In 2012, I visited Hong Kong and Macau. Among the many examples of industrial might, such as shipyards and grandiose buildings like the Hong Kong airport, two of the things that impressed me the most were a real estate complex in Macau and the bridge, then under construction, between Macau and Hong Kong. I remember wondering how it was possible for such enterprises to be built in about four years, as I knew the complex in Macau had been built, while the 34-mile-long Hong Kong–Zhuhai–Macau Bridge took nine years to complete. In the United States, Latin America, and Europe, both projects would have taken far longer and would have incurred absurd costs, as evidenced by the California high-speed rail, which has been under construction for eleven years now, with no end in sight, on top of having its cost increased from 33 billion dollars to an almost unbelievable 231 billion dollars estimated cost.

　　In the almost fifteen years since then, I found myself time and again in conversations taking the position that it is a mistake to say that China is simply a command society, and that there is no protection of rights over there. The memory of the examples of capital formation I saw firsthand told me a different story. That is not to say that there aren’t many dark sides to the dictatorial regime. But Chinas experience highlights something I think the West has lost sight of.

　　Hayek’s Distinction

　　In Law, Legislation and Liberty, F. A. Hayek distinguished between two kinds of social order. The first is an intentional order, or taxis, established to pursue specified objectives, such as an army, in which the actions of its members are coordinated by commands to achieve definite ends, such as victory on the battlefield. That differs from a spontaneous order, or cosmos, that emerges from the interaction of individuals pursuing their own purposes under general rules. Markets and languages, for example. Hayek calls thesis the commands of an organization, and nomos the general rules of just conduct of a spontaneous social order.

　　Spontaneous orders are superior at coordinating individual plans because of the knowledge problem Hayek described in “The Use of Knowledge in Society.” The knowledge relevant to the best use of resources is not concentrated in any one mind. Much of it concerns particular circumstances of time and place, and some of it is not merely waiting to be collected by a legislator or central planning authority. It is created by the interaction of agents themselves. It is subjective in nature and often cannot be reduced to statistical form. We do not possess mind-reading capacities with which to extract, aggregate, and transmit it after the fact, much less before it comes into existence. Private property and freedom of contract, therefore, do more than protect an abstract sphere of liberty. They create the institutional conditions under which dispersed knowledge can be created.

　　These concepts provide us with a framework for comparing China and the democracies of the West. Critics of liberal democracy often say that the Chinese “communist” regime has proven that intervention in markets and authoritarian political structures are more efficient than the Western alternative. The evidence they offer is straightforward: over the last four decades, China grew much faster than Western Europe and the United States. If private property and freedom of enterprise are the indispensable sources of prosperity, they ask, how could a country governed by the Chinese Communist Party have achieved such extraordinary results?

　　My answer is almost the reverse of the anti-Western Chinese apologists. China did not become rich because bureaucrats in Beijing learned to allocate resources better than markets. If Hayek is correct, that would be impossible. China became rich because, beginning in the late 1970s, reformist governments created a legal and institutional order sufficiently predictable to convince its people that they could pursue their own interests, create wealth, and keep much of the fruits of their labor. Capital markets developed, commercial and civil-law institutions strengthened, money became tolerably trustworthy, and labor mobility expanded enormously. Private enterprise was allowed while the government retained the power to pursue whatever policy it regarded as being in the interest of the CCP.

　　This is not to claim that China became a classical liberal state or established the rule of law in the Western constitutional sense. It plainly did not. The claim is comparative and functional. For large areas of ordinary economic life, the Chinese order became “good enough” to permit decentralized discovery. Political power remained authoritarian, yet individuals could make plans on the expectation that success would leave them better off. That expectation, imperfect as it was, proved sufficient to unleash an extraordinary process of cooperation and capital formation.

　　That is my claim; let us see now some major objections to it.

　　Catch-Up Growth and the Institutional Question

　　The strongest empirical objection is that China’s performance is largely a story of catch-up growth. China was very poor when reform began. It could move workers out of low-productivity agriculture, adopt technologies already invented elsewhere, urbanize, accumulate capital, and converge toward the productivity frontier. Countries already near that frontier could not grow at Chinese rates.

　　China’s political system remains authoritarian. Yet in important economic domains, its reform era enlarged the space for spontaneous coordination.

　　In the abstract, this objection is correct. But it is incomplete. Many countries possessed the same potential for convergence and squandered it. Latin America is especially instructive. Brazil, Mexico, and Argentina were not poorer than China at the beginning of the reform era; indeed, they were richer. Yet their subsequent growth was weaker. Catch-up potential does not explain why one country succeeds while another does not.

