So far, my favorite book about the 2016 election is one that came out in 2014

Like many good books, Martin Gurri’s The Revolt of the Public and the Crisis of Authority in the New Millennium is about One Big Idea, though the implications take a while to work through. It’s basically a story of how technology and media are changing politics.

Though Gurri does not, I found it helpful to put the idea in economists’ terms: a dramatic increase in the supply of information and media has pushed down its value. For many established institutions, this has meant a decline in influence, as their once-authoritative statements must now compete for attention and truth-value with a growing horde of statements from the margins. The struggles of old-line newspapers, political parties, and governments in the new environment are thus all of a piece:

The grand hierarchies of the industrial age feel themselves to be in decline, and I’m disposed to agree. They evolved to operate on a more docile social structure – one in which far less information circulated far more slowly among far fewer persons. Today a networked public runs wild among the old institutions, and bleeds them of the power to command attention and define the intellectual and political agenda. Every expert is surrounded by a horde of amateurs eager to pounce on every mistake and mock every unsuccessful prediction or policy. Every CRU has its hacker, every Mubarak his Wael Ghonim, every Barack Obama his Tea Party. Nothing is secret and nothing is sacred, so the hierarchies some time ago lost their heroic ambitions and now they have lost their nerve. They doubt their own authority, and they have good reason to do so.

Gurri really won my heart when he brought this insight together with the work of the great anthropologist Mary Douglas, who had an uncanny knack for creating powerful and useful analytical frameworks:

Another way to characterize the collision of the two worlds is as an episode in the primordial contest between the Center and the Border. The terms were employed by Mary Douglas and Aaron Wildavsky in another context, long before the advent of the information tsunami, but they are singularly apt for our present condition. “Center” and “Border” can be applied to organizations embracing specific structures, ideals, and beliefs about the future. The two archetypes are relative to each other, and perform a kind of dance which determines the direction of social action.

The Center, Douglas and Wildavsky write, is dominated by large, hierarchical organizations. It frankly believes in sacrificing the few for the good of the whole. It is smug about its rigid procedures. It is too slow, too blind to new information. It will not believe in new dangers and will often be taken by surprise. The Center envisions the future to be a continuation of the status quo, and churns out program after program to protect this vision. The Border, in contrast, is composed of “sects” – we would say “networks” – which are voluntary associations of equals. Sects exist to oppose the Center: they stand firmly against. They have, however, “no intention of governing” and develop “no capacity for exercising power.” Rank means inequality, hierarchy means conspiracy to the Border. Rather than articulate programs as alternatives to those of the Center, sects aim to model the behaviors demanded from the “godly or good society.” Making a program is a center strategy; attacking center programs on behalf of nature, God, or the world is border strategy.

If this is starting to sound a bit like what happened in the primaries last year, that is no accident. Gurri I think provides a useful way of thinking about the realignment of politics made clear by the 2016 election in the US, and the UK’s Brexit referendum:

I was trained, as even the youngest of us were, to think in terms of the old categories: to think, for example, that the direction of American politics depended on the balance between Democrats and Republicans. Yet both parties are, in form and spirit, organizations of the Center. Both are heavily invested in the established order, offering the public minor differences in perspective on the same small set of questions. Surprises in America’s political trajectory are unlikely to come from the alternation of Democrat and Republican. The analyst searching for discontinuities – for the possibility of radical change – must wrench his mind free of the old categories and turn to the subterranean strife of hierarchy and network: in the political parties, between “netroots” activists and a variety of Tea Party networks on one side, and the Democratic and Republican organizations on the other. There, different languages are spoken, potent contradictions can be found. …

The book is consistently interesting, and although he refrains from making explicit predictions it nonetheless often feels quite prescient. Gurri’s blog extends the analysis into 2016, though that piece will make more sense after having read the book.

