These words were spoken by Vladimir Lenin in 1917. The results were not encouraging. It shouldn’t be too surprising why this attempt failed – the socialist system he wanted to create was impossible. Ludwig von Mises argued this point decisively Economic calculations and the socialist commonwealthAnd history has demonstrated the point many times since.
Eventually, the Soviet Union collapsed and Russia attempted to transition to a capitalist system. However, the results we see today are less than inspiring. What was wrong? We know that a capitalist order, as opposed to a socialist system, is possible, so this calls for a different interpretation. Many explanations have been given. in his book Why Perestroika Failed: The Economics and Politics of Socialist TransitionPeter Boettke begins his analysis by noting that “despite the prominent announcement of ten radical plans for economic restructuring, None were implemented.” However, I am not convinced that the implementation of this plan will change things.
We see how attempts to create an impossible situation fail. Less obvious is the idea that the only reason is a certain order is is possible, it does not follow that it can be constructed. Capitalist orders are possible, and can work, but that doesn’t mean they can be built. Instead, it may be that they need to be allowed to develop rather than nurtured.
The book should be read to see how it can work How China Became Capitalist by Ronald Coase and Ning Wang (from which all quotations below are derived). While Russia attempted to become capitalist through political decree, Coyes and Wang describe how “China became capitalist through marginal revolution.” It started small. Here and there, small villages began to operate private farms, operating quietly under the radar. During the Great Leap Forward, such behavior was condemned as counter-revolutionary and quickly crushed. This time, however, the Chinese government backed down, and allowed these new markets to flourish. China did not plan to transition to private agriculture, nor did they deliberately design a model or framework within which such farming would operate. Centralized attempts at agrarian reform had taken place before, but they always sought to find a new “right way” to do something and directed it from the top down, such as the “attempt to impose a model developed in the village of Dazhai. The whole nation” which “Denyed local governments the freedom to take local circumstances into account.”
There was no official plan for how private farms should be managed, as “private farming was not a single practice, but an umbrella name for a family of non-collective farming practices that emerged spontaneously in rural China.” It was not until 1982 that the Chinese government officially recognized private farming as a legitimate project, after it had emerged and established itself across the country.
One of FA Hayek’s most important ideas is the distinction between laws and laws. Laws are realities of the world that operate independently of our design or our will. These include the laws of physics, but also economic laws, such as the law of supply and demand or the reality of opportunity costs. Law, in contrast, is written and produced by humans. We can make and change laws, but we cannot simply make or change laws. All we can do is try to embody what the law is with our laws. Recognizing the legitimacy of the various agricultural developments that have arisen, China is using law to reflect law. In contrast, Russia has always sought to use law to guide and direct rather than reflect these processes.
Numerous marginal revolutions have occurred throughout China over the years. What was really remarkable about it was how planned or directed it was. For example, in the 1990s “Shenzhen already had more than 300 offices where people could buy or sell stocks, although there was no official permission to do business this way.” This is just one example of the “gap between practice and regulation”. Rather than trying to dictate what changes should occur and how they should be structured, Chinese authorities have stepped back, allowing new forms of economic activity to develop freely. After they are in place, laws will be written after the fact, around the practices that have developed. Laws were created to reflect economic activity, not to attempt to design it.
China is far from a bastion of free markets, and much of the progress that was made has been undone. Still, there is a lesson to be learned here. Lenin could not build a socialist system, but neither can we build a capitalist system. These things take time, and freedom.
Kevin Corcoran is a Marine Corps veteran and a consultant in healthcare economics and analytics and holds a Bachelor of Science in Economics from George Mason University.