Chapter 11: The Great Experiments

The twentieth century ran two vast experiments in non-market coordination. The Soviet Union attempted comprehensive central planning from 1928 until its dissolution in 1991. China began with Soviet-style planning, then invented something stranger—a hybrid system that defied the categories of both capitalism and socialism, and that, against all expectations, produced the most dramatic economic transformation in human history.

These experiments provide evidence that pure theory cannot. What happens when you actually try to plan an economy? What goes wrong? What, surprisingly, works? The answers matter not just for historical understanding but for imagining what coordination mechanisms might be possible in the future.

The Soviet System

Gosplan—the State Planning Committee of the USSR—was the nerve center of the Soviet economy from 1921 to 1991. At its peak, Gosplan attempted to coordinate the production and distribution of millions of products across a territory spanning eleven time zones.

The planning process was staggeringly complex. Five-Year Plans set strategic priorities: industrialization, agricultural targets, military production. Annual operational plans translated these into specific production quotas for every enterprise in the country. The material balances method—the core planning technique—attempted to match sources and uses for each major product, iterating until supply and demand balanced on paper.

Consider what this required. Planners needed to know: How much steel will be produced? Who needs steel, and how much? What inputs does steel production require—iron ore, coal, electricity, labor? Who produces those inputs, and what do they require in turn? Each product connected to dozens of others in chains of dependency that extended across the entire economy. Balance one product and you unbalanced another. The plans were never fully consistent; they couldn't be.

The planning bureaucracy was enormous—tens of thousands of officials gathering data, setting targets, monitoring compliance. Information flowed upward through enterprise reports, was processed centrally, and flowed back down as directives. The lag was substantial: by the time a plan was finalized, conditions had changed.

Kornai's Shortage Economy

The Hungarian economist János Kornai provided the definitive analysis of what went wrong. In The Socialist System (1992), he identified a constellation of pathologies that followed from the logic of central planning.

Soft budget constraints: Socialist enterprises couldn't go bankrupt. Losses were covered by the state. Humane in theory—no workers thrown out by market forces—but perverse in consequence. Enterprises had weak incentives to economize. Why cut costs when losses will be covered? Why innovate when there's no competitive pressure? Efficiency atrophied.

Chronic shortage: In market economies, supply and demand equilibrate through price. In the Soviet system, prices were administered, often set below market-clearing levels. At those prices, demand exceeded supply. Queues formed. Goods disappeared from shelves. Citizens spent hours searching for necessities.

Shortage cascaded through the system. If an enterprise couldn't get the inputs it needed, it couldn't meet its production quota. The enterprises that depended on its output faced shortages in turn. Hoarding became rational—grab what you can, when you can, because you never know when you'll see it again. The shortage economy became self-perpetuating.

The ratchet effect: Planners set targets based on past performance. Meet your quota this year, and next year's quota would be higher. The incentive was perverse: perform just well enough to satisfy superiors, but not so well that next year's target becomes impossible. Innovation and effort were punished; minimal compliance was rewarded.

Gaming the indicators: Enterprises were evaluated on measurable targets—tons of steel, units of output, square meters of fabric. But the metrics never captured quality. Produce heavy goods to meet tonnage targets, regardless of whether heaviness served any purpose. Sew large sizes to meet fabric quotas, regardless of what sizes customers needed. The system optimized for what was measured and neglected what mattered.

China's Different Path

China began with Soviet-style planning after the Communist victory in 1949. Mao's Great Leap Forward (1958-1962) attempted to accelerate industrialization through mass mobilization—and produced history's deadliest famine, with tens of millions dead. The Cultural Revolution (1966-1976) disrupted planning itself, subordinating economic coordination to political turmoil.

By 1978, China's economy was stagnant, its people desperately poor. Deng Xiaoping launched "Reform and Opening Up"—and invented an approach to economic transition that would confound Western expectations.

The genius of Deng's reforms was gradualism. Rather than dismantling the planned economy overnight—as Russia would later attempt with disastrous results—China allowed markets to grow alongside the plan.

Dual-track pricing was the crucial innovation. Enterprises still had to fulfill their planned quotas at planned prices. But any production above the quota could be sold at market prices. This created incentives for expansion without threatening existing arrangements. The plan continued; the market grew around it.

Special Economic Zones allowed experimentation without risk. In designated coastal areas, capitalist practices were permitted—foreign investment, private ownership, market pricing—while the rest of the country maintained socialist structures. If experiments failed, they could be contained. If they succeeded, they could spread.

