These words were spoken by Vladimir Lenin in 1917. The results were not inspiring. It shouldn’t be too surprising why this effort failed – the socialist order he sought to create is impossible. Ludwig von Mises argued this point decisively in his Economic Calculation and the Socialist Commonwealth, and history has demonstrated the point many times since then.

Eventually, the Soviet Union collapsed, and Russia attempted to move to a capitalist order. However, the results we see today are less than inspiring. What went wrong? We know that a capitalist order, unlike a socialist one, is possible, so this calls out for a different explanation. Many explanations have been offered. In his book Why Perestroika Failed: The Economics and Politics of Socialist Transformation, Peter Boettke begins his analysis by noting that despite prominent announcements for “ten radical plans for economic restructuring, not a single one was ever implemented.” However, I’m not sure the implementation of these plans would have changed things.

We can see how attempting to construct an impossible situation is doomed to fail. Less obvious is the idea that just because a particular order is possible, it doesn’t follow that it can be constructed. Capitalist orders are possible, and can work, but this doesn’t mean they can be constructed. Instead, it may be the case that they need to be allowed to evolve, rather than being built.

To see how this can work, one should read the book How China Became Capitalist by Ronald Coase and Ning Wang (from which all the below quotes originate). While Russia attempted to become capitalist by political decree, Coase and Wang describe how “China became capitalist with marginal revolutions.” It started small. Here and there, small villages began to operate private farms, quietly operating under the radar. During the Great Leap Forward, this kind of behavior would have been condemned as counterrevolutionary, and quickly crushed. This time, however, the Chinese government backed off, and allowed these fledgling markets room to develop. China did not plan to transition to private farming, nor did they deliberately design a model or framework within which such farming would operate. Centralized attempts at agricultural reform had taken place before, but they were always attempts to find a new “right way” to do things and dictate it from the top down, such as “an attempt to impose a model developed in the village of Dazhai on the whole nation” which “denied local governments the freedom to take into account local circumstances.”

There was no official plan for how private farms should operate, because “private farming was not a single practice, but an umbrella name for a family of non-collective farming practices that had emerged spontaneously in rural China.” It was not until 1982 that the Chinese government officially recognized private farming as a legitimate project, well after it had emerged and established itself across the country.

One of F. A. Hayek’s most important ideas is the difference between law and legislation. Laws are realities of the world which operate separately from our designs or our wishes. This includes laws of physics, but also economic laws, such as the law of supply and demand or the reality of opportunity cost. Legislation, in contrast, is what is written down and produced by human beings. We can create and change legislation, but we cannot simply create or change laws. The best we can do is to try to embody what the law is with our legislation. By recognizing the legitimacy of the various farming developments which had emerged, China was using legislation to reflect the law. By contrast, Russia had always attempted to use legislation to guide and direct these processes, rather than reflect them.

Numerous marginal revolutions took place throughout China over the years. The truly remarkable thing about it was how little of it was planned or directed. For example, by the 1990s “Shenzhen already had more than 300 offices where people could buy or sell stocks, despite the fact that there was no official permission to trade in this way.” This is just one example of the “lag between practice and regulation.” Rather than trying to direct what changes should occur and how they should be structured, the Chinese authorities pulled back, allowing new forms of economic activity to develop independently. After they had grown into place, laws would be written after the fact, around the practices which had developed. Legislation was made to reflect economic activity, rather than being used to try to design it.

China is far from a bastion of free markets, and much progress that had been made has also been undone. Still, there is a lesson to be learned here. Lenin couldn’t construct a socialist order, but we can’t construct a capitalist order either. These things take time, and freedom.

 

Kevin Corcoran is a Marine Corps veteran and a consultant in healthcare economics and analytics and holds a Bachelor of Science in Economics from George Mason University.