Vision and Calculation: Economics from China's Perspective

444 Pages·2020·8.034 MB·English

by  Sheng Hong

Vision and
Calculation
Economics from
China’s Perspective
Sheng Hong
Vision and Calculation
Sheng Hong
Vision and Calculation
Economics from China’s Perspective
Sheng Hong
Unirule Institute of Economics
Beijing, Beijing, China
ISBN 978-981-15-2897-2 ISBN 978-981-15-2898-9 (eBook)
https://doi.org/10.1007/978-981-15-2898-9
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P V c
reface to ision and alculation
As an author who has published several books, I have always felt that pub-
lishing books is amazing. Suddenly one day, a person will say to you, “I
read a book of yours many years ago, and it had a great impact on me.” In
reality, this situation is very rare. More often, you do not know who reads
your book and what impact it had on him or her. For instance, I have read
the books of the human sages. They have passed away and do not know
what kind of impact they have had on me, how they have inspired my
thinking, and how I wrote out those inspired thoughts and shared them
with others. However, this is the mysterious mechanism of the develop-
ment of human culture.
This book, Vision and Calculation, is a collection of my papers. The
papers were originally written in Chinese, and now they have been col-
lected and published in English. Although I have published several books
in English, they have all been research reports for the Unirule Institute of
Economics. It is only because I am the leader of the research team and the
main writer that I use my name and the name of the collaborator as the
authors’ names for those reports. However, this book is composed of all
of my own papers. This gives me the feeling of facing my English readers
directly. I will not know who reads my book or what magical results it will
have for them. However, I feel obliged to make it easier for my English
readers. Therefore, herein, I’d like to introduce my own academic and
cultural background and explain what I think ordinary English readers
may find difficult.
The title of this book, taken from one of the articles, is called “Vision
and Calculation.” Economics has always posited that people are rational
v
vi PREFACE TO VISION AND CALCULATION
economic people and that they will make rational judgments through
cost-benefit comparisons. However, we often see irrational behavior. In
2010, a sensational event occurred in China. A young man, Yao Jiaxin,
hurt a woman while he was driving. Instead of saving her, he killed her
with a knife. This, of course, was morally reprehensible. Nevertheless,
from an economic point of view, it was also wrong according to rational
calculation. Yao Jiaxin’s reason for killing the woman was that the injured
women would pester him. Nonetheless, there was a high probability of his
crime being uncovered by police and of him being sentenced to death.
There have been many explanations given in psychology and economics
about calculation errors. My explanation is that the calculation is wrong
because of the limited field of vision. A person’s calculations depend on
the information that he or she obtains. The more comprehensive the
information, the more accurate the calculation. Additionally, the amount
or comprehensiveness of the information depends on the field of vision.
The larger the field of vision of space and time, the more abundant and
comprehensive the information and the more accurate the calculation. In
this regard, I quote a Chinese idiom that says, “The mantis stalks the
cicada, unaware of the oriole behind.” This idiom comes from a story
from the Spring and Autumn period (770–221 BC). The story tells that
the King of Wu wanted to attack the state of Chu and refused to listen to
criticism. At this time, a young man went several times to the garden
behind the palace with a slingshot. The King of Wu asked him curiously
what he was doing. The boy said, “I saw a cicada chirping in the tree, but
it did not know that there was a mantis behind it; the mantis wanted to
catch the cicada, but it did not know that there was an oriole behind it;
and the oriole wanted to eat the mantis, but it did not know that I wanted
to shoot it down with a slingshot.” After hearing this, King of Wu decided
not to attack Chu. This story vividly illustrates the importance of vision to
calculation.
Therefore, why are people (let alone other creatures) limited in their
field of vision? The first reason is that it takes attention resources to observe
and pay attention to external things, and natural evolution makes crea-
tures save their resources as much as possible. For most of the millions of
years of evolution, humans were hunter-gatherers. They only needed to
pay attention to the range of a few hundreds of meters and the current
time. Beyond this range, the direct threat to their survival was greatly
diminished. Thus, applying more observation and attention was a waste of
scarce attention resources. Thus, nature automatically limits human
PREFACE TO VISION AND CALCULATION vii
attention to a smaller area. The second reason that people are limited in
their field of visions is that when people and other creatures find a benefi-
cial target (such as prey), they are more likely to focus on this target and
automatically ignore other targets. This is what I call a “win a little game,
lose a big game” mistake. However, with the rapid development of human
civilization in the most recent thousands of years, the cooperation between
human beings has made the factors that affect a person’s costs or benefits
far beyond his or her physiological field of vision, which may be at the
other end of the earth or in another period of time. This requires that
people’s vision extend beyond the past. Nevertheless, when the psycho-
logical structure cannot be quickly evolved and adjusted, overcoming the
mistakes of having too small of a vision depends on learning, education,
religion, and other cultural traditions.
