Recent advances and trends in economics
Western economic thought was first introduced to China by Karl Gutzlaff (1803—51), a German missionary, who wrote two Chinese texts on economics, Outlines of Political Economy in 1839 and Treatise on Commerce in 1840.
By the 1880s the first Western economics texts were being translated and studied in China. However, these texts were modified to reduce what was seen as a bias towards low tariffs, regarded as an imposition of Western thought onto Chinese autonomy. Intellectuals such as Ma Jianzhong, one of the first Chinese educated in the West, viewed Western thought in more mercantilist terms, stressing increased exports to achieve wealth (Trescott, 2007).The first attempt to directly translate the Wealth of Nations in Chinese was made by Yan Fu in 1902. Although not an economist by training, it was the first attempt to translate the classic and is even more important because of the translator’s inclination to interpret, rather than merely translate, in a manner that could accommodate, rather than supplant, Chinese intellectual traditions (Lai, 1989). This was part of a trend towards rehabilitation of Chinese thought and only nine years later Chen Huan-Chang (1911) introduced the Western world to Confucian economic principles in his masterwork The Economic Principles of Confucius and His School, which contains a brilliant exposition of Confucian economic theory and its relationship to Western economic theory.
From 1920 to 1939, the works of many Western economists were translated into Chinese, including J.M. Keynes, F. List, K. Marx, I. Fisher, H. George, A. Marshall, T. Veblen and D. Ricardo. However, there was a strong anti-imperialist current coupled with the socialist philosophy of Sun Yat-Sen, who was heavily influenced by George rather than Marx. This laid the groundwork, not for mainstream economics, but for the introduction of institutional economics in the Veblen-Ayers-Commons tradition, since institutionalism was not antagonistic to socialism.
For example, at Yenching University most of the economics faculty had studied under institutional economists from the United States (Trescott, 2007).Until Mao took power in 1949, Marxist economists were removed from their posts due to strong anti-communist Kuomintang policies. After 1949, Marxist thought became ascendant but with a Maoist flavour. Most Western economists were suppressed, but ironically Smith and Ricardo were taught since both were referenced favourably by Marx (Trescott, 2007, 320). Still, while Marx believed the rising organic composition of capital led to a declining rate of profit and to economic crises, Mao did not focus on this aspect since China was predominantly an agrarian society without large-scale industrialisation. Instead, Maoist theory concentrated on the development of the peasantry, and most economics of the time dealt not with theory but rather with practical questions of how to engage in industrialisation without losing China’s rural character. However, with China’s industrialisation more traditional Marxian analysis has come from the Chinese New Left, including Minqin Li and Cui Zhiyuan.
Minqi Li (b. 1969) attended the University of Massachusetts, Amherst and is one of the foremost Chinese Marxists. He believes the insertion of China into the world economy will hasten the decline of the worldwide rate of profit, bringing about the end of the capitalist world system. His argument rests not on traditional Marxian analysis but on the squeeze between competitive prices and the rising cost of energy due to climate change. He views the coming collapse as necessitating a transition to communism so as to ensure a fair distribution of resources in its wake (Li, 2008).
Cui Zhiyuan (b. 1963) was heavily influenced by John Mill and James Meade, explicitly calling for the creation of a ‘shareholder-cooperative system’ that would pay a ‘social dividend’ in a similar fashion as Meade’s ‘labour-capital partnership’ (Cui, 2005). He regards social inequality and uneven regional development as critical issues for China.
The Chinese New Left was a reaction against the reform movement, which was developed by Gu Zhan (1915-74). During the 1950s, he dared, along with Sun Yefeng (1908-83) to argue that the market, not the state, was the proper vehicle for socialist planning. These two economists heavily influenced Liu Shaoqi and Deng Xiaoping and are the intellectual fathers of Chinese economic reforms (Song, 2013). They, in turn, influenced Wu Jinglian.
Wu Jinglian (b. 1930) is known as ‘Market Wu' for his unbridled championing of markets. A protege of Gu Zhan, Wu also cites James Buchanan and Douglas North as his main influences. As someone involved in the decision-making process, he has written the definitive study of the evolution of China's economic reforms from the 1950s to 2002 (Wu, 2005). He believes China has become a crony capitalist society with high levels of rent-seeking behaviour, and has publicly condemned the Chinese New Left for advocating ‘restarting the Cultural Revolution and establishing a total dictatorship over the bourgeoisie' (Wu, 2012).
Zhang Weiying (b. 1959) worked with Wu Jinglian and introduced the ‘dual-track price system' to China. This system provides a centrally planned price for a predetermined quota amount of production, and then allows all production above that quota to be set by the market. By reducing the quota over time, one can successfully transition to a market economy. In recent years, Zhang has become an Austrian economist, declaring that it is time to ‘bury Keynesianism' in a speech to the China Entrepreneurs Forum (Bhattacharya, 2012).
Since 1976, a dialogue has opened between China and the West, mostly in the form of orthodox economic thought as well as two strands of heterodoxy: institutionalism and Post Keynesian. However, there are gaps in the knowledge base with J.K. Galbraith and G. Myrdal seen as prime proponents of neo-institutional thought and little attention paid to such important luminaries as Clarence Ayers, Marc Tool or Paul Bush (Zhang and Xu, 2013, 320).
