Nobel prize winning economist Douglass North recently opined on the pages of the Wall Street Journal that China needs to establish clear property rights in order to make capitalism work there. I wrote a letter in response that questioned the feasibility of this approach. To my pleasant surprise, the Journal saw fit to publish my letter. I have reprinted the letter here below and the North article itself can be found at: http://online.wsj.com/article/0,,SB111283514152300351,00.html.

As Chinese stock markets continue their descent the fragility of the Chinese economy continues to worry many around the globe.

The letter:

Mr. North is certainly right that Chinese leaders need to establish clear property rights if they are to move to the next stage of modern capitalism. What he seems unable to explain is why that move is likely to be deeply problematic, if not impossible.

To establish property rights to assets effective enough to enable efficient trading and innovation to take place would almost certainly require a violent confrontation with the Chinese working class and peasantry — groups that, understandably, believe they have a claim to the nation’s wealth senior in priority to that of the party and newly emerging wealthy elite. That confrontation has been taking place sub rosa since the bloody suppression of the democracy movement centered in Tiananmen Square in 1989. But conflict is now more open, with strikes and even violent confrontations between the state and aggrieved citizens increasingly the norm.

The regime is clearly hesitant to unleash a final confrontation. To resolve this conflict, China must find an alternative way forward that relies, instead of on authoritarianism, on democracy and social equity.

Stephen F. Diamond
Assistant Professor of Law
School of Law, Santa Clara University
Santa Clara, Calif.