The subtitle of this book is Economics from the Viewpoint of China. I
think there are two difficulties for ordinary English readers. The first is
“economics,” and the second is “China.” Regarding the difficulty of
understanding “economics,” my book can be regarded as a collection of
economics papers. Because my academic major is economics, I am myself
an economist. Generally, economics is not hard to read, but I have included
some papers herein that contain many mathematical formulas and geo-
metric charts. Their interpretation will not be a problem for readers with
an economics background, but they may bring difficulties to ordinary
readers. However, I would like to say that these formulas and charts are
not the most important part of these papers. If you find it difficult to inter-
pret them, you can skip them and only look at nonmathematical parts and
conclusions. I included mathematics in this book mainly because I was
influenced by some examples of neoclassical economics and because my
research at the Unirule Institute of Economics required the inclusions of
some numbers to express judgment and persuade readers; thus, I devel-
oped a slight habit of using mathematics.
As an economist, I can be regarded as an economic liberalist. My aca-
demic background is mainly in new institutional economics. I think that I
inherited the tradition ranging from Adam Smith to Friedrich Hayek. I
can still remember the excitement of reading Hayek for the first time. To
date, I am still studying Hayek’s Law, Legislation and Liberty. Obviously,
there is no mathematical formula in Hayek’s book. The so-called new
institutional economics refer to the economics tradition created by Ronald
Coase. In the late 1980s, I read Coase’s “The Nature of the Firm” and
“The Problem of Social Cost.” I not only applauded his theoretical insights
viii PREFACE TO VISION AND CALCULATION
but also clearly realized how powerful his theory is in explaining and the
practical value of the market-oriented reform in China at that time. I later
corresponded with Professor Coase and edited and organized the transla-
tion of his selected work The Firm, the Market and the Law. When we
heard that Professor Coase had won the Nobel Prize in economics in
1991, the Chinese version of the selected work had just been published.
In 1993, I was invited by Professor Coase to be a visiting scholar at the
University of Chicago Law School. For half a year, I had discussions with
Professor Coase almost every week. I had read Professor Coase’s main
articles before I went to Chicago, so what I learned while I was there was
more about his thinking methods and academic style. Regarding his think-
ing methods, he urged me to pay attention to experience and oppose
“blackboard economics.” He once took me to the Chicago Board of
Trade to see trading scenes and told me to “learn the real world.”
Regarding his academic style, he encouraged me to form academic con-
cepts and theories by using communication and argument. For example,
when I asked him to define “institutions,” he said that the definition
should be formed by the interaction and competition of different defini-
tions. Additionally, he had excellent intuition and the proper judgment of
unfamiliar things. He did not come to China, but when we talked about
China’s rural reform, he said that China’s success was due to the fact that
there were still families remaining after the dissolution of the people’s
communes, while Russia’s failure in a similar reform was due to there
being only individuals left after the dissolution of the collective farms.
Then, I did not see Professor Coase for 14 years. In 2008, he proposed
to hold an academic conference on China’s 30 years of reform and open-
ing up at the University of Chicago. He used his Nobel Prize to fund the
conference attendance of dozens of Chinese economists, entrepreneurs,
and officials, and he invited me to attend. “To struggle for China is to
struggle for the world,” he said in his closing speech. In 2010, Professor
Coase organized another academic conference in Chicago. This time, he
did not need to fund the travel of the Chinese attendants. On December
29, 2010, to celebrate his 100th birthday, we held a large-scale academic
conference in Beijing called “Coase and China” and invited Professor
Coase to give a speech via the Internet. “Just as China has Confucius,
Britain has Adam Smith,” he said. In 2013, while he was planning to visit
China, he unfortunately fell ill and died. I cannot help but feel sorry for
him when I think that he once said, “I intend to set sail once again to find
PREFACE TO VISION AND CALCULATION ix
the route to China, and if this time all I do is to discover America, I won’t
be disappointed.”
