How Deng aced Mao Ze Dong by Recognizing Self Interest
Incentives matter. Recognizing that people will contribute more to the public good by working towards their self interest is a principle that should be recognized.
In the 1950s, Mao Ze Dong unveiled the Great Leap Forward whose goal was to transform China from a primarily agrarian economy into a leading industrial state. His plan – to become a leading steel producer by encouraging each household to set up backyard furnaces and melt scrap iron for steel. Millions of backyard furnaces were set up, and peasants started to melt down their pots, pans, and equipment. The effect was devastating. It was almost like melting forks to produce forks, but with a difference – much of the produce from the furnaces was unusable as authorities only focused on meeting the quotas demanded by the state.
The agricultural policy was even more devastating.
The government made a study on how to increase agricultural produce. One of the conclusions was that to increase yields, farmers have to do closer planting and deeper sowing. The other was to kill grain –eating birds, which unfortunately had also the effect of increasing the population of insect pests.
Mao Ze Dong would ride the train to inspect the fields, and the party officials, anxious to please their chairman would build furnaces along the railroad, and transplant the rice from faraway fields and replant it on the officially designated density in fields near the tracks.
Food production declined, but the officials were keen to report surpluses. Thus, China exported grains, and state warehouses reported ample stocks, but there was hunger in the countryside. An estimated 30 to 50 million people died of starvation in what was dubbed as probably the greatest economic failure of the 20th century.
China’s agricultural output per person did not improve much from the 1950s to the 1970s, and part of the reason is that the country had a very perverse incentive plan.
First is that farmers were organized into collectives of twenty or thirty families, and people were rewarded with ‘work points’ if they produce over quota, which was given to the collective itself. There was no opportunity for personal improvement, and thus many individuals did not have any incentive to provide extra effort.
Moreover, in the interest of the collective good, the surplus one region produced was bought at a very low price to aid other regions, which has the effect of discouraging the more fertile regions of improving productivity.
When Deng Xiao Ping came into power in early 1980s, he first started to raise the price paid for surplus crops by more than 40 percent. The now better price was incentive for fertile areas to produce more.
Then he allowed the collective to subcontract land to individual households. The household now had more incentives to work harder, because the crop prices were better, and they could now be directly rewarded for their increased production. In 1979, over 99 percent of production was by collectives. By 1983, over 98 percent of collectives were now subcontracted to households.
The result was a growth of more than 10 percent of production a year for the first half of the 1980s.
As we now all recognized, it was not Mao who brought the Great Leap Forward. For the last 30 years, China had achieved the great leap by recognizing the power of markets, prices, and self interest.