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The continuing relevance of Kornai for China

It’s feeling like something of a Kornai moment to me: not long after finishing a nice book covering Kornai’s influence on China of the 1980s, I have stumbled across an excellent discussion of Kornai’s ideas apply to China today.

In the latest issue of the Journal of Economic Literature, Xu Chenggang reviews János Kornai’s Dynamism, Rivalry, and the Surplus Economy. Kornai calls the 2013 book a sequel of sorts to his 1992 classic The Socialist System, as it lays out a conceptual framework for understanding capitalism in contrast to socialism. But Xu also uses the review to think through China’s current situation in the context of Kornai’s framework, especially the key concept of the soft budget constraint:

Two pairs of concepts highlight the analytical framework for contrasting capitalism to socialism: shortage economy versus surplus economy and soft budget constraint (SBC) versus hard budget constraint (HBC). Compared with the distinctive feature of socialism called chronological shortage, which was first pointed out by the author in the 1970s, capitalism is characterized as chronological surplus, which means excess supply, including excess capacity and excess inventories, and labor unemployment. …

One of the major challenges beyond understanding “pure” systems is the hybrid system, which covers most of the economies in the world. China presents an interesting case of such a challenge. The pre-reform socialist China was a shortage economy, which is exactly consistent with Kornai’s predictions. Since the reform, China transformed into a particular type of hybrid system, that is, state capitalism, similar to that in Vladimir Lenin’s New Economic Policy. …

The Chinese economy is a super-surplus economy featured by massive over-capacity, which exceeds the over-capacity problem in all leading capitalist economies in the world. Such an extraordinary over-capacity problem is concentrated in the state sector with SBC. The SBC syndrome and the “forced growth” behavior of the SOEs create shortage under the socialist system. This phenomenon raises the issue of why SBC under state capitalism is associated with surplus. …

In contrast to private firms in capitalism, state firms under state capitalism continually produce and expand unwanted and obsolete products because they are protected by SBC (i.e., no “destruction” policy). The monopolistic power and government protection provide SOEs with the privilege of heavily subsidized capital. They imitate other innovations at extremely low costs because of favorable technology transfer deals from advanced multinational firms that are supported by the government and the monopolized super-large scale of the market (e.g., high-speed train technology). …

In socialism, SBC and lack of competition create shortage. Moreover, SBC is a mechanism that hampers competition. Indeed, market competition was weak in the Central and Eastern Europe and Former Soviet Union (CEE–FSU) reformed economies when central planning was replaced by market mechanisms. Different from CEE–FSU reforms, the large-scale entry of nonstate firms, particularly private firms, makes market competition the norm in the Chinese economy. Even SOEs, which are subject to SBC, are driven to fierce market competition and regional competition.

When high-powered incentives associated with these competitions are given to the CEOs of SOEs for market share or for profits and when SBC serves as insurance against insolvency, SOEs are induced to take bold risks in competition for market shares. This situation seems to be the force that produces extraordinary surplus. Thus, the coexistence of fierce product market competition and severe SBC could trigger more drastic over-capacity problems.

This phenomenon in which SBC under fierce competition may exacerbate surplus can also be observed in leading capitalist economies. Examples include the bad loan problems in Japan and the sub-prime mortgage problem in the United States. If the essential mechanism of SBC is the moral-hazard problem created by the removal of bankruptcy threat (broader than bailing out by an ex ante identifiable agent), the sub-prime mortgage scheme in the United States can be regarded as a sophisticated variation of SBC in advanced capitalism.

Like most of Xu’s work, the whole review is worth a read. I also happen to think that Xu’s 2011 article “The Fundamental Institutions of China’s Reforms and Development” is one of the single best things ever written about the Chinese economy; it and other pieces are at Xu’s profile and bibliography page.

What happened to the Chinese arguments for inland infrastructure investment?