Professor Coase founded two schools of thought by himself. In the
field of law, it is called “law and economics,” while in the field of econom-
ics, it is called “new institutional economics.” I am an economist, so I am
closer to the new institutional economists, such as Professor Douglas
North. His Structure and Change in Economic History helped me to
understand Coase’s theory. Professor North visited China many times,
and he also attended the Chicago conferences organized by Professor
Coase in 2008 and 2010. Therefore, I have had many opportunities to
meet and discuss with Professor North. The other new institutional econ-
omist to whom I am close is Professor Harold Demsez, who, either
together with Professor Armen Alchian or independently, published papers
on property rights, which are important classics through which we can
understand the theory of property rights. When I met Professor Demsez
in Chicago in 2008, he was a humorous old man. In addition, I heard
Oliver Williamson’s lecture on “transaction cost economics” at the
Institute of Industrial Economics at the Chinese Academy of Social
Sciences in 1988. Another person I should mention is Steven Cheung.
Compared to Coase, in terms of age, he is a next-generation scholar.
However, his contributions and influence are so great that he could inspire
Coase himself, as well as North and others. More importantly, he is
Chinese. Cheung introduced new institutional economics to China and
attracted the attention of new institutional economists to China. I first
read his paper “The Contractual Nature of the Firm,” and then later, I
read his doctoral dissertation The Theory of Share Tenancy and his other
early papers. I increasingly feel that his theory is one that can explain the
Chinese phenomenon better by using new institutional economics.
Therefore, it can also be said that my economics papers are mainly
those of new institutional economics. For example, “When Public Goods
Become Private Goods” is a chapter that further studies the theory of
property rights. In 2002, when I was commissioned by the Ministry of
Water Resources to study water rights, I found that the default allocation
principle of river water resources in traditional China is that whoever has
the ability to dig the canal has the right to the water. However, in modern
society, the cost of digging canals has greatly decreased, and there is no
water distribution rule established for rivers. In fact, all regions compete
for water resources by digging canals, which is known as the “upstream
first” principle; this approach resulted in the total reservoir capacity of the
x PREFACE TO VISION AND CALCULATION
middle and upper reaches of the Yellow River exceeding the annual runoff
of the Yellow River, which, in turn, resulted in the scarcity of water
resources in the Yellow River Basin as a whole. Thus, the Yellow River was
cut off for several years. I think that when the cost of obtaining a certain
resource is quite high, it may not be a scarce resource because scarcity
means that the demand is greater than the supply. What determines
demand is not only the scarcity of resources themselves but also the cost
of their acquisition. Thus, when the cost of obtaining resources is lower
than a certain extent, the resources that are not scarce will become scarce.
Only when resources are scarce is it necessary to establish property rights.
Therefore, with the development of technology, it seems necessary to
establish water rights for water resources without original property rights.
The institution of property rights is related to the physical characteris-
tics of resources. Water is a liquid that flows and is boundary-changeable.
To establish property rights, it is more difficult to define the physical
boundaries of water than it is those of solid objects. From solid to liquid
to gas, to sound, to landscape, and to intangible assets, such as digitality
and creativity, they can be considered as a continuous pedigree. An effec-
tive property right, first of all, must be “held” by its owner and then must
be “exclusive.” However, if you want to hold this right, you have to pay
the cost or the “exclusive cost.” The physical characteristics of a resource
will affect its exclusive cost. A liquid is more difficult to hold than a solid,
and a gas is more difficult to hold than a liquid. Only when a solid con-
tainer, such as a reservoir, a bottle, or a balloon, has been created can a
liquid or gas be effectively held. Regarding idea-related products, due to
the development of printing and the Internet, it is difficult to define their
physical boundaries, which can only be protected by an artificial property
right system, that is, the intellectual property system. Thus, the concrete
form of the institution of property rights, in a dimension, is related to the
physical characteristics of resources.
Regarding the difficulty of understanding “China,” I include several
aspects. The first aspect is China’s reform and opening up. This is the field
in which I have invested much energy in the past years, and I think it is
also the focus of my English readers. The second aspect is the history of
China, especially the economic history. Understanding this is necessary to
understanding China, including modern China. The third aspect is
Chinese culture. This is an important aspect of understanding why Chinese
people think in the ways that they do and why China is different from the
English-speaking world. The fourth aspect focuses on the problems