A ‘market’ is an economic mechanism, distinct from the state and primarily geared for profit and is thereby essentially capitalist. This is an extremely common assumption, but fortunately it is wrong.

We have been too conditioned by Adam Smith’s effort to define human nature as the desire to ‘truck, barter, and exchange one thing for another’. This slogan has – for some strange reason – come to be seen as a self-evident truth, neglecting how it was part of the immense struggles to redefine human nature from the sixteenth to the eighteenth centuries.

One unfortunate outcome of the slogan is that has generated an assumption that all markets throughout human history have been – to a greater or lesser extent – capitalist. This assumption is simply untenable.

Let me explain. The earliest markets were local affairs, operating between village communities usually within eyesight (2-4 kilometres away). Here one could acquire a few things not available in one’s local village community. It was simply untenable and indeed unimaginable – due to the friction of distance – to obtain anything in bulk from further away. And the few preciosities that did travel longer distances were desired by rulers and despots, for whom the cost and risk for the sake of acquisition were deemed to be worth it.

In the first millennium BCE, another type of market arose. They may be called tax markets, for the following reasons. One of the abiding problems for ancient rulers was provisioning armies on the move. An army of 5000 would require the same number of additional people to provide for the army. The invention of coinage – simultaneously in China, India and Lydia – changed the whole dynamic. Rulers or their advisors hit on the novel idea of paying soldiers in coin and demanding taxes in coin. How were rural labourers to get hold of coins? Sell various items to the soldiers – foodstuffs, alcohol, sexual services, and so on. Rural people then had the coinage to pay taxes, should the hated tax collectors come knocking with their armed thugs. As a result, a whole new range of markets arose. But the crucial point is that they solved to some extent a logistical problem of ancient states. For this reason they can be called tax markets. Making a profit from such processes was clearly a secondary affair.

Fast forward to the emergence and spread of capitalist markets in the sixteenth century – when the Dutch established the first capitalist empire. In this case, profit became a primary dimension of markets. The Dutch not only took over the routes of the Hanseatic League in the Baltic, but they thoroughly reformed their manufacturing basis so they could process raw materials more cheaply and efficiently than anyone else. For example, the Dutch were able to buy wool from England and produce garments more cheaply than the English. That the Dutch also levied a fee on any ships passing through from the Baltic to the Atlantic also helped matters.

The outcome of this brief historical sketch is that markets arose and functioned for specific purposes. Indeed, capitalist markets are a relatively late development.

The logic of this process leads to the possibility of socialist markets. Let me begin with the Soviet Union in the 1930s and 1940s. As a result of the massive and incredibly disruptive process of industrialisation and collectivisation of agriculture in the ‘socialist offensive” of the 1930s, a situation developed in which the agricultural and industrial sectors engaged in commodity exchange. But these commodities were socialist commodities. Agricultural collectives sold produce to the cities, while industrial centres sold products to the rural communities. We should really call this the first – and rudimentary – version of a socialist market.

But now a complication arises. Yugoslavia, in its break with the Soviet Union, developed what they called ‘market socialism’. In this case, enterprises were collectively owned but they sold products – internally to Yugoslavia and externally to a capitalist Europe – in a capitalist framework. Hence ‘market socialism’. Some suggest that the Chinese borrowed this model for their own approach in the massive process of the ‘reform and opening up [gaige kaifang]. This is actually not the case.

Instead, the Chinese studied the situation in the Soviet Union and in Yugoslavia and came up with their own approach. They call this a ‘socialist market economy’. What does this mean? (I should say that my research on this topic is only at the early stages, but it is predicated on taking seriously the Chinese claim that they have such a market).

The key is that the structures of the state are intimately involved with the market at all levels. This is not a version of ‘state capitalism’, which is usually used as a dismissal of socialist market economies. Instead, it means:

  1. You have state-owned, collectively-owned (in rural areas) and private enterprises.
  2. The state-owned sector should always remain the dominant part of the economy, although it should be ready to learn from the non-state-owned sector.
  3. Private companies and start-ups are directly fostered – in many ways – by the government to encourage innovation.
  4. Many of the heads of private companies are members of the communist party, so they see their role as developing the socialist market economy. For example, Chinese billionaires are expected – and do – contribute to key causes such as education. This is a far cry from American philanthropy, for it is enmeshed with Chinese assumptions: if one has benefitted from a particular situation or opportunity, one simply must –without question – contribute to the greater good.
  5. Annual reports for both state-owned and non-state-owned companies have to include far more than profits made. Instead, they need to include items that relate to community concerns, ecological incentives, government directives, and how they contribute to socialism with Chinese characteristics.
  6. Foreign companies wishing to engage with China at times find themselves in unfamiliar territory. They cannot buy land (for there is no private property in land) but must rent. And they cannot engage in the usual practice of inter-company espionage, for in a Chinese situation this is also espionage against the state. From time to time, those engaged in such espionage find themselves arrested.

Many more items could be added to this collection, which I will do in due course. But let me finish with a specific example. Research into the development of the internet in China – which is in many respects more advanced than elsewhere – shows clearly that it has been and continues to be driven by incentives and directives from the state. This is in stark contrast to the growth of the internet elsewhere.

In closing, I should say that my research thus far has not been primarily in terms of the literature available. Instead, it has taken place in discussions with people involved in the non-state sector of the market. They are very much aware of the fact that the way this particular market works is very different from other places. In other words, they know that this is neither a capitalist market economy nor a ‘distorted’ version thereof. Instead, it is a socialist market economy, albeit one that has to survive and indeed engage with a capitalist market economy elsewhere.