There is a pretty overwhelming consensus these days that China is wasting huge amounts of money by building lots of unneeded infrastructure projects in its less-populated inland provinces. A lot has been written on this theme since the 2009 mega-stimulus that launched the infrastructure spending boom, but one of the more recent examples is this piece by Trefor Moss in The Wall Street Journal; here’s a sample:

While President Donald Trump says the U.S. urgently needs to invest in its decaying transport systems, China, if anything, faces the opposite problem of profligate infrastructure spending, according to some economists. Yet after years spent building airports, roads and railways, Beijing outlined plans for more of the same in a recent policy paper.

Under the plan, China would have 260 commercial airports by the end of the decade, up from 207 in 2015. Additions include a second major airport in Beijing at a cost of $11.7 billion, and a second airport for the western city of Chengdu for $10.2 billion. …

Three-quarters of Chinese airports—and virtually all the country’s regional airports—lose money, the then-chief of the civil aviation authority, Li Jiaxiang, said in 2014, in the agency’s most recent public comment on the issue. The agency spent $191 million last year subsidizing loss-making airports.

Airports in far-flung parts of western China are especially vulnerable. The $57-million Libo airport in Guizhou, for example, drew media attention in 2009 for handling just 151 passengers, yet the zombie facility hasn’t been allowed to close.

In this context it was interesting for me to recently read an older book that makes a strongly argued case for doing lots of infrastructure investment in inland provinces, with plenty of statistical evidence and full consideration of the relevant economics literature. The book is The Political Economy of Uneven Development: The Case of China by Wang Shaoguang and Hu Angang; it was published in 1999 but is a translated and revised version of a Chinese book composed in 1995. Therefore it very much predates the launch of China’s “develop the West” drive in 1999, and indeed the book seems to be a key source for the intellectual arguments driving that program and subsequent efforts to close the gap between the coast and the inland.

I would summarize Wang and Hu’s main arguments as follows:

  • There is no natural trend for regional disparities to be narrowed through a process of convergence. Market forces do not necessarily cause factors of production to spread evenly around the economy, but can concentrate them in areas that possess initial advantages. And in fact, regional inequality in China in the early 1990s was rising sharply.
  • Regional inequality in China was already extremely high by any international standard, which poses risks to national unity and political stability. (“The China of 1994 would undoubtedly have higher levels of regional inequality [if properly measured using units of similar size] than did Yugoslavia in 1988, just a few years before its disintegration.”)
  • The different endowments of China’s provinces–geography, economic structure, human capital, etc.–are either a function of differences in per-capita GDP or have no statistically significant relationship with per-capita GDP. In fact the numerous historical, geographical and cultural differences among provinces are less important than gaps in transportation infrastructure.
  • Differences in economic growth rates across China’s provinces are mainly driven by differences in investment, and differences in investment are mainly driven by differences in provinces’ local savings. Since local savings levels are themselves determined by the level of economic development, higher-income provinces have a natural tendency to grow faster.
  • These natural advantages could be offset by a capable and committed government that organized inter-provincial capital flows. But policies in the 1980s and early 1990s lead to fiscal decentralization and favoritism for the rich coastal provinces, aggravating rather than alleviating regional inequality.
  • The solution then is for the central government to stop unnecessarily favoring coastal provinces, and instead organize large fiscal transfers and investment programs in inland provinces in order to compensate for their lower savings, boost their growth and put them on a more equal footing with the coastal provinces.

Compared to most academic policy recommendations, these were almost unbelievably influential: two decades of large investment programs for inland provinces have followed. Yet the regional gaps that so worried Wang and Hu have not closed; indeed recently they have widened again. I would be surprised if many people these days would argue that the problem with inland provinces is that they aren’t getting enough infrastructure investment.

