2 - Central Planning and Its Decline

Summary

In the ideal-typical market economy envisioned by Adam Smith, markets operate under a relatively neutral state and direct resource allocation by providing self-interested economic actors with a nexus of trade, a locus of information and incentives, and a screen through which winners are selected and losers sifted out. Such a mechanism, however, would be hampered if the assumption of state action as being relatively neutral breaks down. In some economies, the breakdown may be short-lived or limited to certain market niches, whereas in others it may be widespread and sustained despite the existence of a few oases resembling the Smithian vision. The post-Mao Chinese economy, I argue, is akin to the latter. Although concrete markets for products and factors have emerged to become the main motivating and mediating force of economic activities, they often fall short of playing the dominant role in shaping the distribution of relative payoffs among firms, where particularistic state action holds enormous sway. Nevertheless, the post-Mao era has seen a shift of the locus of such action from centralized institutional authority to decentralized, increasingly individualized bases of power.

To set up a backdrop for discussing these changes in the reform, I provide a sketch, based on the experiences of several firms, of the institutional change from the plan to markets. I first illustrate the essential features of the centrally defined, highly institutionalized particularism in the state's treatment of different firms under central planning.