In their book, Victor Nee and Sonja Opper examine the emergence and growth of China's private sector. Formally eliminated in the 1950s with the socialization of the economy, China's private sector was reborn in the early 1980s as black-market speculators moved into the aboveground economy and workers and peasant-farmers opted to become entrepreneurs. Initially limited to the employment of no more than eight family members, private firms rapidly proliferated. According to the authors, by 2008 China's private sector included 5.5 million registered firms employing 100 million people, twice as many as then employed by state-owned enterprises. In recent years, private firms have accounted for over 40% of industrial output, 40% of industrial profits, and close to half of total industrial employment. In all, the private sector now accounts for 70% of GDP. Given that it started at zero, the rapid development and growth of the private sector has, in fact, been one of the single most important dynamics in the “Chinese Economic Miracle.”

As Nee and Opper correctly argue, it is not simply the magnitude of its growth that calls for explanation; it is also the fact that the private sector grew remarkably in spite of the government's best efforts to limit private economic activity and to protect the state-owned sector. Would-be entrepreneurs faced a long uphill fight against a hostile regulatory system that sought to limit the private sector to small, family businesses; denied the private sector secure legal and property rights; shut private companies out of the formal banking system, and often allowed local governments to treat private businesses as easily milked cash cows. In the face of such adversity, proto-entrepreneurs turned away from the state and its formal legal policy–based regulatory system. Instead of relying on the state and legal mechanisms to solve problems of interfirm cooperation, they devised a system based on social norms and intense interaction in which an individual's reputation was the gold star and deals were sealed with a handshake rather than a formal contract. Those who welched on a deal or cheated became pariahs, and word of their untrustworthiness spread quickly. Funds were raised from relatives or from downstream and upstream partner companies. Knowledge about markets, production technologies, and management techniques were spread by word of mouth by businessmen seeking to help other would-be entrepreneurs set up new businesses. In short, as the book's title suggests, it was private businessmen who built China's private sector, and, by extension, it was their pluck and willingness to work outside of the state's control that produced China's “miraculous” growth.

To a large extent, Nee and Opper's description of the workings of the private sector in China dovetail with previous works by authors such as Susan Whiting and Kellee Tsai. Nee and Opper's data are particularly rich. They base their description of the emergence, growth, and operation of the private sector on a sophisticated survey methodology that yielded information on more than 700 private businesses in seven cities in the Jiangnan region, including Wenzhou, Hangzhou, Shanghai, and Nanjing. The authors draw on this data to provide not only statistical support for their assertions about the private sector but also lively and often fascinating firsthand accounts of the challenges faced by would-be entrepreneurs: how they dealt with adversity, how they overcame obstacles, and how they interacted with other private businesses, state-owned firms, the state, and their own employees. The authors are thus able to answer a number of key questions about the private sector. For example, they reveal that, in general, private firms try to avoid interaction with the state sector; that in many cases firms spawn new firms as employees learn business skills and opt to set up their own companies; that when this occurs, existing firms often nurture and encourage spun-off firms, even though they are potential competitors; and that firms engaged in similar lines of production often co-locate because this allows them to realize efficiencies in both subcontracting and downstream processing and production.

Capitalism from Below is not without shortcomings, however. In particular, it appears to paint a rather rosy picture of China's private entrepreneurs. In Nee and Opper's account, businessmen and women are upright, honest, and hardworking; they rely on their reputations for delivering goods and services on time and at reasonable prices, and they stand behind their products to achieve the sorts of interfirm cooperation that in most market economies is backstopped by a legal system and enforceable contracts. Like Elinor Ostrom, Nee and Opper reject Mancur Olson's prediction that the collective-action problem can be overcome only by the creation of a Leviathan empowered to penalize free riding in favor of a social-networking model that posits that dense interaction allows individuals to detect potential free riders and use tit-for-tat strategies to sustain mutually beneficial cooperation.

While China's private sector may rest on a foundation of reputation, trust, and social networks, rather than on a strong legal framework, the notion that it is populated by upright and honest individuals seems hard to accept, given the rough and tumble nature of business in China. It seems difficult, for example, to reconcile Nee and Opper's account with the many examples of product adulteration, scams, forced demolitions, and so on unless one is willing to ascribe the bulk of such abuses to the state sector. Similarly, the authors seem to minimize the role of corruption. At the very end of the book, they allude to it in their discussion of “political capital,” but conclude that political capital does not confer advantages on a business that invests in seeking rents.

A final issue with Nee and Opper's findings comes from the work of Yasheng Huang, who argues that while private entrepreneurship flourished in the 1980s, the state sector has since regained the upper hand, and that far from evolving toward a true market economy, China has become trapped in a deviant form he calls “Capitalism with Chinese Characteristics.” Nee and Opper's conclusions are obviously very different and suggest that the private sector has the upper hand, thus ensuring that China will continue to push toward a more fully marketized economy. The contrast between Huang and the authors of Capitalism from Below thus forms the basis for a new round in the ongoing debate over the political economy of reform.