So what went wrong? I can think of a few possibilities, which are not mutually exclusive:

  • The differences in endowments among provinces were more consequential than expected, and could not be equalized simply by building more transportation infrastructure in poorer inland provinces. Coastal provinces’ real advantages may have been less about geography, infrastructure and transport costs, and more about greater access to social and business networks abroad, stronger entrepreneurial experience and traditions, and higher levels of education and human capital. Lowering transportation costs for the inland provinces helps, but it isn’t everything.
  • All investment is not created equal — public-sector investment in infrastructure and private-sector investment in manufacturing are not substitutes. Boosting public-sector investment in the inland provinces may have added to their GDP in the short run, but it did less to change their growth potential and economic structure than private-sector investment would have. High rates of public investment also risk entrenching dependency rather than ending it, in much the same way that huge amounts of foreign aid are not always helpful for poor countries.
  • The infrastructure investment boom was in practice not a centrally-organized transfer of capital designed to narrow regional gaps, but more of a nationwide epidemic of soft budget constraints.

Japan’s WWII war machine did not have enough machines

It is not a stirring description of valor in battle, but the following passage from Ian Toll’s The Conquering Tide: War in the Pacific Islands, 1942-1944the sequel to his excellent Pacific Crucible, nonetheless stayed with me for a while:

Japanese war planners had hoped to produce 40,000 new military aircraft in 1944, but the production rate was barely half that level in the fall of 1943. Aviation plants were straining under the pressure of material shortages, maladroit logistics, and a paucity of trained machinists and engineers. Shipping losses bit deeply into deliveries of Malaysian and Jakartan bauxite, the industry’s chief source of aluminum alloys. The Mitsubishi complex in Nagoya had expanded steadily, employing 43,000 workers by the end of 1943, but it had turned out only 1,029 new Zeros in 1943, fewer than half the number demanded by the military services. The Japanese aircraft industry had relied to a disproportionate extent on a small, overworked coterie of talented craftsmen and technicians, and was never optimized for mass production. Belated efforts to introduce standard production-line techniques brought some improvement, but neither Mitsubishi nor the other major aircraft suppliers (Nakajima, Aichi, Kawasaki, Tachikawa, Yokosuka) managed to ramp up output fast enough to fill the military’s ballooning wartime orders.

When a government inspector passed through the Nagoya works in late 1943, he was surprised to learn that newly manufactured Zeros were still being hauled away from the plant by teams of oxen. There was no airfield adjoining the Mitsubishi plant. The new units had to be transported overland to Kagamigahara, twenty-four miles away, where the navy would accept delivery. The aircraft were too delicate to transport on trucks, and the railheads were not convenient. Twenty oxen had died, and the remaining thirty were verging on complete exhaustion. Feed had been obtained on the black market, but the supply was not reliable. Essential wartime deliveries of replacement aircraft thus hung on the fate of a diminishing herd of underfed beasts. Mitsubishi engineers at length discovered that Percheron horses could haul the aircraft to Kagamigahara faster and required less to eat. These ludicrous exertions, when compared at a glance to the arrangements at Boeing, Douglas, or Grumman, tell most of the story of Japan’s defeat.  …

Writing years after the war, Jiro Horikoshi observed that his country could not draw from the deep wellsprings of engineering and technical expertise that existed in the United States. There was nothing in Japan to compare with America’s sprawling complex of universities, research laboratories, design firms, and heavy industries. Japan had a small circle of gifted engineers employed by the navy, the army, and about a dozen industrial firms. Owing to rivalries between the army and the navy and between rival companies and cartels (zaibatsu), much of their work was duplicative and wasteful. All too often their talents were squandered on impractical, profligate, stop-and-start projects that never got off the ground (in some cases, literally). They were resourceful and dedicated, but there were not enough of them. Horikoshi and his colleagues drove themselves to the verge of complete exhaustion and collapse, until the doctors and bosses ordered them to rest. “Such poor management of technical policy created the situation where we had no other choice but to rely on the Zeros [a lightweight plane that US pilots were shooting down in increasing numbers] from the beginning of the war until its end,” Horikoshi wrote, “and this, in turn accelerated Japan’s defeat.”