Township and Village Enterprises (TVEs) created a form of collective entrepreneurship. Neither state-owned nor privately held, TVEs were controlled by local governments and operated in market conditions. They became engines of growth, employing over 100 million workers at their peak.

Deng's phrase for his approach: "Crossing the river by feeling the stones." No blueprint, no master plan—just careful experimentation, observing what worked, scaling successes, pruning failures. It was, in its way, more empirical than the Marxist-Leninist system it was replacing.

Why Did China Succeed Where the USSR Failed?

The question haunts economic analysis. Both countries started with Soviet-style planning. One collapsed; the other became the world's largest economy (by some measures). Why?

Several factors stand out.

Gradualism versus shock therapy: China's gradual reform allowed institutions to adapt. Russia's rapid liberalization—the "shock therapy" of the 1990s—destroyed the old system before new institutions could form. The result was economic chaos, plummeting living standards, and the rise of oligarchs who captured state assets.

Growing out of the plan: The economist Barry Naughton's phrase captures China's strategy. Rather than shrinking the plan, China let the market sector grow faster. Over time, the plan's share of economic activity diminished naturally. The transition was Pareto-improving—nobody was made worse off by reform, even as markets expanded.

State capacity: China maintained strong state institutions throughout its transition. Russia's state largely collapsed, leaving no authority to enforce contracts, regulate markets, or prevent predation. Effective markets require effective states; China had one, post-Soviet Russia did not.

Political authoritarianism: This is uncomfortable but unavoidable. China's one-party system allowed reforms to proceed without electoral backlash. Russia's partial democratization created opportunities for opposition to reforms—and for oligarchs to capture the political system. Economic and political liberalization proceeded at different speeds, with chaotic results.

Historical contingency: China had certain advantages—a vast rural population whose productivity could increase dramatically, proximity to dynamic economies like Taiwan and Hong Kong, a diaspora that could provide investment and expertise. These conditions were not replicable.

What Is China's System?

Even today, after four decades of reform, China's economic system defies easy categorization.

It's not capitalism as the West knows it. The state maintains commanding heights: major banks, key industries, infrastructure. Land remains collectively owned; what's traded is use rights. The Communist Party retains authority over all significant economic actors.

It's not socialism as twentieth-century theory defined it. Markets set most prices. Private enterprises flourish. Billionaires accumulate fortunes. Income inequality has widened dramatically.

Observers have called it "state capitalism," "market-Leninism," "socialism with Chinese characteristics." Perhaps the most accurate description is that it's a hybrid—neither purely plan nor purely market but a strategic combination of both, constantly adjusting.

The Belt and Road Initiative, China's vast infrastructure investment program spanning continents, shows state direction at massive scale. Yet domestic consumer markets operate with market dynamics. Industrial policy targets strategic sectors for development; yet competition among firms within those sectors is intense.

China's system suggests that the binary of plan versus market may be false. Coordination mechanisms can be combined. The question is not "markets or planning?" but "what combination, in what domains, adjusted how?"

The Coherentist View

From a coherentist perspective, China's success illustrates the principle of adaptive resonance.

The Soviet system tried to impose coordination through force—central directives transmitted through hierarchy. When conditions didn't match the plan, the plan didn't adapt; conditions were expected to conform. This is force-based coordination, and it inevitably generates friction. Eventually, the friction accumulated beyond what the system could bear.

China's reform approach sought resonance. The dual-track system aligned incentives: enterprises could benefit from market activity while honoring plan obligations. Special Economic Zones allowed experimentation without threatening existing interests. TVEs gave local communities stakes in economic development. Each reform generated buy-in from those it affected.

This doesn't mean China's system is ideal. Authoritarianism suppresses dissent and enables abuses. Corruption remains endemic. Environmental devastation has been severe. The model may face limits as the economy matures.

But China's experience demonstrates that economic coordination can be designed, adjusted, and combined in ways that pure theory might not anticipate. The great experiments taught lessons that neither market fundamentalists nor central planners expected. Those lessons are still being absorbed.

The Thread Forward

The Soviet collapse and China's rise are data points, not conclusions. They tell us that comprehensive central planning has serious problems—but so does rapid, unmanaged marketization. They tell us that hybrid systems are possible—but not that all hybrids will succeed.

The next chapter examines what we can learn from the Soviet collapse in particular. Was it primarily political, economic, or informational failure? What would have been necessary for comprehensive planning to work—if anything? And in an era of vastly greater computational capacity, do the old arguments about planning's impossibility still hold?

The calculation debate continues, in new forms, with new technologies. The dreams of planning have not died; they have evolved. The question is whether the new forms will escape the failures of the old.