Shock therapy economics emerged originally as a quick-fix strategy for transitioning from a "planned economy" to a "market economy" in the crude binary that dominated conventional economic thinking and became entrenched in the Cold War of the 20th century. It was a branded package of austerity economics promoted by economic theory heavyweights like the University of Chicago school of Economics, Milton Friedan, and marketed to communist or socialist states, any state really, looking for ways to open and grow their economies. And as such it was a hot topic of market reform debates in China in the decade following Deng Xiaoping's opening of China in 1978.
Actually, to step back for a moment, austerity economics like shock therapy-- i.e., campaigns to cut public spending and reduce democratic oversight of the private economy-- are not new and go back at least to the 19th century beginnings of the modern economy. They kick-in whenever capital, the rich, feel threatened by democratic pressures and government reforms; popular suffrage, labor organization, minimum wage laws, environmental regulations, antitrust, anything that might impede maximizing private profits and wealth. In WW1, 1914-1919, governments naturally expanded involvement in their economies, organizing production for the "total war" effort. This improved working conditions for labor, and after the war workers pressured big employers and the government for better wages and job security. In response, big business elites, in Italy, Great Britain, and to one degree or another nearly everywhere in the developed world, launched austerity campaigns to discredit these democratic demands for better working conditions as budget busters, socialism, etc.
The Reagan Revolution, 1980 to the present or until proven otherwise, bent on deregulation, disarming antitrust enforcement, tax cuts for the rich, hostility to labor organization, was another such campaign of austerity economics and has resulted so far in the redistributive transfer of 50 trillion dollars of wealth from the bottom 90% of the income scale to the top 1% of Billionaires.
During the industrial revolution, from 1800 to the present, whenever labor asks for a raise and/or a government asks private industry to pay their fair share for the development of basic public infrastructure they are condemned as anti-business, overreaching sound Laissez-faire or "free market" principles, and offered instead some austerity economics. The only state or public spending capital, or Wall Street, likes are contracts with private industry and strong police and militaries to protect their massive holdings in private wealth.
Shock therapy, specifically, a radical Big Bang austerity project to expand private control of the economy, grew out of neoliberal reforms developed at the International Monetary Fund (IMF) and World Bank (WB); both established after WW2 to promote global economic development. In the 1960s and '70s the IMF/WB peddled Structural Adjustment Programs (SAP)'s to member borrowing states. As an end-run around the Group of 77 and the growing democratic influence of Global South countries in the UN General Assembly, and as a condition for loans, states receiving IMF/WB funding were required to aggressively privatize public utilities and other public assets and eliminate or dramatically reduce or pull back on taxing and regulating capital, implementing price controls, and supporting labor organization. The World Trade Organization (WTO), formed in 1995 ostensibly to update and replace the General Agreement of Tariffs and Trade or GATT (1948), but, again, formed essentially to get around the growing democratic pressures of states in the Global South has promoted privatization and shock therapy since it began operation.
The market fundamentalist ideas behind shock therapy economic policies are relatively simple, if increasingly in gobsmacking contradiction to reality. Privatizing public assets, letting private industry drive the economy unfettered by government interference leads to more economic expansion and modernizing technological development. This philosophy of political economy has gone by numerous names in the modern period, classical liberal economics, Laissez-faire, free market capitalism, ordoliberalism, neoliberalism, and probably others I don't know or I'm forgetting. But why I say they contradict reality is because the historical record increasingly indicates all these so-called "free market" regimes promote hoarding, monopoly, oligarchy, class war transfers of wealth, endemic exploitation of labor and plutocracy, corporatist state authoritarianism, and, yes, even fascism and Nazis, all of these things before and over general economic prosperity, in nearly every historical instance.
Isabella Weber's relatively humble case in How China Escaped Shock Therapy: The Market Reform Debate is that China's state-directed growth spurt between 1980 and 2020, better known as "China's economic miracle," is at least in part, significantly, attributable to China escaping privatizing capital shock therapy policies in the crucial 1980s.
