The credibility of American-style capitalism was among the earliest victims of the global financial crisis. With Lehman Brothers barely in its grave, pundits the world over rushed to perform the last rites for US economic ideals, including limited government, minimal regulation, and the free-market allocation of credit. In contemplating alternatives to the fallen American model, some looked to China, where markets are tightly regulated and financial institutions controlled by the state. In the aftermath of Wall Street’s meltdown, fretted Francis Fukuyama in Newsweek, China’s brand of state-led capitalism is “looking more and more attractive.” Washington Post columnist David Ignatius hailed the global advent of a Confucian-inspired “new interventionism”; invoking Richard Nixon’s backhanded tribute to John Maynard Keynes, Ignatius declared, “We are all Chinese now.”

But before proclaiming the dawn of a new Chinese Century, leaders and executives around the world would do well to reconsider the origins of China’s dynamism. The received wisdom on the country’s economic miracle—it was a triumph of technocracy, in which the Communist Party engineered a gradual transition to the market by relying on state-controlled businesses—gets all the important details wrong. This standard account holds that entrepreneurship, private-property rights, financial liberalization, and political reform played...