The image of the starving oxen pulling planes indeed captures so much of the tragic waste that was Japan’s attack on the US.

Toll’s book is really a narrative history of key military engagements, not primarily an economic or social history–but it’s nuggets like this, along with digressions on topics like Hawaiian social history and shore leave in Australia, that help make the book continuously interesting and far from narrowly focused. It’s vividly written and a marvel in clarity, no simple task given the mass of names and the obscure and complicated geography it covers.

The lasting influence of “Kornai fever” in China

Julian Gewirtz’s new book, Unlikely Partners: Chinese Reformers, Western Economists, and the Making of Global Chinahas gotten rave reviews from plenty of people smarter and more important than me, but I am happy to add my voice to the chorus. It is an excellent general history of economic policymaking in the first fifteen or so years of the reform era (1978-1993), focusing particularly on the intellectual exchanges between a group of Chinese intellectuals and various foreign economists. The “western” in the title should be interpreted very broadly, as the stars of the story are in fact mostly lesser-known scholars from what used to be called the Eastern Bloc.

At the center of this tale is the great Hungarian economist János Kornai, who incisively analyzed the nature and problems of socialist economies. With detailed research and interviews, Gewirtz nicely uncovers the chain of encounters that led to Kornai’s ideas getting wide exposure in China:

Kornai’s major idea presented at the [1981] Athens conference was his analysis of the “soft budget constraint.” This crucial concept showed that, under a planned economy, the firm “is not limited by fear or loss of failure”–in more practical terms, loss-making in the firm’s finances does not bring negative consequences to the firm. … Kornai’s presentation drew a sharp rebuke from V.R. Khachaturov, president of the Soviet Economic Assoication and a vehement supporter of the socialist planned economy. … But an unlikely voice, not heard previously in the conference discussions, spoke up in Kornai’s favor: Wu Jinglian. “In his paper, Professor Kornai had analyzed the functioning of a specific model of a socialist economy. Chinese experience made it easy to understand his analysis,” Wu said. Chinese economists had observed these issues, especially the “paternalistic relationship” of the government and enterprises, “serious waste” in enterprise management, and “the disappearance of the function of prices as carriers of information about supply and demand.” Wu praised Kornai for providing a rigorous conceptual apparatus. …

While at Yale University’s Department of Economics in 1983-1984, the 53-year-old Wu had read Kornai’s Economics of Shortage. Returning to China in 1984, Wu stashed a copy of Kornai’s book in his luggage and, at home, excitedly circulated sections of the book among friends and colleagues. In the minds of this small, elite group of Chinese economists, Janos Kornai seemed like an unexpected friend. …

[in 1985] Kornai had come to China as part of a distinguished group of economists from Europe and North America who would gather with many of China’s leading economists and economic policy makers. … The ostensible topic of his presentation was “could Western policy instruments (especially monetary and fiscal policies) be effective in socialist countries?” Kornai’s career, built on applying sophisticated economic analysis to the economic problems of socialist countries, clearly suggested an affirmative answer to this question–although this idea was relatively new to China. Since arriving in Beijing, Kornai had been listening carefully to discussions of China’s problems, including economic “overheating” and fears of inflation, as well as to the Chinese economists’ sense that they did not have in mind a goal model for the reform. Listening to such discussions, he wrote in his memoirs, “I felt…that I was at home in China, despite the distance and the historical and cultural differences. All the phenomena that came up and the cares and woes were familiar.” …

Kornai’s ideas, transmitted through diverse channels, flooded into Chinese debates, including the 1986 publication of the Chinese translation of Economics of Shortage. Dozens of articles in periodicals introduced an even wider readership to what Dushu, then a prominent liberal magazine, called the “enlightening” views of Kornai, whom they dubbed “the economic theorist that reform cried out for.” “Kornai fever” would go onto fuel sales of over 100,000 copies of the Hungarian economist’s book. Kornai was mentioned hundreds of times in academic and research journals in the period 1986-1989, including in regional and provincial journals in areas as varied as Guangxi, Hubei, Anhui, and Heilongjiang. …

These authors placed particular emphasis on two related aspects of the book: why the shortage economy was innate to socialism and how enterprise behavior under socialism created shortage phenomena—focusing, as a result, on Kornai’s arguments about the “soft budget constraint” and “paternalism.” These ideas, which the reviewers defined as priorities to address in future reforms in China, would remain the most salient aspects of Kornai’s thought for Chinese economists.

