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How China defeated poverty

In the 1980s, greed was celebrated as good, and prosperity through private enterprise was lauded as the path to economic success. Thatcher ushered in a dystopian era of privatising public assets, Reagan sought to stimulate economic growth through tax cuts, deregulation, and reduced government spending, and Howard followed his mentors into neoliberalism with his middle-class welfare measures.

Yet, it seems evident that neoliberal orthodoxy has failed to deliver prosperity or stability to global economies. In "How China Escaped Shock Therapy", Isabella Weber presents a compelling and meticulously researched case for re-evaluating China’s economic reforms in the late 20th century, challenging the dominant neoliberal narrative. Weber argues that China’s successful transition to a market economy was largely due to its careful, gradual approach, rather than the rapid privatisation and price liberalisation often associated with "shock therapy".

Weber highlights China’s strategic decision to implement market reforms incrementally, allowing for experimentation and adjustments based on evolving circumstances. This approach stood in stark contrast to the radical shock therapy policies adopted by many former socialist states, such as Russia. The illegal dissolution of the USSR and the harsh imposition of austerity, championed by the West, devastated Russia’s economy, plunging its population into ruin.

The economic downturn was so severe that life expectancy for men, which had risen steadily since the war, plummeted at a rate unprecedented in history outside of wartime.

Weber traces the key elements of China’s reform strategy, particularly the dual-track system, which allowed planned and market-based economic activities to coexist. This system mitigated the risks of sudden market liberalisation and ensured a degree of social stability. Notably, stability was maintained through tight control of staple goods’ prices, while luxury goods were allowed to be governed by market forces.

Contrary to the neoliberal prescription of privatising all state-owned enterprises, China retained a significant role for these entities in key sectors. This allowed the state to maintain control over strategic industries and provide essential services. The Communist Party’s ability to maintain social order and prevent widespread unrest was largely facilitated by its control of inflation on essential goods.

It is rare to hear or read about these historical events and how effective price control was for China, or how disastrous neoliberal economic policies have been. For decades, the prevailing narrative was that "rising wages cause inflation." Yet, when wages stagnated for years, the true drivers of inflation were exposed.

Following the remarkable success of her book, Weber joined many economists in demonstrating how the triple shocks of climate change, the pandemic, and war triggered inflation. Data unequivocally pointed to corporate price gouging as the primary source of inflation. However, Weber avoids using inflammatory terms like "greedflation," as they fail to explain the mechanisms behind post-shock inflation.

In *The Wall Street Journal*, she stated, "We do have to think about pricing differently. A cost shock or bottlenecks can create an implicit agreement among firms to raise their prices, expecting others to do likewise." In other words, in times of scarcity caused by catastrophe, firms raise prices without fear of competition, expecting consumers to pay more. They realise that as sales volumes drop, maintaining revenue requires higher prices to offset reduced volume. Margin × Volume = Profit. If volume drops, margins must rise to maintain profits.

Weber is critical of central banks raising interest rates in response to aggregate demand. Demand is uneven, and some of it is insignificant. A broad government or central bank response targeting the entire economy misses the mark. Key sectors—energy, food, and housing—require targeted policies to prevent the kind of runaway price surges we are currently experiencing.

Weber’s solutions are unorthodox but not extraordinary. If housing costs spiral out of control, governments must impose price controls to curb inflation. Interest rate adjustments simply do not work.

For further reading, see "Inflation in Times of Overlapping Emergencies: Systemically Significant Prices from an Input-Output Perspective" by Weber et al