3
It is time for us to distinguish the responsibilities of the Party and those of the government and to stop substituting the former for the latter.
Deng Xiaoping (1984)
The special defining characteristic of Chinese socialism is CCP leadership, and without an understanding of the Party one simply cannot deal with China.
Wang Qishan (2015)
Placing Chinese political economy in historical and comparative perspective raises a question about how adequately the extant concepts of state and market – so fundamental to Western political economic theory – serve as lenses through which to identify and analyse ‘rational’ socio-economic action. Given the extent to which states and markets in contemporary capitalism are understood to interpenetrate one another in iterative and mutually constitutive ways, a rationale emerges for deprioritizing such concepts as the core building blocks of political economy and developing new conceptualizations of how economic and political dynamics interact within contemporary capitalism. China’s socialist market economy offers an opportunity for doing so, and this chapter makes the case for analysing these dynamics in Chinese capitalism as revolving around socio-economic uncertainty and its relationship to both political power and economic activity.
Two faces of uncertainty: governance and power
Financial systems in contemporary capitalism are organizational systems that embody mechanisms for growth, stability, and distribution at both the microeconomic and macroeconomic levels. At the microeconomic level, the first role is that of allocating funds to projects with higher or lower rates of return, thus affecting the marginal productivity of capital (King and Levine 1993). Second, financial development can also allocate resources at lower costs, if it causes the financial system to be subject to lower taxation and regulatory burdens (Lardy 1998). Finally, financial systems have an effect upon the rate of private savings (Pagano 1993). At the macroeconomic level, as a set of social institutions that cause certain forms of financial market dynamics such as perpetual crisis (Krippner 2011) or financial bubbles (Akerlof and Shiller 2009), a financial system matters first and foremost either as a force of real economic pro-cyclicality or conversely as a tool for moderating the business cycle.
At the core of the redescription of these financial processes is socio-economic uncertainty. One of the fundamental obstacles confronted by social actors is that of the uncertainty that arises out of an actor’s embeddedness within a social environment (Knight 1985 [1921]). For a rational institutionalist such as Douglass North, uncertainty is a product of the complexity of the problems to be solved, the limitations of the problem-solving software possessed by an actor, and incomplete information between social agents (North 1990). In contrast, for an economic sociologist such as Jens Beckert uncertainty must be regarded as qualitatively different from situations of risk, since the problem of risk is commonly understood to be one that is to be measured, evaluated, and responded to on a quantitative basis (Beckert 1996). In situations of risk, ‘the distribution of the outcome in a group of instances is known … while in the case of uncertainty … it is impossible to form a group of instances because the situation dealt with is to a high degree unique’ (Knight 1985 [1921], 229). Uncertainty is thus much more than the probability distribution problem that arises out of the ‘complexity’ emphasized by rationalist institutional analysis.
As a concept, I develop and use socio-economic uncertainty in a way that denotes two things. Firstly, socio-economic uncertainty is a problem to be solved for financial behaviour to be undertaken on a ‘rational’ basis. Secondly, it constitutes an opportunity – an epistemic space – that can be exploited for political purposes. There is a tension between these two ‘faces of uncertainty’. It is at once a hindrance to economic action, and particularly financial investment, yet it is also an indispensable element in a profit-driven market economy. In the world of perfect information that remains the counterfactual benchmark for modelling economic behaviour, economic decision-making is easy, but profits do not exist. It is this fine tension between the two, and the possibility of action being interpreted as either or both, that constitutes the intersection between finance as a basis for economic prosperity and finance as a mechanism for political authority.
This use of the concept of uncertainty emerges out of the broader sociological literature on action, and economic action in particular. The essential relevant insight of economic sociology is that:
Although economic action is conditioned by the social contexts in which it takes place, it is not determined by these contexts but rather depends on how they are interpreted by economic actors … understanding economic action requires that the responses of actors and their assessment of the risks and opportunities inherent in a given situation be explained with reference to the meaning that the situation has for them. (Beckert and Streeck 2008, 17–18)
At a general level, therefore, under conditions of uncertainty social action can be contrasted with the reduction of rationality to an under-socialized conception of an individual’s utility-maximizing calculus of either economic wealth or political power. At the same time, such an understanding does not preclude an emphasis upon the intentional agency of the social actor, seeking to avoid an over-socialized view of institutional constraints and macro-structures.
The importance of approaching the issue of risk and uncertainty as a socially mediated factor is borne out through field research. Actors within the Chinese political economy and particularly the financial sector refer frequently to ‘expectations’ [预期 or 期待] in how they deal with not only government and Party officials but also, if they are bankers, with their clients and creditors. The basis of these expectations is rooted in their interpretation of a broad variety of factors and variables stretching across the directly political (elite Party politics as well as localized political dynamics), the sociocultural (shifting patterns of demand and consumption and the evolution of social values), and the directly economic (production efficiency, earnings records, and investment prospectuses). In this way, financial elites refer to ‘structures of expectation’ in their decision-making processes, and the manner in which they do so then reinforces certain patterns of expectation and intersubjective acceptance such that they also emerge as social rigidities capable of structuring individual agency.