This jibes with my own experience; I discovered Kornai’s work from Chinese references to the term “soft budget constraint” in writings on state-owned enterprise reform. But while the soft budget constraint is brilliantly useful conceptual tool, being able to identify the problem of soft budget constraints has not enabled China to solve it. In fact the simplest diagnosis of the problems of the post-2008 Chinese economy is probably that budget constraints, which had been getting harder, became a lot softer.

Kornai’s most important contribution may actually have been to articulate the idea a market economy could still be regulated or managed by the government through indirect means–the fiscal and monetary policies used in Western economies–rather than the direct planning characteristic of socialism.

There is much testimony that Kornai’s presentation on this theme at the 1985 Bashan conference helped many Chinese reformers clarify the direction in which they wanted to head. They knew that they didn’t want a planned economy any more, but they were also very uncomfortable with the idea of an economy completely driven by random market forces. Kornai’s presentation helped square the circle, and Gewirtz shows how the deceptively simple concept of a “market economy with macroeconomic management” eventually became an official goal and (more or less) a reality. Kornai himself recognized how unlikely this whole chain of events was:

It’s very strange that in my own little country [I was ignored] most of the time, and in this giant country I was able to speak at a certain historical moment when one billion people wanted to hear exactly what I wanted to say. That was a very rare moment, and good luck.

Who lost the battle for Manchuria?

A lot of mythology surrounds the Chinese Communist Party’s peasant origins and guerrilla tactics. But the Communist victory over the Nationalists in the civil war was not a mass uprising around the country, but a military campaign that started with victories in northeast China–Manchuria–and moved south from there. (Of course, when the Mongols and, later, the Manchus, conquered China, they also came from the northeast.) Here is Andrew Walder in his China Under Mao:

Victory was actually attained through conventional warfare fought between large modern armies, involving massive mobilization of material and human support for each side. Guerrilla warfare permitted the CCP to survive and expand during the Japanese invasion, but this survival strategy placed minimal demands on peasants to supply Communist partisans with food, material support, and recruits. Once the civil war began, the CCP abandoned guerrilla operations. As its armies poured into Manchuria after Soviet forces occupied the territory, Mao turned to a strategy of total mobilization for revolutionary war. The Red Army, renamed the People’s Liberation Army (PLA) in 1945, grew from 475,000 in 1944 to 2.8 million by 1948. …

The final years of the civil war resembled the Soviet army’s conquest of Eastern Europe in the last phases of World War II. The PLA rolled south from Manchuria and adjacent regions of North China, conquering vast regions that had never before been under CCP control, and regions like Tibet and Xinjiang that had not been governed by any Chinese state since the fall of the Qing dynasty.

Since the Communist victory was truly a military victory, many have looked to military causes to explain it. Chiang Kai-shek himself, in a book published after the war, focused attention on a series of events in 1946, around the city of Siping in Liaoning. Communist forces had occupied the city but were then dislodged by the Nationalists; at the same time, however, both parties were negotiating with the American envoy George Marshall, and a ceasefire was declared shortly afterward the Communist troops fled Siping. Chiang of course agreed to the ceasefire but in hindsight felt it was a mistake that allowed the Communists to regain the initiative:

This was a war that Chiang had lost in 1949, but which might have come out very differently, Chiang argued, if the Second Battle of Siping and its aftermath had been handled differently. The battle itself, Chiang said, had been “another decisive battle against the Communist troops.” As he described it, the three hundred thousand men under Lin Biao’s command had been utterly defeated: “More than half the Communist effectives became casualties.” Reports from the front, he said, “all agreed that barring some special international complications the Chinese Communists would not be able to fight anew after the terrific punishment they had just taken at the hands of the Government forces.”