In the middle of the 1980s China held several international economic conferences to address market reforms. China wanted to expand economically and develop technologically, and had been moving in that direction since Deng's first big visit to the US in 1979. The conferences in China were attended by WB/IMF officials, conservative economist Milton Friedman and his entourage, the usual suspects in international finance, including Eastern European states like Yugoslavia, all making pitches to the Chinese leadership in Beijing to privatize their economy with shock therapy economic reforms. And no doubt all the while drooling at the prospects of getting more access to China's potentially massive markets.
So how did China escape the shock therapy onslaught? Scholars at an economic research institute in China set up by Deng reviewed shock therapy doctrine and concluded it was too preoccupied with hypothetical principles and ignored real economic impacts. Unfettered capital pitted private property against the state and encouraged self-dealing capitalist corruption. These Chinese economists promoted, instead, pragmatic, incrementalist, "crossing the river by touching the stones" market reforms.
Scholars dug into Chinese history. They studied closely "The Discourses on Salt and Iron," appearing in the 1st century BCE during the Han Dynasty, and recognized price stability as crucial to sustained economic development. They found evidence of the rudiments of a dual pricing system going all the way back to the Shang Dynasty and the second millennia BCE. They noted persuasively that China prioritized, from its imperial beginnings, price stability over unfettered growth on the principle that wild swings in prices and jobs generated social unrest and depressed commerce.
They found a tradition in Chinese history of separating commodities into Heavy and Light categories. Heavy commodities, like salt and iron, like grains, were in heavy demand (or inelastic demand), everyone needed them, and so people, communities, were very vulnerable to sharp changes in the prices or supply of these commodities. And so the state took a role in stabilizing these Heavy markets; maintaining stable prices and supply. They did this less by price controls as we think of them today, although they did use them to set strategic boundaries constituting fair trade, but stabilized markets more by state procurement, or reserves, of the given Heavy commodity sufficient to offset fluctuations in private prices and supply. When private supplies in grain ran low, and prices rose, for instance, the state would release more grain reserves into the market; when supply exceeded demand, and prices fell, the state would purchase more grains to hold in their reserves.
In this way China's state protected consumers from price gouging and other manipulations of private profiteers. Most commodities, the far longer list, were designated Light commodities and required no state interventions or fewer and looser price controls. When you get into the weeds it should be noted that some commodities moved between the Heavy and Light categories by the season and over time the Heavy commodities list, rice replacing millet, for example, evolved, naturally. But the position of the state in this tradition of Chinese economics remains a constant, trying to protect people from predatory greed and the wild swings of the market.
My overall sense after reading Weber's study is that the pressures to privatize and deregulate the Chinese economy in the 1980s were particularly intense and consequential to China's subsequent economic boom but the neoliberalizing pressures never really stop. Weber, late in the book, references slackening price controls, enacted in the early 1990s that precipitated some wild swings in inflation and social hardships. The formal dual track pricing system was given up by 1989 but by then Weber makes the case they had already established a big state role in stabilizing the markets for so-called Heavy commodities, which was a shifting but relatively short list.
Weber's biggest claim, or one I'm giving her anyway, is China's resistance to full-on Big Bang shock therapy privatizing market reform in this crucial historical moment, coming to head in two big international economic conferences held in China in the 1980s, was also likely very crucial to China's big modernizing push, enabled state-guided economic growth in China, industrial policy, "market socialism with Chinese characteristics," to reach a scale and resiliency that enabled it to effectively resist being taken over by private global financial interests.
And resulted, let's remind ourselves, in a state-directed growth spurt between 1980 and 2020 that rivals any in modern economic history; growing by 10% a year when overall average annual growth rates in GNP around the world over the same period hover around 2.8-3.0. And led to China's global dominance in nearly every technology relevant to the coming 21st centuries energy transition: solar, wind, rare earths and battery technology, and EVs.
China still puts significant limits on capital flows, again, seeing the unlimited flow of capital from outside China as a potential threat to China's political independence, presumably.