Uncertainty is socio-economically significant because equilibrium within complex systems – including modern economies – is a contingent, entropic, and thus consistently elusive condition (Beckert 1996). Decision-making under conditions of uncertainty demands that a variety of complex and interrelated social conditions be interpreted and then managed in order for any form of agency to be exercised in a coherent manner. These dilemmas can only be resolved via a system of more or less stable reciprocal expectations on the part of actors that enable them to manage the uncertainty and risk that arise not just within market-settings, but which also obstruct agency within the political economy more broadly. These expectations are ‘fictional’ in nature (Beckert 2013) and buttressed by both rational means-end calculations and social macrostructures, although the decision-making process is ultimately reducible to neither. A distinctive feature of contemporary capitalist societies that differentiates them from other historical modes of political economy is that both economic growth and political stability are intimately connected to the construction of ‘stable reciprocal expectations’ (Beckert 2009, 245), which are capable of reducing financial uncertainty for both political and economic actors. Accordingly, rather than beginning with the assumption of static institutional equilibria that are disrupted by bouts of institutional change, we must first assume that the landscape of social institutions is constantly in flux and that it is through the contingent and highly contested construction of institutions that some inherently limited and temporary degree of social order is achieved.
Examining the sociological role of the financial system in economic growth demands addressing not only the way in which the financial system allocates capital according to economic and political interests, but also the way in which discourses and ideas about the financial system itself affect the path of economic growth. First, it will affect the internal structure and dynamics of the financial system, but it will also affect the way in which non-financial markets and broader economic systems come to structure themselves vis-à-vis the financial system. The deployment of financial capital and its investment into production thus stimulating employment, economic activity, and the resulting accumulation of greater capital is a process that demands intersubjectively shared understandings amongst a wide variety of actors throughout the political economy. The flow of capital throughout the real economy as financial capital rests upon sociological foundations, and it is thus socio-economic features that both require and are reflective of capitalism’s systemic dynamism and individual innovativeness.
This emphasis upon uncertainty builds upon and extends recent advances (e.g. Braun 2016) at the nexus of economic sociology and political economy. Beginning with the contributions of Knorr Cetina and Bruegger (2002), and Mackenzie and Millo (2003), which built upon Callon’s (1998) initial performativity thesis, social studies of finance have made significant advances in understanding exactly what kind of socially constructed environments financial systems are embedded in. The question of why this embeddedness matters in macro-distributive terms has generally been more the preserve of constructivist political economy, pioneered in such studies as those edited by Hall (1989) and Blyth (2002). The two fields, however, have struggled to engage fruitfully with one another, and the ideational underpinnings of economic processes and their political outcomes remain largely separate areas of inquiry. The dialectical interplay between the two faces of uncertainty is an important point of articulation between the microfoundations of actors’ decision-making processes and the broader contexts in which this decision-making takes place. A constructivist analysis of how financial actors across the state-market divide, manage, and exploit uncertainty provides a concrete basis for integrating the micro- and macro-levels of action. It also prompts a much deeper connection between economic sociology with its emphasis on actors and micro-level agency, and political economy, with its emphasis on structures and macro-level consequences.
Seen from this perspective, China’s transition has involved much more than the introduction of markets as mechanisms for price setting and resource allocation. The underlying rationale for the nature of financial reform has been to preserve the macroeconomic stability of a dynamic real economy, whilst stimulating headline economic growth and ensuring that this growth remained under the political control of the CCP. Each of these outcomes – stability, growth, and political control – depends on the management of expectations within a deeply uncertain socio-economic environment. The structures of expectation that mitigate uncertainty are therefore sources of social power and authority, thus becoming laden not just with neutral ‘steering capacity’, but also with the potential for realizing profoundly normative visions and agendas for the nature of social action. These ‘two faces of uncertainty’ are crucial to understanding how, in China, the point of intersection between state and market resides with the CCP and its simultaneous construction of mechanisms of governance and mechanisms for the extension of power.
Conceiving directly of the financial system itself as a broader tool of socio-economic governance and not just a system of microeconomic intermediation with macroeconomic implications opens up scope for reinterpreting the institutional foundations of the connection between the financial system, the real economy, and the political system. Notwithstanding the specific combination of state or market actors within the institutional dynamics of a financial system, its capacity to intermediate capital effectively is dependent upon systems of trust, expectations, and the investor confidence thus generated. Providing a financial risk-minimal environment is thus critical for both economic growth and stability, a policy challenge otherwise generally known as financial governance. This risk can be managed within the financial system, for example through financial market securitization, or through the use of implicit or explicit guarantees. The use of government guarantees of loans and credit is an effective method of stimulating economic growth when financial market freedom either fails or is not permitted. This model of risk management has underpinned growth in China to the extent that one banker summarized it pithily thus: ‘moral hazard is state policy’.1
Yet such techniques of financial regulation and policy, whilst necessary, are clearly insufficient to secure the broader stability of a system of financial intermediation. The belated recognition of the myth of the self-regulating financial market is opening up greater scope for understanding and parsing the social foundations of financial governance. The management of socio-economic uncertainty should be distinguished from the more specific task of attending to financial risk itself, either at the micro-level of individual financial transactions or institutions, or at the systemic level of macroprudential regulation.2 Rather, the management of socio-economic uncertainty is a broader social project; one that the technocratic exercise of risk assessment and management itself is both dependent upon and deeply embedded in. This is a problem that is further accentuated when financial markets themselves lack adequate mechanisms for signalling the appropriate price of capital. In such circumstances, the management of financial uncertainty within a complex economic system becomes much more than the deductive application of principles of financial regulation. This has the result that
Motivating the decisions of actors by shaping their expectations, including the shaping of the social and political structures underlying these expectations, becomes one of the main tasks of political regulators and a major goal of speech acts uttered in the field of the economy. (Beckert 2013, 326)
The management of uncertainty in this way articulates the relationship between financial markets and substantive economic conditions. It is clearly apparent in the evolving central banking practice of ‘forward guidance’ (Braun 2015; Abolafia 2010). Yet whilst central banks might be the single institution most closely linked to coordinating this relationship, it is by no means the only factor involved in the process of constructing economic narratives, setting financial expectations, and injecting meaning into otherwise disconnected data points. The management of socio-economic uncertainty, then, is clearly the responsibility and priority (even if one assumed unknowingly) by a broad and deep array of actors throughout the political economy.