Then there came the ceasefire and the suspension of [Nationalist general] Du Yuming’s pursuit of the Communist forces. Chiang believed that if his armies had continued their pursuit, “Communist remnants in northern Manchuria would have been liquidated.” Without a base area in northern Manchuria, the remaining Communist forces in Manchuria would have been deprived of Soviet support and “a fundamental solution to the problem of Manchuria would have been at hand.” Instead, “the morale of Government troops in Manchuria began to suffer” and Lin Biao rebuilt his forces in northern Manchuria. “The subsequent defeat of Government troops in Manchuria in the winter of 1948,” said Chiang, “was largely due to the second ceasefire order.” In this view, Siping was the decisive battle that could have been— if only a ceasefire, negotiated by George Marshall, had not intervened. Defeat had been snatched from the jaws of victory.

Chiang Kai-shek and Mao Zedong in 1945

Chiang Kai-shek and Mao Zedong in 1945

That is from Harold M. Tanner’s The Battle for Manchuria and the Fate of China: Siping, 1946, which reconstructs the events leading up to and following the battle, and tries to answer the question of whether Siping was truly the turning point that ensured Communist victory in the civil war. While Senator Joseph McCarthy also blamed Marshall’s intervention for “losing China,” a number of more reputable historians have also seen Siping as a key turning point. Tanner however concludes that Chiang’s hope was a false one, in part because the Soviet Union was quietly but effectively supporting the Communists, and both the Nationalists and the Americans were afraid of getting into a direct confrontation with the Soviets:

The Truman administration had decided that while the United States would support Chiang Kai-shek, there would be limits to the extent of that support. Chiang desperately wanted the United States to take a more active role in supporting his government and his army in their struggle against what Chiang portrayed as the Soviet Union’s imperialist designs on Chinese territory. The Truman administration, however, was determined not to get directly involved in the Chinese Civil War, and especially not to challenge the Soviet Union by getting drawn into the struggle in Manchuria.

America was willing to transport Nationalist armies and to supply substantial amounts of weapons and ammunition, but, as we have seen above, American equipment alone could not give the Nationalists a substantial advantage on the battlefields of Manchuria. Even if the United States had been willing to do so, extending unlimited military aid to an army that was pursuing a fundamentally flawed strategy and a government that was proving incapable of winning the political struggle is not likely to have changed failure into success. In any event, the United States did not have unlimited resources to expend on Chiang’s government. Truman’s decision to limit support for Chiang was based on his assessment of American interests and capabilities, including American commitments elsewhere around the globe, and the very real possibility that American embroilment in China could lead to conflict with the Soviet Union.

Marshall’s decision to push for a ceasefire in June 1946 was made in this context, as well as on the basis of his assessment (backed up by the intelligence reports available to him) that the Nationalist Army was simply not capable of achieving victory in Manchuria. Chiang agreed to the ceasefire not only because Marshall was pressuring him to do so (although this was certainly an important factor), but also because he was aware of the limitations of his own armies, the challenges of further operations in North Manchuria, and the possibility that military operations north of the Songhua could elicit a dangerous reaction from the Soviet Union.

The Communist victory in China’s civil war, in this analysis, is ultimately the result of the Cold War and thus of how the Second World War ended. In fact, Peng Shuzhi, a Chinese Trotskyist, made much the same argument back in 1952:

Placed in an unfavorable position in the international situation created by the Second World War, American imperialism was obliged to abandon its aid to Chiang and its interference with Mao. At the same time, the Soviet Union, which had secured a superior position in Manchuria at the end of the war, inflicted serious damage to Chiang’s government and offered direct aid to the CCP. This enabled the latter to modernize its backward peasant army. Without this combination of circumstances, the victory of a party like the CCP, which relied purely on peasant forces, would be inconceivable.

