>I still don’t know whether
this is big or small, and so I’m wondering how you thought about base lining this for example, is there a comparison to
other sources legal trade, or what sort of notion scale there?>>Yeah absolutely, so
for one I think a we face a fundamental problem as we
do with any malice error sources. For one, the high level statistics that some people use
are just garbage, I mean they’re pretty much made up. There’s a really big knowledge
problem in society right? If you turn to
those high level statistics, they are so subject to various kind
of political incentives, and misincentives that you
really can’t trust the data. So, I think the only thing we
can do is do this reconstruction of this bottom-up method
of analysis of using large collections of
sources to rebuild data. But as you say, this suffers
from limitations too, because ultimately
the people that we know about are the people who were
prosecuted by the State. In some sense they’re the people who failed at entrepreneurship right, I mean the really successful ones
never got caught. I’ve interviewed a lot of
those people actually, and they went on later to form really impressive
enterprises in the 1980s. Actually China’s first big generation of entrepreneurs after
reform and opening up, it was mostly these guys
who were doing underground elicit economic activity
in the 60s and 70s. So, anyway there’s
fundamental limitations to how we can extrapolate this. But there are some things we can do, this at least provides a baseline. We can say we know at a minimum
this is how big the economy is, then of course then we can try to do clever tricks to
extrapolate from that, does this represent 10 percent
of economic activity? We can look at for example, as you have waves of
political prosecution, as you have these
mass campaigns right, where the government
will say, “You need to intensify your crackdown
on capitalism.” We can look at how as the cases of these tacking
speculators and profiteers increase, the value of the activities decrease. So, you can maybe see then
how they’re getting into more increasingly marginal
entrepreneurs, and stuff like that. So, we can play with
that to get a sense. The next big thing I’m doing, it’s like I said that database
took eight months to construct and there’s all other kinds of
analysis we can do from that. But in order to make
it really useful, I need to compare it
to another region. So, I have another county in China right now where
I have over 1000 cases. So, we have similar longitudinal data where we can begin to compare
and contrast for example, how economic governance in
one county versus another county. How for example, how much did local government officials
protect entrepreneurs, versus how much did they
prosecute them to death. We can begin to ask
questions like this, and then also through
those types of analysis also get a little bit better sense
of the scale of activity. Then finally as you
said then we can start comparing it to formal industries, and stuff directly, and
then you have to make a lot of extrapolations from this. So I think the best thing to do
first is establish the baseline, to say look at a minimum, this is how big elicit
economic activity was, and we know it’s a lot bigger. But then it’s just a matter of
what ratios are we applying? What kind of you know.>>I’m really struck in
what you just said by also the fact that the interview which I guess it’s very micro analysis. That the interview evidence that
shows that even the biggest successful enterprise queries on
this kind of people that seems, since we know how
big those are later.>>Yeah.>>It speaks to the importance
of this phenomenon back in time.>>Yeah and I think
another thing to think about when you’re thinking about
entrepreneurship in this area. So, I do care about
the quantitative aspects, but there are really interesting quantitative aspects
which are fundamental. So the fact that these individuals
are building networks, the fact that they’re amassing
entrepreneurial experience, and the fact that they’re
accumulating some capital prior to reform and opening
up is really critical. Because it’s this knowledge, for example it’s the knowledge of how do you navigate
this margin of acceptability, all of these people are
doing illicit stuff. But it’s only the ones who are really egregiously violating the law
that are being punished, and of those even most of them, actually most of these guys they’re not like being sent to labor camp. They’re not being executed. Actually the State, this
is this is fascinating, and I didn’t include this analysis, but I’m working on it right now. The state is just fining them. In fact a lot of times it
doesn’t even fine them, it just seizes their goods. Sometimes when it ceases their goods, they don’t even just seize them, they pay them for them. They just pay a discounted price, and that speaks volumes to me. The fact that you have
the State arresting these capitalists who
are supposed to be the worst people in society, the deepest threat to socialism. The fact that you’re arresting them, taking their goods, and
then paying them for them. So I think you see increasingly over time local government officials
start becoming really, they recognize the
value of these people, and they start working with them. They say, “Okay even if we
are going to arrest you just take this fine and then
keep doing what you’re doing. ” That kind of thing. So there’s a lot of tacit negotiation going on. Anyway, I think all of these
qualitative findings are really important for understanding where Chinese entrepreneurship comes from. Where are the origins of the economic success later
comes from, yeah sorry.>>You might have said this
because I came in late.>>Yeah.>>How much do these other individual entrepreneurs
group it together, and to what extent when they
group together resemble what might be in self
perspective we called organized crime in the societies.>>Yeah. So the Russian coupons. So the first thing I was thinking of too it looks like the drug trade. It looks like someone running
heroin or something like that. Like that of organizational
structure is pretty similar. One I would say I need
to clear up something. When I’m talking about
entrepreneurship, I’m not talking about
just petty entrepreneurship. I’m not talking about
entrepreneurship at the margins and things like that. These entrepreneurial functions
are being engaged. People are doing this
underground economic activity, are those state actors,
