China's Economic Policy: Is Milton Friedman Replacing Chairman Mao?

Photograph by Diego Azubel/EPA

Chinese Communist Party leaders, at their recent party meeting in Beijing, indicated that they planned to let market competition play a “decisive role” in the country’s economy moving forward.

Days later, recognizing the demographic time bomb the country faces, they announced partial relaxation of China’s restrictive “one-child” policy, which was leading to future labor shortages. And a few days after that, they hinted that the government would reduce its energy subsidies to state-owned enterprises, which have fueled inefficiencies throughout the economy and are largely responsible for the choking pollution in many parts of the country.

Is Milton Friedman’s Free to Choose replacing Chairman Mao’s Little Red Book as the bible of the People’s Republic?

The truth, of course, is far more subtle than that. In the 1970s and ’80s, a number of leading American thinkers, pointing to the political and social unrest then taking place in Latin America, Africa, and Asia, argued that the most important prerequisite for democratization was increased economic freedom. By creating a middle class with high expectations, they argued, economic liberalization would eventually result in increased political freedom, because a knowledgeable, educated, prosperous middle class wouldn’t settle for partial freedom. The process would be gradual, and not without setbacks, these scholars contended, but it would be irreversible.

We may be witnessing that very process now taking place in China.

As my colleagues pointed out in their 2012 book, The $10 Trillion Prize, China’s middle class, which didn’t exist a generation ago, now numbers in the hundreds of millions. These are consumers with great fondness for Western brands. They travel to places—Taiwan, the U.S., Britain—where previous generations couldn’t have conceived of traveling. They study at Western universities: Stanford, Harvard, Northwestern, Insead, Imperial College London, etc. They enjoy Western food, wine, music, TV shows. They’ve had a taste of what freedom brings and they want more.

Though the details of what the Chinese leadership means by market competition remain sketchy, it seems clear these latest steps away from central control will likely be followed by others. Not tomorrow, or next week, necessarily, but eventually, as sure as spring follows winter.

For Americans, the more freedom that China’s 1.3 billion citizens enjoy, the brighter the future for all of us.

If party leaders mean what they say, the changes point to an era of increased stability, predictability, and rule of law. Cleaner air, freer trade, increased transparency, and even greater opportunities for U.S. businesses and investors can’t be far behind.