For example, if Manchuria had not been occupied by the Soviet Union but had fallen entirely under Chiang’s control, Chiang Kai-shek would have utilized the economic resources and the Japanese arms in Manchuria to cut off direct connection between the CCP and the Soviet Union. This would have blocked the USSR’s armed support to the CCP. Similarly, the situation would have been quite different if direct intervention against the CCP by American imperialism had been possible. Under either of these two circumstances the victory of Mao Tse-tung would have been very doubtful.

To approach this from another direction, we could recall the defeat of the CCP’s peasant army in the Kiangsi period, 1930-35, when the bourgeois KMT’s power was considerably stabilized as a result of continual aid from imperialism, while the CCP was isolated from the Soviet Union. From this we can also derive sufficient reason to justify the conclusion that today’s victory of the CCP is entirely the result of the specific conditions created by the Second World War.

The Soviet Union’s pivot to Asia

I very much enjoyed Chris Miller’s new book The Struggle to Save the Soviet Economy, which explains just how and why the Soviet Union’s economic problems became overwhelming in its last decade of existence. I was too young when the USSR broke up to do much more than just register the news headlines, so the book helped me get a better understanding of the events leading up to its collapse. One of Miller’s themes is that perestroika was not in fact an ill-considered attempt to rapidly introduce Western neoliberal economics, but rather an attempt to emulate the reforms that China was implementing so successfully at the time:

The stagnation and crises of the 1970s and 1980s in Eastern Europe and in the West convinced Soviet leaders that they needed to look elsewhere for models of reform. The rapidly growing economies on the USSR’s eastern border were the obvious place to turn. Most historians have overlooked perestroika’s Asian roots, but they were clear to contemporaries. Leading economist and Gorbachev adviser Stanislav Shatalin, for example, was asked by a journalist which of the world’s economic models the Soviet Union should emulate. Should it copy the West, or learn lessons from its Eastern European socialist allies? The question of international orientation had vexed Russia since Peter the Great, but like many perestroika-era intellectuals, Shatalin believed it was time for something new. “We need to be more attentive to the experiences of Japan, South Korea, and China,” he said. “It is time to unite the Slavophiles and Westernizers, and turn our face to the east.” …

One irony, many Soviet officials noted, was that China’s policies were not actually new. Not only was Deng’s policy of “reform and opening” similar to Lenin’s New Economic Policy, it also mirrored changes to economic governance mechanisms that some Eastern European countries like Hungary tested in the 1960s and 1970s. …But the Soviet officials who embraced China as a model did so not because they thought Beijing’s policies were unique, but because they believed that China provided compelling evidence of what such reforms could accomplish.

Miller’s argument is not that Gorbachev’s reforms were too aggressive or poorly designed, but rather that their effectiveness was undermined by heavy opposition from entrenched interests in the bureaucracy. With the budget in crisis and inflation spiraling, the incomplete reforms could not stabilize the economy and so it collapsed. (This view is similar to the argument made by Jeffrey Sachs and Wing Thye Woo in their classic 1994 article “Structural Factors in the Economic Reforms of China, Eastern Europe, and the Former Soviet Union”). For me, the book had just the right balance of analytical coherence, narrative drive and use of original sources; a great read and now a late addition to my best books of 2016 list.

Another virtue of Miller’s book is how it gives a sense of the socialist countries compared ideas and borrowed from each other, forming a common and distinctive intellectual universe. For more on this kind of cross-pollination, see a previous post on the influence of the New Economic Policy of the 1920s on Chinese economic reforms of the 1980s, and my short account of how China first looked to Eastern Europe for reform ideas before turning to Japan and Korea.