This role of a financial system as a tool for economic governance dovetails with its role as a tool for exercising political authority. To take seriously the status of financial systems – and the risk environments within which they operate – as social systems further involves recognizing that the economic outcomes produced by a risk environment will have socio-political implications that are the product of power relations. Socio-economic action relies upon the reduction of uncertainty by way of structures of expectations that are generated through cognitive frames, social institutions, and relational networks. Power emerges from these frames, institutions, and networks; the intersubjective understandings that reduce socio-economic uncertainty and thus enable a fundamental capacity for action – generating social agency – necessarily do so in a variegated and differentiated manner. Structures of expectation are thus laden not just with neutral ‘steering capacity’ as a result of functional imperatives, but also with the potential for realizing profoundly normative visions and agendas for the nature of social action. Accordingly, these structures of expectations are manipulable by actors in order to achieve particular objectives and interests.
Scholars in political economy and economic sociology have increasingly turned their attention to theorizing the connections between ideas, institutions, and power (Carstensen and Schmidt 2016). Financial uncertainty constitutes a particular kind of social space in which ideational power can be exercised. The power of ideas, when combined with concrete agents, and the social institutions and networks through which it is exercised, is crucial to understanding the structure, operation, and consequences of financial systems. Developing ideas about the role of risk and return in credit and finance have implications for the wielding of social power, as creditors can leverage their expectations so as to compel a debtor to act in confidence-preserving ways (Beckert 2013). The outcome of appealing to economic interests in the use of investment capital is that the necessity of maintaining such confidence, and thus loyalty, ‘gives to the capitalists a powerful indirect control over government policy: everything which may shake the state of confidence must be carefully avoided because it would cause economic crisis’ (Kalecki 1943, 139). And yet this confidence and game of expectations remains a mutual one. The establishment of market-oriented institutions was necessary not just for the purpose of being rational and efficient, but also for being rational and efficient for specific political purposes.
The process of managing uncertainty in order to achieve both economic growth and stability therefore also has distributional consequences. Yet the social agency behind this power-infused management of uncertainty is opaque, and often deliberately so; the use of ambiguity and uncertainty is a well-established mechanism for the extension of political authority. Heilmann and Perry (2011, 8) have argued that one of the central elements of the style of ‘adaptive governance’ practised by the CCP is that of ‘guerilla-style policymaking’ in which secrecy, versatility, speed, and surprise enable the CCP and its leaders to ‘embrace uncertainty in order to benefit from it’. Although Heilmann and Perry limit themselves to assessing the mechanisms by which individual elites and policymakers ‘push and seize’ policy innovations, this deliberate embrace of ambiguity and uncertainty generates a broader phenomenon of ‘multivocality’ as a distinctive mechanism of control and authority. The multivocality of interpretation is ‘the fact that single actions can be interpreted coherently from multiple perspectives simultaneously, the fact that single actions can be moves in many games at once, and the fact that public and private motivations cannot be parsed’ (Padgett and Ansell 1993). In their illuminating study of Florentine state-building in the fifteenth century, Padgett and Ansell argue that this was key to how the ‘sphinxlike character’ of Cosimo de Medici was capable of founding a dynasty that dominated Florence for three centuries, paradoxically even as he appeared to possess no formal institutional authority within the city. Both in maintaining a high degree of opacity in its own institutional workings and dynamics, and conscientiously cultivating a legal culture that preserves ambiguity and encourages the exercise of discretion according to interpretations of political priorities, the CCP ensures that it remains at the indispensable centre of Chinese politics, society, and economy. The significance of the CCP lies in its role in confronting uncertainty, a necessary but insufficient condition for China’s economic and political development.
This focus upon the role of the CCP does not exclude the roles played by other factors, but rather highlights the central and distinctive nature of that role, and its implications for how we conceptualize development as a product of socially embedded action capable of being undertaken by a variety of actors independently of their preconceived role within either bureaucratic or market structures. This conception of the CCP is therefore not one to explain the behaviour of ‘the market’ under conditions of economic uncertainty, nor to explaining bureaucratic decision-making or policy development. Rather, it is dedicated to comprehending the evolution and behaviour of particular agents and institutions arising from a context of social embeddedness in which they not only constitute the political sphere, but also simultaneously determine the parameters and shape of the market. That is to say, it operationalizes the political implications of economic activity and the economic implications of political activity, without relying upon the operation of the state vis-à-vis the market or vice versa. By extension, it therefore represents a means of understanding the political and economic significance of the CCP within a single analytical framework.
Embeddedness and Chinese social structure
This begs the question of what – if neither exclusively a black-boxed political economy of state regulation nor an economic sociology of market competition – does determine how uncertainty is managed and why the CCP is central to this process. Mechanisms for confronting uncertainty render it more or less rational for actors to undertake certain economic activities. They do so in historically and culturally mediated configurations of social structures, bridging an actor’s micro-social circumstances and actual social outcomes by detailing the social theoretic dimensions across which logics of action will play out so as to produce particular outcomes. Such mechanisms of some form or another underpin all socio-economic activity by generating an array of intersubjectively generated capacities to act within an inherently uncertain social environment. In any given historical circumstance, they will assume a particular institutional configuration that permits and encourages a particular form of economic growth and development. Shifts in this institutional configuration will produce corresponding change in the nature of economic growth and political development. The exercise of power within this social space is what enables actors to engage in sense-making of the social world, to develop interests and preferences, and to coordinate meaningful social action. The recognition that mechanisms for confronting uncertainty are socially constructed and preconditional for economic activity allows us to turn one of the central questions of political economy on its head. Rather than asking how effectively an environment enables one to manage uncertainty, we may ask how the effective management of uncertainty itself has been defined via the construction of a particular politico-economic environment. To answer this question it is necessary to turn to how these mechanisms are embedded in historically contingent and culturally mediated social structures.
