ABSTRACT
The transition from a war economy to a market economy posed challenges similar to those later encountered in the socialist reforms. The wartime debates presented an important reference point for China’s market reforms in the 1980s. Chapter 2 shows how universal price controls were implemented in the United States during the Second World War and how American and European economists grappled with the question of how to deregulate prices and re-create markets in the transition back to peace. It presents intellectual origins for both the gradual and the shock therapy reform paradigms. The chapter analyzes the contributions by prominent institutionalist economists such as John Kenneth Galbraith in the United States and Alec Cairncross in the UK, who argued for a gradual decontrol. It contrasts this pragmatist take with the call from Milton Friedman, Friedrich Hayek, and Ludwig von Mises for wholesale price liberalization; they warned that the continuation of any price controls presented a “slippery slope” toward a planned economy. These neoliberal arguments anticipated the logic of shock therapy that swept the developing and socialist world from the 1970s onward.
