The Making of the State Enterprise System in Modern China: The Dynamics of Institutional Change

In The Making of the State Enterprise System in Modern China, Morris Bian provides a compelling theory of institutional change through an historical case study of the development of state-owned ordnance and heavy industry during the Sino-Japanese War (1937-1945). As a result, a duality exists within the book. It presents both a specific, clearly defined, and well-argued historical monograph that questions the existing literature on the subject of the development of the state-owned enterprise system while also offering a broadly applicable framework that serves to address fundamental issues of institutional change within the field of world history. Bian begins by clearly defining his key terms within the introduction, a strategy that is unfortunately not yet pervasive. He defines institutions broadly as "not only humanly devised systems and principles that define and structure human action and interaction but also...organizational establishments that embody these system and principles." To understand the origins of the state-owned enterprise system one must first breakdown its component parts, and Bian presents the system's key characteristics as "a bureaucratic governance structure, distinctive management and incentive mechanisms, and the provision of social services and welfare." Bian places his work firmly within the existing scholarship and is, in part, responding to a perceived gap in the literature. He argues that scholars have been content with attributing the origins of the state-owned enterprise system to the adoption of the Soviet model by the Chinese Communist government, the result being "a general lack of interest in exploring the indigenous roots of China's economic system in the period before 1949." That the state-owned enterprise, the danwei system, and their ideological justification all existed before 1949 is the central historical theme of the work. Bian argues that "institutional and ideological evolution, not revolution, explains the basic structure of state-owned enterprise and its ideology in post-1949 China." In order to explain this change, Bian adopts an interdisciplinary approach. He turns to economic historian Douglass C. North for an understanding of incremental institutional change and to Thomas S. Kuhn for his theory of radical change. Institutions are the result of mental models, a framework used within psychology to explain individual action. Through communication between individuals a shared mental model is developed, which then becomes an ideology and explains collective action. Bian argues that "institutional change results directly from the formation or revision of shared mental models or ideologies." Institutional change is gradual, or "normal", when mental models are not strongly challenged and institutional revision is sufficient to handle problems that arise whereas radical institutional change occurs during times of crisis when existing institutions fail and new mental models, and therefore new institutions, must be created to deal with the drastically changing environment. The nature of institutional change, however, is limited by resource endowments of which institutional endowments are considered a secondary, generated type; a society's freedom of action is defined and restrained by the means available to it. Institutional change, therefore, is path-dependent "because of the constraints of limited institutional endowments." How, then, was China able to overcome crisis outside the scope of these constraints? When new resources must be created "to overcome the constraints of institutional endowments" exposed by crisis the resulting radical change in mental models and corresponding institutional change is considered path-independent. The main examples within the narrative of path-independence are the adoption of cost accounting, the Work Emulation Campaign, the provision of social services and welfare by enterprise, and the development of Nationalist ideology (with an emphasis on national defense). The first two were borrowed from the United States and Soviet Union, respectively, while the last two where the result of an endogenous response to external crisis. Bian sees a high level of continuity between the Qing dynasty and the Nationalist government which is indicative of gradual institutional change; it is only with the sustained crisis of the Sino-Japanese War that the four previously discussed radical institutional changes occurred, resulting in the state-owned enterprise system as recognized today. These developments were then perpetuated by the Communist regime, denoting a return to incremental change and hence an evolutionary interpretation of twentieth-century Chinese economic history as advocated by Bian. Having established his broad framework for institutional change, Bian then proceeds to utilize a vast amount of archival sources to illustrate the defining role of the Sino-Japanese War in the path-dependent and path-independent development of economic institutions. The continuity between the Qing dynasty and the Nationalist government is clearly visible in his discussion of the ordnance industry, and, though triggered by crisis, their gradual move inland along with their steady centralization is a prime example of developmental, path-dependent change. Path-dependent change is also shown within state-owned heavy industry, with the Nationalist planning system finding its theoretical support within the ideology of Sun Yatsen and its culmination in the National Resource Commission. Though the institutional endowment of the bureaucratic model carried on as the basic blueprint in both ordnance enterprises and heavy industry, the Confucian scholar-officials were replaced with the new zhiyuan composed of management, factory officials, and technicians which were ranked the same way and treated as if government officials. The author equates the reason for the continuation of the pervasive bureaucratic system with China's limited institutional endowments. "Despite the 1911 Revolution and the alterations in terminology, the fundamentally bureaucratic nature of China's state machinery remained unchanged." Though some path-independent solutions were developed, Bian sees a clear developmental progression connecting the Qing, Nationalists, and Communists governments. The most interesting part of the book to this reader is the chapter devoted to the development of Nationalist ideology. This ideology emphasized "state-owned enterprise, heavy industry, national defense, and the creation of a planned socialist economic system." Bian shows that the development of this ideology was both path-dependent, due to its foundation in Sun Yatsen's Three Doctrines of the People, and path-independent, due to the elevation of national defense over the people's livelihood in response to the externally generated crisis in which China found itself. The important dynamic displayed here is that Nationalists leaders and scholars agreed on all four points; their shared mental model became the ideology of the Nationalist government. Bian has provided not only a well-researched study of the development of the state-owned enterprise in China, but also provided a framework for institutional change that is "both path-dependent and path-independent because new resources must be created to overcome the constraints of institutional endowments." He has succeeded in not only moving forward the discussion of China's economic development in the twentieth-century, but also in developing a solid framework for understanding the dynamics of institutional change.