Gregory Chow (b. 1929) is one of the world's top econometricians and developer of the Chow (1960) test that checks the stability of a regression either over time or across groups. He also demonstrated the superiority of the Lagrangian technique over other more complex dynamic programming methods (Chow, 1997).
Stephen Ng-Sheong Cheung (b. 1935), former Professor of Economics at the University of Hong Kong and a former colleague of Ronald Coase at the University of Chicago, is probably the most important of all contemporary Chinese economists from the standpoint of economic theory. A leading member of the New Institutional School of economics, in his ‘simplistic general equilibrium theory of corruption' (Cheung, 1996), he argues international competition in private markets limits the ability of officials to obtain bribes. Corruption tends to increase in areas where competition is inherently limited, such as antiquities and state-owned enterprises that have been granted a monopoly. Moving from a hierarchical-based property rights system, where claiming resources depends on your position in the party, to a private-property-based approach opens opportunities for corruption and this can cause institutional sclerosis, preventing a full transition to a market-based economy. This worsens under democratically formed governments since individuals vote themselves opportunities to be corrupt.
In ‘Irving Fisher and the Red Guards' (Cheung, 1969), he asserts that Mao's interpretation of a ‘social contradiction' between individuals who desire limited resources is inherently superior to Marx, but still fundamentally flawed. Whereas Marx believed a communist state would end competition since man was inherently good, Mao believed it would endure, but in an unstable form, unless something could be done about human nature itself. This presented a rationale for government action: if human nature does not change naturally, it must be forced. The Red Guards, acting on Mao's instructions to abolish private property, took it to the logical extreme of eliminating all differential rents, even those due to superior intellect or ability, leading to the disaster of the Cultural Revolution.
Two other articles are considered seminal reading in transaction cost economics. Cheung (1983) discussed the problem of defining a firm as a set of contractual arrangements existing to reduce market transaction costs, and notes that piece-rate payment and other endeavours that treat workers as independent contractors threaten to destroy the notion of what a firm actually is. In ‘The Fable of the Bees' (Cheung, 1973), he demonstrates the traditional view on reciprocal externalities was inaccurate. So long as both parties could exchange services and benefit from that interaction, a market can develop. Similarly, he has shown that the use of bride prices (payments from the groom's family to the bride's) and foot binding served to enforce property rights at a time when children were viewed as an economic good, and this consequently reduced female infanticide (Cheung, 1972).
In 1957, Ma Yinchu (1882—1982) proposed his ‘New Population Theory', advocating China begin state-enforced family planning (Ma, 1997). Ma had been one of the first Chinese graduates from Columbia University and was influenced by Malthus. Initially decried as a reactionary who did not uphold socialist values, by 1979, his viewpoint had become government dogma with the introduction of the ‘One Child Policy'. Solving one problem may lead to others, as suggestions arise for the Chinese government to re-examine this policy in light of a demographic crisis of too many males and a rapidly aging workforce. After all, Taiwan, Hong Kong and Singapore, none of which have had a population control policy, all have birth rates lower than mainland China. Still, pointing to these counterexamples as a rationale for abandoning the one child policy is problematic, since levels of development differ.
Zhou Xiaochuan (b. 1948), governor of the People's Bank of China, has argued that using SDRs (special drawing rights) rather than the US dollar as the world's reserve currency will resolve the Triffin paradox whereby the reserve currency country (in this case the United States) ends up with a permanent trade deficit as it attempts to provide liquidity for the rest of the world (Zhou, 2009), a policy the International Monetary Fund has cautiously endorsed.
Yu Yongding (b. 1948) has been influenced by Nobel Laureates Robert Shiller and Paul Krugman. He argued that China needs to reduce its capital and current account surpluses. The ongoing US budget deficit, the dysfunctional US political system and the aforementioned Triffin Paradox make a rapid devaluation of the US dollar more likely, which will negatively impact China's investments. He believes diversification, including into gold and away from US treasuries, is beneficial for this reason and will act as a steriliser for the vast amounts of foreign currency coming into the country, so that it does not lead to mal-investment. China suffers from severe overinvestment in the property market (both commercial and residential) and this is causing a major bubble. Indeed, this overinvestment might be masking actual underinvestment in productive capital and infrastructure (Yu, 2006, 2013).
Yang Xiaolai (1948—2004), then called Yang Xiguang, spent 10 years (1968—78) in prison after writing a notoriously scathing critique of the Chinese Communist Party from a leftist perspective entitled ‘Whither China?' It set the stage for the ‘bourgeois democracy' and the desire for a ‘privatized economy' (Unger, 1991, 34). In deriding ‘the red capitalist class', it is cited as a precursor for the backlash against corruption that is now manifested throughout the country (Unger, 1991, 3). While in prison, he taught himself calculus and later undertook a PhD in economics. He contributed to our understanding of infra-marginal economics. Inframarginal decisions are those that cause discrete future path-dependency that closes off some alternatives while opening others. Infra-marginal analysis also leads to endogenous specialisation, reduced transaction costs, and network effects that contribute to increasing returns in society (Yang, 2001).