　　China’s experience, therefore, cannot be dismissed by saying that it began from a low base. Its institutional order evidently enabled a more effective process of cooperation and investment than occurred in several middle-income countries that possessed at least as much room for convergence. The relevant Hayekian question is whether China’s institutions enabled individuals to mobilize dispersed knowledge and form capital more effectively than alternative institutions did.

　　How Secure Must the Rule of Law Be?

　　A second objection is that Chinese property rights are politically contingent. Courts are not independent in the Western sense. Entrepreneurs can be disciplined. Capital movements can be restricted. Land rights are different from Western fee-simple ownership. The Party can intervene when political objectives become paramount. A critic could therefore say that China did not establish nomos at all, but only a stable permission to become rich for so long as the Party continued to approve.

　　This, however, falls into the Nirvana fallacy by comparing imperfect Chinese institutions with an idealized West. A proper comparison is between actual institutional orders. How certain is the rule of law in the United States or Europe? Western governments also alter expectations, change tax liabilities, modify regulatory requirements, use emergency powers, restructure contractual relationships, and adopt trade policies that can change abruptly. Controversies over the General Motors restructuring in 2008, emergency changes to election procedures during the pandemic, and, more recently, retroactive tax burdens and repeated changes to major US tariffs illustrate a broader point: political discretion is not a uniquely Chinese phenomenon.

　　The rule of law is certainly not absolute in China, but that is not absolute anywhere. The question is whether an institutional order provides ordinary economic actors with sufficient confidence in the security of possession, contracts, and future rewards to induce them to undertake long-term projects. For several decades, the Chinese answer was plainly yes. The security was sufficiently credible to generate higher savings and investment and to support an immense expansion of private economic activity than in Western societies.

　　Building, Capital Formation, and the Meaning of Command

　　A third objection points to China’s spectacular infrastructure and real estate projects and argues that these may prove the opposite of my thesis. A state able to assemble land, direct credit, and suppress objections can build a bridge or railway quickly, precisely because it is a taxis. “Build this bridge” is much closer to the mission of an army than to the open-ended process of coordinating an entire economy.

　　That qualification is important, but it does not explain the full scope of Chinese achievements. In 2012, I saw a giant real estate enterprise in Macau that would be difficult to imagine completing in the United States on a comparable timetable: reclaimed land, the second-largest casino in the world, an enormous shopping mall, and thousands of hotel rooms in a single project. The Hong Kong–Zhuhai–Macao Bridge is another visible symbol of the capacity to execute large projects. Of course, some Chinese projects have wasted resources. Adam Smith’s observation that “there is a great deal of ruin in a nation” applies to China as it applies everywhere.

　　Western economies also waste resources through subsidies, protected industries, distorted health care incentives, costly educational systems with disappointing results, and projects inflated by prolonged litigation and permitting. The existence of Chinese malinvestment, therefore, does not settle the question. What matters is the overall process of capital formation. China has for decades devoted a much larger share of its output to investment than most Western economies. That capital was not all wisely allocated, but neither is Western capital. The institutional question is which system leaves more room, after all its distortions are accounted for, for resources to be recombined and productive capacity to be created, and it is here that private property rights enter.

　　The conclusion is not that China possesses a more liberal political constitution than the West. It does not. Nor is it that Chinese property rights are more secure in every dimension, that Chinese officials allocate capital wisely, or that rapid GDP growth measures all that matters in human life. The narrower claim is that, over much of the last forty years, China created a sphere of economic nomos broad enough to permit an extraordinary spontaneous order to emerge, while important parts of the Western economy moved toward discretionary systems of permission.

　　If we truly believe Hayek’s reasoning, we should reject the idea that China’s economic transformation demonstrates the superiority of comprehensive command. Bureaucrats in Beijing could not possibly have possessed the knowledge required to determine the best uses of hundreds of millions of workers, trillions of dollars of capital, and innumerable parcels of land. What the reform regime successfully did was establish rules under which individuals believed they could pursue their own interests and retain enough of the results to make it worthwhile.

　　The deepest comparison is not democracy versus dictatorship in the abstract, nor state versus market as mutually exclusive categories. It is between institutional arrangements that leave decisions to people who possess and create relevant knowledge, and arrangements that take away from owners the decision-making power over their property and transfer those decisions to political bodies that lack that knowledge. China’s political system remains authoritarian. Yet in important economic domains, its reform era enlarged the space for spontaneous coordination. The West remains politically liberal. Yet in important economic domains, it has narrowed that space by hollowing out private property rights. That paradox is worth taking seriously, because Hayek’s central insight was that civilization depends on governments limiting themselves to rules under which individuals can use knowledge that the government itself can never possess.

　　Any opinions expressed are the author’s and do not necessarily reflect those of Liberty Fund.