A number of prominent Chinese intellectuals have taken steps to attempt to construct a Chinese social science that is ‘both informed by Western social science and at the same time critical of mainstream Western thinking’ (Fewsmith 2008, 129). Central amongst these are Wang Hui and Cui Zhiyuan, who have argued that China should avoid the single-minded pursuit of the Western neoliberal economic model, not only because the validity of that model has been rendered highly doubtful in recent decades and years, but also because China has the intellectual resources and legacies that will enable it to avoid some of the problems that afflict the West (Cui 1997; Wang 2003 [1998]; Wang 2009). The arguments developed by such intellectuals during the reform era and their influence will come into play in later chapters. However, their thought functions most effectively as a method of critique and for framing the theoretical endeavour at hand, rather than as the basis for a positive conception of social order in modern China. For the purposes of developing such an analytical framework the most useful figure to turn toward is that of Fei Xiaotong, who in From The Soil (2006 [1948]) was the first Chinese sociologist to attempt to develop an indigenous theory of Chinese society that was intelligible through the conceptual and linguistic idioms of Western social science, and which thus enabled a comparative reference (Yang 2001).
Fei’s sociology assists in developing a framework for analysing a structure that does not abide by traditional categories of institutional design dominated by the state/market dichotomy. The culture question is not one that should be resolved here through epistemological debate. Rather, it can and should be approached empirically as a relevant and influential factor in the process of social evolution; a ‘practical sociology’ (Sun 2012) that, in its due attentiveness to the practice of socio-economic evolution and transformation, embeds its theory and analysis in the social reality undergirding and surrounding this process. Fei’s theory draws clear conceptual distinctions between the social structures of Western (the Anglo-Saxon western world) and Chinese society. He argues that whereas Western society is characterized by an ‘organizational mode of association’ (tuantigeju 团体格局), Chinese society is characterized by a ‘differential mode of association’ (chaxugeju 差序格局). Fei’s conception of the Western mode of association as a distinct social formation is thus described:
Western societies are somewhat like the way we collect rice straw to use to cook our food. After harvest, the rice straw is bound into bundles; several bundles are bound into larger bundles; and these are then stacked together so that they can be carried on shoulder poles. Each piece of straw belongs in a small bundle, which in turn belongs in a larger bundle, which in turn makes up a stack. The separate straws, the separate bundles, and finally the separate stacks all fit together to make up the whole haystack. In this way, the separately bound bundles can be stacked in an orderly way. (Fei 2006 [1948], 61)
According to Fei, in Western society these separate units are organizations, each with its own boundaries clearly defining membership, and with a priori rules establishing any distinctions or hierarchy amongst these members:
My purpose in making the analogy […] is to help us see more concretely the pattern of personal relationships in social life, what I will henceforth call the ‘organizational mode of association’. (Fei 2006 [1948], 61–2)
In contrast to the organizational mode, the concept of chaxugeju represents an attempt to describe analytically the patterning of Chinese society through non-equivalent ranked categories of social relationships. These social relationships have four key features. First, networks are discontinuous, in that they centre on individuals and are composed differently for each person. This means that egocentrism and an a priori social embeddedness can coexist. They are egocentric since everyone is at the centre of their own social network (Feuchtwang 2009). Yet simultaneously the Chinese mode of association presupposes multiple linkages of self with others and a categorization of those linkages in sets of ‘consanguineous coordinates’ such as the ‘socialized space’ of geography, close family, or broader lineages (Fei 2006 [1948], 121). Secondly, each link in a Chinese person’s network is defined in terms of guanxi. Each social tie is simultaneously both normatively defined and strictly personal.3 They are normative in the sense that they consist of an explicit category of social relationship that demands specific, prescribed ‘ritual’ [礼] behaviour (see Hamilton 2010); personal in the sense that the specific prescribed actions necessary to maintain the link are rooted in norms of reciprocity and are defined as personal obligations on the part of each individual, particularly the subordinate in the dyadic relationship: obligations of the child to the parent, the wife to the husband, the official to the ruler, and the younger to the older. Thirdly, networks have no explicit boundaries, since they are not created on a jurisdictional basis – ’signed up for’ – as is the case for Western organizational forms, but rather are preset. Whether someone in fact conforms to the obligations and expectations of the relationships, and thus is ‘moral and upright’, is another matter. Although the relationship pre-exists, a person is called upon to ‘achieve’ the relationship by rising to the normative standard demanded by that specific tie. A society thus comprised contains no sharp boundary lines, but only ambiguous zones of more or less dense and more or less institutionalized network configurations that impose normative demands upon the individuals within them. Finally, the normative content of behaviour in society is context-specific. Embedded in a world of differentially categorized social relationships, people evaluate ongoing action by considering the specific relations among actors. What is considered moral behaviour depends on the situation and social categories of the actors, rather than on abstract standards pertaining to autonomous individuals.
