Two kinds of victims

Compensating victims is a major theoretical and policy issue in the economics of environmental protection. It is, therefore, necessary to clarify the definition of “victims” before looking into the issue. As a matter of fact, victims fall into two categories: (1) those victimized in the course of environmental damage; and (2) those victimized in the course of environmental treatment. There are both direct and indirect victims in each category.

Direct victims of environmental damage are individuals who lose health, property and the means to earn a living, make less money, whose lives are disturbed, or whose family relationships are upset because of the damage done to their living environment. They also include businesses that suffer losses in output, product quality, revenue and property due to environmental damage.

Indirect victims of environmental damage comprise mainly those individuals and businesses whose economic interests have been impaired by the financial and other losses incurred by the aforementioned direct victims – individuals or businesses – with whom they maintain close economic ties.

Direct victims of environmental treatment include businesses that are forced to close down, reduce output or relocate, and individuals working in such businesses. These businesses and individuals make less money as a result. Such direct victims also include families that are relocated due to the needs of environmental treatment – their property may be impaired, their income may drop, and their daily lives may become disturbed or disorganized.

An old argument claims that the poorer a place is, the less mindful the locals are of the ecosystem, the more indiscriminate they are in land reclamation, logging, and mining, while having less money to treat the damaged environment and thus sinking deeper into poverty. Another oft-heard opinion puts it this way: When a place is poor, water, soil, and air pollution are rare; but when the local economy is booming and the local standard of living is improving, the local rivers, soil, and air are polluted too. Which argument holds water? Or are both of them reasonable? If both hold water, does it mean that the cause of environmental protection is helpless whether a place is rich or poor, or that it can be helped only when the place is neither poor nor rich?

In fact, both environmental economics and development economics are confronted with the same baffling paradox concerning the economic operational mechanisms for environmental preservation and for the development of less developed regions. Only by beginning our study from these mechanisms can these questions be answered.

Economic operational mechanisms associated with environmental preservation and developing less developed regions

Society, whatever its type, invariably relies on an inherent impetus and employs the resources at hand to keep the economy going in the direction of certain goals. Defying all sorts of interference, it strives to reach these goals or approach them as closely as it can. The “economic operational mechanisms” is a general term for all the relationships society employs to go through this process.

Economic Reform and Development in China collects the papers I wrote from the 1980s to the 1990s, which were born in an environment of academic debate, and reflected my opinions on how China's economy had reformed and developed as well as my own ideas for reforms and policy proposals. It was translated into English by Foreign Language Teaching and Research Press in 2010 and I am very glad that Cambridge University Press will introduce the translated version overseas. I am glad not only because this book will have the opportunity to be read by Western economists and to contribute to the enhancement of exchanges between Chinese and Western academic circles, but also because Cambridge University Press is an outstanding publishing house with historic recognition in academic circles.

China's reform is on the way. And China's development has entered a new phase: it is confronted with many challenges, but it also embraces a great many new opportunities. Like most Chinese economists, I still stick to my own viewpoints and would like to continue with ongoing discussions to make my own contributions to the growth of China's economy.

Differences of resource allocation in equilibrium and disequilibrium

In economics, disequilibrium is pertinent to Walrasian equilibrium. The latter is achieved under the assumption of a complete market and a flexible price system. Disequilibrium, which is a kind of equilibrium arrived at in the absence of a complete market and a flexible price system, is also dubbed “non-Walrasian equilibrium.”

According to the theory of French economist Léon Walras (1834–1910), given that the market is complete and the price system flexible, given also that traders possess full information and prices adjust instantaneously with changes in supply and demand, then under a given price condition aggregate demand must equal aggregate supply, excess demand and excess supply do not exist, and the settlement of every transaction is guaranteed by an equilibrium price. No deals will be reached before equilibrium price is attained; only with equilibrium price can transactions take place. According to this theory, overproduction, unsalable products, chronic unemployment, and inflation associated with excess demand will never happen.

The analysis of Walrasian equilibrium, alien to economic reality, had long drawn acute criticism from dissentient Western economists. In The General Theory of Employment, Interest, and Money published in 1936, John Maynard Keynes (1883–1946) went out of his way to dissect the unemployment and other perennial problems in capitalist society. Nevertheless, up till the early 1960s Western economists' study of disequilibrium was partial and unsystematic at best.

Ownership reform stems, in the final analysis, from the requirement for developing a commodity economy in this nation. It also arises from the unchangeable position of companies as commodity producers. Whatever its form, ownership structure should contribute to the promotion of production. A monomorphic ownership structure is detrimental to the growth of the commodity economy, to the motivation of firms as commodity producers, and to the effort to make the most of the superiority of socialism. All this gives rise to the mission of hammering out a post-reform ownership structure.

Will the post-reform ownership structure include public ownership? The answer is in the affirmative: Public ownership will be included. However, the reformed public ownership will no longer be the same as it is today. There will be differences between the two.

Under the influence of the traditional economic mode, people believed that the only workable way to run public companies was to put them directly into the hands of government institutions. In the reality of socialist economic development, however, the drawbacks of this practice were becoming pronounced. Companies became appendages of the government, which held all the power over human resources, finance and materials, and kept a tight rein on them. A company's performance thus had no direct bearing on its economic gains, nor was it held accountable for its own economic losses. Such was the inevitable outcome of the direct government intervention of business management, in which public ownership was synonymous with the direct involvement of government institutions in corporate activity.

An overview of economic history

Economic history, as an academic discipline, studies the historical process of economic activity that involves the evolution of the economic system, the development of productivity as well as the interaction between the two. It is a hybrid of economics and history, as its name suggests. From the viewpoint of the history of economics, a lot has been said and written about past economic phenomena and issues, and many ideas have been put forth on the relationship between economics and history from perspectives ranging from mercantilism to classical economics. These efforts, however, were not systematic enough to give rise to economic history as an academic discipline. It was not until the late 19th century that economic history emerged in Western Europe as an independent discipline, thanks to contributions from numerous prominent European scholars. These included representatives of the German history of economics such as Gustav von Schmoller, Albert Eberhard Fridrich Schaffle and Karl Wilhelm Bücher, as well as their contemporaries James Edwin Thorold Rogers, Henry de Beltgens Gibbins, Arnold Toynbee and William James Ashley of Great Britain, Emile Levasseur of France, and Charles Franklin Dunbar, Henry Walcott Farnam, Gerald C. Gross and Richard Theodore Ely of the United States. Economic history came a long way in Europe and America in the first half of the 20th century.