non-state actors, there are informal enterprises, there are in underground enterprises. So it’s something that
really permeates society. As you were asking, the networks
include groups of these people. So for example, I interviewed some guys that used to
work for state agencies, and every state agency has to
have a procurement officer. He’s the guy that gets you your goods that your state agency needs. Every factory has one
too and everything. I found out that in
one city in China, there were more than 30,000 of these procurement officers
illegally there, buying up wood, because wood
is like a really rare thing, and it’s a short supply
in the Mao’s economy. I was asking the guy, and it’s really far away, the distance from,
say, Miami to Boston, that’s how far away
where the guy was based, it’s affiliated institution,
and then the wood, the place he’s buying
the wood, I asked him, “How did you get it back,
what were you doing?” He said, “Well, first,
you have to go there, and then you have to take
the officials out to dinner, and you have to give them cigarettes. You have to schmooze them a little bit, and
bribe them a little bit. Then they will write
you a coupon saying, “Okay, you get this much wood.” But, of course, it’s still illegal. It’s still not part of
the formal procurement system. So then, when that wood
is loaded on the train, you can’t let it get inspected
by the train officials. So then the people have to
run ahead of the train, the trains are slow at
that time, not that hard. You run ahead of the train and
at every inspection station, you then take out all the
inspection officers to dinner. Give them some cigarettes. Then by doing that, you get your goods
back home all the way, and this involves
all manner of actors. You have state actors are the main, the ones are doing it, you
have inspection officials, you have underground
entrepreneurs that are helping them move the wood and do
other kinds of stuff too. So you have these networks that
are really big and they’re involving all manner of
formal and informal actors. Yeah. How did this compare with
the fixers in the Soviet economy. Sorry. How did this compare with
the fixers in the Soviet economy, which I gather informally were also extremely important to actually
keeping things working. Yeah. I see it as being very similar. There are maybe
some critical differences. Why did the Chinese do so much better after liberation than the Russians? Exactly. So my argument would be, the reason why the Chinese
do so much better is because they don’t immediately
try to transition to capitalism, and instead they
institutionalized this. So over the 1970s leading up
to reform and opening up, I have my quantitative evidence
now that shows that these prosecution of
elicit economic activity ramps up, but people keep failing. Like the government is trying to suppress this underground
capitalist stuff, and it’s not working,
there’s more and more. There’s reports by
government agencies saying we’ve led five major crackdowns
and the number of illicit merchants in
the city just keeps growing. Then eventually, you start to have this tide of local
government officials. I was actually able to interview, I think he’s the first man in China, first local government official
who opened up this thing. Who finally said, “The
cracking down is not working, I’m just going to let them do it.” That was in late 1976-1977, right before reform and opening up. So in my opinion, reform and opening up
when Deng Xiaoping said, “We’re going to reform the economy.” He was looking too. There was all kinds of
reports that were being sent up about the pervasiveness
of elicit economic activity. He was looking to that and saying, “Look, it already exists.” So now it’s just a matter
of either formalizing it or keep failing at suppressing it. So he was able to, at
least at a minimum, harness that momentum
that was building up, and then use it to push for reforms. Then, of course, once the reform
start, everything explodes, it just happened so much faster
than they had it intended to. But in the 1980s I think, you see the government recognized the importance of
this space for negotiation, to allow people to break
a little bit of the rules, and then whatever
works, we’ll formalize. I read about the failure of the Soviet Union economy in
the latter half of the ’80s, and one of these things was
the comparison with the Chinese. His theory is it was because of the Cultural Revolution that
the Chinese did so well. The Cultural Revolution
corresponded to Stalin’s terror, but it was much more recent. So it had been much less opportunity for institutional structures to build up that would
effectively resist liberation. So I would agree with that in part. Hongyan Zhang at MIT and I are
co-authoring a paper on this. Our argument is, yeah the Cultural
Revolution mattered a lot, but it had the opposite effect
of what they intended. So the Cultural Revolution, they intended to crack
down on the capitalists. But what ultimately happened was, the whole bureaucratic apparatus
came under attack, and effectively shut down. So the Gong Shang, the Bureau of Industry and Commerce basically stops functioning
during the Cultural Revolution, and these were the main guys
charged with governing the economy. They actually create this new
institution, beautiful name, Office of Attacking
Speculators and Profiteers. But it’s a political institution, and the way it’s trying to attack these underground capitalists
is very different. It’s not doing it systematically. It’s picking a couple of
people and then parading them in front of society
to put them on show. So our argument is, yeah, actually the Cultural Revolution
by shutting down the bureaucratic apparatus it
effectively created space, and especially the rural economy for these entrepreneurs to really
start doing new stuff, and that led to all the
formation of these networks, formation of underground factories
and lots of innovation. We are short of time I’m sorry
to say but we have a reception, we have some food and snacks
just outside the hall. If you just pass through
the elevators on the other side. I highly encourage you-all
to join us for a few snacks. So let’s take a chance to thank
Gordon for the talk today.

6 thoughts on “Capitalism and Entrepreneurship in Socialist China

  1. China is State Capitalist not socialist at all. The so called socialism is created by the media is a farce.

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