Crack-Up Capitalism Chapter 1: Two, Three, Many Hong Kongs
Chapter 1 of Crack-Up Capitalism by Quinn Slobodian (ISBN: 9781250753908) opens with a wild scene. Peter Thiel is onstage with a young Google engineer named Patri Friedman. And they are talking about building nations on the ocean.
Not as a joke. As a business plan.
Floating Hong Kong
Patri Friedman, grandson of the famous economist Milton Friedman, had an idea. Take old oil rig technology, park it in international waters, build a new country. No government. No taxes. No elections. He called them “seasteads.” Beyond 200 miles from any coast, the open ocean belongs to nobody.
His blog slogan was borrowed from Mao: “Let a Thousand Nations Bloom.” But the picture on that blog was of Hong Kong. And the logo looked a lot like the flower on Hong Kong’s flag.
So what was it about Hong Kong that made these guys so excited?
Milton Friedman Falls in Love
Slobodian takes us back to late 1978. The world was a mess. Inflation in America. Labor strikes in Britain. Revolution in Iran. Military dictators in South America. Political scientists were asking if democracy was dying.
But Hong Kong was doing great.
Milton Friedman flew there to film his PBS series Free to Choose. He was already famous, a Nobel Prize winner. The companion book sat on the New York Times bestseller list for 51 weeks.
Cameras followed Friedman past vegetable stalls and back-alley workshops. He praised the sweatshops. He called Hong Kong “an almost laboratory experiment” in what happens when government stays out of the way.
Here’s what Friedman loved: no labor unions, no elections, low taxes. The top income tax was 15 percent flat. No capital gains tax. No inheritance tax. Compare that to 83 percent in Britain and 70 percent in the US.
And nobody voted on any of it. Hong Kong was a British colony, run more like a corporation than a country. Friedman’s colleague Alvin Rabushka called it a textbook model “made possible by the absence of an electorate.”
The quiet part said out loud. The secret ingredient in Hong Kong’s “freedom” was that regular people had no say.
How Hong Kong Got There
The British took Hong Kong Island in 1842 after the First Opium War. Yes, the drug trade. They were selling opium to Chinese consumers, and when China tried to stop it, Britain went to war. They won, took the island, turned it into a free port. More territory followed: Kowloon in 1860, then the New Territories leased for 99 years in 1898. That lease is what would cause all the anxiety later.
After Mao’s revolution in 1949, about a million refugees flooded in. The population quadrupled between 1945 and 1956. All those people became cheap labor. Factories popped up everywhere making clothes, toys, plastic flowers. By the late 1970s, this tiny territory of less than 500 square miles was the world’s top clothing exporter, the 20th largest exporter overall, growing at 10 percent a year, and quickly becoming Asia’s financial center.
The Handover Problem
But here’s the thing. That 99-year lease on the New Territories was running out in 1997. Hong Kong was one of the last British colonies left. As people said, “living on borrowed time in a borrowed place.”
Thatcher tried to negotiate. She wanted China to take ownership but let Britain keep running things. China said no. But they needed Hong Kong’s economy to keep working. Two-thirds of foreign investment into China flowed through Hong Kong.
So Deng Xiaoping came up with “one country, two systems.” China would take Hong Kong back, but the territory keeps its capitalist system for 50 years, until 2047. The Basic Law, Hong Kong’s mini-constitution, guaranteed balanced budgets, low taxes, free ports, free movement of capital.
A Hong Kong lawyer read those clauses and said they read “like an excerpt from Milton Friedman.” The drafters had literally cited Mont Pelerin Society members’ work.
China Copies the Model
Here’s where it gets really interesting. While the neoliberals were meeting at luxury hotels in Hong Kong, Deng was creating the first special economic zones (SEZs) right next door, on the Pearl River Delta.
The first one was in what would become Shenzhen. In the late 1970s, it was farmland. A Hong Kong businessman pitched the zone idea and brought the magic number: 15 percent corporate tax.
Shenzhen was ringed by barbed wire. Even Chinese citizens needed visas to enter. Inside, entrepreneurs organized themselves with little direction from Beijing. Workers got contracts instead of permanent jobs. For the first time since 1949, land was sold on a market.
Officials planned for 300,000 people by the year 2000. The real number? Ten million. By 2020, twenty million, with a GDP bigger than Singapore or Hong Kong.
This was “zone fever.” The model spread from coastal experiments to the entire country. Rural land was converted into private property on a massive scale. One scholar called it one of the biggest transfers of public wealth into private hands in modern history.
The Portable Hong Kong
Slobodian calls it “the Portable Hong Kong.” Friedman and his colleagues took the Hong Kong idea and shipped it around the world in different packages.
The 15 percent flat tax? Rabushka promoted it from US Congress to post-communist Eastern Europe. Twenty-one former Soviet countries adopted it.
The balanced budget requirement? It spread across Europe as “debt brakes.”
And the biggest export: the idea that economic freedom matters more than political freedom. Friedman and Rabushka created the “Economic Freedom of the World” index. It ranked countries by tax burden, trade openness, and ease of doing business. Democracy was not measured. Hong Kong topped the list for over two decades.
The index called the right to food and housing “forced labor requirements.” It called redistribution “slave labor.” Under these rankings, Guatemala’s dictatorship in 1980 was one of the top five “freest” economies in the world.
The Reality Check
But Slobodian shows what the freedom indexes left out. They did not measure unemployment, welfare, or equality.
If they had, Hong Kong would look very different. Top ten billionaires control 35 percent of GDP (in the US it’s 3 percent). Ten families controlled a third of the corporate sector. Hong Kong topped the Economist’s “crony capitalism index” too. Not exactly free competition.
And democracy kept knocking. In 1990, 150,000 people marched in solidarity with Tiananmen Square. The Umbrella Movement erupted in 2014. When asked why voting couldn’t expand, Hong Kong’s chief executive was blunt: more voters means more poor people voting, and poor people vote for welfare.
Three Stories Broken
Slobodian ends the chapter by saying Hong Kong breaks three stories we tell ourselves:
First, that democracy is always spreading. It’s not. China’s success made it look like capitalism without democracy could be a winning formula.
Second, that the world neatly moved from empires to nation-states. It didn’t. Nations split into zones, havens, and enclaves. The nation-state era turned out to be just as “lumpy” as empire.
Third, that capitalism always produces things useful to regular people. Hong Kong’s economic freedom meant freedom for capital, not for people living in tiny apartments while a few families controlled everything.
The real Hong Kong model was not abstract freedom. It was a small territory with no democracy, tight bonds between business elites and government, low taxes, and open borders for money.
And that model was about to be brought home to the heart of the empire. Next chapter takes us to London.
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