File under “the road not taken.” The following is from Carl Riskin’s China’s Political Economy: The Quest for Development since 1949, a 1987 book that is still a very useful guide to the Mao-era economy.

The return to rigid centralization in the early 1960s [in reaction to the Great Leap Forward] meant that very soon the economy was facing the same problems as before the 1957-8 reforms [i.e., sluggish growth in agriculture, ineffective central planning, rising unemployment]. At this time a very far-reaching discussion took place among economists, in which the possibility of enterprise autonomy and a major role for the market was cautiously explored. …

A number of reforms were advocated during this period that anticipated the reform proposals put forward from 1979 on. In accordance with the emphasis on efficiency, the idea of diversified, comprehensive enterprises was rejected in favour of specialized units and division of labour. At the level of the individual worker, specialization and division of labour meant a strictly enforced individual responsibility system with emphasis on individual material interests to shore it up. …

The remarkable debates among economists during the 1961-4 period went far beyond the specific reform proposals listed above. Among the most important subjects covered was the role of commodity production and the law of value under socialism. …

‘Commodity production’ refers, of course, to the production of goods and services for exchange rather than for direct use. The ‘law of value’ refers to the tendency, under competitive market conditions, for goods to exchange with each other at rates proportional to their relative socially necessary labour times. The two concepts are linked, in that the production of commodities for exchange presupposes exchange values satisfactory to all parties, and the workings of competition in a market commodity economy will tend to make such values gravitate toward proportionality with socially necessary labour times, given certain assumptions. It was also widely held that a commodity economy requires regulation by the law of value (i.e., requires regulation by a market through which the law of value determines exchange relations), but that a non-commodity economy—such as one with only a state sector, producing and distributing goods strictly according to plan—is free of such a requirement. Sun Yefang denied the latter contention, arguing that instead that the law of value states a basic principle of optimal resource allocation that must be respected whether in a commodity economy or a totally planned one. …

The importance of these apparently esoteric exercises in Marxist theory is not hard to see. The finding that socialism still provides considerable scope for commodity production and exchange constitutes a theoretical basis for relaxing centralized command planning—up to then established by Soviet theory and practice as the only orthodox form of economic organization—without betraying socialism. The proposition that the law of value must regulate resource allocation even in a planned economy is tantamount to a repudiation of arbitrary and intuitive planning. And, since central planners nowhere (and certainly not in China) have the capacity to allocate physically tens of thousands of individual goods and services in conformity with the law of value, this proposition also implies the need to replace command planning with the use of the market. …

Sun Yefang had gone well beyond the theoretical exploration of these questions to map out a series of reform proposals that would fundamentally alter the nature of China’s planning and management system. The essence of his proposal was the replacement of administrative command planning with market socialism, in which autonomous enterprises would strive to maximize profits under a regime of parametric planning, with the state influencing enterprise behaviour via economic levers such as prices, taxes, and credit policies. …

The Tenth Plenum in September 1962 made it clear that radical changes of the sort discussed would not take place… most of the reform proposals had to wait during another decade and a half of turmoil before getting a sympathetic hearing from a relatively united leadership.

And from 1964 on, as the polemics that would become the Cultural Revolution began to build, Sun Yefang and other economists were subject to increasingly vicious public attack. More detail, albeit more than most readers will want, can be found in Cyril Lin’s 1981 article, “The Reinstatement of Economics in China Today” (JSTOR link).

Sun Yefang

China’s top economics prize commemorates that history: it is called the Sun Yefang Prize in Economic Science, supported by a foundation set up in 1983 by a number of officials and reformist scholars. Interestingly, the most recent recipients of the award are two economists at the Federal Reserve Bank of San Francisco.