The failure of China’s The Great Leap Forward due to imperfect market

Why did the Great Leap Forward fail?

Spearheaded by Mao Zedong, the Chinese Communist Party uprooted the National Party in 1949. The removal of this longstanding rival in power marked the beginning of communism in China.

Mao aspired to transform China from an agrarian economy to an industrialised and centrally planned economy. In doing so, the CCP promoted and upheld one of its flagship economic and social campaign known as The Great Leap Forward beginning in 1958.

However, the entire duration of the campaign spanning from 1958 to 1961 marked a catastrophic period in the country. Why did the Great Leap forward fail? This wide-scale socioeconomic program caused an economic crisis for the simplest reason that it undermined two critical factors of successful industrialisation—competition and pricing.

Lack of competition and imperfect market

What went wrong? The problem essentially centred on inefficiency that transpired from the micro level to the macro level. Such inefficiency, moreover, was a product of subdued or diluted sense of competition. Renowned economist Friedrich Hayek mentioned that lack of competition leads to imperfection in the market. In his 1949 essay The Meaning of Competition, he said:

“When we compare an ‘imperfect’ market…with a relatively ‘perfect’ market as that of, say, grain, we shall now be in a better position to bring out the distinction which has been underlying this whole discussion. [This distinction] is between the underlying objective facts of a situation which cannot be altered by human activity and the nature of the competitive activities by which men adjust themselves to the situation.”

From the aforementioned, Friedrich illustrated two situations that set the difference between an imperfect market from a perfect market. The first situation involved inability of alteration by human activities while the second situation involved competitive activities that enable individuals to adjust themselves according to the situation.

The first essentially represented a controlled and competition-free market while the second represented free and competitive market. Between the two, the communes in China during The Great Leap Forward mirrored inability to alter the situation by mere human activities.

A communal or shared microeconomic goal trapped people and denied them the ability to progress in their individual situations and thereby, in their respective markets. Simply put, they threaded a single linear flow within an inert environment. Note that in a free market competitive setting, the situation would be dynamic and multi-linear. There would be no communal or shared goal that would trap people. Instead, they would need to define and create their separate microeconomic goals based on the market direction they choose.

One of the reasons why the Great Leap Forward failed and became disastrous was the fact that the removal of competition resulted in an imperfect market in which personal microeconomic goals became inexistent. The Chinese government controlled the economy by defining and limiting the role of the people. It is important to remember that competition fuels innovation. In a free market economy, profit motivates individuals or businesses. And to become profitable, a business needs to appeal to the customers not only by satisfying a demand or creating a new demand but also by offering an innovative product.

Inefficiency due to lack of comparison and pricing

Remember that Friedrich argued for competition and thus, economic decentralisation. In a nutshell, his arguments were counterarguments against theories, notions, and perceptions about planned economy and centralisation.

In another essay entitled The Use of Knowledge in Society, Friedrich mentioned that a planned economy and centralisation prevent the dissemination of information that is vital to economic progress because people are merely confined within a small fraction of an economic unit. This argument was very evident in the situation of the communes and agricultural units in China during the Great Leap Forward.

Because people were trapped within the so-called commune life, they simply failed to grasp market situation, economic issues, market needs, and innovation among others. They merely focused on producing without understanding the greater implications of their outputs.

There was also lack of comparative points. Because people were in unison, they did not aspire to make better products due to lack of competition. After all, they could not compare their outputs because there was no point of comparison in a planned and centralised economy.

The lack of pricing also made the Chinese economy inefficient. According to Thomas Sowell, pricing is at the heart of incentives in a market economy. This means that pricing is the monetary reward for a successful product or output.

In China during the Great Leap Forward, there was no concept of pricing in its centrally planned economy. After all, people were merely producing outputs for the consumption of everyone. Thus, they produced not to achieve personal incentive but to appease the government or their community. Again, this demonstrated the lack of goals and objectives at the micro level.

Another reason why the Great Leap Forward failed was the absence of comparison and pricing due to lack of competition in the market. China simply designed an economy with a goal of manufacturing or producing predefined categories of products or outputs. The purpose of production was for immediate consumption. The government removed the marketplace for these outputs. People did produce to compete. They just did for the sake of responding to predefined demands. There was no pricing that would provide a monetary reward for the outputs.

Conclusion: Why did the Great Leap Forward fail?

From the discussions above, the most daunting phenomenon that emerged from The Great Leap Forward campaign was the lack of sense of purpose at the micro level that eventually resonates to the macroeconomic facets of the country. This is daunting because people failed to understand and appreciate the importance that comes from individual productivity or from participating in economic activities.

In summary, the reason why the Great Leap Forward failed was that the planned and centralised economy clearly undermined the essence and benefits of competition and pricing, thus resulting to market imperfection and overall economic inefficiency. Competition fuels innovation and pricing provides an economic reward that further fuel products to become innovative and competitive. It is easy to imagine that interplay among competition, pricing, innovation, and market efficiency. These concepts or phenomenon work hand-in-hand in a progressing and evolving economy.

RELATED POSTS