In sum, it is a profoundly personal, relational, normative, and egocentric system of social networks linking people together in multiple ways and placing different, though clear-cut, moral demands on each person in each specific context. The Confucian state was seen by its members as an enormous, but nevertheless united group, whilst the Western version is doctrinally at least an abstraction, a universal or absolute idea. It is not too far a stretch that the CCP conceives of its role as the patriarch of the ‘super-family of Chinese people’ (Redding 1990, 44). Yet it is not that Chinese society is group-oriented; the popular notion of Chinese society as oriented towards the ‘collective’ and thus disinclined to prioritize self-interest is a fallacy. Rather, Chinese society is indeed centred on the individual, but as the basis of social egoism, not social individualism. Social structure emerges from networks created through relational ties linking the self with discrete categories of other individuals. It is a society in which considerations of order, not laws, predominate. In this context, social order rests not upon the adherence of individuals to norms whose universal legitimacy is defined procedurally and thus in the abstract, but rather on the ability of individuals to uphold the normative obligations inherent in their network of concentrically expanding social relations. Fei’s conception of this social egoism identifies clearly the paradox of Confucian normative theory: how Confucius himself was never capable of identifying a universal definition of ‘benevolence’ [仁], always relying upon discrete examples to identify what would not be ‘benevolent’ in the context of a particular dyadic tie or personal relationship (Zhao 2007). That Confucian political philosophy remains rooted in practical circumstances – in simple terms lacking a universal theory of justice – is intimately related to how it both emerged from and shaped fundamental characteristics of Chinese social structure itself.4
The organizational mode of Chinese commerce thus stands in contradistinction to the Western model of economic organization that revolved around those who controlled access to economic sectors and had jurisdiction over economic institutions. It was with the development of constitutional government that citizens emerged with the right to unfettered access to the economy, where their profit-making was unrestricted, and only the law limited control. Rather, in the Chinese mode of economic organization, the emphasis has always been upon harmony, upon a relational order that solicits obedience to the relationships that will ostensibly generate that harmony. As Needham (1956, 582) states,
The Chinese notion of order positively excluded the [Western] notion of law … The Chinese world-view depended on a totally different line of thought [from the law-based world-view developed in the West]. The harmonious cooperation of all beings arose, not from the orders of a superior authority external to themselves, but from the fact that [the Chinese] were all parts in a hierarchy of wholes forming a cosmic pattern, and what they obeyed were the internal dictates of their own natures.
This Chinese emphasis upon ordered relationships and on the achievement of harmony in those relationships profoundly influenced the establishment of social and political institutions (Hamilton 1996). That influence is still profoundly apparent in the mechanisms through which contemporary Chinese governance structures both manage and exploit socio-economic uncertainty.
Confronting uncertainty: frames and institutions
Fei’s ideal-typical analysis provides a basis for integrating substantive features of Chinese social structure and relations into a model of how socio-economic uncertainty is confronted in China. Making the conceptual link from the nature of socio-economic embeddedness to socio-economic outcomes involves identifying the mechanisms by which social actors are both conditioned by and elect to shape that embeddedness. From the cognate fields of constructivist political economy and economic sociology, two key analytical concepts form the basis for this theory: cognitive frames and social institutions. Together they generate analytical space for understanding cross-societal variation in how institutions are constructed and assembled so as to confront uncertainty, without devolving into a state–market binary dichotomy. Cognitive frames and social institutions serve as mechanisms for reducing the uncertainty that would otherwise inhibit the development of a coherent basis for social action. In doing so, they do not simply function as ‘neutral’ devices to resolve coordination problems, but shape patterns of competition, mediate the exercise of power, and thus make a deep contribution to socio-economic stratification. A focus on how frames and institutions both reconfigure and reinforce the social world is therefore not to deny the role and significance of interests, but rather to emphasize the extent to which these interests are shaped and modulated by a pervasive and multidimensional social embeddedness. This emphasis permits the development of a dynamic model of the role of ideas in cognitively framing the process of institutional change and the production of socio-economic outcomes that in turn precipitate the renegotiation of dominant ideas and thus new cognitive frames.
Cognitive frames are essential for managing Knightian socio-economic uncertainty. Frames are ‘schemata of interpretation’ (Goffman 1986, 21), comprising ‘narratives that guide both analysis and action in practical situations’ (Rein and Schon 1996, 89). The development, contestation, and agreement of such frames enable actors to coalesce around shared interpretations and understandings of social reality. They function heuristically, contributing to the normative and mental organization of a social environment, and thereby establishing foundations for confronting uncertainty. Working with the related vocabulary of economic ideas, Blyth (2002, 37) argues that ‘economic ideas make it possible for agents to reduce uncertainty by acting as interpretive frameworks that describe and systematically account for the workings of the economy by defining its constitutive elements and providing a general understanding of their “proper” (and therefore improper) interrelations’.
Given the uncertainty of outcomes that afflicts all social action, such frames assist in reducing uncertainty and generating stability in two ways: first, as lenses through which interpretations of institutions and social networks are refracted,5 and secondly as social structures in their own right that both catalyse the formation and legitimize the perpetuation of such institutions and networks (Beckert 2010, 610). Such shared understandings are essential to the skill of actors in interpreting their situations, constructing viable courses of action, and innovating upon existing routines and practices (Béland and Cox 2011; Bourdieu and Wacquant 1992). Just as the economy is embedded in economic ideas (Callon 1998), economic ideas are embedded in broader society as an inflection of deeply rooted lineages of cultural heritage and historical trajectories of politico-economic development. As Beckert and Streeck (2008, 13) state emphatically,
Economic action, like social action in general, takes place and is bound to take place within collectively constituted social macrostructures of social order, and it depends on their integrity. The interests that economic actors pursue and the rules that they follow must be culturally sanctioned; not being naturally given, they are also in need of discursive reflection whenever they become problematic.
