Dragon in a Three Piece Suit: The Emergence of Capitalism in China

In the famous account he gave of his twenty-four years away from his native Venice, Marco Polo was not above embellishment: the gold and silver said to line the walls of Kublai Kahn’s palace, the Basci enchanters who moved goblets filled with drink from the hall to the table without touching them, the diamond hunters in the Kingdom of Mutfili. Yet even these were not enough for the artists who illustrated the various editions of his work. Drawing from existing myths and legends—men with heads like dogs, or men with no heads, whose faces were on their breasts—they adorned Polo’s work with even more fabulous tableaux.

As we smile our twentieth-century smiles at such ingenuousness, we do well to note we have not improved much over the centuries, notwithstanding our considerable advantages. In the heat of the Cultural Revolution of the late 1960s, when Mao had the Chinese people smelting iron in their own backyards from their pots and pans, Western accounts were dominated by tributes to the superiority of New Maoist Man’s economics. A generation later, China has opted for something called “market socialism with Chinese characteristics,” and the American Chamber of Commerce types who collect Mao buttons are wowed because Jiang Zemin has memorized a few lines of the Gettysburg Address. Not to mention the anti-trade faction—many of whom have never set foot in China—whose speeches, articles, and newsletters portray the Chinese religious landscape as nothing but one long Neroian purge.

The usual course for a reviewer is to present the truth as lying somewhere between two extremes. I have done it myself at times. Alas, the truth of modern China is not in the middle; it is somewhere in the messy and oft-contradictory details of Chinese life, which has itself become exponentially more complicated since the bankruptcy of traditional Marxist solutions forced Deng Xiaoping to make increasing compromises with such hitherto taboo principles as profit and self-reliance. Everywhere in China the physical manifestations of this new openness still jolt, from the Leonardo DiCaprio posters that dominate the sidewalk vendors even in a third-rate provincial capital such as Nanchang to the golden arches of McDonalds, which loom on Tiananmen Square across from the rostrum where a triumphant Mao proclaimed the People’s Republic.

In Dragon in a Three-Piece Suit: The Emergence of Capitalism in China, Doug Guthrie takes a stab at separating illusion from reality. His subject matter is admittedly narrow: the huge industrial firms based in Shanghai, many of them state-owned, which he takes to be the engine driving China’s transformation. Leave aside for a moment that the author appears blind to an entirely different supposition, to wit, that these industries today constitute the chief obstacle to change. Leave aside too that his sociological bias—organizational theory—compels him in the direction of the industrial giants. Far more interesting are his findings: that the changes are real and “extend far beyond the economic sphere where they began.” Indeed, perhaps most remarkable is his assertion that even changes adopted for largely cosmetic reasons end up having tremendous, largely positive, consequences.

The thrust of Guthrie’s book is to argue that the neoclassical model of rational agents all pursuing the maximization of profit is too abstract for a China in transition between communism and the market. Again, this is a narrow point. I’m not sure, for example, that even the most neoclassical economist would argue that every single agent in a business entity, from the shipping clerk and the secretary to the floor manager and factory owner, is always and everywhere guided by the drive to maximize profit. More important than why they may do things is where their actions are taking them. And here Guthrie argues that “Chinese managers hanging up their traditional Communist Party uniforms” in favor of “a sleek set of threads that would place any Western boardroom at ease” are, in the process, imposing changes in the structure, organization, and management of their firms that bring them closer to the capitalist model.

At this point the argument sounds an awful lot like Adam Smith’s invisible hand. At times the reader wishes it were. For this is a decidedly sociological tract, grimly determined to add up detail after detail in as clinical a fashion as possible. Managers are interviewed, factories are visited, and numbers are crunched, yielding tables and conclusions as dry as any investment guide produced by the Guangdong Board of Investment. Fortunately the book is leavened by the observations of the managers themselves, such as this one from a Chinese lawyer:

The most difficult part is changing the way people think. You Americans, as you grow up, become used to a legalistic way of thinking. You know the laws and you understand them. But this is not the case with the Chinese. We have grown up knowing one thing: Always listen to your leader. Changing the way people think about these things is the most difficult task of a developing nation. It takes a great amount of time; many things must be changed for a significant amount of time before people will start to think in a different way.

Guthrie is pretty clear that the major influence behind recent developments in China is economic uncertainty coupled with foreign investment. Because Chinese managers can no longer count on automatic bailouts from the government, they are scrambling for new ways of survival. Foreign capital is one easy answer. For one thing, it provides cash. For another, it brings technology, often more valuable than the cash itself.

Proclaiming a market, moreover, is one thing, and the actual implementation another. Here Guthrie’s focus on the sociology of investment provides a perspective not always evident in the standard texts on trade and reform. For unlike press reports and political debates that consider reform in the abstract, Guthrie always and everywhere remembers that we are talking about specific organizations with a history (industrial policy), an ownership structure (often the state or some government entity), and a managerial force that frequently has different priorities from those of a Wharton grad (e.g., colonies of retired workers for whom the factory still provides housing and livelihood).

Often, he says, the result is that Chinese managers ape Western practices less because they think this the way to maximize profit than to attract foreign capital. In other words, evolution rather than revolution. Still, the effects can be far-reaching: on China’s legal arrangements, on new mechanisms to handle worker grievances, on the devolution of authority from central to local governments. And Guthrie does not even consider the liberating effects that come from people providing for their own housing, their own health care, their own education, etc.

These are side benefits and not without their costs; probably no Chinese who suddenly finds himself without a pension and apartment is going to be consoled to learn that this is a painful part of reform. Although Guthrie doesn’t address it, these mounting internal contradictions today represent the key challenge to China’s leadership. For the initial marketing openings allowed a number of new industries to bloom but did not address the inefficiencies of the large, state-owned enterprises. That meant almost all gain with no pain. But now these latter are becoming an obstacle because they squander resources better spent elsewhere, jeopardize the financial system, and threaten to unload a lot of superfluous people on a system not yet equipped to take care of them.

Indeed, in terms of unintended consequences, the benefits that come from a state turning ever more to market solutions owes more to desperation than planning. Still, the outcome will surely be a China whose government has less and less control over people’s lives because it has less control over their livelihoods. Remember that it was the work unit (housed, fed, and treated on the company grounds) that helped give the state the control to enforce their one-child policies, through such means as listing the menses of female workers on a drawing board. The “problem with the perspectives surrounding the trade debate is the assumption that trade should be the reward for legal and institutional change when, in fact, economic exchanges may be the very engine—or at least a key component—that is driving the system toward the rational institutional structure that is so desired.” That includes a respect for workers’ rights, which is always a long time coming in a workers’ republic.

Dragon in a Three-Piece Suit is not for everyone. Its academic style and presentation has none of the color of the China books featured in chain bookstores, and its empiricism rarely allows the work’s attention to extend into areas of public policy such as Most Favored Nation status and the debate between rights and trade. Yet in its own way and on its own terms it pulls back a bit of the China curtain, in a way that is more interesting, I confess, than I had at first expected. I’m not sure Guthrie has established, as he appears to believe, that sociology trumps economics in terms of the incentives at play in China today. But if I read him correctly about the direction in which they are both headed, it may not really matter.

William McGurn is chief editorial writer for and a member of the editorial board of the Wall Street Journal. From 1992 to 1998 he served as senior editor of the Far Eastern Economic Review in Hong Kong.