ON the night of November 24, 1978, eighteen farmers in Xiaogang village, Anhui province, signed a document dividing their commune’s land into household plots, each family keeping anything grown above the state’s grain quota. Each pressed a red fingerprint next to his name and swore that if any of them were imprisoned or executed for it, the others would raise their children. The 1979 harvest produced as much grain as it had in the previous five years combined.
The system they were dismantling had already been tested to destruction. During the Great Leap Forward’s collectivization drive, 1958 to 1960, more than half of Xiaogang’s 120 villagers starved to death. Local officials across China had inflated harvest reports for years to avoid being labeled disloyal, and Beijing kept setting procurement quotas against numbers that were never real, extracting grain that did not exist as surplus.
Beijing did not approve the farmers’ agreement. The Party’s official position at the Third Plenum, weeks later, still prohibited dividing collective land. Deng Xiaoping’s endorsement came only in 1980 and a formal policy in 1982.
The original document was hidden in a mud hut roof until it was safe to bring out, and now sits in a museum, taught in Chinese schools as the starting point of the Household Responsibility System that spread nationwide.
Extreme poverty in China, as measured by the World Bank’s US$1.90 line and its estimates, fell from 88 percent in 1981 to near zero by 2018. The household system drove the early rebound in farm output through the early 1980s. Industrialization, urban migration, and trade carried the rest.
Xiaogang is not a story about capitalism suddenly replacing socialism but is a story about what happened when the state changed the incentive structure inside a socialist system.
Output moves higher when the people producing it keep and dispose of what they produce. Free-market capitalism formalizes that claim into property rights and market price discovery. Output stays flat, or turns fatal, when the claim is missing and an outside authority sets prices, assigns ownership, and decides who profits. That is the standing arrangement under socialism, and it requires central planning to function.
Inequality is the residue of the capitalism system in that whoever captures the surplus ends up ahead of whoever does not. That system stays justified only as long as it keeps producing more, in total, than an equal split would have produced instead. Past that point, the justification runs out.
Winston Churchill told the House of Commons on October 22, 1945: ‘The inherent vice of capitalism is the unequal sharing of blessings. The inherent virtue of socialism is the equal sharing of miseries.’ He was right on both counts, and that is the problem. The point most people forget is that blessings have to be produced before anyone can divide them unevenly. Miseries require nothing resembling a factory or marketing. A farmer does not need to risk a fingerprint on a contract. A country generates the equal misfortunes for free just by doing nothing.
A small pizza, split evenly, still leaves everyone hungry. A large one, split unevenly, feeds even the short end more than the first pizza whole.
India used the same state-controlled economic experiment without a dictatorship to blame it on. From 1950 through 1990 the economy ran on permits. A company needed official papers to enlarge a factory or bring in a machine part. For most of those decades growth sat near 3.5 percent, the so-called Hindu rate, barely ahead of the population. Government officials allocated capital instead of letting the markets do that job.
The system broke in 1991 from empty coffers, not an economic ideology conversion. Foreign reserves covered roughly three weeks of imports and within months the government tore up most of the licensing regime in order to stay solvent. Growth roughly doubled over the next two decades. Extreme poverty had already been falling since the 1970s but it fell faster once the state stopped deciding who got to produce what.
Two governments, one that never held an election and one that has held them about every five years since 1951, ran a similar experiment with similar results. Hand the surplus back to the people who produce it, and poverty collapses. Let the state keep deciding who profits, and the country waits for growth that arrives late, if at all. Capitalism has inequality to account for only because it keeps producing results worth arguing over. Socialism rarely has that problem.
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