What accounts for the extraordinary rise of China’s private sector after the economic reforms that followed Mao’s death? The 1980s were a pivotal decade for China in many ways, as the rapid growth of the private sector transformed the structure of a still officially socialist economy. In 1987, Deng Xiaoping famously said that the explosion of private-sector activity in the countryside in particular came as a surprise to him:

In the rural reform our greatest success — and it is one we had by no means anticipated — has been the emergence of a large number of enterprises run by villages and townships. They were like a new force that just came into being spontaneously. …If the Central Committee made any contribution in this respect, it was only by laying down the correct policy of invigorating the domestic economy. The fact that this policy has had such a favourable result shows that we made a good decision. But this result was not anything that I or any of the other comrades had foreseen; it just came out of the blue.

Of course, the township and village enterprises–which is to say, private companies avant la lettre–did not actually come out of nowhere. They drew on China’s long traditions of commercial enterprise, and people’s experience with living and operating in a market economy before it was suppressed in the 1950s. In an interesting new paper, “Markets under Mao: Measuring Underground Activity in the Early PRC” (the link is currently open-access), Adam Frost and Zeren Li offer quantitative evidence to suggest that hidden market activities continued at scale even through the height of the Maoist period:

There was already substantial market-based activity prior to the launch of economic reforms. Even after the “socialist transformation” of the Chinese economy was ostensibly complete, Chinese citizens continued participating in “underground market activity,” i.e. private acts of exchange that occurred outside of systems of planned allocation and distribution and which were intentionally concealed from the state. A broad host of actors, ranging from rural people who “abandoned farming to take up commerce” to merchants who specialized in the illicit wholesale trade of ration certificates, devised novel strategies to evade state control and engaged in consensual private transactions. While these individuals often filled critical voids in the economy, they were collectively maligned as “speculators and profiteers” and, for three decades, were the recurring targets of mass campaigns. Yet, even at the height of the Cultural Revolution when anti-capitalist sentiments reached their zenith, “speculation and profiteering” were never wholly suppressed.

The authors use local administrative documents recovered from flea markets to compile data on 2,690 cases of “speculation and profiteering” that authorities prosecuted in two areas, the rural county of Chun’an in Zhejiang and the city of Zhenjiang in Jiangsu. These records often list what items the “speculators” were accused of selling, and at a what price. The value of the transactions was usually pretty substantial:

The mean case value (i.e. the estimated total value of activity described in each case) is about 334 yuan for Chun’an and 362 yuan for Zhenjiang. To put these figures into perspective, in 1955 the national average income was 102 yuan for an urban worker and 94 yuan for a rural farmer, and income levels remained stagnant for most of the 1960s and 1970s. In other words, the mean case involved activity that represented three years’ worth of consumption for the mean worker. Given that prosecuted individuals probably succeeded in concealing some portion of their gains, this figure is likely only a fraction of the true quantities of goods, cash, and ration certificates involved in each case.

The authors use various assumptions to estimate the total size of underground market activity from these figures. The results depend so much on assumptions that the exact figures are not particularly meaningful, but the range of estimates is consistent with contemporary estimates of the “shadow economy” of illegal transactions in most countries–perhaps suggesting that Maoist China was more economically normal than its ideology would indicate. This finding is also interesting:

We observe that the average spread between the purchase and resale price of items in underground market transactions was relatively low and remained so throughout the entire period of observation. There was, on average, no more than a 19% mark-up on items that were bought and resold in underground markets. These figures suggest that the maximum perceived risk of capture was low, even during the height of the Cultural Revolution.

The low black-market premium also suggests these kind of underground transactions were widespread enough that the scarcity value was not extreme, and that underground traders faced enough competition that they could not charge exorbitant prices. The repeated campaigns against “speculation and profiteering” that generated these administrative documents therefore do not seem to have been particularly successful. When the formal prohibitions on these private transactions were lifted in the post-1978 reforms, many Chinese people had plenty of experience with trading and business that could be quickly put to use.

Frost and Li’s account lines up with my own thinking about the reasons for the early success of China’s economic reforms–although when I pondered this question before, I focused more on the fact that China did not actually spend that much a time as a full-fledged socialist economy (see my previous post, “How long was China Communist?“). The time from the forced nationalization of private firms in the mid-1950s to the re-legalization of urban and rural private sectors in the early 1980s was barely three decades. By contrast, socialist prohibitions on private enterprise in the Soviet Union lasted two full generations, long enough to wipe out any previously existing base of skills and knowledge formed in the private commercial economy (which was not that developed in tsarist Russia anyway).

These two explanations seem fully complementary to me: China’s socialist prohibitions on private transactions were neither complete enough to truly stamp out market-based activities, nor did they last long enough to for the population of people with experience running businesses in a market economy to die off. Once the state began to tolerate markets again, the hidden traditions of private enterprise could come out into the open.