It is therefore appropriate to view the cultural resources of Chinese society as important for understanding socio-economic action in the context of contemporary China. Within such framings, decision-making will never take place out of the context of concrete social circumstances, as officials, executives, and entrepreneurs will absorb information immediately at hand and use their intuition to process it, rather than looking for abstract theoretical explanations removed from the complex social context in which such decisions are always embedded (Redding 1990, 77). Understanding frames in this light draws attention to the multivocality of CCP authority in China, in which the ambiguity surrounding the nature of CCP rule is at once a producer of socio-economic uncertainty within broader society, as well as a solution for coping with that uncertainty. Nonetheless, the underlying sociocultural basis for the CCP’s paradoxical embrace of uncertainty is not solely to be derived from Mao’s revolutionary experiences, as Heilmann and Perry (2011) argue, but derives also from more fundamental structures of Chinese social relations, many of which came to be embodied in the CCP itself through the revolutionary period. Yet as I argued in Chapter 2, the cultural-historic rootedness of Chinese social relations is by no means incompatible with processes of institutionalization, rationalization, and systematization of social structures and decision-making mechanisms. The distinctive intersubjectivity of these social relations raises the issue of institutions and the role that they play in the rational organization of social order.
Institutions and the norms underpinning them create mutual expectations for interactions and limit the choice set of actors.6 They reduce contingency in action situations by generating sanctions for norm transgression and providing credibility to decision-making processes (Beckert 2002; Hodgson 2006). Yet at the same time what is distinctive about social institutions is their need to be legitimated within a given social order and thus integrated into a specific social, political, and cultural context (Beckert 2002). Further, how an institution, and the rules and norms underpinning it, is mentally perceived and self-represented by an individual is constitutive of that institution (Searle 1995; 2005), for in their peculiarly social nature institutions are dependent for their existence upon the supporting beliefs and mental attitudes of those individuals that both ‘make’ and ‘take’ the relevant rules and norms (see Streeck 2009; 2010).
The implications of Fei’s conception of the differential mode of association for institutions of social order are profound. The logic and actual unit of control differ between Chinese society (the relationship between individuals) and Western society (the individual). In the West, individuals are presumed to be autonomous, and thus subject to the rule of law as individuals. Individual rights, as identified and secured through a constitution, specify the basis for individual autonomy. Laws itemize those actions that would unduly infringe upon these rights. In China, society is regulated and order generated more through rituals, which means that order depends upon people’s obedience to their social obligations. Accordingly, the obligations for each relationship must be identified, people must learn those obligations, and be corrected when they fail to fulfil them. The entire network of people joined through a set of relationships is implicated when one person fails to perform appropriately (Hamilton and Zheng 1992).
Significant differences begin to emerge between the West and China in terms of conceptualizing the nature and role of institutionalized norms and rules in society, and therefore the nature of state authority. The state is the highest organization in Western society. As Nettl (1968, 559) once classically stated with reference to the state, ‘the thing exists and no amount of conceptual restructuring can dissolve it’. It has historically been extremely difficult for the Chinese state to maintain order and rule by jurisdiction, since ruling elites were inevitably faced with a disparity between their direct and formal tools of power, and the scale and diversity of the country (Wright 1962). In such circumstances it was role compliance, rather than formal legal structures that protected social order (Redding 1990), and this was thus a social order that ‘could operate by itself, with the minimum of assistance from the formal political structure’ (Yang 1959, 164). Given the nature of Chinese society, such a formal political structure, with the rigidity and constitutionalizing nature of ‘rationalized’ laws and codified norms, was fundamentally impractical and undesirable. In this sense, Chinese social structure developed on the basis that ‘reasonableness’ is superior to ‘reason’ (Lin 1941, 86).
This formed the basis for the distinctly social role of the state as it has existed historically in China. The CCP was already twenty-eight years old when it forged the Chinese state and thus, ‘to the revolutionaries, a state constitution surely did not mean something like a contract that a democratic government makes with society or an agreement on how political power should be divided and shared’ (Zheng 1997, 47). It is the CCP that provides coherence and consistency across a fragmented and decentralized state, as its institutional presence extends across all branches and levels of the bureaucracy (Florini et al. 2012). The fundamental nexus of authority and control is not a jurisdictional top-down system that controls the actions of every individual through the imposition of legal rules through a transparent bureaucratic state structure. Rather, the means of control is located in the institutionalized networks of relationships, and power holders’ authority derives from their ‘educational’ function. Conceiving the role of the CCP in this manner casts in a different light the well-known aphorism that ‘heaven is high and the emperor is far away’. This means that officialdom is removed from local society, and whilst it is in principle responsible for managing the whole, it does not intervene in the parts. It is only when disorder arises that it must ensure that all involved in the network work within their own successive circles of relationships to ensure that order is restored. The logic is that if everyone is attentive to the normative expectations of his or her close relations, then the whole world is at peace and the people can prosper (Hamilton and Zheng 1992).
