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CATO JOURNAL

taken, and yet nothing is left undone. An empire is often brought to order by having no activity’’ (Lao Tzu, 48; Chan 1963: 162).

Like water, the market is resilient and will seek its natural course— a course that will be smoother, the wider the path the market can take and the firmer the institutional banks that contain it. The challenge for China is to widen the free market and provide the institutional infrastructure necessary to support private markets. The solution is to discard market socialism and make the transition to ‘‘market Tao- ism.’’ Or, as Gao Shangquan, vice minister of the State Commission for Restructuring the Economy, recently stated (in Chang 1997: 15), the challenge is to throw SOEs ‘‘into the sea of the market economy.’’

Breaking the Planning Mentality

The collapse of the Soviet Union and the failure of central planning have ended the debate over whether the plan is superior to the market. As Liu Ji (1997), vice president of the Chinese Academy of Social Sciences, recently remarked, ‘‘The only people in China who still cling to the idea of central planning are fossilized, dogmatic Marxists.’’ Yet the planning mentality is hard to break—in both the East and the West. It is very tempting for the ‘‘best and the brightest’’ to imagine that they can improve upon the ‘‘invisible hand’’ of the market. But free markets cannot be planned; they emerge spontaneously as consumers’ preferences and technology change, and they require well-defined private property rights and freedom of contract.

The incompatibility of government planning and market forces threatens China’s future. The vibrancy of the market-driven nonstate sector, which accounts for more than 70 percent of industrial output value, is propelling the People’s Republic into the 21st century, but the ossified state sector—driven by state planners—is acting as a drag on development. The ‘‘heavy-industry-oriented development strat- egy,’’ which is reminiscent of the days of Soviet-style central planning, is still ingrained in the collective consciousness of China’s ruling elite (Lin et al. 1996: 218). Without free capital markets and widespread private property, investment decisions necessarily become political decisions. Corruption and rent seeking will continue in China as long as economic decisions are government driven instead of market driven. When the government holds interest rates at artificially low levels, politics—not prices—determines who gets scarce capital. People become dependent on government and lose their foresight and free- dom. Moreover, one control leads to others, so that once a government departs from free-market principles, it tends to head further down the ‘‘road to serfdom’’ (Hayek 1944; Mises 1980, 1998).

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