In the first period of the opening, the 1980s, they were very careful about how they setup the first market reform zones, special economic zones (SEZs), the biggest one setup next to Hong Kong and another across from Taiwan; both in southern China, far from Beijing, the center of Chinese political power. Expanding the freedom of capital to flow first into these SEZs, experimentally, and then incrementally outward from there. They were wildly successful almost immediately but did unleash a lot of capitalist hustle and corruption.
I've heard in recent commentary that China's limits on capital flows in and out of China have made it harder for China to expand the global trade in yuan/renminbi as a global reserve currency, as a viable alternative to the dollar or euros. Global investors want more liquidity, confidence they can cash out their assets in China whenever they want, and China doesn't want to be subject to extortion by global capital. It's in the news again but it's an old tension; and one, again, it should be noted very likely closely associated with China's tremendous economic growth over the last forty plus years.
China, or Deng Xioaping, set out in the late 1970s to build a market socialism that worked, expanded, and prospered, but didn't threaten the authority of the central political state or China's sovereignty. They were wildly successful on the economic side of this equation but much less so on the political side, where Xi Jinping is now paramount leader for life and Uyghurs in western China live and work in or near concentration camps.
This is Weber's first book. I first heard of her via Zachary Carter, my favorite Keynes biographer. And she's recently appeared in the news by helping the Biden admin deal with inflation. To offset rising oil prices triggered by Russia's invasion of Ukraine, and abetted by Saudi Arabia, the Biden admin released strategic oil reserves in 2022 or 2023, bringing back down the price of gas or at least mitigating the impact of Russia and Saudi Arabia's weaponized gas inflation against Bidenomics and the US. But when Weber's part in these policy actions first got out, Paul Krugman, the most popular economist in the US, called her an idiot. He was apologizing shortly thereafter but it's another illustration of the orthodox economic reflex against price controls and industrial policy, and the mainstream economic bias against the caring economy and essential government services and state capacity to build in America. It's a problem; I know I keep repeating myself.
Meanwhile, we'll see how shock therapy economics works out this time for the US.
Footnotes:
1. First, pulling back again to world history scales, if you ask me, you have to add China's Century of Humiliation, 1850-1950, as relevant and crucial here to understanding Weber's study. China felt ripped off by the West and Japan in the 19th century; and has felt so since the Opium Wars with Britain in the 1840s and "unequal treaties" allowing imperialist nations to run nearly all China's biggest port cities and foreign trade until after WW2. Foremost, I think, China's resistance to shock therapy economics and "free market" shock doctrine is rooted in their deep suspicion that such foreign ideas can be threats to Chinese sovereignty and independence, as Western ideas and foreign relations have been in the past. Deng Xiaoping's strong hand and general Chinese wariness were a ballast moderating the market fundamentalist pressures coming from outside (and inside) China. Deng's aim was to open China one step at at time, without ever compromising China's sovereignty and political independence. His intolerance for political dissent was too harsh and illiberal but his state support for economic and technological development, research, and education were astonishingly effective and productive.
2. Still, any study of China's economics comes up against how much economics are influenced by China's police state crackdowns on political dissent. Many of China's liberalizing economic reformers, those on the side of shock therapy reforms, found themselves on the wrong side of the authorities in the crackdown on protesters in Tiananmen Square during demonstrations in 1989. And it's not clear at all that the crackdown was necessary; there was no evidence of any organized armed uprising against the state. Up close it appears what protesting college students wanted most was more control over choosing their own career paths. They showed no interest in handing China's independence over to multinational corporations; they appeared as committed to overcoming the Century of Humiliation as any previous Chinese generation. But to the communist party leadership in China, Deng Xiaoping, masses of street protesters were a political threat. Overall the crackdown didn't even slow economic development in China much or for very long but it did draw a red line suggesting that economic reforms would not be allowed to challenge or threaten political authority in China. It subordinated economic power to political power, a political power that did not tolerate political dissent, could brutally disregard basic human rights, and still agitates against international standards on human rights and democracy today. Nor is it clear China has solved the problem of poverty and inequality domestically, by any stretch. But China has been exceptionally successful at fostering economic growth and technological development. It's something of a paradox, perhaps, but one that deserves more of our attention, not less.