Understanding the nature and role of cognitive frames and social institutions in this way allows us to begin to make sense of the politico-economic roles that the financial system and the CCP have played in the course of China’s development since 1978, and also gain a social-theoretic understanding of why certain features of these roles have displayed resilience at the same time as others have undergone radical transformation. Frames concerning the relationship between ‘socialist’ ideology and the market economy gave rise to cognitive frames that guided debates within the CCP over institutional design, providing the motivation and generating the normative resources for certain actors to stabilize particular institutional forms and to delegitimize others. The cognitive frames that have underpinned Chinese political economy both in the modern and pre-modern eras generated the ideational basis for the CCP to act simultaneously as the guarantor of economic control and of economic growth. They generate a means of controlling uncertainty by way of embracing uncertainty. Institutional design thus reflects the shared understandings of how frames are to be interpreted, as actors draw upon them as resources and tools for catalysing institutional change. The resulting evolution of legal-bureaucratic and market institutions reconfigured the relative positions of individuals and groups within the political economy and enabled certain actors to reinforce their position within a stratified political economy, even as others’ positions were weakened and subordinated through newly emergent institutions of reform and development. In the realm of financial and monetary policy, this change involves regulating and modulating the flow of capital. An array of institutions embodies particular conceptions of how to manage the social relations that constitute financial networks, including those that affect the quantity and value of capital (central banking), the allocation of capital (financial intermediaries), and the dynamics of financial markets (financial regulation). The resulting changes in the real economy and the ever-present prospects of financial crisis have continually catalysed these processes of social change. The consequence of this distinctive set of ideational and institutional mechanisms for confronting uncertainty has been an unbalanced stability in China’s economic developmental trajectory.
Consequences of uncertainty: unbalanced stability
This allows us to begin to make greater sense of the politico-economic roles that the financial system and the CCP have played in the course of China’s development since 1978, but also gain a deeper insight into the dynamics of stability and change in these roles. Ideas concerning the relationship between ‘socialist’ ideology and the market economy gave rise to cognitive frames that guided debates within the CCP over institutional design, providing the motivation and generating the normative resources for actors to stabilize certain institutional forms and to delegitimize others. Having embraced the idea that stable economic growth was essential above all else for securing the social and political goals of the CCP, China’s policymakers and financial elites sought to orient the banking system and the allocation of capital towards this particular set of economic goals and priorities in the absence of sophisticated financial market mechanisms and in the face of increasing market dynamics in the real economy. Fulfilling these goals involved approaching the financial system as a set of socio-political resources – a tool of macroeconomic and political policy. The resulting evolution of legal-bureaucratic and market institutions reconfigured the relative positions of key individuals and groups underpinning the CCP and its relation to the real economy, and enabled certain actors to reinforce their position within a stratified political economy, even as others’ positions were weakened and subordinated through newly emergent institutions of reform and development. These distributive consequences in the real economy and the ever-present prospects of financial crisis continually catalysed further processes of ideational and institutional change. In this light, it becomes both possible and necessary to base an analysis of the foundations of economic growth on a sociological analysis of the financial system as constitutively embedded within the broader economy.
Within this conceptualization, these economic goals can also be thought of in terms of a variety of dichotomies that flow from the ‘two faces of uncertainty’ – its management and its exploitation. As China’s political economy has become increasingly rationalized, but rationalized around the power of the CCP, both the management and exploitation of socio-economic uncertainty have been integral and central to the path of market-led economic reform under the authoritative control and guidance of the CCP. Crucially, though, they can be both at the same time, as this environment incentivizes a constant straddling of a fine tension between conditions necessary for economic growth as well as those that imperil growth. As one prominent academic stated in relation to China’s financial development,
There is a serious inequality in the distribution of wealth and capital resources. … This is directly connected to the way in which interest rates and financial markets must be managed in order keep China’s economy on an even footing as it speeds forward like a high-speed train from Shanghai to Beijing and back again.7
The result is to make it easier and cheaper for one set of actors in the economy to access capital than others (Johansson 2012). In China’s case, assets are highly concentrated within the banking system and associated financial institutions. This ‘deep but narrow’ financial profile is reflected in the observation that ‘China is an extremely credit-dependent economy. Without the role of credit finance, the China growth story would not have been possible.’8 The implication is that credit intermediated through banks has played an integral role in influencing not only the rate but also the nature of economic growth.
This takes place by mediating financial capital through the shaping of actors’ expectations of the consequences of particular pathways of action. For example, cognitive frames emerged that fundamentally disrupted expectations for the extension of credit. Expectations for the use of capital shifted from underpinning egalitarian social policies through the all-encompassing firms of a command economy to a mechanism for capital accumulation.9 Yet the ways in which this capital would be accumulated, however, was to remain firmly within the control of the CCP. Implementing this notion of development would thus lead to an institutional framework that fostered growth and retrenched control at the same time:
On the one end, the financial framework has arranged a forced marriage between the deposits of the masses and state-owned commercial banks. On the other end, the illegal fundraising law has served as a means to keep public deposits from running away from their arranged marriage. This in effect serves as an official announcement that financial independence is forbidden. (Wang 2013)
Understanding the function of the financial system in these terms sheds further light on China’s financial development. Conventional wisdom holds that financial liberalization and economic growth are positively correlated (McKinnon 1973; Shaw 1973; Roubini and Sala-i-Martin 1992; Levine 2005). There is a growing literature on how repressive financial policies foster a number of specific politico-economic imbalances, including inequality (Johansson and Wang 2012b), sectoral transformation (Johansson and Wang 2011), and an economy’s external position (Johansson and Wang 2012a). However, China’s experience has also led many to question this line of argument and re-examine the role of financial repression in development. Arguments have therefore also been made in favour of the need for developing countries to manage money supply and financial stability through repressive domestic financial policies (Stiglitz 1994; Hellmann et al. 1997), and limits upon the extent and pace of external liberalization (Stiglitz 2000; Prasad et al. 2003).
