An Economist Goes to Shanghai

Last October, I found myself in an Uber being whisked along a bank of the Huang-pu River. I'd just arrived in Shanghai, and several of my students were eager to take me to see the sights. They wanted to show me the Bund (rhymes with fund). That's the local, Persian-origin name for the promenade on which the Europeans a century ago erected a collection of 50 or so banks, trading companies, and insurance firms: the very heart of pre-Communist capitalism in China. The buildings, especially nice when illuminated at night, are done in 1920s Beaux-Arts or art deco style.

But what gobsmacked me when we got out of the car wasn't the warmed-over continental architecture I'd been brought to admire. On the opposite side of the river rose the Pudong district. Thirty years ago Pudong was farmland, wretchedly farmed because it was collectivized. Then local Communist Party officials decided to plat it and put in water, sewerage, and a few roads—part of an experiment in opening up the economy that continues to this day. Officials were tempted to erect their own, state-financed version of the Bund in the new turf, but a professor from Hong Kong convinced them instead to offer 99-year leases and then let developers build whatever they wanted, with private finance and profit taking, doubtless with a little baksheesh on the side.

The result has been scores of immense modern skyscrapers, dwarfing the proud European buildings of the Bund. They now stretch for miles in that direction, typically 80 stories high, festooned along the river with garish advertisements and corporate logos, like the loveliness of Times Square or Piccadilly, though gigantically bigger. As I gawked, I realized that in Shanghai I was the rube (a term I later had to explain to my hosts). One colleague at Fudan University told me that when he arrived as a freshman in 1981, there were two modern skyscrapers in the city. Now there are 2,000.

Shanghai, about two-thirds of the way up the east coast, has been since the 1800s the most open place in China. It was forced open by Western governments establishing "concessions" where Europeans lived and traded in silk and opium and electric lights, out of reach of Chinese law. Aside from the so-called French Concession, which looks like a piece of Paris, Pudong and the rest of Shanghai are not beautiful, though the architectural standard is high. But taken as a whole it is immensely impressive and filled with meaning.

The bulk and busyness of the buildings proclaim: "Look what can be built in two short generations if the government will but do its modest job moderately competently, and for the rest leave people alone to profit themselves and enrich the nation." The Bund was the old center of 1920s economic modernity, and yet the ordinary Chinese at the time were rickshaw drivers to the Europeans. Now Shanghai and in particular Pudong are the new centers, and in a couple of more generations the ordinary Chinese will be as well off as Europeans.

Our left-wing friends will object to the lack of equality, citing the wealthy developers as disgraceful profiteers. Yet John Rawls–style, the poor have been made startlingly better off. Wages are twice as high in Shanghai as in the country's interior, inspiring the largest migration in human history, 200 million people moving mostly voluntarily, Robert Nozick–style, to the east coast to work in factories and to whiz around for an evening on electric motorcycles (for some reason without their headlights on). Real incomes in China have increased by a factor of 16 since Pudong was farmland.

John Mueller of Ohio State wrote in 1999 a book called Capitalism, Democracy, and Ralph's Pretty Good Grocery. It's little wonder if you miss his joke, taken from Garrison Keillor's public radio show, A Prairie Home Companion. In Keillor's imagined Lake Wobegon, Minnesota, Ralph's Pretty Good Grocery is in its advertising comically modest and Scandinavian ("If you can't find it at Ralph's, you probably don't need it"). Mueller reckons that trade and elections, as they are imperfectly realized in places such as Europe and now India, are pretty good. Capitalism is better than it is usually portrayed and democracy is messier than it is usually portrayed, but for both we do well to leave well enough alone. The "failures" to reach perfection in, say, the behavior of Congress or the equality of the United States' distribution of income, Mueller suggests, are probably not large enough to matter all that much to the performance of the polity or the economy. They are good enough for Lake Wobegon. We could drive across town to shop instead at the Exact Perfection Store, staffed by lawyers and economic theorists specialized in finding political and economic failures without asking how big they are. But it would lead to consequences we probably don't need.

Sweet statists will say of Shanghai, "The government did it!" They will point to all that platting and sewerage and road building. Their mistake might be called the "supply chain fallacy," an error that has dogged arguments about commerce and progress for centuries.

We see it nowadays in the Harvard historian Sven Beckert's fallacious claim that slavery was necessary for cotton growing, and in the University of Sussex economist Mariana Mazzucato's view that if a scientist got a National Science Foundation Fellowship when she was a graduate student, then all her subsequent works can be attributed to the government. It's the idea Barack Obama expressed when he told business owners, "You didn't build that."

It's a legal way of thinking, not an economic way. The economist points out that if the private developers in Pudong had not gotten sewerage or roads from the government, the private developers would have built them without government help. Sometimes better. That is, in fact, what happens in India, whose local governments are corrupt and incompetent. Yet India's real per capita income since 1991 has grown almost as fast as China's, and recently faster.

And after all, Shanghai had a more interventionist government before, with nothing like the results that private development produced in Pudong. If planning is such a fine thing, pre-1978 Communism is the ticket. When the party ceased killing growth by killing businesspeople, real income for the poorest started doubling every seven to 10 years. India's story has been the same since 1991, after 44 wretched years of Gandhian socialism that led to poor-people-damaging rates of growth at which it would take seven decades to merely double.

People everywhere—China, India, even the United States—will leap into any space that can be opened up for growth and improvement. The professor from Hong Kong who convinced the authorities to take a hands-off approach to Pudong tells me that he realized how courageous the migrants were in bettering their lives, and those of their families, when at midnight in a mainland city he saw the sparks of a welder high up on a construction project, working, working through the night.