3. Worth noting also that Weber insists on this deep historical tradition in Chinese economics; its conception of the role of the state in economics: that, in the main, Chinese state economics prioritizes price stability over market freedoms. Weber takes a detour in her discussion of the market reform debates in the 1980s to point out that China maintained relative price stability in the inflationary aftermath of WW2 far better than Ludwig Erhard's "Economic Miracle" in West Germany during the same period, the latter a cherished model of shock therapy trumpeted by Friedman and neoliberals to this day. A year or two into Erhard's so-called miracle Berlin was rocked by inflation rates over 20% and suffering brutal poverty before abandoning the privatizing obsession for price controls and social democratic reforms; by the early '60s Erhard is already denying there was any liberalizing shock therapy economic miracle in West Germany at all. But Friedman and the neoliberals would rather go with the legend, of course. Which when you get down to it might be most of what market fundamentalist economics, neoliberalism, Econ 101, continues to run on. Myth and legend.
4. Naomi Klein's 2007 book Shock Doctrine chronicles the disastrous results of shock therapy in Chile in the '70s and Russia in the '90s. Friedman's Chicago School, the neoliberal braintrust in the US at the time, working with the CIA, fomented a military coup that overthrew a democratically elected government in Chile. In Russia selling off public assets after the collapse of the Soviet Union subsidized the rise of a corporate oligarchy that brought to heel by Putin undermined democracy in Russia, generating a political system that How Democracies Die's Steven Levitsky calls "competitive authoritarianism," and what everyone else calls a murderous dictatorship. And, needless to point out, serves as a model to the current regime in the US. Klein's book is a big takedown of shock therapy economics and a brilliant example of investigative journalism. But her admittedly sensational account got a lot of pushback from mainstream economists at the time, castigating it as muckraking journalism depending on economic over-simplifications. None of the economic criticism I've seen is very convincing but I'm just a poor retired school teacher partial to New Deal social democratic economic reforms. The reaction, though, does encapsulate for me, again, the reigning power of free market dogma amongst economic policy elites and the populist Chamber of Commerce mob. The prevailing binary formula since the 1980s goes something like this:
Deregulation, tax cuts, free (legally unfettered) capital=Pro-economic growth.
Consumer protections, living wages, and regulations/environmental reforms=Anti-economic growth.
It's becoming increasingly obvious this is a ridiculously false choice but money talks and here we are.
5. At any rate, this last bit about Klein raises a question about who is a an academic economist that might appreciate the insights in Weber's study and corroborate the critique of the shock doctrine and has their own interesting takes on the real history of shock therapy economics, neoliberalism, and economic privatization being discussed here? Here's one: Ha-Joon Chang! Scholar at Cambridge for over thirty years, long time consultant to the World Bank and other international economic development agencies. Chang's like the Mr. Roger's of liberal economic development and reform. He unpacks and gently demolishes various "free market" orthodoxy in Bad Samaritans (2008) and many other delightfully readable economics books; Kicking Away the Ladder (2002) and 23 Things They Don't Tell You About Capitalism (2010) being only two more I've read of the over ten Chang has written on the topic. For an example of his thinking: The Asian Tiger economies since the 1960s, Japan, Singapore, Hong Kong, and South Korea, are often held up by mainstream economists as models of successful neoliberal capitalist economics. Chang argues, by contrast, that South Korea, where he grew up, and the other Asian Tigers, actually took off economically and continue to develop with lots of essential state guidance and industrial policy; tariffs protecting infant domestic industries, price controls, etc. He makes the case that so did Great Britain, and the US, in the 1800s, when they were first industrializing, but they forget this now that their principle economic aim is to sustain and extend their own dominant position in global economic markets. Anyway, I'm a fan and would recommend his books to anybody interested in the history of political-economy.
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