The relationship between financial repression and growth, however, is not linear (Johansson 2012), and thus these two views are not necessarily incompatible. Huang and Wang have argued that financial repression was beneficial to China’s overall economic growth during the 1980s and 1990s, however, after 2000 it had a negative impact upon headline GDP growth (Huang and Wang 2011; Huang and Wang 2017). Of all of these measures of financial repression, the one form that did not have a negative impact upon growth was that of the share of state-owned banks in total bank loans. The hypothesis is that the capital allocation of the state banks is not significantly different from that of the other banks (Huang and Wang 2011). The implication is that under certain conditions financially repressive policies of interest rate regulation and directed-credit allocation may be beneficial for economic growth. Such repression can generate an ‘adaptive efficiency’ at the expense of ‘allocative efficiency’ (Li 2001; Maswana 2011), by carving out the policy space for fostering rapid development in the real economy through a state-led growth strategy (Hausmann and Rodrik 2003). Financial repression may thus be beneficial for economic growth under certain conditions, but it will nonetheless generate economic dynamics that threaten the balanced nature of that growth.
These distributive consequences of stratification have the potential to disturb the intellectual coherency of cognitive frames, generating an impetus to challenge and reconfigure existing institutions. Whether or not the actual social outcomes produced by this process – in terms of stability, aggregate material wealth, social equality, and so forth – coincide with the still salient cognitive premises upon which institutions constructed have an effect upon the evaluative interpretation of those cognitive frames as fundamentally normative socio-economic discourses. Exogenously, shocks and events further have the potential to disturb the coherency of cognitive frames, as new interpretations and understandings disrupt the continuity and harmony between still salient cognitive framings and actual socio-economic outcomes. These endogenous and exogenous trends and disruptions thus in turn produce ‘cognitive evolution’, as this diffusion reconfigures interpretations of actual social outcomes and reflects back upon the salience or acceptability of the original cognitive frames.
Conclusion
The distinctive position of the CCP – deeply embedded in China’s distinctive patterns of social structure – reflects a specific and inherently normative vision of political economy as an unequal relationship between political authority and financial capital. The uncertainty of socio-economic action has enabled the CCP to maintain control, even when circumstances undermine its legitimacy. Entrenched and resilient CCP control has arisen out of the CCP’s ability to exploit the functional imperative of managing uncertainty, such that the capacity to manage uncertainty becomes concentrated within the CCP as a particular social grouping. This need for cognitive and institutional mechanisms for reducing uncertainty and mediating (and thus translating) the social world into a comprehensible environment for action has historically been conceived of as being satisfied either by the structures of state governance or market exchange. In constructing a capitalist political economy, the role of the CCP disturbs these traditional categories of state and market, not because the functional characteristics of hierarchical control or contractual exchange as a means of organizing socio-economic reproduction have been modified, but rather because the imperatives of capitalism find clear expression in how the CCP seeks to orient financial activity towards economic growth whilst also satisfying the priorities of social stability and order.
Existing accounts of the expansion of markets throughout different economic sectors in China too often neglect the implications of how particular markets are constructed in particular ways. The construction of a capitalist economy is not a matter simply of guaranteeing market exchange, but rather one of accounting for the assumption of risk and the distribution of the profits of that market exchange. This reflects Braudel’s characterization of the system of capitalist exchange as distinguished by the existence of a layer of systematic appropriation of profit, an activity that presupposes but is not necessarily directly attached to a lower stratum of participants in trade and exchange whose rewards are more or less proportionate to the costs and risks involved in such activities (Braudel 1981). For Braudel, market economies can exist wherever buyers and sellers convene to exchange goods at prices considered sensible by both parties. In historical comparative context, as we saw above, the construction by the CCP of particular markets for capital in China has not been neutral, but rather has been directed towards a particular vision of national growth and development.
Notes
1Interview 20 November 2012, Beijing – Minsheng Bank.
2For more on embedding financial regulation within broader social practices and objectives, see Lothian (2012).
3For an interpretation and update of Fei’s concepts of chaxugeju and tuantigeju see Chang (2010).
4The extent to which Confucian philosophy merely reflected or itself played a performative role in this social structure is a complex debate which shall be left alone here.
5At a fundamental level, modes of cognition shape social reality. For example, one particular aspect of Chinese language is significant in this regard. The creation of a graphical language as opposed to a phonetic one relies upon the medium of the senses, the notion of a tangibility that permits it in some way to be ‘seen’. This requirement thus hinders the emergence of purely abstract and non-tangible notions and concepts, and goes some way in further explaining the emphasis placed upon developing both social philosophy and political practice through practical and tangible examples, rather than as a deductively abstract exercise. See Redding (1990, 75).
6An institution is any collectively accepted system of rules (procedures, practices) that enable us to create institutional facts. These rules typically have the form X counts as Y in C, where an object, persona, or state of affairs X is assigned a special status, the Y status, such that the new status enables the person or object to perform functions that it could not perform solely in virtue of its physical structure, but requires as a necessary condition the assignment of the status. See Searle (2005).
7Interview, 24 November 2012, Beijing – Tsinghua University.
8Interview, 14 December 2012, Beijing – Bank of China.
9As Deng Xiaoping stated at the crucial Central Work Conference of 1978, in a speech that would become official policy of the Communist Party in December 1978,
We should allow some areas, enterprises, and workers and farmers to earn more and live a better life earlier than others through diligence and hard work. When some people become better off ahead of others, they are bound to have a tremendous demonstrative impact on their neighbors and will prompt them to follow their examples. In this way, the national economy as a whole will keep advancing wave upon wave, enabling people of all ethnic backgrounds throughout the country to become rich at a relatively faster rate. (Li 2009, 69)